Corporate Law

Answer to PTP_Final_Syllabus 2012_Dec 2015_Set 1
Paper-13: CORPORATE LAWS AND COMPLIANCE
Academics Department, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) Page 1
Learning objectives
KNOWLEDGE
What you are expected to
know
COMPREHENSION
understand
Verbs used
List
State
Define
Definition
Make a list of
Express, fully or clearly, the details/facts
Give the exact meaning of
Describe
Distinguish
Explain
Produce
Discuss
Communicate the key features of

Highlight the differences between
Make clear or intelligible/ state the
meaning or purpose of
Recognize, establish or select after
consideration
Use an example to describe or explain
something
Put to practical use
Ascertain or reckon mathematically
Prove with certainty or exhibit by practical
means
Make or get ready for use
Make or prove consistent/ compatible
Find an answer to
Arrange in a table
Examine in detail the structure of
Place into a defined class or division
Show the similarities and/or differences
between
Build up or compile
Place in order of priority or sequence for
action
Create or bring into existence
Examine in detail by argument
Interpret
Translate into intelligible or familiar terms
Decide
To solve or conclude
Advise
Counsel, inform or notify
Evaluate
Appraise or asses the value of
Recommend
Propose a course of action
Identity
Illustrate
APPLICATION
LEVEL C
How you are expected to

apply
your knowledge
ANALYSIS
analyse the detail of what you
have learned
SYNTHESIS
utilize the information
gathered to reach an
optimum
conclusion by a process of
reasoning
EVALUATION
How you are expected to use
your learning to evaluate,
make decisions or
recommendations
Apply
Calculate
Demonstrate
Prepare
Reconcile
Solve
Tabulate
Analyse
Categorise
Compare
and contrast
Construct
Prioritise

Full Marks: 100
Time Allowed: 3 Hours
This paper contains 3 questions. All questions are compulsory, subject to instructions provided
against each question. All workings must form part of your answer. Assumptions, if any, must
be clearly indicated.
Question 1: Answer all questions
[20 Marks]
(a) Yusuf, an employee of ABC Ltd., was appointed as an alternate director. In the meantime,
the original director returned and wanted to attend the Board meeting. Advise.
3
(b) Is there any maximum limit on shareholding by the promoter in an Indian Insurance
company, as per Insurance Act, 1938?
3
(c) The Promoters of a Company to be registered under the Companies Act, 1956 having its
main object of carrying on the business as manufacturer and stockist of Iron and Steel,
proposes that the names of the Companies is to be "ABC Steel Bank Limited". You are
required to state with reference to the provisions of the Banking Regulation Act, 1949,
whether the said Company with the proposed name can be registered.
3
(d) In a proceeding before the Competition Commission of India involving two
pharmaceutical companies, the plaintiff requested the presiding officer to call upon the
services of experts from the pharmaceutical sector to determine' the truth of the
allegations levelled by it against the respondent. The respondent opposed the request on
the ground that such action cannot be taken by the Competition Commission. You are
required to state with reference to the provisions of the Competition Act, 2002, whether the
contention of the respondent is tenable.
3
(e) The object clause of the Memorandum of Association of LSR Private Ltd, Lucknow
authorized to do trading in fruits and vegetables. The company, however, entered into a
Partnership with Mr. J and traded in steel and incurred liabilities to Mr. J. The Company,
subsequently, refused to admit the liability to J on the ground that the deal was 'Ultra Vires'
the company. Examine the validity of the company's refusal to admit the liability to J. Give
reasons in support of your answer.
3
(f)
Can CSR be integrated with decision making?
(g) What are the functions of the supervisory board under Cromme Code.
3
2
Answer:
(a) An alternate director shall not hold office for a period longer than that permissible to the
original director. The alternate director shall vacate his office when the original director returns
back to India, irrespective of the fact as to whether the original director attends the Board
meetings or not. Thus, after an original director comes back to India, only he can attend the
Board meetings. The alternate director would automatically cease to be director.
In the given case, the contention of the original director is correct and he is entitled to attend
the Board meeting.

