Section II (40 Marks)

Answer Question No 5 which is compulsory and any two

from the rest of this section
Questions:
5. (a) Choose the most appropriate one from the stated options and write it down (only
indicate A,B,C,D as you think correct): 1x5

Under the Companies act, 1956, the first directors shall hold office upto
A. The end of the statutory meeting
B. The end of the period as prescribed by the articles of the company
C. The end of three years from the date of appointment
D. Till the first Annual General Meeting

Mr. Saxena is a Director of SUVALAXMI LTD. which failed to file its annual return from the year 2005-06.The
maximum period for which Mr. Saxena will be disqualified from becoming a Director in any public limited
company is
A. 3 years
B. 5 years
C. 7 years
D. 10 years

Which of the following items requires special resolution in a general meeting under the Companies
Act, 1956?
A. Issue of shares at discount
B. Adoption of Statutory Report
C. Appointment of Managing I whole time Director
D. Reduction of Share Capital
The concept of Corporate Governance was initiated on the recommendations of
A. The Report by the Confederation of Indian Industry (CII)
B. The Report by Or. Y.V.Readdy
C. The Report by Mr. Kumar Mangalam Birla
D. The Report by Mr. Narayan Murthy
As per section 292a of the Companies Act; 1956 every public company having paid up of not less than_____of
rupees shall constitute a committee of the Board known as Audit Committee. (Fill in the gape from the below)
A. Fifty lakh
B. Twenty five crore
C. Five crore
D. Ten crore
(b) State whether each of the following statement is True (T) or False (F):
1 X 5
(i) The qualification shares required to be taken up by a director must be purchased from the
Company.
(ii) Increasing the voting rights of the shares held by the management can be considered as an act
of oppression under the Companies Act 1956.
(iii) Risk Management is not a linear process; it is the balancing of a number of interwoven elements.



"
(iv) The Companies act 1956 provides a positive definition of the term "Independent Director"
(v) As per clause 49 of the listing agreement on Corporate Governance, the Audit Committee shall meet
at least twice a year. 1 x 5
Answer to question No 5(al:
(i) -D
(ii) - B
(iii) -0
(ill) - c
(11) -c
Answer to question No S(b):
(i) -False
ii) -True
(iii) -True
(iv) -False
(v) -False
aue.tlon:
8.(a) MIS VIVITHA is a director in 14 public limited companies on 30
1
November, 2008. Thts apart
she.'s an alternate director in another public limited company. The following particulars are made
available to you relating to her appointment as director in various companies in annual genera l
meetings (AGM) held:


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Nametdetalls of Company Date of AGM

Daya Organ1cs Ltd. 1
5
r DECEMBER ,2008

Vm1ala PlastiCS LTD. 29"' November,2008
Bala11 Va1shnav Association ( a companyregistered under
sect1on 25 of the Companies Act, 1956)
30"' November. 2008
Based on the prov1s1ons of the Compan1es Act, 1956. you are requ red to adv1se M1ss. V1v 1tha,as to
the opt1ons available to her for accepting or refus1ng the aforesaid appomtments 8
(b) The Audit Comm1ttee of Yash Telecommun1cat1ons Ltd const1tuted under sect1on 292a of the
Compames Act. 1956 submitted to the Board of D rectors. a report conta nmg tts
recommendations .These recommendations were however not accepted by the Board.In ths
scenano, state your v1ews on the followings:
(i) Can the Board adopt the stand of not accepting the Audit Committee's recommendations?
(ii) If yes, the board does not accept the recommendations, what should the Boards do?
(iti) How should the Cha1rman of the Aud1t Committee respond? 7

Answer to aueshon No 6(a).
Sect1on 275 of the Compan1es Act, 1956 debars any person to hold off1ce as a director or more
than 15 company's Simultaneously
As per the provisions of Section 277(2) of the Companies Act, 1956, where a person holds
d1rectorsh1p of 14 or less companies is appointed as a director of other companies, and such
appomtments make the total number of his dectorsh1ps more than 15,then the person concerned
has to choose the d rectorsh1ps which he w1shes to continue to hold or to accept so that the total
number of directorships, old or new, henceforth to be held by him does not exceed 15
The sa1d section further prov1des that none of the new appointments shall be effective unhl such
a choice IS to be made and 1n case of failure of the person to make such a choice with1n 15days
of the day on which the last of the new appointments was made, all the new appointments shall
become vo1d.
Section 278 Of the Compan1es Act, 1956 states that lor the purpose of section 275 and 277 the
number of companies are not be counted
(a) A pnvate company unless 1t IS a subs1d1ary of a public company
(b) An unhm1ted company.
(c) An assoc1allon not carrymg on busmess for prof1t or wh1ch proh1b1ts the payment of d1v1dend
(d) A company in which such person is only an alternate director.
In vew of the abovementoned legal provisions, M1ss Viv1tha. Who 1s already a director 1n 14
compames, has to consder the following aspects.
Alternate d1rectorsh1p or d rectorsh1p m section 25 company 1s not affected. Hence she can take
up the d1rectorsh1p m Balap Vaishnav Assocallon, the company regstered u's 25
The appomtmentm v1mal PlastiCS takes the number to 15 on 29112008. and 1n Daya org:m cs
Ltd on 1" December, 2008 takes the number of drectorship to 16
Hence wrth1n 15days from the date on which the last appo1ntment was m,'\de VIZ.1" December,
Mlu VMtha has to decide upon one pi the two compan1es 1n wh1ch she would take uptbe d rectors! P.
I._ fals to decide ,the two new appontments shall become vod and shall nottnlo;o ef!E.'CI





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Suggested Answers to Qudt/UtU (S)IIabus 2008) D mber]
/6

Answer to guestjon No 6(b);
(i) As per Section 292A(6). the recommendations of the Aud1t Comm1ttee shall be b1nd1ng on the
Board of D rectors. in so far as relating to the financial management 1nclud1ng the aud1t report In
1
respect of other matters, the recommendations are not bringing on the board.
(ii) Sechon 292A (7) enjoins that .if the Board does not accept the recommendations of the Auo t
Committee. it shall record the reasons therefor and communicate such reasons to the shareholders .
(iii) As per section 292A (10). the Chairman of the Audit Committee shall attend the Annual General
Meeting(s) of the company to provide any clarifications on matters relating to aud1t. Beyond th1s
the Chairman of the Audit Committee cannot do anything inthe case of non-listed companies. It
may be noted that in case of listed companies. clause 49 of the Listing Agreement gives more
powers to the Audit committee 1n this context.

Question:
7.(a) HEMA BIOMWDICALS LTD. is an existing profit making company w1th strong free reserves and
having a huge real estate property. The Managing Director obtains reliable mformation that a
group of undesirable persons are Cornering the shares of the company, w1th a view to transfer
them to their names and effect change inthe composition of the Board of D rectors. He apprehends
that such change will be prejudicial to the public interest.
You are requested to advise the company with reference to the provisions of the Compan1es Act,
1956, as to how the company can block the aforesaid transfer of shares.
7
(b) Your help is sought in drafting the relevant portion of directors' Responsibility statement form1ng
part of Directors' Report.
Draft the same.
4

(c) S ate the additional requirements stipulated in clause 49 of the Listing Agreement which are
Silent 1n sect1on 292A of the Companies Act, 1956. 4
Answer to question No 7!a):
Power to block transfer of shares
As per Section 250(4) of the Companies Act, 1956,
Where_ the Company Law Board ( Company Law Board till the company law Tribunal becomes
::rat nal; referred to as CLB hereinafter) has reasonable ground to believe that a transfer of
res 1n a company IS hkely to take place, and
The CLB
is of the opinion tha
.
t any s
uc
h
c
h
ange would be prejudicial to the public interest,

such
may, by an order, dtrect that any Iran 1
period not exceeding th s er
h .
s ares In the concerned company. dunng
As per Section 250( 1) & (2) f ree ears, as may be specified in the order, shall be void.
T
e
h
r
at==
0
compan es Act 1956, if the CLB is of the view that
reasons to lind out the relevant facts about any shares and
lmay. an can not be found out unless the r . .
.
are

as an intenm measure
order direct that tra estnction Imposed,
'

WIIe n:is4td
n res

pect of such
ns
1
er of any
'
such sha
res s
h
a
II
be void and no vohng nght sha
IIIIo conferred with th
e power to vary or rescind
given sn the q t'


it
S.

ord
er any t1me
ues IOn squarely tall within h .
Act. 1956.The management f H e purvew of the proviSions of sectiOI'l 250
0
ema Biomed1cals Ltd.may lodge a tnl
: 7

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w1th the CL 0 <tnd prove to 1t that the transf er of shares 1n favour of the group of unscrtJpu ou
persons would cl1unge the compos111on of the Board of D1rectors of the Company, wh ch sha be
preJUdicial to the public interest; if the CLB is persuaded of the plea of the company,
1
t may pass
an order as ::.tated above, wh1ch would block the transfer of shares, as mentioned in the quest on
Answer to question r--..o 702).;
Directors' Responsibility Statement

Pursuant to the rcqu rements of Section 217(2AA) of the Compan1es Act,1956, 11 1s hereby confirmed.-
) that 1n preparation of the annual accounts, the applicable accounting standards have been followed
and that no matenal departures have been made from the same.
ii) That the D rectors has selected such accounting policies and applied them consistently ana
made JUdgments and est1mates that are reasonable and prudent so as to give a true and fa1r v1ew
of the state of affairs of the Company as at 31" March,2008 and of the profit of the Company for
the year ended 31 'march,2008
iii) That the Directors had taken proper and suffic1ent care for the maintenance of adequate
account1ng records in accordance with the provisions of the Companies act,1956, for
safeguarding the assets of the Company and for preventing and detecting fraud and other
irregularities;
iv) That the Directors had prepared the annual accounts for the year ended 31"' March,2008 on
Answer to Question No gomg concern basis.

Answer to question No 7Jd
Additional requirements stipulated as per Clause 49
The follow1ng additional requirements are stipulated as per Clause 49 of the L1sting Agreements wh1ch
are silent in Sect1on 292A of the Companies Act, 1956:
(I) The aud
1
t comm
1
ttee should invite such of the executives, as it considers appropriate (and
particularly head of the finance function) to be present at the meeting of the comm1ttee, but on
occas
1
ons
1
t may also met without the presence of any execut1ve of the company.
(u) The company secretary shall act as secretary to the committee. . . .
(Iii) The audit committee shall meet at least thrice a year. One meeting shall be held before hnahzalion
of annual accounts and once m every six months.
(iv) The quorum of the audit committee shall be two members or one-third of the members of the
aud
1
t comm
1
ttee- wh
1
cl
1
ever is higher and m1nimum of two mdependent d1rectors.
(v) The powers and role of the aud1t committee are elaborately contamed m sub-paragraphs C&D of
paragraph II.
Question: 1
d a prehend that the company s so vency li
B.(a) A group ot shareholders 1n a publiC hmlte company, P
at stake, as the Board of Dtrectors of the compa y IS
1

naging the affa rs tn accordance
almng directions for conduct1ng a
w1th sound busmess pnnc1ples. They seek your a VIce or
spec1JIaud1t. d 4
Bnefly state the provisions o
f
t
h
e
C
om
Panles ac
t

1956 1n thiS regar

(b) Bnofly diScuss the ptov1s1ons of the Competition act. 2002 relat1ng to









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Sug ested An.nwrs to QlUWWm (S;.IIahus 1008) December]


() Power of Central Government to exempt,
(n) Restrict1on on dsclosure of information. 22
(C) What are the act1ons required in identifying suitable responses to Risk 1n the context ol r sv
Management? 7
Answer to guestion No 8(a):
Provisions regarding Special Audit
Section 233A of the Companies Act, 1956 deals with the aspects connected with the Special Aud1t.
The Special Audit can be ordered by Central Government if it is of the opinion:
i. That the affairs of the company are not being managed in accordance with sound business
principles or prudent commercial practices, or
it. That the company is being managed in manner likely to cause serious inj ury or damage to the
interest of the trade, industry or business to which it pertains,or
iii. That the financial position of the company is such as to endanger its solvency.
The dissatisfied group of shareholders should lodge a complaint with the Central Government requesting
for conduct of the special audit. If the Central Government is satisfied that there exists suff icient
reasons, it may order a special audit to be carried out by a Chartered Accountant who may or may not
be company's statutory auditor or who may or may not be in practice.
Advice should be tendered on above lines to the group.
Answer to guestion No 8(b)(i):
Competition Act,2002:Power to exempt
The Cent ral Government may, by notification, exempt from the application of the Competition, Act,
2002. or any provisions thereof , and for such period as it may specify in such notification-
a) Any class of enterprises if such exemption is necessary in the interest of security of the State
or public interest;
b) Any practice or agreement ansing out of and in accordance with any obligation as-summed by
India under any treaty, agreement or convention with any other country or countries;
c) Any enterprise which performs a sovereign function on behalf of the Central Government or a
State Government;
Provid d that icase an enterprise is engaged in any activity including the activity relatable to the
soveregn funct1ons of the Government, the Central Government may grant exemption only in respect
of activity relatable to the sovereign functions.
Answer to question No 8(bl(ij):
Completion,Act ,2002:Restriction on disclosure of information
No informatio r lating to any enterprise, being an information which has been obtained by or on behJ
of t
i
h
f
e Co
1
m
th
mss1on fo

r th
b
e pu
.
rpose of the Competition Act

shall
,WI
'th
ou
t
t
h
e prev1

ous pem11SSI
on 10
wr 1ng o e enterpnse, e disclosed otherwise than in compliance 'th
1
h f the Acl
or any other law for the time being force. WI or or t e purpose o

AQ6Wer to question No.B!cl
Identify suitable responses to risk.
The action break into broadly five types, as shown below :










(imup Iff l'.!p,r I'll C,1pital Mm/..1'1 Anail'.,ls & Corpora1e La11S

19



1) PreventiOn: Term1nate the nsk- by doing things differently and thus removing the nsk, where 1t
is feasJble to do so. Countermeasures are put in place that e1ther stop the threat or problem from
occurnng or prevent 1t hav1ng any impact on the proJect or bus1ness.
2) Reduction:Treat the risk- take act1on to control it m some way where the actions e1ther reduce
the hkehhood of the nsk developing or hm1t the impact on the project to acceptable levels.
3) Transference :Th1s 1s a specialist form of risk reductron where the management of the risk IS
passed to a th1rd party v1a, for 1nstance, an insurance policy or penalty clause, such that the
impact of the nsk rs no longer an 1ssue for the health of the proJect. Nol all risk can be transferred
m th1s way
4) Acceptance :Tolerate the risk- perhaps because nothing can be done at a reasonable cost to
m1tigate 1t or the likelihood and 1mpact of the risk occurring are at an acceptable level.
5) Contrngency: These are actions planned and organized to come into force as and when the risk
occurs.
A. ny given nsk could have appropnate actions in any or all these categories. There may be no cost-
eftecttve action available to deal with a risk, 1n which case the risk must be accepted or the justification
for the proJect rev1sited (to rev1ew whether the project 1s too risky), poss1bly resultmg 1n the terrrunation
at the prOJect.
The results of the nsk evolution activitieS are documented 1n the Risk Log. If the project 1S part of a
pi'Ogfamme, proJeCt nsks should be examined for any impact on the programme (and vice versa).
Where any cross-mpact 1S found, the risk should be added to the other Risk Log.
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12 Suggested Answers to Questions (Syllubus 2008)- June 2009

Sec:noN II
(CORPORATE LAWS)
Answer Question No. 5 which is compuiSo,Y and any I;.Q, Troir\the rest in this section.
Question:
5.(a) Choose the r'ost appropriate one from the stated options and write it down (only indicate A,B.
C. D as you tl">mk correct):
(i) A public information officer shall as expeditiously as possible provide information from
the date of receipt of request but in any case within
A. 15 days
B.30 days
C.45 days
D.60 days
(ii) Under Competition Act, 2002, penalty for offences in relation to fumishing .of information is
A. As. 51akh
B. As. 10 lakh
C. As . 25 lakh
D.As. 50 lakh
(iii) Inthe Context of corporate governance,Narayana Committee was formed in the year
A.2002
B.2003
C.2004
0.1999
(iv) An ordinary resolution is one which is passed in a general meeting by
a simple majority of votes including the casting vote of the chairman

l
A.
B. 3/ th major ty of votes
C, 2f?rd.majer f Yol
I
D.N
-
o
-
ne
-
of the above

-- .
u (v) Inthcontext of-:cl.assi{
the below).
\
A. Credit Risks
i
B.Liquidity Risk
j
C. Disaster Risks
-
ication-of

risk, tax risks will fall under----. (Fill in the gap from
D.Legal Risks 1 X 5
(b) State whether each of the following statements is True (T) or False (F):
(i) An entity is to obtain certif icate from a company secretary as to compliance of
condition s of corporate Governance as provided in c lause 49 of the listing agreement.
I
(ii) Related party transactions means a transfer resource or pbligations between related parties
1
regardless of whethe r or not a price is charged.
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Groz p Ill : Paper P II Capuu/ M arker Anul ysi & Ccrporalt Lau< /3


(iii) SEBI had in the rev1sed clause 49 of the list1ng agreement mandated that at least 30% of
the Board of a listed company comprise of independent Directors.
(iv) An index of members must be maintained by a company when its membership exceeds
100.
(v) W1thout the sanction of the Tribunal,the liquidator of a company can appoint an agent to do
any business wht ch he is unable to do himself. 1 x 5
Answer to Question No S!i!t
(i) A. (ii) B.(iii) B.(iv) A. (v) B.
Answer to Question No S(b}.;
(i) False. (it) -+ True (iii) False (iv)-+ False (V) -+ True
Question:
e.(a) State the importance of a remuneration committee inthe context of corporate Governance.What
are the responsibilities normally assigned to such Committee? 3+3
(b) What are the additional requirements stipulated 1n section 292A of the Compantes Act, 1956
which are s1lent in clause 49 of the Lsting Agreement?
3
(c) It is said that after the risk identif ication takes place, the actions involved in pinpointing suitable
responses to the risk are broadly of five types.Elaborate on these live types of actions. 1+5
Answer to Question No G(a):
REMUNERTATION COMMITTEE:
It is now a universally accepted proposition of corporate governance practice that Boards of
directors of companies appoint appropriately .composed remuneration committees to work out
executive remuneration on their behalf .The combined code of the UK says that the remuneration
committee will be responsible lor working out remuneration package "toattract. retain and motivate
exccut1ves of the quality required".The committee should decide where to.poSitionthe11company
relat ve to other companies and take account of comparable remuneratiOn and relative
performance. W,ith regard to the composition of the committee, as overwhelming majority of
guidehrtes suggest that it be composed exclusively of independent non-executive directors.The
committee would makeits well considered recommendations to the board for final decision.The
followtng responsibilities are normally assigned to a remunerationcommittee, which should have
a writt en terms of reference:
a) Remuneration packages and service contracts of the CEO and other senior executives.
b) Remunerat ion packages for non-executive directors.
c) Remuneration policies and practice of the company.
d) Any company share and other incentive schemes.
e) Company superannuat ion and pens1onarrangements.
r tQ...Qucstio n No 6(b);
Additional requirements stipulated as per Section 292A
The f ollow ng additional requirements are stipulated as per Section 292A of the Companies Act,
1956 whtch are silent to Clause 49 of the Listing Agreement:
(i) The audit committee constituted shall act in accordance with terms of reference to be
specified in wnt1ng by the board.







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Suggested Answers to Questions (Syllabus 2008}- June 2009

(ii) The recommendations olthe audit committee on any matter relatingto financial management,
including the audit report, shall be binding on the board.
(iii) If the board does not accept the recommendation of the audit committee,it shall record the
reasons therefore and communicate such reasons to the shareholders.
Answerto Question No 61Cl :
Risk Identification
This step identifies the potential risks (or opportunities) facing the project . lt.is important not to
judge the likelihood of a risk at tht s early time.This is done in a controlled manner in a later step.
Attempting to form judgments while 'brainstorming' a list of potentialrisks may lead to hurried
and incorrect decision to exclude some risks.
Once identified, risks are all entered in the Risk log. This contains details of all risks,their
assessment, owners and status.TheRisk log is a control tool for the Project Manager, providing
a quick reference to the key risks facing the project, what monitoring activities should be taking
place and by whom. Reference to it can lead to entries.
Ident fies suitable responses to risk
The_actions break into broadly five types, as.shown below,
1."Prevention Terminate the risk- by doing things differently and thus removing the risk
where it is feasible to do so. Countermeasures are put in place that either stop the threat or
problem from occurring or prevent it having any impact on the project or business.
2. Reduction threat the risk- take action to control it in some way where the actions either
reduce the likelihood of the risk developing or limit the impact on the project to acceptable
levels.
3. Transference- This is a specialist form of risk reductionwhere the management of the risk
is passed to a third p3rty vi3, for incto.nce, aninsurance policy or penalty clause, such that
the impact of the risk is no longer an issue f or the health of the project. Not all risk can be
transferred in this way.
4. Acceptance- Tolerate the risk -perhaps because nothing can be done at a reasonable cost
to miti e it or likelihood and impact or the risk occurring are at an acceptable level.
-S....COntlngency-These ere-actions !)fanned and organized to come into force as and when
the risk occurs.
f Any given ri k could have appropriate actions in any or all these categories.
There may be no cost-effective actions available to deal with a risk, in which case the risk must
be accepted or the justific ation for the project revisited (to review whether the project is too
risky),possibly resulting in the termination of the project.
The results of the nsk evaluation activities are documented in the Rtsk log. If the project is part
of a programme,project risk should be examined for any impact on the programme (and vtce
versa).Where any cross-tmpact is found , the risk should be added to the other Risk log.
Question:
7 (a) The Board of directors of Vtvitha Pharma Ltd.,decide to termtnate the services of Mr. Upadhyay,
employed as General manager.Mr.Upadhyay is occupying a flat owned by the company at
Kolkata. The company fears that he may not vacate the flat. The Board desired to know the
action to be taken under the Companies Acn, 1956 to reassume possession of the flat. Advise







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Group Ill f'ap er P II : Capital Marku Analym & Corporac lA>'.! 15
appropriately. Will your answer be d1fferent if the flat is not owned by the company,but has been
taken on lease? 4
(b) Vasudha Footwear Ltd. is of the view that XYZ Co. ltd.,is abusing its dominant position 1n the
footwear industry.It wishes to lodge a complaint against XVZ Co. ltd., before the Competition
CommissiOn .Bnefly elucidate the factors which the commission will consider to ascertain whether
Z Co. ltd.,is enjoying a dominant position in the footwear industry. 6
(c) Mr.Janak who had been appointed as director in Madhav Marbles ltd..was to retire by rotation
on 21M August , 2008. Due to reasons beyond the company's control, annl@l general meeting
could not be heldon scheduled date. Further,inthe adjourned meeting also, the vacancy could
not be f illed up.You are required to ascertain whether under the provisions of the Companies Act,
1956,Mr.Janak shall be deemed to have vacated office on 21" August,2008 when the annual
general meeting was scheduled to be held or whether it will be deemed that he has been
reappointed. 5
Answer to Qy estjon No 7(a) :
ACTION AGAINST GENERAL MANAGER
The company can take action under Section S30 of the Companies Act, 1956 if the general
manager ref uses to vacate the premises provided by the company.According to Section 630, it
is an offence , if any officer or emplc-yee of a company-
(1) Wrongfully obtains possessiOn of any property of a company or
(2) Hav ng any S\)Ch property in his possession wrongfully withholds it or knowingly applies it
to purposes other than those expressed or directed in the articles and authorized by the
Act and such an offence is punishable with fine up to Rs. 10000/-. Further the court may
also order such officer or Amployee to deliver to the company any such property wtongly
obtained or wrongfully withheld withi n a.time fixed by the court.
So the company can file a complaint under Sec1ion 630,as 11provides epeedy relief.
Section 630 covers either existing as well as past officers or employees. Thus,action may
also be initiated after termination of the services of Mr. Upadhyay.
1t1s not necessary that the property in question should be owned by the company.Even if the
company exercise only a leasehold right, the provisions of Section 630 can be invoked.
Answer to Quest ion No Z(b):
Dominant position of an enterprise
The Competition Commission while inquiring whether the enterprise XYZ Company enjoys a
dominant position or not under Section 4 of the Competition Act, 2002 will take the following
factors Into account:
(a) market share of the enterpnse
(b) size and resource of the enterprise
(c) size and 1mportance of the competitors
(d) economic power of the enterprise including commercialadvantages over competitors.
(e) Vertical integration of the enterprises or sale or service net work of such enterprises.
(f) Dependence of consumers on the
enterprises.
(g) Monopoly or dominant position whether acquired as result of any statute or by virtue of
being
a Government company or a publ1c sector undertaking or otherwise.






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P 11J2009P16
and how the same is permissible. 5
(b) A promoter stands in a fiduciary relation towards the company, he promotes"-Explain. 3
(c) What are the important elements of Good Project Governance? 7

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16 Suggesred Answers ro Questions (.'iyl/obus 1008) June 2009

(h) Entry barriers including barriers such as regulatory-barriers,financial risk,high capital cost
of ontry,marketing entry barriers, technical entry barriers, economies of scale, high cost of
substitutable goods or services for consumers.
(i) Countervailing \>tJying power.
. (j) Market structure and size of market.
(k) Social obligations and size of market.
(I) Relative advantage, by way of contribution to the economic development, by the enterprise
enjoying a dominant positive having or likely to have an appreciable adverse effect on
competition.
(m) Any other factor which the commission may consider relevant for the inquiry.
Answer to Question No 7(c):
DEEMED REAPPOINTMENT OF DIRECTOR
Section 256 of the Companies Act , 1956deals with deemed re-appointment of a retiring director.
The vacancies caused by retirement of a dir ctor by rotation should be filled up at the same
meeting or at an adjourned meeting. If it is not so done, the retiring director shall be deemed to
have been reappointed at such adjourned meeting except in the f ollowing cases-
(i) at any previous mlileting, a resolutionfor his reappointment was put to vote but was lost, or,
(ii) the retiring directo-r has, in writing expressed his unw[l_lingne s to continue, 0(
(iii) he is not qualified or is disqualified for the said appointment ,or
(iv) a special or ordinary resolution is necessary for his appointment or reappointment by virtue
of any provisions of the Companies Act ,1956 or
(v) it is resolved to appoint two or more directors by a single resolution,or
.(vi) it is resolved not to fill the vacancy.
It the instant case the above mentioned exception are not appl icable and hence Mr.Janak
cannot be deemed t.o be retire. He is deemed to be re-appointed as director.
Question :
8.(a) Vasudha Group of Companies has under its fold, two public limited companies and a private
!I
lin:ii c!Lis...a_s.ubsidiary of one of the _public limited companies). The Group
wishes to appoint Mr. NABIN as the managing director for all the three companies inits Group.
f
Briefly advise-the 6roup, with reference to the provisions-of the Companies Act, 1956, whether
I

l Answer to Qycstjon No 81a):
f Number of companies for which a person can be appointed as managing director
As per the provisions of-sect ion 316(1) of the Companies Act , 1956, no public company znd no
private company which is a subsidiary of a public. company can appoint or employ a person as
its managing director, if such person is a managing director or manager of any other company,
whether public company or private company which is a subsidiary of public company, except as
provided in sub-section (2) of Section 316.
Section 316(2) enjoins that a public company or a private company which is a subsidiary of a
public company may appoint or employ a person as its managing director, if he is the managing







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Group Ill l'ap.:r P II . Capitu/ Marla:t A11aly.ris & Corparmt IAII"S 17


director or manager of one, and of not more than one, [other company (includtng a private
company which is not a subsidiary of a public company)] .
Inview of the above legal provisions. Mr.Nabin cannot,prima facia.be appointed as a managing
director of these three companies (two public companies and the pnvate limited company. which
is a subsidiary of a public company).
An exception to the above is prided by section 316(4), which en1oins that the Central Government
may, by order, permit any person to be appointed as a Managing Director of more than two public
limited companies. If the CentralGovernment is satisfied that it is necessary that the companies
should,for their proper working,functiOn as s1ngle umt and have a common Manag1ng Director.
In the light of the aforesaid exception provided by the Companies Act, 1956,Vasudha Group of
Companies should approach the Central Government and convince the Central Gov1:abou1 the
importance and advantages of having a common Managing Director for all the three companies. If
the Central Government is satisfied and issues an order accepting the plea of the Group, then only
the Group can appoint Mr.Nabin as Managing Director of all these three companies of the Group.
Ans wer to Question No B(.b):
A promoter stands in a fiduciary relation (relation requiring confidence or trust) to the company
which ho promotes.The promoter in such a situation (i) must not make,either directly or indirectly.
any profit at the expenses of the company which is being promoted.
(ii)must give to the company the benefit of any negotiations or contracts into wh1ch he enters in
respect of the company,
(iii) must give full disclosure of all the relevant facts, including any proht and his personal interest
in a transaction with the Company.
A nswer to Question No 8Cc) ;
Important specific elements of good Project Governance are enumerated as follows:
1. A compelling bus1ness case,stating the object of the project specifying the in-scope and
out-of scope aspects.
2. A mechanism to assess the Compliance of the completed project to its original objectives.
3. Identifying allstockholders with an interest in the project.
4. A defined method of communication to each stockholder.
5. A set of business -level requirements as agreed by all stockhnlrl,.rs.
6. An agreed specification f or the project deliverables.
7. The appointment of a Project Manager.
8. Clear assignment of project roles and responsibilities.
9. A current published plan that spans all project stages from project 1n1hallon through
development to the transition to operations .
10. A system of accurate upward status and progress-reporting including time records.
11. A central document repository for the project.
12. A centrally-held glossary of project terms.
13. A process for the management and resolution of issues that anse during tho project.
14. A process for the recording and communicat ion of risks identified during the project.
15. A standard for quality review of the key governance documents and of the project
deliverables.