(b) As per section 6AA of Insurance Act, 1938, no promoter shall at any time hold more than
26% or such other percentage as may be prescribed, of the paid-up equity capital in an
Indian Insurance company.
(c) As per section 7(1), no company other than a banking company shall use as part of its
name or, in connection with its business any of the words "bank", "banker" or "banking".
In the given case, the main object of the proposed company is to carry on the business of
manufacturing and acting as stockist of iron and steel. The proposed company is not a
banking company as defined u/s 5(c) of the Act.
In view of the provisions of section 7(1), the name 'ABC Steel Bank Limited' is not permissible.
(d) Section 36 of the Competition Act, 2002 empowers the Commission to call upon the
experts from the fields of economics, commerce, accountancy, international trade or from
any other discipline to assist the Commission in the conduct of any inquiry before it.
Therefore, in the given case, the contention of the respondent is not correct. The Commission
has the power to call upon the services of experts from the pharmaceutical sector to
determine the truth of the allegations levelled by the Plaintiff against the respondent.
(e) The company is not liable to J because of the following reasons:
since the partnership agreement for trading in steel is an ultra vires contract, and an ultra
vires contract is void ab initio, and is not binding on the company or the other party;
since the power to enter into partnership is not an ancillary or incidental power;
since such power can be legally exercised by the company only if the object clause of
memorandum expressly authorises the company to enter into partnership
(f) Integration of CSR in decision making:
CSR is viewed as a comprehensive set of policies, practices and programs that are
integrated into decision-making processes throughout the organisation. Therefore, an
entity should incorporate CSR initiatives in its core business operations and strategies.
The organisation should set specific goals for CSR.
At the stage of planning, the organisation should lay down the measures for evaluating
the progress from time to time.
As far as possible, the goals should be laid down in quantifiable terms.
(g) The supervisory board carries out a number of important functions as follows:
1. It provides independent advice and supervision regularly to the management board on
the management of the business;
2. The management board and the supervisory board should ensure that there is a long-term
succession plan in place;
3. The supervisory board may delegate some duties to other committees, which include
compensation and audit committees;
4. The chairman of the supervisory board, who should not be the chairman of the audit
committee, co-ordinates work within the supervisory board and chairs its meetings and
attends to the affairs of the supervisory board externally.
Answer to PTP_Final_Syllabus 2012_Dec2015_Set 3

Question 2: Answer any four questions
[60 Marks]
Question 2(a)
(i) Dev Limited issued a notice for holding of its annual general meeting on 7th November,
2014. The notice was posted to the members on 16.10.2014. Some members of the company
allege that the company had not complied with the provisions of the Companies Act, 2013
with regard to the period of notice and as such the meeting was not validly called. Referring to
the provisions of the Act, decide (a) Whether the meeting has been validly called?
(b) If there is a shortfall in the number of days by which the notice falls short of the statutory
requirement, state and explain by how many days does the notice fall short of the
statutory requirement?
(c) Can the shortfall, if any, be condoned?
(ii) The promoters of a public company propose to have the strength of the Board of directors
as eleven. They also propose to make the managing director and whole time directors as
directors not liable to retire by rotation. They seek your advice on the following matters:
(a) Maximum number of persons, who can be appointed as directors not liable to retire by
rotation.
(b) How many of the remaining directors will have to retire by rotation every year at the
annual general meeting?
(iii) Advise the Board of directors of a public company about their powers in respect of the
following proposals explaining the relevant provisions of the Companies Act, 2013;
Buy-back of shares of the company upto 10% of the paid up equity share capital.
[5+6+4 = 15]
Answer:
(i)
Day of holding the AGM
7th November, 2014.
Day of despatch of notice
16th October, 2014.
Days to be excluded
Number of days notice given
Day of holding the AGM (i.e., 7th November,

2014)
Day of despatch of notice (16th October, 2014)
2 days for service of notice (i.e., 17th and 18th
October, 2014).
= 19 days.
Number of days notice required u/s 101 = 21 days.

(a) AGM has not been validly called
- since 21 days' notice of the AGM has not been

given to the members.
(b) The notice is short
- by 2 days.
(c) The shortfall may be condoned
- if consent is given for such shorter notice by at

least 95% of the members entitled to vote at such
AGM.

(ii) As per section 152(6), not less than 2/3rd of total number of directors shall be the directors
whose period of office is liable to determination by retirement by rotation (any fraction
contained in that 2/3rd shall be rounded off as 1). Such directors are referred to as rotational
directors. However, the articles of a company may provide for greater number of rotational
directors. In other words, in no case, the number of non-rotational directors shall exceed 1/3rd
of total number of directors.
As per section 152(6), at the first annual general meeting and every subsequent annual
general meeting, 1/3rd (or nearest to 1/3rd) of directors liable to retire by rotation shall retire
from the office.
Applying the provisions of section 152(6) to the given case
(a) At least 8 directors shall be rotational directors (2/3rd of 11 is 7.33; taken as 8 since not less
than 2/3rd of total directors shall be rotational directors). Accordingly, only 3 directors can
be appointed as non-rotational directors. Therefore, it is permissible to appoint managing
director and whole time director as non-rotational directors.
(b) In case 3 directors are appointed as non-rotational directors, 1/3rd of rotational directors
shall retire at the ensuing annual general meeting, i.e. 3 directors (1/3 of 8 is 2.67; nearest
to 2.67 is 3). These 3 directors shall be eligible for reappointment.
(iii) As per section 179(1), the Board is entitled to exercise all such powers as the company is
authorised to exercise. Similarly, the Board is authorised to do all such acts and things as the
company is authorised to do. However, the provisions of section 179(1) are subject to the
other provisions of the Companies Act, 2013 (e.g. Sections 179(3), 180,181 and 182 of the
Companies Act, 2013).
The Board shall exercise the powers mentioned under section 179(3) only by means of a
resolution passed at a meeting of the Board. Among other powers, the power to buy-back as
referred to in section 68 is also included in section 179(3). Section 68 empowers the Board to
buy-back not more than 10% of the total paid-up equity capital and free reserves of the
company.
Therefore, in the present case, the Board is authorised to buy-back the shares of the company
upto 10% of the paid up equity share capital, provided the resolution authorising the
buy-back is passed at a Board meeting and not by circulation.
Question 2(b)
(i) 500 equity shares in 'XYZ Limited' were acquired by Mr. 'B'. But the signature of Mr. 'A', the
transferor, on the transfer deed was forged. Mr. 'B', after getting the shares registered by the
company in his name, sold 200 equity shares to Mr. 'C on the strength of the share certificate
issued by 'XYZ Limited'. Mr. 'B' and Mr. 'C were not aware of the forgery. What are the rights of
Mr. 'A', 'B' and 'C against the company with reference to the aforesaid shares?
(ii) Apple Company Limited has 10 directors on its board. Two of the directors have retired by
rotation at an Annual General Meeting. The place of retiring directors is not so filled up and the
meeting has also not expressly resolved 'not to fill the vacancy'. Since the AGM could not
complete its business, it is adjourned to a later date. At this adjourned meeting also the place
of retiring directors could not be filled up, and the meeting has also not expressly resolved 'not
to fill the vacancy'. Advice:
(a) Whether in such a situation the retiring directors shall be deemed to have been
re-appointed at the adjourned meeting?

(b) In case at the adjourned meeting, the resolutions for re-appointment of these directors
were lost?
(c) Whether such directors can continue in case the directors do not call the Annual General
Meeting?
(iii) What is the required quorum for holding a Board meeting? Examine the following cases:
(a) In a Board meeting, only 3 directors were present out of the total of 11 directors. None of
the 3 directors was interested in any of the items of the agenda. Examine the validity of
meeting.
(b) In a meeting of the Board, out of the total of 11 directors, 7 directors were present of which
only 2 directors were not interested in one of the transactions. How should the meeting
deal with the matter?
[4+5+6 =15]
Answer:
(i)
Rights of A
He can compel the company to restore his name on the register of members
(since a forged transfer is without any legal effect and the true owner
continues to be the member of the company).
Liabilities of B
'B' is liable to compensate the loss caused to the company since he had
lodged the forged transfer deed, even though he was not aware of the
forgery.
Rights of C
The company can refuse to register 'C as a member.