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Net worth of least Rs 1 crore
1n all the preceding three
years of twelve months each

(I) Where a charge requ1nng registratio'l is ro: regis e
against the cred1tor and not aga 1nst tr.e liquidator.
(1i) To effect buy back of shares, the same shou!:J be. e' aha. after passing an crdmary
resolution in a meetmg of the Board of directors
(ii) Amalgamation in the nature of merger is to be accountcc <JS per the purchase method.

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3 Net worth 3 1-3-2008 IS
I
Corr.pany may check up
more than one crore rupees th1s aspect as to whether .t
No 1nformat1on 1n the p oblem has had net worth of Rs 1 .
whether it has been so for crores for minimum 3 yea's,
mmimum 3 years otherw1se fulfill this norm
4 In case of change in name, Requirement is relating to No act1on required.
50% of preceding yeai's revenue and not net profit.
revenue should be from new More than 50% of revenue has
activity. been from the new activ1ty
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"'
The aggregate of the Pre-issue net worth bemg
!
Anyway . two more years at
propose<l issue and all 1 4 crores. 5 times the same
'I
the eas: are required
previous issue made in is Rs 7 crores only Firm
the same financ ial year m a:lotment ... promoters
terms of s,ze (i.e., offer contribution to be culy
t hro .;gh offer document+ cons1dered
1cond1ton 1) Tre corr.oany
I
IS lii<ely to :ulf!;l th1s norrr
tncn. Act1on to be taken
I
accord1ngly.
frm allotment+ promoters'
I

contributionthrough the
offer document). does not
exceed five(5) times its
pre-issue net worth as per
balance sheet of the last
financialyea r. )
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SECTION II (40 Marks)
(CORPORATE LAWS)
Answer Question No. 5 wh1Ch tS compulsory and any two frorr: t:1e rest tn this section.
Question:
5 (a) Fil: up the blanks:
(i) Every public company havmg a paid-up capital of not less t .an rupees-----shall
constitute the Aud1 t Comm1ttee.
(ii) In the context of classification of risk, tax nsk will fall urder ris (credit.
liquidity, disaster)
(iii) The Competition Commission shall consist of a Chair person and more than _
other Members to be appointed by the Central Government
(iv) In the context of corporate governance, Narayana Murtt1; Committee was formed in the
year 1x4
(b) State with reasons whether true or false (Mere conclus,on .vJt rJt s:.df1ce)
red 111e charge become s vc'dab e





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Suggested AnJwers to Quetioll! (S.vllobus )008)- Dl!Lw11&41r 1009
Answt:r to question no. 51a)
(1) 5 crores
(ii) Uqu1dity
(iii) 10
(iv) 2003
Answer to guestion no. 5I b)
(i) FALSE. Where the comJ)any fails to register the charge, the charge becomes void(not voidable)
as against the creditor as well as the liquidator. The given statement Is thus false on two
counts.
(ii) FALSE. As per section 77A(2) of the Companies Acts, 1956, the buy-back of shares can
effected , inter alia,where a special resolution ha,s been passed Inthe general meeting of the
company authorizing the buy bacl<..This clause shall not be applicable,where the buy back is
or Jess than 10% of the total paid up equity capital and free reserves of the company and such
buy back has been authorized by the Board by means of resolution passedat irs meeting.
(1ii) FALSE.Amalgamation inthe nature of merger is to beaccounted as perthe Pool ng ofinterest
Methodand in case of amalgamation inthe nature of purchase accounting needs lobe done as
per the Purchase Method.
Question:
6 {a) A public company sought extension of time from the ROC for holdingAGM up to of 3 months
and it was granted. However, when the actual AGM was to be held. the company faced a
situation that the annual accounts were up to a period beyond which it is permissible. The
company contended that since ROCgranted .extension of time for holding the AGM, the same
would also be applicable for presentation of accoun as well. Referring to the relevant provisions
of the Companies Act, 1956 state whether the contention of the company holds good. 4
(b) The Soard of Directors of Moonshine Ud. are contributing every year to a charitable ti'\JSI a sum
of Rs.1lac. Ina particular year. the company suffered lo$.ses and the directors arecontemplating
to contribute the same amount in spite of the losses.In this connection,discuss whether the
directors can do so. 4
(c} Ganga Plastics Ltd.and Yamuna Tubeplasts Ltd. entered into a scheme of amalgamation by
which formerwould transfer itsentire undertaking to the later. However, the Central Government
raised an objection that unless ' theobjects clause ol !he companies ate similar and the
Memorandum empewers to do so. the scheme of amalgamatioo cannot be permitted. Is the
objection of the C tral Government tenable? 7
Answer to question no. 6(a)
While a company may hold its AGM in a year within the timelimit of 15 months as enjoinedin
Section 166(1). it may stW contravene Section 210. A company and its directors may commit
offences if they do not fulfill the three requirements and failure to comply with anv of them.
unless e n extension of time has been given by ttle ROC for holding the meeting.However the
extension of time for holding the AGM is only with reference to the meeting and not to that of
submission of accounts.
Answer to question no.S(b
The power to givedonation to general charities does not hinge on the existence of any profit
during the year in question . In such a case they may contribu lc up to the limit given in Section

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2g3 (1) (e), even though the company maybe functioning 1 o loss.As stipulatecr in-t.'le section,
a pub c company can contribute in any linanclal year not exceeding Rs.50,000 or 50% of its.
average net proftis during t'le three preceding financial years whichevar is grf'.at!!r.
Answer to gueitlon " 2 6!cl
The power to amalgamate may be derived from the Memoraf;dum of Assoeiat':ln of tfle company
or rts may be acquired by resorting to the Companies Act, 1956:
Section 17 of the CompaniesAct, 19561ays down that a company which aes1res to amalgamate
will'l another company ..viii e nece&Sa.'Y steps to come before a Court for alte.-ation of it:;
Memorandum authorizing such amalgamation. The Comr:anies Act, 1956confers a rignt o;1a
comp3ny to alter Its Memorandum inaid of amalgamation with anothercompar.y.The ptovisioos
con!ained insecltoo 91 to 396 and494 ,illustrate instances of statutory power of amalga111ating
a company with anotlier comp.any without any specific power in the Memorandum (Hari Krishna
LoKia vs. Hoolur>goor Tee'Co. Ltd. 1996].
Section 391 is not coly a corr.pleta code,but 1tis the nature of a single window clearance
system to ensure that parties are not put to avoidable, unnecessary and cumbersome procedura
lor makll'l9 repea:e: applications to court or va.;ous alternations and changes.What ts to be
seen Is: the over an fairness midfeas.ibllity of s<:t1eme of amalgamation and there need not be
any 'unison of objects' of l>oth transforor and the transferee company. [R Morarjee Gokvldas
spg Wrg.Co., 1995).
To amalgamate with another company is the power ofthe company and not an object of the
company. (Re. Hari Krishna Lohia. 1996). lrre.spec ve of the objects clause, the Cou:t is
err.powerQd to sanction scheme of amalgamation provided it does not prejudice Inainterest of
the public. Therefore, ba::OO onthe above judicialrulings, tt:econl<mtionof the Ctlntrai Ocwrr:ment
is not tenable in taw.
Question:
7.(a) Fruits ltd. has its subsidiary company Oranges ltd., which was formed to carry out some of
the objqctives of the former.FN1ts Ltd. $USpends one of its severe:!businesses, by passing a
resolution at the company's extra-ordinary generalmeeting,with effect from 1''January,2009.
The business: so suspended cor.timks to be suspe nded until the end of March. 2009.On 1"
April2009 ,a group of shari!ho!ders of Fruits; Ltd. File a petition inthe Co.urt for w ,dmg of the
company on the ground of suspension of business by the company.
Referring to the provisions of the CompaniesAct,1956,
(ij State whether the content/on of the shareholder s is !ega:ly correct;
(ij) Will your answer be Li1e same in case Fruits Ltd. suspends all its business? 8
[b) What do you comprel\end bythe term "Corpprate Governance"? Explain how the provisions of
the CompaniesAct. 1956relahng toAud:t Committee v.111 help in reaiizing soma of the objectives
of Corporate Governance .
7
Answer to gyestlon n o. 7Cal
The problem Isconcernedwi!n suspension ofbosir.ess by a company.
Section 433 prov:des that a co'mpc; ny may be wound up the court if it does not commence
1ts business witllill a year from !Is incorporation or suspends 1:s busmess for a whole year, it.
The cor\tention of the shareholders of XYZ Ltd:hatthe company is liable to be\I.Ound up on the
ground of suspension ofbustness, is nottcmable for the foUow1n9 reasons:

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S11ggested Answers ro Que$rforu ( llob ts 2008)- December 1009


(i) (a} A Company may be woun.d up by court if acompany suspends its business fQr a wholeyear. In
the givensituation, the business was suspended only on 01.01.20-09, Hence on 1..April, 2009,
it c nnot be said that the business has baen suspended for.the whole year, so as to attract the
provisions of Section 433 (c}.
(b) Where a company having morethan one business discontinues one of them, it cannot be said
to nave suspended business within the meaning of Section433 (c).
(a) Where a company ceases to do any business but isaholding company of subsidiaries engaged
inthe pursuit of the business,which itwas previOusly doing, it cannot be said the company has
suspended its business (Ref: Easltlfn Telegraph Company Lid.)
(ti) Even if Frutts Ltd suspended aU its businesses,the suspension was not for a period of more
that 1 year as on 01.04.2009 and hence the provisions or Section 433(c} are not applicable.
Again for the reasons stated in (i) (c) above Fruits Ltd cannot be said to have suspended its
business as its subsidiary Orange Ltd, Is carrying on the business,
Answer to guesUon no.7(b)
CORPORATEGOVERANCE
.

The vast amount of literature availableon the- subject ensures that thereexist jnnumera bredefinitions
of corporate governance.To get a fair view on the subject itwoukf be prudent to give a narrow aswell as
a boarddefinition of corporate governance .
In a narrow sense, c<Jrporate governance Involves a set of relationships amongst the companys'
management , its board of direct9rs. its shareholders, its auditors and other s.takehofder5. These
relationships, which involve various rules andincentives,provide the structure through whlcl1the objectives
of the company are set,and the meansor attainingthese objectives as well as monitoring performance
are determfned. Thus. the ey aspects of goodcorporate gov.ernence include transparency orcorporate
structures andoperations,the accountal>ility of managers andthe boards to shareholders,an<fcorpor:r te
responsibility towards stakeholders . .
Ina broader sense, however,good corporate governance, the extent to which companies are run inan
open and honest manner. is important tor overall market c<Jnfidenee, the efficiency of capi1al allocation,
the growth and development of countries' Industrial bases, and ufhmalely the nations' overall wealth
and welfare .
AUDIT COMMITTEE
For better corporate governance, the concept of Audit Committee for companies a! ln oduced by
section 29?A of the"Companies Act,1956.Every public company having paid upcapital of not ress than
Rs. 5 Crores must have anAudit Committee.
The auditors .the internal auditof, if any,and the dirootor-in-<:harge of finance shall attend and participate
at meetings of tha Aud t Committee {Section 292A (5)]
As,per section 292A (6) of the sald Act, the functloris of the Audl!Committee include the following:
(a) TheAudit Committee shoulddiscussWith the auditors periodically about lntemal control systems.
the scope of audit includif\g the observations of the auditors.
(b) TheAudit Committee should reviewhalfyearlyand annual linancial statements before submission
to the Board.
(c) The AUdit Committee should ensure compliance of internal control systems.
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The Audit Commltt e shafl have aut orlty to Investigate into any matter in relation to the Items specified
in this section or referred to it by the Board and for thi? purpo$es,shall have full access to information
contained inthe recordsof the company and external professional advice, if necessary (Section 292A
(7) ofthe Compal'!lasAct, 1956),
The recommendations of the AuditCommittee on any matt r relatingto financialma,.agement Including
the audit report, shall binding on the Boardand if the Board does nor accept the recommendations
of the Audit Committee, It shall record the reasons therefore end communicate such reasons to the
shareholders.[Section 292A (8} & (9)of the Companies Act. 1956!.
The above provisions of the Companies Act, 1956 relating to powers and functions of theAudit Committ&e
relating to financial statements will helpinachieving one of the objectives of corporate governance .I.e.,
accountability and avoidance of poor.financial reporting. Italso ensures thi:it the companies are managed
inclean and transparent ma ner.
Question:
B.(a) Can it be said that management audit incorporates il'l itself,an efficiency audit? What are the
mainobjects of efficiency audit? 7
(b) State the importance of going concern concept in preparation of corporate financial statements
in India. How is the term foreseeable fvture defined inthis context? 8
Answer to qu!!lloo n9, s (a
Management AuditIncorporates in i elf an efficiency audlt. Efficiency audit ensures "application of the
basic economic principle so that resources flow into the mos.t remunerativechannels". Themain object
of efficiency audit is to ensure that
1. Every rupee investedincapital or inother fields give the optimvm returns and
2. The pla.rmlng of Investment between the different functions and aspects is designed to give
optimum results.
The parameters for measuring eftictencywithIts concomitant details are
1. Overallrate of retum on capital employed
2. Better capacity utilizatio"
3. Better utilization of raw material, power, labor; eqvipments ,and finance
4. Effective incentive system
5. Better export performance and Import substitutron
6. CostControl
It is nec&$sary to make study activity wise s.o as to identify areas ot deficiency In particulars activity.
To conclu{!e we can infer saying that Investor io order to protect hisinvestment inany company expec}S
proper exhibition of corporate governance which is taken care by Management Audit as Management
Audit would encompass compliance audit,efficiency audit, propriety audit and systems audit as well
as management audit is concerned with the overall objectfves of an organization.
Answer to question no. 8fbl
Management may not prepare financial statements applying going concern basis in case there exists
signlficant doubt about the going concern status olthe enterprises.The point has not been taken care
of in section 217(2AA).
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Suggested Answer.! to Questions (S.dlohus 200!/j- Decem btr'* 2001J


lr lndta preparation and presentation of corporate financial statements are governed by accounting
pol'c1es stated 1n the Companies Act and any other statutes Ittat govern the reporting ent1ty, accounting
standards and other documents stating accounting policies, measurement and disclosure issued by
the Institute o Chartered Accountants of India or any other regulatory authority like SEBI. RBI, IRDA
e:c Tt-.ey together form Indian GAAP In fact while preparing financial statements it IS necessary to
follow Indian GAAP.
Corpora:e ftnanc al statement are prepared following "go1ng concern' assumption which imphes :hat
the repocting ent1ty IS ex pected to continue operations in the foreseeable future and it has ne1ther the
trten:1on nor necessity of liquidation or of curtailing the scale of operations. In India the Corporate
managernent 1s not requ1rec to make expliCit disclosure as regards the validity of gomg concern
assumption. The term foreseeable future is also not defined in the accounting standard. Considering
the uncertaint1 es involved t n the predication of business continuity, foreseeable future should not taken
as distant future.
Paramete ;s of identifying going concern uncertainty:
Forecasts and budgets
Borrovnngs requirement
L1abi l 1ty management
Cont1ngent liabilities
Produc t and markets
Financi al risk management
Other factors t ncluding consistency of earning, stability of cost base, recurring operation losses, arrears
of divioends, wor i< stoppage, etc.
The Institute of Chartered Accountants of India has issued SAP - 16 Going Concern. This audit standard
attempt to capture going uncertainty in the of ISA -23. Generally,financ 1cl statements are prepared on
the basts of fundamental assumption of going concern. It is necessary for the auditors to cons1der the
appropnateness of the going concern assumptions. The auditors should consider the existence of the
follow1ng tnd1cat1ons which risks the going concern
Assump!IO n :
Financial Indications
1i Negative net worth or negative working capital
2) Fixed term borrowing approaching maturity without realistic prospects of renewalor repayment
or excessive reliance on short term borrowings to finance long ter massets.
31 Adverse key financial ratios
4) Substantial operating losses
Si Substantial negat> ve cash flow from operations
61 Ar rears or discontinuance of dividends
71 Inability :o pay creditors on due dates
8) D.Htculiy in complytng with the terms of loan agreements

9l Change from credit to cash on delivery transaction with suppliers
10) Inability to obtain financing for essential new product d velopmen t or other essential investments

Gruup Ill. Paper P II . Capital Market Analysi.> & Cotporarc Lwvs 17


11) Entering into a scheme of arrangement with creditors for reduction of liability
Operating Indicati ons
1) Loss of key m a nagement without replacement
2) Loss of a m aj or market tranch1se . license. or pnnc1ple supplier
3) Labour difficulties or short a ge or importa t supplies
Other Indications
1) Non-Compliance with capita ,or other statutory requirements
2) Pending legal proceedmgs against the e"ltity may if successful result 1 n JUdgments that could
not be met
3) Changes in legislation or government pol icy
4) Sickness of the entit under ny statutory definit i on
5) The significance of such de ications can often be mitigated by other factors.
To resolve the doubt about the appropriateness of the going concern assumption the aud1tor should
gather sufficient audit evidence.
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12 Suggested Answt'rs to Questions {Syllabus 2008)- June 1010


SECTION II(40 Marks)
(CORPORATE LAWS)

Answer Question No. 5 which is compulsory and any two from the rest in this section.

Question:
S(a) State with reasons whether true or false (Mere conclus ion will not suffice):
(i) A company having a paid-up share capital of As.50 lakhs or more can appoint a sole
selling agent with the approval of the CentralGovernment.
(ii) A stalement in lieu of prospectus filed when shares are not issued to publ c, but private
sources need to be signed by any two Directors of the company.
(iti) The guidelines for good Corporale Government 2009 brought out by Ministry of Company
.affairs are for voluntary compliance and 1\re not mandatory. 2 x 3
(b) Fill up the blanks with the appropnate answers:
(i) Alternation of share capital requires lhe passing of resolution.
(i) Mr. Anup Kumar is a director of SHEETAL LTD which f ailed to file its annual return from
the year 2006.07.The maximum period for which Mr.Anup will be disqualified from becoming
a director in any Public Limited Company is years .
(iii) Clause of the Listing Agreement deals with principles of Corporate
Governance.
(iv) The Committee set up by SEBI submitted s report in February 2003 on
Corporate Governance 1 x 4
Answer to Question No.S(a)
(i) FALSE
A company having a paid up capital of As 50 lakhs or more shall not appoint a sole sellingagent
expect with the consent of the company according by a special resolution and the approval of
the Central Government. Thu.s passing of a specialresolution in a meeting of members Is also
required.
(ii) FALSE
Statement in lieu of prospectus needs to be signed by every person who is named as director
in the statement.
(iii) TRUE
The recently gUidelines f or good Corporate G<?vemance 2009 brought out by the Ministry of
Companies Affairs are for voluntary compliance and emphasize that good Corporate Governance
practices enhance companies' value and stakeholders ' trust resulting in robust development of
capital market, the economy and also helps in the evolution of a vibrant and constructive
shareholders' activism.
Answer to Question No.5(b)
(i) Ordinary
(ii) 5 years
(iii) 49
(iv) Narayana Murthy Committee







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Group Ill . Paper F-P/1 : Capital Mark r Analysis & Corporatt lAws 13
Question:
6{a) The official liquidator of VASUDHA LTO receives a notice from a trade creditor of the Company
that the court has passed a decree In its favour, relating to the dues for services rendered to
VASUDHA LTD,e.nd the amount specified in the court decree should be paid first, prior to the
clearing of dues of workmen.The same is owosed by the workmen.Advice the official Liquidator
suitably; with reference to provisions of the.Companies Act ,1956. 7
(b) Anapplication was filed by Mr.Lalit Modi under Sec. 403 of the Companies Act, 1956 seeking
direction to an annual general mcet.ng (AGM) scheduled to be held on 10" June, 2010 at the
factory premises instead of the reg1steredoffice of the Company, and also to adopt the accounts
and reappdintments of auditors at the AGM, in accordance with the outcome of his petition. The
respondents submitted that the applicant was a party to the meeting held for the amendment of
articles 15 and 16 and to S!Jbstitute a new Artic le 16,that the petitioner had signed the Minutes
and lhat the necessary From 23 and filed with the Registrar of companies for shifting the
registered office to its new location. Is the claim of the applicant tenable? 4
(c) Where the Central Government is of the opinion that a number of the Competition Commission
has acquired such financial interest that would affect prejudicially his functions as member of
the Commission,can sucha member be removed? Explainwith reference to the relevant provisions
of the Competition Act,2002. 4
Answer to Question No.6(a)
The situation in the question is covered by the provis1ons of section 529A of compames Act, 1956
read wit h section 529 and 530.
The effect of combined reading of these sections that the workmen of the company become secured
creditors by operation of law to tho extant of the workmen 's dues and ar entitled to proportionA l
payment along with other secured creditors.
If there is no secured creditor then the wor1< men ol the company become unsecured preferential
creditors under the said 529A to the extent of workmen's dues.
The purpose of the said section 529A is to ensure that the workmen should not be deprived of their
legitimate cla1ms in the event of the liqu1datron of the company and the assets of the company would
remain charged for the payment of workmen's dues and suchcharge will be pari passu withthe charge
of other secured creditors. There is no other statutory provisions overriding the claim of the secured
creditors except the said section 529A.
Thus under the said section 529A,the dues of the workmen and the debt due to the secured creditors
are to be treated pari passu and have to be treated as prior to all other dues.
Thus , the law is very much clear in th1s respect and the Hon'ble Supreme court of India held in the
case of [UCO BANK (1994) 81 comp, Case 780jthat the provisions of Section 529A of the Compan1es
Act 1956 will over ride all other claims of the creditors even where a decree has been passed by a
Court.
In view of the stated legal posit1on ,the contentionof the workmen of VASUDA LTO is va!id and the
off cial liqUidator will have to pay their dues as provided in section 529A of the Companies Act.
Answer to Question No.6{b)
No.Mr Lalit Modi, the applicanVpetitioner is not correct in his claim, since all the formalities for shifting
the registered office of the company were undertakenduly taking the approval of the shareholders ina
proper1y convened meeting 1n which the petitioner/applicant also had participated and signed in the


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14 Suggested Answers r o (}u1!$lions (Syllabus 2008)- June 2010


Minutes for the alteration of Articles of Association, his present request for changing of venue of AGM
is not tenable.
As per Sec. 166(2), the Company has to hold the AGM only at its Registered Off1ce and there IS no
reason to shift the proposed meeting to a new location.
It was so held by the Company L-aw Board in MYLSAMY Vs .SRI GAJENDIRA PAPER AND BOARDS
P.LTO (2009) 153 Cornp Cas 2 (CLB) and the application was dismissed.
Answer to Question No. 6(c)
1 Provisions of section -11(2) of the competition Act ,2002 empower the Central Government to remove,
by an order, a member of the Competition Commission of India from his office if such member has
acquired such financial interest as is likely to affect as is likely to affect prejudicially his functions as
a Member of the Competition Commission.
However ,Provisions of section - 11(3) of the said Act put some restrictions on such powers of the
Central Government.
According to this section. in case as stated in the question, the Central Government wants to remove
a member of the Competition Commission from his ofllce, it has to make a reference to the Supreme
Court. The Supreme Court shall hold an enquiryinaccordance with the procedure formulated by it and
report that the member in question ought to be removed from his office.
Thus,the Central Government can remove a member of Competition Commission from his office by
following the a\><>ve procedure.
Question :
7(a) LMN LTD was incorporated on tJune,2007.On 1March2010a political party approaches the
company lor a contribution of As . 10 lakh:; for political purposes.Your advice is sought w1th
re'spect to the under mentioned issues:
(i) Is the company legally authorized to give this political contribution?
(11) Will it make any difference if the company was in existence on 1"April,2007?
(11i) Can the company be penalized for violation of the applicable provisions relating to political
contribution?
(iv) What are the disclosure requirements in this regards? 2+2+2+2
(b) The Audit Committee of LATHA PHARMA LTO constituted under section 292A of the Cempanies
Act, 1956 submitted to the Board of Directors a report containing its recommend'ations. These
recommendations were however not accepted by the Board.In this scenario state your views
on the following:
(i) Can the Board adopt the stand of not accepting the audit Committee's recommendations?
(il) If yes, that the Board does not accept the recommendations what should the Board do?
(ii) How should the Chairman of the Audit Committee respond? . 2+2+3
Answer to Question No.7 (a)
(i) Only a company which had been in existence for 3 years can make cont ribution to political
parties. Since LMN ltd had not completed three years of existence on 1" March,2010 it Is not
eligible to-give political contribution.
(ii) Yes,Because In that case,LMN Umited shall complete three financial years of its existence,
therefore, will be eligible to give politicalcontnbubon.






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Group Ill : f!aper F-P II . Capital M arker Analysis & Corporate Laws 15


(Iii) A company will b eligible to give political contribution subject to the congition that such a
contravention of the provisions of this section will make a company liable to fine which may
extend to three tjmes the amount so contributed.
Further every officer of the company in default would be liable to imprisonment for a term which
extended to three years and also toline.
(iv) The amended section 293A seeks to impose an obligation on every company to_disclose inits
profrt and loss account contributions made by it to any political party or f or any politicalpurpose.
Con1ravention of the provtsions of this section wiff make a company liable to line which may
extend to three times the amount so contributed. Further every officer of the company indefault
would be liable to imprisonment lor a term which may extend to three years and also to line.
Answer to Question No.7(b)
(i) As per Section 292A (6) the recommendations of the Audtt Committee shall be binding on the
Board of Directors, In so far as relating to the Financial Management including audit report . In
aspect of others matters, the recommendations are not bringing on the board.
(it) Section 292A(7) enjoins that if the Board does not accept the recommendations of the Audtt
Committee, it shall record the reasons therefore and communicate such reasons to the share
holders.
(n As per Section 292A(t0) of the Companies Act1956 ,the chairman of the Audit Committee
shall attend the Annual General Meeting(s) of the company to provide any clarifiCations on
matters relating to audit. Beyond this, the Chairman of the Audit Committee cannot do anything
in the case of non - listed companies.Itmay be noted that in case of listed companies,clause
49 of the listing Agreement gives more power to the Audit Committeein this context.
Question:
8(a) SEBI has introduced Corporate Governance ina comprehensive manner to protect shareholders
interests as well as provide teeth in monitoring Companies' performance through independent
Directors. Discuss. 6
(b) State some of the procedures which an auditor has to follow in order to evaluate going concern
uncertainties. 6
(c What were the recommendations of the Narasimhan Committee relating to percentage of
independent directors? 3
Answer to Question No. 8(a)
An outline provided by the Confederation of IndianIndustry (CII) was given concrete shape in the
Bir1a Committee report of SEBI,SEBttmplemented the recommendations of Bir1a Committee and the
Narayana Murthy Committee worked for further relining the rules of SEBI. These recommendations
were implemented through the enactment clause 49 of the listing agreements.
The Committees which were created for the purpose were:
1. Audit Committee
2. Share holders grievance Committee
3. Remuneration Committee
4. Share Transfer Committee









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/6 Suggested Answers to Questions (Syllabus 2008) June 2010


A udit Committee :

viewol interest olshareholders andefficiet cy.ThisCon-mttee alsoasc.ISSed indelaiquarterly perfoonances
taking care for proper disclosures and transparency. The annual report included a report on a corporate
Governance, Corporate Social responsibility and Management discussions on future plans.
Sbareholdt[l Grleyance Commltte:e.:
The interests of the shareholders regarding dividend payments ,changes of addresses, any grievance
against the company were discussed and disposed of every quarter and the status Is Indicated Inthe
quarterly report.
Remuneration Committee:
Remuneration of whole time Managing Directors was recommended after application of mind as well
as the relevant sections of the companies Act approval in the GeneralMeetings of the Share holders.
Share transfer Committee :
With dematerialization. transfer of shares have become more transpare nt. However, the Committee
looks into the aspects of insider trading and any possibilities and malpractices.
Answer to Question No. B(b)
Evaluating the going concern uncertainties
Inorder to evaluate various going concern uncertainties anAuc1or needs to follow certaln procedures
which may include
1} Analyze and discuss cash flow, profit and other relevant forecasts with management
2) Review vents ......,..urring after the balance sheet date f or items affecting the entity's ability to
continue as a going concern
3) Analyze and discuss the entity's latest av.ailable interim financial statements
4) Review the terms of debentures'and loan agreements and determine whether any have been breached
5) Read minutes of the meeting of shareholders, the board of directors and important committees
for reference to financing difficulties.
6) Review the status of matters under litigation and claims
7) Confirm the existence legahty and enforceability of arrangements to provide or maintain financial
support with related and third parties and assess the f inancial ability of such parties to provide
additional funds.
6) Considering the entity's position concerning unfilled orders.
Answer to Quest ion No. 8(c)
RECOMMENDATION:PE8CENTAGE OF INDEPENDENT DIRECTORS.
No less than 50 percent of the board of director of any listed company,as well as unlisted public
limited companies with a paid up share capitaland free reserves of As. 10 crores and above, or
turnover of 50 crores and above, should consist of independent directors -independence being
defined in ear1ier recommendation.
However th1s will not apply to
(1) Unlisted public companies, which have no more than50 shareholders and which are wit hout debt of
any kind from the public, bank or financial institution,as longas they do notchange their character.
(2) Unlisted subsidiaries of listed companies.
Nominee directors will be excluded bothIrom the denominator .






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B. 3
c. 4
0. 5





SECTION - II(40 Marks)
(Corporate Laws)

Answer Question No.5 which is compulsory and any two from the rest, m this Section.
Question:
5. (a) Choose the most appropriate answer from the stated options and write it down (Only indicate
A,B,C or D as you think correct).
(i) ESCORT LTO has 12directors on its Board.The maximum number of non-rotational Directors
the Company can have on its Board is:





(ii) The offtee of the Director becomes vacant of he fails to obtain the share qualifications, if any
required by the Articles:
A. Within 2 months of appointment;
B. Within 1 month of appointment;
C. Within 1 year of appointment;
D. Before appointment.
(ii The concept of Corporate Governance was initiatedon the recommendation of the report by:
A. Confederation of indian Industry (CII)
B. Dr. Y.V. Reddy;
C. Mr.Kumar Mangalam Birla;
D. Narayana Murthy.
(iv) An application to investigate the affairs of a public Company where the shareholders are
scattered allover the country can be made to the National Company Law Tribunai(NCLT) by
A. Any one hundred members;
B. Any two hundred members;
C. Not less than one f ifth of the persons on that Company's register of members:
0. Not less than one fourth of the persons on that Company's register of members;
1X4=4
(b) Fillin the blanks withappropriate answers;
(i) Buy back of equity shares by an Indiancompany should not exceed __% of its paid up
equity capital in the financial year.
(ii) In the context of classification of risks, fraud will fall under_ __
(iit) The membership of the Governance and nominating Committee consists of at least-----
each of whom shall meet the Independent requirements established by the Board.
(iv) In the case of a listed company, in addition to those stipulated In Clause 49of the Usting Agreement,
Section__ of the Companies Act 1956contains additional requirements for Corporate Governance.