The company is liable to 'C since the company had issued share certificate
to B, and therefore, the company shall be stopped from denying the
liability accruing to it from its own default.
(ii) The provisions relating to automatic reappointment are contained in section 152(7) of the
Companies Act, 2013. Applying these provisions, the given problem is answered as under:
(a) As per Section 152(7), if the vacancy in the place of retiring director is not filled up and the
meeting has not resolved not to fill the vacancy, the annual general meeting shall adjourn
to the next week at the same time and place or if that day is a public holiday, then to next
succeeding day which is not a public holiday.
If at the adjourned meeting also, the vacancy in the place of retiring director is not filled
up and the meeting has not resolved not to fill the vacancy, the retiring director shall be
deemed to be reappointed.
Thus, in the given case, both the retiring directors shall be deemed to have been
reappointed at the adjourned annual general meeting.
(b) In case at the adjourned meeting, the resolutions for reappointment of retiring directors
were lost, there is no question of reappointment or automatic reappointment. They shall
have to vacate their offices.
(c) In case the AGM is not called, the directors liable to retire cannot continue beyond the
last day the AGM ought to have been held, and so their offices shall be vacated as such,
as was held in B. R. Kundra v Motion Pictures Association.
(iii) The provisions relating to quorum for a Board meeting are contained in section 174. Unless
the articles provide for a higher quorum, the quorum shall be l/3rd of the 'total strength' (any

fraction contained in that l/3rd shall be rounded off to one) or two directors whichever is
higher [Section 174(1)]. However, section 174(3) states that where at any time the number of
interested directors (present in the Board meeting) exceeds or is equal to 2/3rd of the 'total
strength' (any fraction contained in that 2/3rd shall be rounded off as one), the number of
disinterested directors present at the meeting, being not less than two, shall be the quorum.
(a) In the instant case, 1/3rd of 11 comes to 3.67; the fraction 0.67 shall be rounded off to 1.
Thus, at least 4 disinterested directors must be present in the Board meeting. However, only
3 directors are present in the Board meeting.
Moreover, there is no interested director present in the meeting and so the benefit of
section 174(3) cannot be availed. Therefore, the quorum was not present and so the
meeting has not been validly held.
(b) In the given case, the required quorum comes to 4 directors, but only 2 disinterested
directors are present. So, the quorum is not present as per section 174(1).
2/3rd of the 'total strength' comes to 8 (Being 2/3rd of 11 is 7.33; the fraction 0.33 shall be
rounded off to 1). Since the number of interested directors (present in the Board meeting)
is only 5, section 173(3) is not attracted. Thus, the remaining 2 directors who are not
interested do not constitute a quorum and hence the Board meeting cannot be validly
convened.
Question 2(c)
(i) ABC Company Limited at a general meeting of members of the company passes an
ordinary resolution to buy-back 30% of its equity share capital. The articles of the company
empower the company for buy-back of shares. The company further decides that the
payment for buy-back be made out of the proceeds of the company's earlier issue of equity
shares. Explaining the provisions of the Companies Act,2013 and stating the sources through
which the buy-back of companies own shares be executed, examine:
(a) Whether company's proposal is in order?
(b) Would your answer be still the same in case the company, instead of 30%, decides to
buy-back only 20% of its equity share capital?
(ii) Asim, a 15% shareholder of a company and other shareholders have lost confidence in
the Managing Director (MD) of the company. He is a director not liable to retire by rotation
and was re-appointed as Managing Director for 5 years w.e.f. 1.4.2005 in the last Annual
General Meeting of the company.
Mr. Asim seeks your advice to remove the MD after following the procedure laid down under
the Companies Act, 2013.
(a) Specify the steps to be taken by Mr. Asim and the Company in this behalf;
(b) Is it necessary to state reasons to support the resolution for his removal?
(iii) Prithvi Limited is paying remuneration to its non-executive directors at the rate of one
percent of the net profits of the company distributed equally among all the non-executive directors.
Is it possible for the company to pay minimum remuneration to non-executive directors besides
sitting fees in the event of loss in a financial year? Answer with reference to Companies Act,
2013.
[4+(4+4)+3 = 15]
Answer:
(i)
(a) The proposal of the company to buy-back its shares is not valid
since the company has passed OR instead of SR, as required u/s 68;
since the company proposes to buy-back 30% of the equity share capital which
exceeds the statutory ceiling of 25% of total paid up equity capital;