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(v) The Status of litigation and claims (need to/ need not) be examined lor evaluating
going concern uncertainties .
(vi) Annual returns of a Company should be f iled with the Registrar of Companies within _
from thedate of annualgeneral meeting. 1x6=6
Answer to Question No.5la):
(1) c
(it) A
(ii c
(iv) B
Answer to Question No.5 (b);
(i) 25%
(ii) Legal risks
(ill) 2 Directors
(lv) 292A
(v) Need to
(vi) 60 days
Question:
6.(a) MR.VASUDEB was appointed as Director of ZISLEEN LTO on 2"" April2010. The Articles
of Association of the Company provides that the qualification of a Director shall be holding of
at least 10shares inthe company. Mr.Vasudeb applied for 10equitysharesolthe Company
on 31" May 2010.But the shares were allotted only at the Board Mooting held on 12"' Auguct
2010.
Examine with reference to the relevant provisions of the Companies Act 1956 whether Mr.
Vasudeb has emplled with the requirements relating to qualiftcation shares. If not what are
the consequences? 5 + 2
(b) $tate the importance of a remuneration Commtttee.in the con1ex1or Corporate Governance.
What are the responsibilities normally assigned to such a committee? 3 + 2
(c) State any 3of the additional requirements stipulated in Clause 49 of the Listing Agreement
which are silent in Section 292A of the Companies Act 1956.
3
Answe r to Question No.6 (a):
The empanies Act 1956 does not provide for any share quahllcation of any director. But Regulatton
66 of Table-A Provides that a dtrec1or must held at least one share inthe Company.
Usually the Articles of a company provides for holding qualificalton share by a director. Where a share
qualification has been prescribed In the Articles of a Company which is a public company or a private
company, which is a subsidiary of a public company, the provision of section 270 regarding holding of
share qualification by a director shall apply whereby such director must take his qualification share
within 2 months after his appointment.
If a person acts as a director without acquiring the qualification shall in accordance. With the provision
of section- 270, he shall be punishable with fine , which may be extending to As. 500 for every day
during which he continues to act as director (section -272). Moreover a director who fails to hold
qualif ication shares is liable to vacate his office. In this caso MR. VASUDEB was appointed as







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Director of ZISLEEN LTO on 2"" April2010.He appliedfor shares of the Company on 31" May 2010
which was allotted only at the Boardmeeting held on 12"August 2010. Unless the shares applied for
by Mr.Vasucleb has been allotted in his favour.it cannot be said that he held the shares before expiry
to two months from the date of his appointment Therefore Mr. Vasudeb must vacate his office.
Answer to Question No.6 (b}:
Remuneration Committee:
Ills now a universally accepted proposition of corporate governance practice that Board of directors of
companies appoint appropriately composed remuneration committees to work out executive
remuneration of their behalf .The combined code of the UK says that the remuneration committee will
be responsible for working out remuneration packages 1oattract retainand motivate executives of the
quality required".
The committee should decide where to position their company relative to other companies and take
account of comparable remuneration and relative performance.
W1th regard to the composition of the Committee on overwhelming majority of guidelines suggest that
it be composed exclusively of independent non-executive d1rectors. The committee would make its
well considered recommendations to the Board for final decision.
The following responsibilities are normally flSSigned to a remuneration committee, which should have
written terms of reference:
(i) Remuneration packages and service con tracts of the ECO and other senior executives.
(i) Remuneration packages for non-executives d rectors
(iii) Any company share and other Incentive schemes.
(v) Company superannuation andpension arrangements .
Answer to Question No.6 <c :
AdditionalAeauiroments stipulated as oer Clause 49:
The following add1llonalrequirements are stipulated as per clause 49 of the listing Agreements which
are silent in Section 292A of the companies Act ,1956:
fr) The Audit committee shouldwrite such of the executives as itconsiders appropriate (andparticularly
head of finance function) to be present at the meeting of the committee, but on occasions it may
also met without the presence of any executive of the company.
(u) The company secretary shallact as secretary to the committee.
(iii) The audit committee shall meet at least thrice a year .One meeting shall be held before finalization
of annualaccounts and once in every six months.
(iv) The quorum of theaudit committee shall be two members or one-thirdof the members of the audit
committee whichever Is higher and minimum Gf two independent directors.
(v) The powers and role of the audit committee are elaborately contained insub-paragraphs C&Dof
Paragraph-If .
Question:
7.(a)Weak Tweak India ltd made an initial public offer of 2 lakh equity shares.Can these shares be
considered as 'Goods' under the Competition Act 2002 before allotment? 3
(b) INSTABLE FERTILIZERS LTDhas been continuously incurring losses; the company mortgaged
its machinery to Mr.BULLY one ol its creditors on 1
51
September 2009 relating to outstanding of







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As. 15 lakhs due to him. The other creditors-of the company filed a petition for winding up the
Company_ on 19"' December 2009. The company was ordered to be wound up on 30" April 2010.
Discuss whether the Official Liquidator can declare the transaction of mortgage with Mr. Bully as
Invalid. .6
(c) Write a brief note on Audit Committee. 6
Answer to Question No.7(a):
Share before allotment are not goods
As per section 2 (i) of the Competition Act ,2002.' goods means goods as defined In the sale of Goods
Act,1930, and includes
(a) products manufactured,Processed or mined:
(b) debentures, stocks and sharJs after allotment ;and
(c) goods imported in India.
Thus 'shares after allotment' can be construed as goods, but 'shares before allotment' are no goods.
Answer to Question No.7 (b);
Mortgage Infavour of a particular creditor can be declared void
Incase of a winding up by the Court, the winding up shall be deemed to have commenced at the time
of presentation of the petition for the wind1ng up. Thus, where a petition is made to the court and the
court orders the winding up, the order relates back to the date of the presentation of the petition.
As per the section 531,a transaction shall be deemed to be a fraudulent pref erence and consequently
invalid if all the following conditions are fulfilled:
(a) The transaction relates to transfer to property, delivery of goods,Payment of monGy or other
act relating to the property of the company.
(b) It took place within 6 months before the commencement of the winding up the company.
(c) It was an entirely voluntary act and not made under any pressure.
(d) The dominant motive was to give a creditor a preference over other creditors.
In the given case, the winding up o.f the company , commenced on 31" December 2009that is the
date of presentation of petition of winding up. The company had mortgaged its machinery in
favour of the creditor on 1September, 2009, i.e., wrthin the 6 months before the commencement
of winding up. The mortgage was voluntarily by the company, without any consideration, and not
under any pressure. Thus, the dominant motive behind the transaction was to give the preference
to Mr. Bully, the creditor over the others. Since all the requirements of Section 531 are satisfied
in the given case, the mortgage of the machinery made in the favour of the creditor amounts to
f raudulent preference, and is hence VOid. Therefore the Official Liquidator can declare the mortgage
in favour of creditor Mr. Bully as void.
Answer to Question No.7 <c);
A udit Committee:
An audit committee is an operation committee of the Board of Directors charged with oversight of
financialreporting and disclosure. Section 292A of the Act requires every public company having paid-
up capital of not less than rupees five cr'Jres to constitute an audit committee as a commlttee of the
Boardof Directors.This Committee shallconsist of suet) number of directors as its members, as may
be determined by the Board.







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However, the number shall not be less then three. Audit committees are typically empower to
acquire the consulting resources and expertise deemed necessary to perform their responsibilities.
I
The role of audit committees continues to evolve as a result of the passage of the Sarbanes xley
Act 2002.Many audit committees also have oversight of regulatory compliance and risk management
activities.Not for profit entities may also have an audit committee.
Responsibilities of the audit oommmee typicallyInclude:
Overseeing the financial reporting and disclosure process.
Monitoring choice of accounting policies and principles.
Overseeing hiring, performance and independence or the extemaVstatutory Auditors .
Oversight of regulatory compliance, ethics. and whistleblower hotllnes.
Monitoring the internal control process.
Overseeing the performance of the internal audit function .
Discussing risk management policies and practices with management
Question:
8.(a) What do you mean by "Right to Information according to the RTI Act 2004? What are the
objectives of the said Act? 5
(b) It is said that after risk identification takes place, the actions involved in pinpointing suitable
responses to the risk are broadly of 5 types. Elaborate on these 5 types of action. 6
(c) State any 8 of the 14 key aspects of the Cll (Confederation of Industries) code for desirable
Corporate Governance. 4
A nswer to Question No.8 (a):
A bill to operationalise the right to information by s tting out tho practical regime for people to StK;ure
access to infOfmation under the control of public authorities, consistent wrth public interest. inorder to
promote openness, transparency and accountability in relation to matters connected therewith or
incidental thereto.
(i) This Act may be called the Right to ilformation Act-2004
(ii) It extends to the whole of India except the state of jammu and Kashmir
(Iii) It shall come into force within 120 days-of it being enacted
(iv) Where State Legislation exist dealingwith the right to access information; a person will have
the right to seek inf ormation under the State law as well as under this Act, if the Information
pertains to a subject under the State list in Schedule 7 of the constitution of India.
Objectives of the Act:
) Give effect of the fundamental Right to information, which will contrj bute to strengthening
democracy ,improving governance, il'lCfeasing public participation, promoting transparency and
accountability and reducing corruption.
Establish voluntary and mandatory mechanisms or procedures o give effects to right to ir1formatlon
in a manner which enable persons to obtain access to records of public authorities in a swift,
effective inexpensive andreasonable manner.
_. Promote transparency, accountability and effective governance of aU public authorities by including
but not limited to,empowering and educating all persona to:understand their rights in terms of
this Act in Ofder to exercise their rights in relation to Public al!'horities.







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)> Understand the functions an operation of pub1ic autho ties;and effectively participating in decision
making by public authorities that affects their rights.
Answer to Ques1lon No. 8 (b);
This step Identifies the potentialrisk (or opportunities) facing the project.It Is important not to judge
the nkelihood of a risk at this early stage. This isdone ina controlled manner at a later stage.Attempting
to form judgments while brainstorming a fist of potential risks may lead to hurried and incorrect decision
to exclude risks.
Once identified risks are all external in the risk log. Thiscontains details of all risks,their assessment,
owners and status. The risk log isa control tool for the project manager, providing a quick reference to
the key risks facing the project, what monitoring activities should be tak1ng place and by whom.
Reference to it can lead to entries.
Identify suitable responses to ri k:
The actions break into broadly 5 categories.
1. Prevention- Terminate the risk: by doing things differently and this removing the risk where it is
feasible to do so.Countermeasures are put In place that either stop the threat or problem from
occurring or prevent it having any Impact on the project or bus1ness.
2. Reduction- of threat of Risk:take action to control it insome way where the actions either reduce
the likelihood of the risk developing and limit the impact on the project to acceptable levels.
3. Transference: This Is a specialform to risk reduction where the management of the risk is
passed to a third party via, for instance, and Insurance policy or penalty clause,such that the
impact of risk is no longer an issue for the health of the project. Not all risk can be
transferred in this manner .
4. Acceptance: Tolerate the rtsk- perhaps because nothing can be done at a reasonable cost to
mitigate it, or likelihood and impact or the risk occurring rate at an acceptable level
5. Contingency:These are actionplanned and organized to come into force as and when the nsks
occur.
Any given risk can have appropriate actionsin any or all of these categories.There may be no
cost-effective actions vailable to deal with a risk, in which case the risk must be accepted or the
justificatiOn of the project revisited (to review if the project is too risky). This may possibly result
in lt rmination of the project. The results of the risk evaluation activities are documented in the
risk tog.If the project is part of a programme,project risk should be examined for any impctc:t on
the programme (and vice-versa) .Where any cross-impact is found the risk should be added to the
other risk log.
Answer to Question No. 8 (c);
Confederation of Indian Industries code for desirable Corporate Governance:
The Cll has recommended the following 14 key as,pects which should be shared with the Board
(i) Annual operatiog plans and budgets together with updated long term plans
(ij) Cap1tal budgets, manpower and overhead budgets
(iii) Quarterly results for the company as a whole and its operating divisions for business segments
(iv) Show cause,demand and prosecution notice received f rom the revenue authorities which are
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(v) Internal audit reports,including cases of theft and dishonesty of a material nature
(vi) Fatalor serious accidents, dangerous occurrencel!. and any affluent or pollution problems .
(vii) Default in payment of interest or non payment of the principal on anypublic deposit and/ or any
secured creditors or financial institutions
(viii) Default such as non-payment of inter-corporate deposits by or to the company or materially
substantial non-payments for goods sold by the company.
(oc) Any issue whichInvolves possible public or product liability claims of a substantialnature,Including
any judgment or order which may have been passed, stric1ures on the conduct of the company ,or
taken an adverse view regarding another enterprise that can have negative implications for the
company
(x) Details of any joint venture or collaboration agreement
(xi) Transactions that Involve substantial payment towards goodwin.brandequity or intellectual property
(xii) Recruitment and remuneration of senior offiCers just below the Board level,including appointment
lor removal of the Ghief Financial OffiCer and Company Secretary
(xiii) Labour Problems and their proposed solutions
(xiv) Quarterly details of exchange exposure and the steps taken by the management to limit the risk
if adverse exchange rate movement. if materiaJ






































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Number of shares outstanding after rights Issue : 800000 Shares
MARKET CAPITAliSATION: Ex-rights price x No of shares outstanding
= Rs.-4().50 X 800000 Rs. 32400000
CALCUlATION OF NEJASSETVAWE PEA SHAREAmR RIGHTS ISSUE;

Paid up capital

8000000
Reserves and Surplus : :t"
Existing 18000000
Premium on Rights issue 6000000 2400000Q
Network of Royal Febrlcs f 32000000
Net asset Value per share :32000000 + 800000 = 40 per share

Answer to Question No 4 (d) :

We know that premium Is comprised of two parts viz Intrinsic value and Time value. Intrinsic value will
be greater than zero only If by exerdsing we get gains. In this case since the option Is not exerdsed, these
premiums reflect the time value of the contract. The fact that there 15 still time left to expiration for the
price to move In a favourable direction means that the buyers are Willing to pay a premium for tM
contract .We would expect that the premium for the August contract would behigher than the premium for
Juty contract and the premium for the July contract would be hlsher than the premium for the June
contract .Obviously the fact that the August contract expires one month after theJuly contract andthat tfle
August contract expires two months after the June contract means that a purchaser would be wRUng to
pay correspondlng1y higher prices for later expirations as there is more time available for the buyer to
exerdse the contract.