since the company proposes to buy-back out of the proceeds of an earlier issue of
same kind of shares, which is prohibited u/s 68.
(b) The decision to buy-back 20% of equity share capital shall not be valid
since buy-back by passing OR is violative of Sec. 68;
since buy-back out of the proceeds of an earlier issue of same kind of shares is
prohibited u/s 68.
(ii) Removal of a non-rotational managing director is possible, since section 169 empowers
the members to remove any director, whether he is a rotational or non-rotational director, or
managing director, whole time director or a non-executive director.
The given problems are answered as under:
(a) Steps to be taken by Mr. Asim
Mr. Asim shall have to give a special notice to the company in accordance with the
provisions of section 115 of the Companies Act, 2013. In the special notice, Mr. Asim shall
propose a resolution for removal of the managing director. The special notice must be (i) given to the company not earlier than 3 months before the date of the general
meeting but at least 14 days before the general meeting (excluding the day on which
such notice is given and the day of the general meeting);
(ii) signed by member(s) holding not less than 1% of total voting power or member(s)
holding paid up share capital of ` 5 lakh.
Steps to be taken by the company
(a) The company shall send a copy of special notice to the managing director.
(b) The managing director has a right to make a representation against his removal.
(c) Representation given by the managing director, if any, shall be sent by the company
to every member at least 7 days before the general meeting.
(d) If the representation is not sent to the members, the representation shall be read at the
general meeting.
(e) The general meeting shall be held.
(f) The managing director shall have a right to be heard at the meeting. The right to
make an oral representation is in addition to written representation.
(b) Whether the special notice must disclose the reasons for removal of a director.
It was held in LIC v Escorts Ltd. (1986) 59 Comp Cas 548 that it is not necessary for a
member to state the grounds of removal of a director at the time of calling the
extraordinary general meeting. The Court held that, under section 102, it is the duty of the
Board to disclose the material facts in the explanatory statement. Neither section 169 nor
section 102 requires a member to disclose the reasons for the resolutions proposed at the
meeting. In other words, a member cannot be compelled to disclose the reasons for
proposing a resolution for removal of a director.
Therefore, non-disclosure of reasons for removal of managing director does not make a
special notice invalid. Accordingly, the special notice given by Mr. Asim is as per the
requirements of section 169 of the Companies Act, 2013, and the company is required to
act on such notice.
(iii) As per second proviso to Sec 197(1) of Companies Act, 2013, the remuneration of
non-executive directors shall not exceed (a) 1% of net profits, if the company has employed a managing director or whole time
director or manager; or
(b) 3% of net profits, if the company has not employed any managing director, whole

time director and
Remuneration to a non-executive director may be paid only if the company has made profits
[sec 197(3) of Companies Act, 2013]. Schedule V does not empower a company to pay
remuneration to its non-executive directors where the company has suffered a loss.
There is no prohibition on payment of sitting fees even where the company has not earned
any profits or its profits are inadequate.
Question 2(d)
(i) A company issued a prospectus. All the statements contained therein were literally true. It
also stated that the company had paid dividends for a number of years, but did not disclose
the fact that the dividends were not paid out of trading profits, but out of capital profits. An
allottee of shares wants to avoid the contract on the ground that the prospectus was false in
material particulars. Decide.
(ii) The last three years' balance sheets of Fantastic Ltd. contain the following information and
figures:
Paid up capital
General Reserve
Credit Balance in Profit & Loss Account
Debenture Redemption Reserve
Secured Loans
As at 31.03.2013 As at 31.03.2014 As at 31.03.2015