The premium for the June contract might be say 3, the premium for the July Contract might be 4.5, and the
premium for the August contract might be S.7S. .

Sl:CTION-U {40 MartcsJ
(Corporate Laws)
Answer Question No. s which rs compufso,Y and any twofrom the resc in this Section.
Question:

5 (a) Match the items in part A. with the most appropriate one in Part 8:
Part A Part B
(I) Appeal against refusal for registration
(II) First directors of the company
(Iii) Memorandum of Assodatlon to contain

certain particulars
(iv) <:adbury Committee
(v) Clau 49 of the listing Agreement
I) Section 13 of tile Companies Act, 1956

(li) Are to appointed and not elected
(Ill) Code of best practices


(lv) Governance Standards
(v) Section 111of the Companies Act, 1956
(vi) Are to beelected and not appointed
(vi!) Code or risk management
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(b) Fill In the blanks in the following sentences by using pproprlate words/Phrases :

(I) For all listed companies as well as public limited companies whose paid-up capital and
free reserves exceed rupae s crore or turnover exceeds rupees crore there
should be a certification by the CEO and CfO.
(ii) The minimum number of member in a Nbminatlon Committee is----
(Ill) Any person aggrieved by any dedslon or order of the Competition Commlsslon may file an
appealto the _
(iv) In the context of dassiftCat ion of- risks, Elections will fall under_ __
(v)' The recommended minimum size of Independent directors In all listed Companies by SEBI is
1)( 5 ::5

Answer to Question No Sla'.

Matching
PlrtA
(I)
(II)
{iii).
(iv)
M
Par1B
(v)
(ii)
(i)
(Ill)
(iv)
.

Answer to Question No 5 lb) :


(I) 7 lQ
(ii) 7 TWO
(iii) SUpreme Court
(lv) 7 Political Risks
(v) 7 One-half of the board


Question:

6 (a) What is meant by "Sweat Equity Share"? When can the same be Issued by a company as per the
provisions of the Companies Act, 1956? 2+4 ..-6
{a) Mr. ANUP KUMAR was a member of the Competition Commission of India. He cea to be
such member on 31It March, 2011. Thereafter,he was offered the post of Executive Director
with appropriate remuneration and perquisites In the following organizations to join his
dutieson from 1
11
June, 2011:
(I) ASHLEEN LTD.,a privet sector public Umlted company, whose case was disposed off by the
Competition Commission under the provisions of the Competition Act, 2002 tn the month of
February, 2011
PllJ2011Pl5.png



Sugges1ed An.pYers To Questio!IS- CMACL + IS

( ii) life Insurance Corporate of India.
You are required to state with relevant provisions of the Competition Act, 2002, the option avail-
able to Mr. Anup l(umar in respect of accepting the above offers. 2+2+2 =6

(c) . DHONI SYNTHETICS LTD. has sent two different notices for holding two separate Annual General
Meetings (AGM),one relating to adjourned AGM of earlier year and another relatins to AGM of
current year.. Both AGMs are scheduled to be held on 30"' June, 2011 one in the forenoon arid
another Inthe afternoon: A shareholder raises an objection that two AGMs cannot be held on the
same day. Is his Contention Correct?
3

Answer to Question No 6 !a)';

Sweat equity shares

For the purposes of sec. 79-A, the expression 'SWeat equity shares' means equity shares ued at a
discount or for consideration other than cash providing know-how or maklns available r ghts \n the
nature of intellectual property rights or value addition by whatever name caile'd ('Explanation.I!'to Sec.
79-A(l)).
lhe expressiOn a company"' means the Mf'llf)al'ty i,oorpora tec:l , formed and reiSttred ul"der the Compa..
nlesArt, 1956 andlndudes lt5 subs1dl-ary company lnrol'pOTated lna country ou ld'e India [ lanatlon
Ito5e<:. 79-A l}),

Issue of sweat equity shares- Notwithstanding anything contained InSec.79 (which deals with the power
of a company to Issue shares at a di unt),a company may issue sweat equity shares of a dass of shares
already Issued If the following conditions are fulfilled, namely - . :

( ) the lssue of sweat equity shares is authorised by a resOlution passe_d by the company In the
general meeting.

(b) the res utlon specifies the number of shares,current market price, consideration, If any,
and the class or Classes of directors o.r employees to whom such equity are to be issued.
(c) not less than on year has at the date of the Issue elapsed since the date on which the
company was entitled to commence business;

(d) the sweat equity shares of the listed company are Issued In accordance with the regula-
tions made by the Securities and E)(change Board of India ih this behalf [sec 79-A (1)).

Answer to Ouutlon No. 6 fb)
. .
The Chairperson and other Members shall.not, for a period of one year from the date on which they cease
to hold office,accept any employment In o connected with the management o af11l nlstratlon of,I!'Y
enterprise which has been a party to a proceeding before the commission under this Act (section 12 of the
Competition Act 2002).

Provided that nothing contained In this Section shall apply to any employment under the Central Govern-
ment or a State Government, or local authority or In any statutory author ity or any Corporat ion estab-
lished by or under ariy Ce(ltral, S ate or Provincial Act or Government Company as defined in ion - 61'7
of the Companies Act, 1956 (1of 1956).



P11J2011P16.png


Sw&gutedA nToQwnliu -CMACL 17

Therefore the refusal on tha grounds that the request was not in English and that the same wa :::'!nt
through email Is not Justffled.
Answer to OUntioo No 7 (b) ;

Checklist onasstanment of risk ownership:

Have owners been allocated to all the various parts of the complete risk process and the full
scope of the risks beina created for? For example, suppliers may be tasted with-ownership of
assessing and evaluating risk as part of their contracts.

Are the various roles ilnd res-ponslbllltles associated with ownership well deflned?

Do the Individuals who have been allocated ownership actually have the authority In practke to
fulfill their responsibilities?

Have the various roles and responsibilities been communbted and understoOd?
'
Are the nominated owners appropriate?

In the event of a change, can ownership be quldly and elfe lvely reallocated?

e Are the differences between benefit and delivery r ks dearly understood illnd, If required, do
they have different owners?
Answer to Oyestlori No 7 lei :

Manasement Audit Incorporates In itSelf an efficiently audit. Efficiently audit ensures "appUcatlon of the
basic economic principle so th4llt resources flow Into the most remunerative channels"'.

The main object of efficiency audit Is to ensure that

1. E tv rupee Invested Incapital or In other tlelds give the optimum returns and

2. The plannlns of Investment between the different filncttons and aspects ts designed to give
optimum result.

The parameters for measurlna efficiency wl.th Its cancomlt4llnt details are

1. Overall rate of return .on capital employed

2. Better capacity utilization

3. tter utilizat i on ofraw material, power, Sabour, equlpments and flnance

4. Effective Incentive system
s.. Better export performance and Import substitution

6. Cost Controt
It Is necessary to make study activity wise so as to Identify areas of defldency In particular actlvfty.

To c:ondude we can Infer saylns that Investor in order to protect his Investment In arrv company e
proper exhibition of corporate governance which is taken care by Management Audit as Manasement



Pll J20llP17.png

18 Sur&tsttd Aruwer;y To Qwstiotts -CMACL.

Audit would encompass compliance audit, efficiency audi . propriety audit and systems audits as well as
management audit Is concerned with the overall objectives of an organezation.

Question:

8,{a)Mc.BHIJSHAN Is holding tlrrepa rofDTredorin fivecompanlesoutofwhich SAMAROH LTD. is one.For
tfle flnandal yer ended on in"' March, :2010, Samaroh Ltd. failed to pay Interest on loans taken from a
flnandall n!itHutlon andr ta tso R"ed to rep;!!{ tt!e matu red deposits.On 1,. July, 2010 Mr.Bhushan accept-
lllli the po$1,obddltional dlf'!e<r In Fl!'dex ltd, submitted a declaration that the disqualification specified
In section 274 of the Companies Att, 1956 fs noL a plicable in his case.
Decide whether the declaration submitted by Mr. Shushan to Fedex ltd. IsIn order. 6

(b)"A good Corporate Governance should have certain basic principles" Enumerate them.

6
(c) State the addltional requlrernents stipulated In Section 292A of the Companies Act,1956, which are
silent in clause 49 of the Usting Agreement. 3

lm}Wer to OuCSSIRfl No Ctl ;

As per section 274(1}(&),a director of a public company shall be disqualified from belns appointed as. a
director in any other public company,If the public company in which he Is already a director-

(a) Does not file the annual accounts and annual returns for any continuous 3 financial
years commendng on and after 1.4.1999; ar

(b) FallSto repay ItsdePosit or Interest thereon due date or redeem Its debentures on due date
on pay dividend and such failure continues for one year more.

In this present case, samaroh Ltd. has cbmmitted the following defaults: '

{a) Flu re. lo pay Jnterut on loans ta from a f1nanda'f Institution for the flnand t year
erldl!d on nn March, 2010. Howelo!ef, such tanuE! does not attract the dls u; nflcallon
unc!'er :sel " .274(11{ 1.since the disqualiflcatlon istncurred only If the default relates to
payment of 'public deposl and not on non-payment or lnlefeSt on 'lti ru.' obtainedfrom
a finandal Institution.
(b) Failure to repay the matured deposit s on due date for financial year ended on 31" March,
2010. .

DeRwlt lllill payment of rrnat urecHiepqsft1. or Interest there.on ld result In appiiC'iJblllty of s.ection
:Z74(l)(g), ontv f such default continues for lyectr or more. 11'1 the absence< o'f nylftfGrmat'IQn,It may be
ssume(j that sueh de:fiu.rlt has not c:on'trnued for lyear, as on 1" July, 2010.AoalrdJngJy ,none o( Lhe
dl_recton of Samarol'tl trd.are> di$ UaHfted un"tfer !S!!'CIJOn 274 1)(g).Hence Mr. 8husfl9o ei O be appointEd
as ail addltlonaldirector of Felled Lid.em t Ju\y zo o. and so the dedaration given by Mr. IS ushc!!'l Is-in
order.








Pll J2011P18.png


Suggested Answers To Questions- CMACl. l9

Answer to Qu stlon No 8 (b) ;

Prlnclp.tes of corporate governance: A good governance should indude the following principles :

(II Re\11ew of opentlon- There should be review of operations of the company at a regular inter-
val. It may Include comparison of monthly/quarterly production and sales targets with actual,
.
cash flow analysis, etc. .

(II) CompUance w1th Statutory and RegulatOfV Requirements - The Board Should ensure compli-
ance with various statuto and regulatory requirements. It may indude clearance of statutory
dues, compliance with FERA regulations,following suitable accounting policies and standard,
etc.

(iii) Appointment of various committees- There should be appointment of various committee to
look after different matters. There can be following committees-{ a) Audit Committee, (b) Griev-
ance Committees,(c) Re_muneration Committee and (d) Investment CQmmlttee, etc.
(a) Audit committee-It should meet periodically to review the effectiveneSs oftkesystem of
Internal controls and reports to shareholders.

(b) Grl van committee- It should look after the grievances from customers, suppliers,
creditors In respect of price, quality, discount, etc. It should also look after the prob-
lems of elCecutlves/emplovees of the organization .

(c) Remuneration committee- Its role should be to fix remuneration of non-executive dl
rectors.It may be fixed In relation to company performance.

(d) Investment committ- It should lool< after the Investment decisions. It shOuld be In
accordance with the guidelines approved by the Board.Shareholders expect that lnv st-
ment decisions are judicious and do not Incur any losses, which affect shareholder's
Interest.

(lv) ContrtbutiCH.t of employees' Union- Employees or worker's union 5f:wuld also contribute sig-
nificantly to good corporilte behaviour by promoting work culture. In this case, Inclusion of
employees or worlcer's representative on the board may be thought of.
(v) Conttfbutlon to Community Development A good corporate governance should help commu-
nity development programme by active partldpation. It should ad pt measures for pollution
control, and follow fair and ethk.al business practices.

Good corporate governance calls for accountabil!tv for all concerned. The Shareholders, Direc-
tors, auditors, executives, advisers and other staff who are associated with the working of the
corporate should combined their efforts to improve the system and ensure good management
practices .
Answer to Ouestlon No Bfcl:

Additional Requirements Stipulated as per Section 292 A:.

The following additional requirements are stipulated as per section 292A of the companies Act, 19S6
which are silent io clause 49 of the Ustlng Agreement :




Pll J2011P19.png








(I}


(II)
20 . SWIIUMI AIUWtn To Q..utiou- CMACL

Theaudit Committee Constttuted shall act In'acxordance with terms of reference to be spedfted tn
wrltlnl by the board.
The rec:omrMnclatton of the audit Committee on any matter relrttng to ftnand;illl manapment
lnducRnc the audit report shala,e blndlrc on the board.

(Ill}

If the board does not aa:ept the recommendations of the audit committee, It shall record the
reasons therefore and c.ommunk:lte such rnsons to the Share holders.



















































PllJ2011P20.png
18
Suggested Answers to Question - CMC


Section II (40 Marks)
(Corporate Laws)

Answer Question No 5 which is compulsory and answer any two from the rest in this section.


Question


5. (a) Choose the most appropriate one from the stated options and write it down (only indicate A,B,C
Or D as you think correct):
(i) In a Public Limited Company there are 10 directors including Managing Director and a
nominee of ICICI. How many directors are liable to retire by rotation?
A. Four

B. Five

C. Six

D. Seven


(ii) MR. RAJESH, a director of GROW WELL LTD died in a train accident. The Board of directors
would like to appoint MR. ARUN KUMAR in place of MR. RAJESH. Which of the following
statements is true?


A. The company has to call for extra-ordinary general meeting

B. The company has to continue with the existing number of Directors till the next
Annual General Meeting.
C. The Board can fill up the vacancy at the Board Meeting

D. None of the above


(iii) Buy-back of equity shares in a financial year shall not exceed

A. 25% of total authorised equity capital of the company

B. 25% of total paid-up equity capital of the company

C. 25% of total called-up equity capital of the company

D. None of the above.


(iv) In the context of classification of Risks war risks will fall under

A. Political Risks

B. Credit Risks

C. Disaster Risks

D. Systems Risks [14=4]
19
Suggested Answers to Question - CMC


(b) Fill in the Blanks in the following sentences by using appropriate words/phrases:

(i) As per clause -49 of the listing agreement where chairman is a Non-executive director, at
least.................................of Board should consist of independent directors.


(ii) After the commencement of the Companies (Amendment) Act,2011, no person, shall, save
as otherwise provided in section 276, hold office at the same times as director in more
than...................companies.


(iii) Section...................to....................of the Companies Act, 1956 contain elaborate provisions
for regulating payment of compensation to directors for loss of office.


(iv) In the case of a public limited company, the director must obtain qualification shares
within..................from the date of appointment.


(v) To examine how a result will change if the predicted financial outcomes are not achieved or if
an underlying assumption changes, managers can use..........................analysis.


(vi) Related party disclosure requirements are spelt out in IAS................................. [16=6]


Answer to Question No 5(a):


(i) C

(ii) C

(iii) B

(iv) A


Answer to Question No 5(b):


(i) One third

(ii) 15

(iii) 318 to 328

(iv) Two months

(v) Sensitivity

(vi) 24
20
Suggested Answers to Question - CMC


Question


6. (a) MS. SUCHANDA has entered into a transaction with GLAMOUR LTD for a contract value of

` 40 lacs. The Articles of Association enjoin that contracts above ` 10 lacs should be approved
in Board Meeting. Mr. Dhuruv, an officer of the company, produces forged documents to her,
which show a resolution having been passed in a Board Meeting approving the contract. Later,
the forgery comes to light. MS. Suchanda pleads that she is protected by the Doctrine of Indoor
Management.-Discuss. [3+2=5]


(b) Can any fine or penalty be imposed on the Public Information Officer of a Government
Department, where he has deliberately delayed the furnishing of information sought for properly,
under the RTI Act,2004?
Is such Levy automatic?

How can the fine or penalty imposed, be recovered from him? [1+2+2=5]


(c) Corporate governance is merely the set of processes, customs, policies, laws and institutions
affecting the way a corporation is directed, administered or controlled. Critically examine this
statement. [5]


Answer to Question No 6(a):


Doctrine of Indoor Management

The Doctrine of Constructive Notice protects a company from outsiders. There is one limitation to
that doctrine. The Doctrine of Indoor Management is an exception to the Doctrine of Constructive
Notice. The Doctrine of Constructive Notice provides that an outsider must read the
Memorandum and Articles of a company. But he is not expected to do more. As far as internal
procedures are concerned, an outsider is entitled to presume that every thing has been done
according the procedures laid down and there is no irregularity. An outsider cannot find out what
is going inside the doors as the doors of the management are closed to an outsider. Therefore
protection to such an outsider becomes necessary. Thus while the Doctrine of Constructive
Notice is a protection to the company against an outsider, the Doctrine of Indoor Management is
protection to the outsiders against the company.
In certain exceptional situations, the doctrine of indoor management is not applicable. The
doctrine of indoor management is not applicable where a person relies upon a document that
turns out to be a forged since nothing validate forgery. A company cannot be held liable for
forgeries committed by its officers.
Thus MS SUCHANDA will not succeed in her Pleading.
21
Suggested Answers to Question - CMC


Answer to Question No 6(b):


As per section 12(4) of the RTI Act, 2004 subject to sub-section (3), where any Public Information
Officer has, without any reasonable cause, failed to supply the information sought, within the
period specified under section 7(1), penalty can be levied.


Such levy of penalty is not automatic. The relevant Information Commissioner shall, on appeal,
impose a penalty of rupees two hundred fifty, which amount must be increased by regulation at
least once every five years, for each days delay in furnishing the information, after giving such
Public Information Officer a reasonable opportunity of being heard.


Any fines imposed under sub-sections (1), (2),and (3) shall be recoverable from the salary of the
concerned officer, including the Public Information Officer, or if no salary is drawn, as an arrears
of land revenue, recoverable within a maximum of six months of the order imposing the fine.


Answer to Question No 6(c):


Corporate Governance


To say that Corporate Governance is merely the set of processes, customs, policies, laws and
institutions affecting the way a corporation is directed, administered or controlled , depicts a
narrow view. It is much more than this. Corporate Governance also includes the relationships
among the many stakeholders involved and the goals for which the corporation is governed. The
principal stakeholders are the shareholders, management and the board of directors. Other
stakeholders include employees, suppliers, customers, banks and other lenders, regulators, the
environment and the community at large.


The stakeholders may be internal stakeholders (promoters, members, employees, management
and the board of directors) and external stakeholders (suppliers, customers, lenders, banks, the
environment and the community at large, government and regulators.)


Corporate governance is a voluntary ethical code of business of companies. According to
Cadbury Committee on financial aspects of corporate governance, It is the system by which
companies are directed and controlled. The Board of directors are responsible for the
governance of their companies. The shareholders role in the governance is to appoint the
directors and the auditors and to satisfy themselves that an appropriate governance structure is
in place.
22
Suggested Answers to Question - CMC


Question


7. (a) Discuss the role, membership and operations of a Nomination Committee. [6]


(b) In the context of management audit, what is meant by control risk vis-a-vis detection of material
misstatements in the financial statements?
In this regard, what is Control Risk at the maximum and Control Risk at less than the
maximum? [6]


(c) An understanding has been reached among the manufacturers of cotton to control the price of
cotton, but the understanding is not in writing and it is also not intended to be enforced by legal
proceedings.-Examine whether the above understanding can be considered as an agreement
within the meaning of section 2(b) of the Competition Act,2002. [3]


Answer to Question No 7(a):


NOMINATION COMMITTEE

Role

The Governance and Nominating Committees role is to determine the slate of director nominees
for election to the Companys Board of Directors, to identify and recommend candidates to fill
vacancies occurring between annual shareholder meetings, to review, evaluate and recommend
changes to the Companys Corporate Governance Guidelines, and to review the Companys
policies and programmes that relate to matters of corporate responsibility, including public issues
of significance to the Company and its stakeholders.


Membership

The membership of the Committee consists of at least two directors, each of whom shall meet the
independence requirements established by the Board and applicable laws, regulations and listing
requirements. The Board appoints the members of the Committee and the chairperson.


The Board may remove any member from the Committee at any time with or without cause.


Operations

The Committee meets at least twice a year. The Committee shall meet periodically in executive
session without Company management present. Additional meetings may occur as the
Committee or its chair deems advisable. The Committee will cause to be kept adequate minutes
of its proceedings, and will report on its actions and activities at the next quarterly meeting of the
23
Suggested Answers to Question - CMC


Board. Committee members will be furnished with copies of the minutes of each meeting and any
action taken by unanimous consent. The Committee is governed by the same rules regarding
meetings (including meetings by conference telephone or similar communications equipment),
action without meetings, notice, waiver of notice and quorum and voting requirements as are
applicable to the Board. The Committee is authorized and empowered to adopt its own rules of
procedure not inconsistent with (a) any provision of this Charter, (b) any provision of the Bylaws
of the Company, or (c) the laws of the State.


Answer to Question No 7(b):


Assessing Control Risk


Control Risk- the risk that the clients internal control policy and procedures are not effective in
preventing or detecting material misstatements in the financial statements.


1. Control risk at the maximum

-Conclusion based upon the auditors judgement that the clients internal control policies and
procedures do not reduce to a low level the potential that the financial statements are free of
material errors and / or irregularities.


-After reaching this assessment the auditor would only be required to document in his/her
work papers the fact that control risk is at the maximum and not the basis for reaching this
conclusion.


The auditor may decide control risk is at the maximum based upon management accounting
technique called cost benefit decisions.


2. Control risk at less than the maximum

Based upon his / her initial understanding of the internal control components, the auditor
may conclude that control risk may be less than the maximum.


The auditors in this situation must evaluate the cost/benefit of existing his/her understanding
of internal controls to make a final decision concerning control risk.


The cost / benefit decision is based upon the audit time involved in extending the auditors
understanding of internal controls, including tests of control versus the time that may be
saved with the possible reduction of substantive audit tests.
24
Suggested Answers to Question - CMC


Answer to Question No 7(c):


As per section 2 (b) of the Competition Act 2002 agreement includes any arrangement
or understanding or action in concert-----


(i) Whether or not, such arrangement, understanding or action is formal or in writing; or

(ii) Whether or not such arrangement, understanding or action is intended to be
enforceable by legal proceedings;


In view of the above definition of agreement; an understanding reached by the
manufacturers of Cotton to Control the price of cotton will be an agreement within the
meaning of section 2(b) of the Competition Act 2002 even though the understanding is not
in writing and it is not intended to be enforceable by legal proceedings.

Question


8. (a) VAIBHAV POLYMERS LTD has an authorised capital of ` 250 lacs. Its paid up capital is

` 200 lacs. The free reserves are to the tune of ` 120 lacs. The company has advanced to other
companies to the tune of ` 180 lacs, as on 30
th
November 2011. On this date, the Board of
directors of the company wants to advance ` 35 lacs to Vasudha Textiles Ltd., without the prior
permission of the shareholders in a general meeting.
- Discuss the correctness of the proposal. [6]


(b) MR. JYOTIRMAYEE has supplied goods worth ` 3,000 to TWINKLE LTD. The company
proposes to appoint him as an independent director in the Board. The total annual purchases of
the company amount to ` 4 crores.
- Discuss about the appropriateness and correctness of this proposal, in the light of provisions of
the Companies Act, 1956. [5]


(c) A group of shareholders of DECEPTIVE TECHNO LTD. filed an application before the Company
Laws Board (CLB) alleging various acts of frauds and mismanagement by MR NAVIN, the
Managing Director & his associates. During this course of hearing before the CLB, the authorized
representatives of the said company contended that the alleged transactions had taken place
several years ago and the company has already removed the Managing Director, who was
responsible for such transactions and hence there is no case before the CLB to interfere in the
working of the company. Against the submission on behalf of the company, the applicants
submitted that although the fraudulent transactions were done in the past and the Managing
25
Suggested Answers to Question - CMC


Director has been removed, but the company is still controlled by the person, who are in leage
with the erstwhile Managing Director and are working as his Henchman.
- State the merits of the applicants arguments and power of the CLB. [4]


Answer to Question No 8(a):


Inter-corporate loans

According to the provisions of section 372A of the Companies Act,1956, a public company and
private company, which is a subsidiary of the public company shall not, directly or indirectly, inter alia,
make any loan to any other body corporate, exceeding 60% of its paid up Share Capital and free
reserves or 100% of its free reserves, whichever is more without prior authorization by way of a
special resolution passed in a general meeting.


In order to arrive at the conclusion whether the directors of Vaibhav Polymers Ltd. Can make the
proposed investments without seeking approval from the shareholders, the amount upto which they
can invest has to be arrived at. In the given case, the two limits are:


Limit 1 (` in lacs)


(i) Paid up Capital 200
(ii) Free reserves 120
(iii) Total 320
(iv) 60% thereof 192

Limit 2


100% of free reserves ` 120 lakh


Higher of the two ` 192 lacs has to be reckoned.


The company has advanced to companies to the tune of ` 180lacs, as on 30
th
November, 2011. On
this date, the company wants to advance ` 35 lacs to Vasudha Textiles Ltd. The total comes to ` 215
lacs, which exceeds the ceiling limit of ` 192lacs.


Hence the Board of Directors of the company cannot advance of ` 35 lacs to Vasudha Textiles Ltd,,
without the prior permission of the shareholders in a general meeting.
(As required U/s 372A of the Companies Act 1956)
26
Suggested Answers to Question - CMC


Answer to Question No 8(b):


Independent Directors

There have been a lot of discussions and debates going on in corporate circles and among
academicians in recent times on the need for role of and importance of independent directors.


An independent director is defined as a non-executive director who is free from business or other
relationship which could materially interfere with the exercise of his independent judgement.
The Companies Act provides a negative definition of an independent director, inasmuch as it renders
ineligible eleven categories of persons to be appointed as independent directors in a company, for
instance, if a person has held any post in a company at any point of time is disqualified to be
independent director of the company. Likewise, any vendor, supplier or customer of goods and
services of the company would stand disqualified, notwithstanding the fact that the amounts of
transaction are insignificant.
In the light of the above, the proposal to appoint Mr. Jyotirmayee, who has supplied goods worth

` 3000 to Twinkle Ltd. as an independent director of the said company is incorrect. Though the
annual purchases may be in crores, the factum of Mr. Jyotirmayee being a vendor, stands in the way
of his being appointed as an independent director


Answer to Question No 8(c):


The powers of the CLB under section 397 and section 398 can be invoked for obtaining relief from
oppression and mismanagement, only where the affairs of the company are being conducted in a
manner oppressive of any member or members or in a manner prejudicial to the interest of the
company. The words are being conducted would indicate that oppression and mismanagement
should be continuous course of conduct and should be present on the date of the application to the
CLB.
Thus, the CLB does not have power to interfere with past and concluded transactions entered into by
a company. At best, the CLB can exercise its power to set aside any transfer of property effected
within 3 months before the date of the application. Further, the CLB can exercise the power conferred
by section 406 to direct the delinquent directors, managers and other officers to refund any funds of
the company that they have retained or misapplied or pay compensation for loss arising on account of
misfeasance or breach of trust. As the applicants have not established the above facts beyond a
vague statement that the management of the company is still controlled by the henchman of Mr
Navin, the CLB will not exercise its powers under the Act. This view is supported by the decision in
Seth Mohanlal Ganpatram v. Shri Satyaji Jubliee Cotton and Jute Mills Company Ltd. (1964) 34
Comp.Cas777.





12 + Suggested Answers to Question CMC

Answer 4. (b)
Banking Ombudsman :
The Reserve Bank of India (RBI) brought about crucial amendments to the Banking Ombudsman Scheme,
2006 which will now enable aggrieved customers to not only appeal against any Ombundsmans decision
but also to appeal in case of complaints being rejected. The appeal could be made to the deputy governors
office of the RBI.
The Ombudsman, however, has the right to reject complaints if they are; not on the grounds of complaint
referred to in clause 8; beyond the pecuniary jurisdiction of Banking Ombudsman prescribed; frivolous,
vexatious, malafide; without any sufficient cause; that it is not pursued by the complainant with reasonable
diligence; in the opinion of the Banking Ombudsman there is no loss or damage or inconvenience caused
to the complainant; or requiring consideration of elaborate documentary and oral evidence and the
proceedings before the Banking Ombudsman.
In case of a complaint being aggrieved by the award under clause 12 or by rejection of a complaint, he may
exercise the option of an appeal within 30 days, the RBI said in its notification.

Answer 4. (c)
(i) The first one indicates that SBI stock futures are traded now at ` 1441. They expire on the last
Thursday of March, 2012. Mr. Karuna has to deposit 10% of 1441 100 = ` 14410 as initial margin.

(ii) The second one indicates that NIFTY Index futures are traded now at 4280. They expire on the Last
Thursday of April 2012.
Mr. Karuna has to deposit 10% of 4280100 = ` 42800 as initial margin.





SECTION - II (40 Marks)
(Corporate Laws)

Answer Question No. 5 (carrying 10 marks) which is compulsory and answer any two
(carrying 15 marks each) from the rest in this Section.


Q. 5. (a) Choose the most appropriate one from the stated options and write it down (only indicate A or
B or C or D as you think correct)

(i) Which of the following statements is true, in respect of constitute an Audit Committee
under section 292A of the Companies Act, 1956?
(A) The Audit Committee shall have a minimum of three members.
(B) The members of an Audit Committee are elected by the members of a Company in general
meeting.
(C) All Companies whether private or public have to constitute an Audit Committee.
(D) None of the above.





Suggested Answers to Question CMC + 13

(ii) If in a general meeting of a Company, a matter could not be resolved because of tie, then
(A) Meeting will be adjourned
(B) Meeting will be postponed
(C) Chairman of the meeting can give his second/casting vote
(D) Managing Director can give his casting/second vote

(iii) The Competition Commission shall consist of a chairperson and not less than two but not
more than other members to be appointed by the Central Government. (Fill in
the gap from the below.)
(A) 7
(B) 10
(C) 5
(D) None of the above.