(`)
(`)
(`)
50,00,000
50,00,000
75,00,000
40,00,000
42,50,000
50,00,000
5,00,000
7,50,000
10,00,000
15,00,000
20,00,000
25,00,000
10,00,000
15,00,000
30,00,000
On going through other records of the company, the following is also determined:
Net profit for the year
` 12,50,000 - As at 31.03.2013
` 19,00,000 - As at 31.03.2014
` 34,50,000 - As at 31.03.2015
In the ensuing Board meeting scheduled to be held on 5th November, 2015, among other
items of agenda, following items are also appearing:
(a) To decide about borrowings from financial institutions on long-term basis.
(b) To decide about contributions to be made to charitable funds.
Based on above information, you are required to find out as per the provisions of the
Companies Act, 2013 the amount upto which the Board can borrow from financial institutions
and the amount upto which the Board of directors can contribute to charitable funds during
the financial year 2015-16 without seeking the approval in general meeting.
(iii) Explain the power of the Registrar to conduct inspection and inquiry as per the provisions
of Companies Act, 2013.
[4+6+5 = 15]
Answer:
(i) The prospectus is misleading
since non-disclosure of the fact that the company was making losses and that the
dividends were paid out of past year profits gave a false impression that the company
was making profits;
since suppression of such fact might have affected investor's decision to subscribe for
shares.
since the prospectus does not disclose all the material facts truly, honestly and
accurately.
The allottee of shares is entitled to avoid allotment since the allottee has a right to rescind the
contract of allotment of shares if he had relied and acted on the prospectus, i.e., he
subscribed for shares after being influenced by a misleading prospectus [Rex v Kylsant].
(ii) The given problem relates to sections 180(1)(c) and 181 of the Companies Act, 2013.
(a) As per section 180(1)(c) of the Companies Act, 2013, without the prior consent of the
members in general meeting by a special resolution, the Board of directors of a company
shall not borrow moneys where the borrowings (already made plus proposed) exceed the
aggregate of the paid up capital and free reserves. However, temporary loans obtained
from the company's bankers in the ordinary course of business shall not be considered as
borrowings.
In the given case, the aggregate of paid up capital and free reserves comes to
`1,35,00,000 (75,00,000 + 50,00,000 + 10,00,000). Since the company has already borrowed
` 30,00,000 (it has been assumed that secured loans of ` 30,00,000 is not a temporary loan,
i.e. it is not a loan obtained from the company's bankers in the ordinary course of
business), the long term borrowings from financial institutions shall not exceed ` 1,05,00,000
without the consent of the members by way of a special resolution.
(b) As per section 181 of the Companies Act, 2013, without the prior consent of the members
in general meeting, the Board shall not contribute to bonafide charitable and other funds
exceeding 5% of average net profits during immediately preceding 3 financial years.
The average net profits during immediately preceding 3 financial years comes to `
22,00,000, viz., 1/3rd of (` 12,50,000 + Rs. 19,00,000 + Rs. 34,50,000). 5% of ` 22,00,000 comes
to ` 1,10,000. Therefore, the Board may make contributions to charitable funds upto `
1,10,000 during the financial year 2015-16 without prior permission of the company in
general meeting.
(iii)
(a) Duty of officers and employees to furnish documents and information [Section 207(1)]
Where a Registrar or inspector calls for the books of account and other books and papers
under section 206, it shall be the duty of every director, officer or other employee of the
company to (i) produce all such documents to the Registrar or inspector and furnish him with such
statements, information or explanations in such form as the Registrar or inspector may
require; and
(ii) render all assistance to the Registrar or inspector in connection with such inspection.
(b) Power of Registrar or Inspector to make copies and place identification marks [Section
207(2)]
The Registrar or inspector, making an inspection or inquiry under section 206 may, during
the course of such inspection or inquiry, as the case may be, (i) make or cause to be made copies of books of account and other books and papers;
or
(ii) place or cause to be placed any marks of identification in such books in token of the
inspection having been made.