(iv) Which of the following committee set up by SEBI had submitted its report in February, 2003
on Corporate Governance?
(A) Narasimham Committee
(B) Kumar Mangalam Birla Committee
(C) Narayana Murthy Committee
(D) Naresh Chandra Committee.

(v) In the context of classification of Risks, System Risks fall under :
(A) Obsolescence risks
(B) War Risks
(C) Tax Risks
(D) Contract Risks [15=5]


(b) Fill in the blanks in the following sentences by using appropriate word(s)/phrase(s)/number(s) :

(i) The prospectus issued by a financial institution for one or more issues of securities specified
therein, is called prospectus.

(ii) When two firms working in different stages of production of the same product combine,
merger takes place.

(iii) The requirement of minimum 50 percent of the total number of directors to be independent
directors in the case of listed companies, is mandated by Clause of the Listing
Agreement.

(iv) As regards corporate governance, apart from those mandated by the Listing Agreement,
section of the Companies Act, 1956 contains additional requirements.

(v) is not a linear process; it is the balancing of a number of interwoven elements.
[1x5=5]





14 + Suggested Answers to Question CMC

Answer 5. (a)
(i) (A)
(ii) (C)
(iii) (B)
(iv) (C)
(v) (A)

Answer 5. (b)
(i) Shelf
(ii) Vertical
(iii) 49
(iv) 292A
(v) Risk Management


Q. 6. (a) The General norms is that after the risk identification takes place, the actions involved in pinpointing
suitable responses to the risk are broadly of five types.
Sketch these five types of actions. [6]

(b) SHAKSHI TELECOM LTD., a private mobile operator had furnished confidential information relating
to customer complaints lodged with the company during the quarter ended 31.3.2012 to a public
authority. On an application under the Right to Information Act, 2004, the public authority wants
to furnish the said information. The authority seeks the objections of SHAKSHI TELECOM LTD.
Can SHAKSHI TELECOM LTD. ask the public authority not to furnish the same on the grounds that
the said information is confidential and that it may endanger its image in the market?
What decision should the public authority take? [5]

(c) The Competition Commission has served notice on VIPUL PAINTS LTD. to look into alleged
contravention of certain provisions. The company wants to object to the same on the ground that
the same was consequent to a complaint made by the State Government, which is not in order.
Advise the company suitably. [4]


Answer 6. (a)
Action taken after identification of risks :
The actions break into broadly five types, as shown below :

(i) Prevention terminates the risk - by doing things differently and thus removing the risk where it is
feasible to do so. Countermeasures are put in place that either stop the threat or problem from
occurring or prevent it having any impact on the project or business.





Suggested Answers to Question CMC + 15

(ii) Reduction threat the risk- take action to control it in some way where the actions either reduce the
likelihood of the risk developing or limit the impact on the project to acceptable levels.
(iii) Transference This is a specialist form of risk reduction where the management of the risk is passed
to a third party via, for instance, an insurance policy or penalty clause, such that the impact of the
risk is no longer an issue for the health of the project. Not all risk can be transferred in this way.
(iv) Acceptance tolerate the risk- perhaps because nothing can be done at a reasonable cost to migrate
it or likelihood and impact of the risk occurring are at an acceptable level.
(v) Contingency these are actions planned and organized to come into force as and when the risk
occurs.
Any given risk could have appropriate actions available to deal with a risk, in which case the risk must be
accepted or the justification for the project revisited (to review whether the project is too risky), possibly
resulting in the termination of the project.
The results of the risk evaluation activities are documented in the Risk Log. If the project is part of a
programme, project risk should be examined for any impact on the programme (and vice versa).
Where any cross-impact is found, the risk should be added to the other Risk Log.

Answer 6. (b)
SHAKSHI TELECOM LTD.
Disclosure of Information treated as confidential by third party :
As per section 11 (1) of the Right to Information Act, 2004 where a public authority intends to disclose any
information or record, or part thereof on a request made under this Act which relates to, or has been
supplied by a third party and has been treated as confidential by that third party, the Public Information
Officer shall, within five days from the receipt of a request, give written notice to such third party of the
request and of the fact that the public authority intends to disclose the information or record, or part
thereof and invite the third party to make a submission, in writing or orally, regarding whether the
information should be disclosed, which submission shall be taken into account when determining whether
to disclose the information.
Provided that except in the case of trade or commercial secrets protected by law, disclosure may be allowed
if the public interest in disclosure outweighs in importance any possible harm or injury to the interests of
such party.
SHAKSHI TELECOM LTD. cannot ask the public authority not to furnish the same on the grounds that the
said information is confidential and that it may spoil its image in the market. This is not trade or commercial
secrets protected by law. Hence the public authority should overrule the objections of SHAKSHI TELECOM
LTD and furnish the information to the applicant under the RTI Act.

Answer 6. (c)
Inquiry into certain agreements and dominant position of enterprise :
As per section 19 (1) of the Competition Act, 2000, the Competition Commission may inquire into any
alleged contravention of the provisions contained in subsection (1) of section 3 or sub-section (1) of section 4
either on its own motion or on -
(a) receipt of a complaint, accompanied by such fee as may be determined by regulations, from any
person, consumer or their association or trade association ; or
(b) a reference made to it by the Central Government or a State Government or a statutory authority.





16 + Suggested Answers to Question CMC

It can be seen from above that a State Govt. can refer the matter to Competition Commission. Hence the
company cannot raise an objection that the Competition Commission cannot enquire into the alleged
violations on the strength of reference made by the State Government.
Advice should be tendered on the above lines.


Q. 7. (a) Discuss the role of Nomination Committee in the context of the principle of Corporate Governance.
What are the principal functions and responsibilities of the Governance and the Nomination
Committee in this regard? [2+6=8]

(b) What is meant by oppression? State whether the aggrieved party would succeed in obtaining
relief from Company Law Board on the ground of oppression in the situations given below :
(i) The complaint is by the minority Directors that the majority of the Board of Directors override
the minority Directors;
(ii) A petition by majority shareholders complaining oppression by minority shareholders.
[4+3=7]

Answer 7. (a)
Nominating Committee : Role
The governance and Nominating Committees role is to determine the state of director nominees for election
to the Companys Board of Directors to identify and recommend candidates to fill vacancies occurring
between annual shareholder meetings, to review, evaluate and recommend changes to the Companys
Corporate Governance Guidelines, and to review the companys policies and programs that relate to mater
of corporate responsibility, including public issues of significance to the company and its stakeholder.

Responsibilities and functions of the governance and Nominating Committee
Subject to the provisions of the Corporate Governance Guidelines, the principal responsibilities and functions
of the governance and Nominating Committee are as follows :

1. Annually evaluate and report to the Board of the performance and effectiveness of the Board to
facilitate the directors fulfilling their responsibilities in a manner that serves the interests of corporate
shareholders.

2. Annually present to the Board a list of individuals recommended for nomination for election to the
Board at the annual meeting of shareholders, and for appointment to the committees of the Board
(including this committee). Review and consider shareholder recommended candidates for
nomination to the Board.

3. Before recommending an incumbent, replacement or additional director, review his or her
qualifications, including capability, availability to serve, conflicts of interest, and other relevant factors.

4. Assist in identifying, interviewing and recruiting candidates for the Board.

5. Annually review the composition of each committee and present recommendations for committee
memberships to the Board as needed.

6. Develop and periodically review and recommend to the Board appropriate revisions to the Companys
Corporate Governance Guidelines.





Suggested Answers to Question CMC + 17

7. Monitor compliance with the Corporate Governance Guidelines.

8. Regularly review and make recommendation about changes to the charter of Governance and
Nominating Committee.

9. Regularly review and make recommendation about charges to the charter of other Board committees
after consultation with the respective committee chairs.

10. Obtain or perform an annual evaluation of the Committees performance and make applicable
recommendations.

11. Assist the Chairman of the Board, if the Chairman is a non-management director, or otherwise the
Chairman of the Committee acting as Lead Independent Director, in leading the Boards annual
review of the Chief Executive Officers performance.

12. Annually review the Companys policies and programs that relate to corporate responsibility.


Answer 7. (b)
Oppression :
The term oppression is not defined in the Companies Act, 1956. Oppression, according to the Dictionary
meaning of the word, is any act exercised in a manner burdensome, harsh and wrongful. The meaning of
the term oppression was explained by Lord Cooper in the Scottish case of Elder v. and Watson Ltd, as
given below :

The conduct complained of should be at lowest involve or visible departure from the standards of fair
dealing and a violation of the conditions of fair play or which every shareholder who entrusts his money to
a company is entitled to rely.

(i) Majority group of the Board overriding the minority group : The oppression dealt with by
section 397 is only oppression of members in their character as such, and it is only in that
character they can involve section 397. The harsh treatment, for instance, of a member who is
a Director or other officer or employee, by the Board of Directors or management does not come
within (section 397). It has been held in Re. Bellador Silk Ltd. that if the majority of the Board
of Directors override the minority Directors the latter cannot resort to section 397 and hence the
minority Directors will not succeed in getting relief from CLB on the ground of oppression.

(ii) Right not confined to minority : According to section 399, the right to apply for relief under
section 397/398 is given to 100 members or 1/10
th
of the total numbers or any member or
members holding not less than 1/10
th
of the issued share capital of the company. There is nothing
in this section which suggests even indirectly that unless the application is made by minority
shareholders it is not maintainable. The right to apply is, therefore, not confined to oppressed
minority of the shareholders alone. It was held by Calcutta High Court in Re. Sindhri Iron Foundry
(P) Ltd. that the oppressed majority also might apply for relief under Section 397. Therefore, the
petitioners are likely to succeed in getting relief provided the other condition laid down in section
397 (i.e. that to wind up the company would unfairly prejudice such members, but that otherwise
the facts would justify the making of a winding-up order on just and equitable ground) is
satisfied, even though the Delhi High Court held a contrary view in Suresh Kumar Singhi v.
Supreme Motors Ltd.





18 + Suggested Answers to Question CMC

Q. 8. (a) What is the role of SEBI in promoting Corporate Governance? [5]

(b) MR MUKHOPADHYAY was appointed as director of EXCEL FITTINGS LTD., a public limited company
on 1.2.2012. He bought 1000 equity shares of ` 10 each from his cousin on 11.06.2012.
Discuss the compliance with the applicable provisions of the Companies Act, 1956 relating to
qualification shares and the ensuing consequences. [5]

(c) The Board of Directors of GREEN ENVIRON LTD. at a meeting held on 15.1.2012 resolved to borrow
a sum of ` 50 crores from a Nationalised Bank. Subsequently the said amount was received by the
Company. One of the Directors who opposed the said borrowing as not in the interest of the
Company has raised an issue that the said borrowing is outside the powers of the Board of Directors.

The Company seeks your advice and the following data is given for your information:
(i) Share Capital (Paid-up) ` 15 crores

(ii) Reserves and Surplus ` 20 crores
(iii) Secured Loans ` 50 crores
(iv) Unsecured Loans
Advice the Management of the Company (Green Environ Ltd.).
` 15 crores


[5]

Answer 8. (a)


Good Governance in capital market has always been high on the agenda of SEBI. This is evident from the
continuous updation of guidelines, rules and regulations by SEBI for ensuring transparency and
accountability. In the process, SEBI had constituted a Committee on Corporate Governance under the
Chairmanship of Shri Kumar Mangalam Birla.
Based on the recommendations of the Committee, the SEBI had specified principles of Corporate Governance
and introduced a new clause 49 in the Listing agreement of the Stock Exchanges in the year 2000. These
principles of Corporate Governance were made applicable in a phased manner and all the listed companies
with the paid up capital of ` 3 crores and above or net worth of ` 25 crores or more at any time in the
history of the company, were covered as of March 31, 2003.
SEBI, as part of its endeavour to improve the standards of corporate governance in line with the needs of
a dynamic market, constituted another Committee on Corporate Governance under the Chairmanship of
Shri N. R. Narayana Murthy to review the performance of Corporate Governance and to determine the role
of companies in responding to rumour and other price sensitive information circulating in the market in
order to enhance the transparency and integrity of the market.
With a view to promote and raise the standard of Corporate Governance, SEBI on the basis of
recommendations of the Committee and public comments received on the report and in exercise of power
conferred by Section 11(1) of the Securities and Exchange Board of India Act, 1992 read with section 10 of
the Securities Contracts (Regulation) Act 1956, revised the existing clause 49 of the Listing agreement vide
its circular SEBI/MRD/SE/31/2003/26/08 dated August 26, 2003. It clarified that some of the sub-clauses of
the revised clause 49 shall be suitably modified or new clauses shall be added following the amendments
to the Companies Act 1956 by the Companies (Amendment) Bill/ Act 2003, so that the relevant provisions
of the clauses on Corporate Governance in the Listing Agreement and the Companies Act remain harmonious
with one another.





Suggested Answers to Question CMC + 19

Answer 8. (b)
The Companies Act, 1956 does not provide for any share qualification of any Director but Regulation 66 of
Table A provides that a Director must hold at least one share in the company. Usually, the Articles of the
Company provided for holding qualification shares by a Director. Where a share qualification has been
prescribed in the Articles of a company which is a public company or a private company which is a subsidiary
of a public company, the provisions of Section 270 of the Companies Act, 1956 is applicable where-under,
a Director must take his qualification shares within 2 months after his appointment. Any provision in the
Articles of the company shall be void in so far as it requires a person to hold the qualification shares before
his appointment as a Director or to obtain them within a shorter time than two months after his appointment
as a Director or to obtain them within a shorter time than two months after his appointment as such. The
nominal value of the qualification shares shall not exceed ` 5,000/- or where nominal value exceeds ` 5,000,
share qualification will be one share.
A person acting as a Director without acquiring qualification shares is punishable under Section 272 of the
said Act. Moreover, a Director who fails to hold qualification shares is also liable to vacate his office under
Section 283 of the Companies Act, 1956.
In the instant case Mr. Mukhopadhyay was appointed as Director of EXCEL FITTINGS Limited on 1
st
February,
2012, he bought the shares from his cousin only on 11-06-2012, which were registered the same day. It can
not therefore be said that he held the shares before expiry of 2 months from the date of his appointment.
In view of this Mukhopadhyay has to vacate the office and is also punishable u/s 227.

Answer 8. (c)
According to the provisions of Section 293(1)(d) of the Companies Act, 1956 there are restrictions on the
borrowing powers to be exercised by the Board of Directors. According to that section, the borrowings
should not exceed the aggregate of the paid up capital and free reserves. While calculating the limit, the
temporary loans obtained by the company from its bankers in the ordinary course of the business will be
excluded. However, from the figures available in the present case the proposed borrowing of ` 50 crores
will exceed the limit mentioned. Thus the borrowing will be beyond the powers of the Board of Directors.
However the share holders have the power to ratify the act of the Board of Directors, if it not beyond the
powers of the company as laid down in the memorandum of association. In that case the shareholders can
rectify as it is intra vires the Company even though it may be beyond the powers of the Board of Directors.
Thus the management of GREENENVIRON LTD, should take steps to convene the annual general meeting
and pass a resolution by the members in the meeting as stated in Section 293(1)(d) of the Act. Then the
borrowing will be valid and binding on the company and its members.