(c) Powers of civil court vested in the Registrar and Inspector [Section 207(3)]
The Registrar or inspector making an inspection or inquiry shall have all the powers as are
vested in a civil court under the Code of Civil Procedure, 1908, in respect of the following
matters:
(i) The discovery and production of books of account and other documents, at such
place and time as may be specified by such Registrar or inspector making the
inspection or inquiry.
(ii) Summoning and enforcing the attendance of persons and examining them on oath.
(iii) Inspection of any books, registers and other documents of the company at any place.
Question 2(e)
(i) M, who was appointed as additional director at the Board meeting held on 31st May, 2014
continues to be in his office on the ground that the annual general meeting for the
financial year 2013-14 was not held as required under the Act. Whether continuation of M
in the office is valid? Will your answer be different if M was also appointed as managing
director for a period of 5 years with effect from 1st June 2014 at the same Board meeting?
(ii) Can an insurer assume risk without receiving the premium, as per Insurance Act, 1938?
(iii) Trinity Bank Limited acquired a building from ABC College in discharging a term loan
advanced. The building had been mortgaged as security with the bank and the college
had failed to repay the loan. The bank proposes to retain the building with it and let out on
commercial basis to shops.
[6+5+4 = 15]
Answer:
(i) As per section 161(1) of the Companies Act, 2013, an additional director holds office upto
the date of next annual general meeting or the last day on which the annual general
meeting should have been held, whichever is earlier. Thus, an additional director vacates his
office on the last day on which the annual general meeting ought to have been held as per
the provisions of section 96 of the Companies Act, 2013, and cannot continue in office
thereafter on the ground that the meeting was not called or could not be held within the time
prescribed under section 96.
A managing director must be a director of the company. Therefore, if a managing director
ceases to be a director, he automatically ceases to be a managing director. Accordingly,
where an additional director, who is also appointed as a managing director, vacates the
office of the additional director at the annual general meeting, the office of the managing
director also ceases simultaneously with the cessation of office of additional director.
However, if the additional director is re-elected as a regular director at the annual general
meeting (by complying with the provisions of section 160 of the Companies Act, 2013) and
thereby he continues as a director, he shall continue as a managing director also for the
period for which he has been appointed as a managing director.
Thus, in the given case M would vacate the office of a director on the last day on which the annual general
meeting ought to have been held as per section 96.
Only a director can be appointed as a managing director. Since, M vacates the office of
additional director, the office of managing director is also vacated, as he is not re-elected
as a regular director at the annual general meeting. He shall vacate the office of
managing director irrespective of the fact that his appointment as a managing director

was made for a period of 5 years.
(ii) As per section 64VB, no insurer shall assume any risk without receiving the premium in
advance. The provisions of section 64 VB are explained below:
(a) No risk to be assumed unless premium received in prescribed manner [Section 64VB(1)]
No insurer shall assume any risk in respect of any insurance business unless and until the
premium payable is received by him or is guaranteed to be paid by such person in such
manner and within such time as may be prescribed or unless and until deposit of such
amount as may be prescribed, is made in advance in the prescribed manner.
(b) Date of assuming risk [Section 64VB(2)]
The risk may be assumed not earlier than the date on which the premium has been paid in
cash or by cheque to the insurer.
(c) Situation where premium is tendered by postal money order or cheque [Explanation to
Section 64VB(2)]
Where the premium is tendered by postal money order or cheque sent by post, the risk
may be assumed on the date on which the money order is booked or the cheque is
posted, as the case may be.
(d) Refund to be made directly to the insured and not to the agent [Section 64VB(3)]
Any refund of premium which may become due to an insured on account of the
cancellation of a policy or alteration in its terms and conditions or otherwise shall be paid
by the insurer directly to the insured by a crossed or order cheque or by postal money
order and a proper receipt shall be obtained by the insurer from the insured, and such
refund shall in no case be credited to the account of the agent.
(e) Duty of agent to deposit the premium with the insurer within 24 hours [Section 64VB(4)]
Where an insurance agent collects a premium on a policy of insurance on behalf of an
insurer, he shall deposit with, or despatch by post to, the insurer, the premium so collected
in full without deduction of his commission within 24 hours of the collection excluding bank
and postal holidays.
(iii) As per section 9, no banking company shall hold any immovable property howsoever
acquired, except such as is required for its own use, for any period exceeding 7 years from the
acquisition thereof or any extension of such period as in this section provided, and such
property shall be disposed of within such period or extended period, as the case may be.
As per Proviso to Section 9, the Reserve Bank may in any particular case extend the aforesaid
period of 7 years by such period not exceeding 5 years where it is satisfied that such extension
would be in the interests of the depositors of the banking company.
In the given case, Trinity Bank Limited proposes to retain the building for letting out on
commercial basis to shops, and not for its own use. In view of the provisions of section 9, Trinity
Bank Limited cannot retain the building permanently with it for the purpose of letting out on
commercial basis to shops. It shall have to dispose of the Building within 7 years from the date
of its acquisition.
However, the Reserve Bank may permit Trinity Bank Limited to hold the building for such
extended period, not exceeding 5 years, as it may deem f it.

Question 3: Answer any two questions
[20 Marks]
Question 3(a)
(i) The concept of Memorandum of Understanding (MoU) has been designed to provide
flexibility and autonomy to CPSEs such that it facilitates them in pursuing the objectives
and purposes, for which the enterprises have been set up.In the light of the above
statement, explain the concept of MoU in India.
(ii) Triple Bottom Line Approach of Corporate Social Responsibility (CSR).
[5+5 = 10]
Answer:
(i) The Memorandum of Understanding (MoU) System in India was introduced in the year
1986, after the recommendations of the Arjun Sengupta Committee Report (1984). Twenty six
years after its inception, the MoU system has evolved and is being strengthened, through
regular reviews, to become a management tool that helps in performance evaluation as well
as performance enhancement of CPSEs in the country.
The concept of Memorandum of Understanding (MoU) has been designed to provide
flexibility and autonomy to Central Public Sector Enterprises (CPSEs) such that it facilitates
them in pursuing the objectives and purposes, for which the enterprises have been set up.
Accountability has to be understood in a wider sense by associating it with answerability for
the performance of the tasks and the achievement of targets negotiated mutually between
the Government and the CPSE. The rationale for MoU could be derived from principal/agent
theory. The principal (administrative ministry on behalf of real owners - the people) can only
observe outcomes and cannot measure accurately the efforts expended by the agent (CPSE
managers). Also the Principal can only, to a limited extent, distinguish the effects of influences
from other factors, which affect the performance. Therefore extensive intervention by
administrators, who might not be too knowledgeable about the nature of problems
confronting the enterprises, not only impacts productivity and profitability but also makes it
impossible to fix accountability for non-achievement of targets.
A negotiated incentive contract (MoU), hence, is viewed as a device to reveal information
and motivate managers to exert effort. Notwithstanding the spectacular performance of
CPSEs in several areas, there has been a sense of disillusionment with some aspects of CPSE
performance such as low profitability and lack of competitiveness. The extensive regulation of
CPSEs by government had stifled the initiative and growth of public sector. The Economic
Administration Reforms Commission (Chairman: L. K. Jha) had dwelt on issue of autonomy and
accountability. The Commission had recommended a careful re-consideration of extant
concepts and instrumentalities relating to the accountability of public enterprises with a view
to ensuring (a) that they do not erode the autonomy of public enterprises and thus hampers
the very objectives and purposes for which these enterprises have been set up and given
corporate shape and for which they are to be accountable; and (b) accountability has to be
secured in the wider sense of answerability for the performance of tasks and achievements of
results. The adoption of MoU system in India could be seen as an attempt to operationalize this
very vital recommendation.
In the backdrop of the dynamic external environment, world - wide competition and
globalization, it is critical that the MoU system is strengthened such that it facilitates the CPSEs
in becoming economically viable through efficient management and control. Hence, the
MoU system aims at offering autonomy to CPSEs and is designed such that it can aid in the

assessment of the extent to which mutually agreed objectives (Mandal, 2012) are achieved.
This section of the report traces the evolution of the MoU system through various committee
reports and highlights the major observations, along with the actions taken thereafter. This
would act as an indicator of the developments that have happened in the MoU system in
India and, through the study of extant literature, would also highlight the areas of concern
raised after each study.
The various committees formed over the years are:
1. Arjun Sengupta Committee Report (1984)
2. National Council of Applied Economic Research (2004)
3. Report of the Working Group (2008)
4. S.K. Roongta Committee Report (2011)
5. Mankad Committee and Task Force (2012)
(ii) Within the broader concept of corporate social responsibility, the concept of Triple Bottom
Line (TBL) is gaining significance and becoming popular amongst corporate. Coined in 1997
by John Ellington, noted management consultant, the concept of TBL is based on the premise
that business entities have more to do than make just profits for the owners of the capital, only
bottom line people understand. People, Planet and Profit is used to succinctly describe the
TBL. People (Human Capital) pertains to fair and beneficial business practices toward
labour and the community and region in which a corporations conducts its business. Planet
(Natural Capital) refers to sustainable environmental practices. It is the lasting economic
impact the organization has on its economic environment A TBL company endeavors to
benefits the natural order as much as possible or at the least does no harm and curtails
environmental impact. Profit is the bottom line shared by all commerce. The people issues
faced by the organization includes i) Health
ii) Safety
iii) Diversity
iv) Ethnicity
v) Education and literacy
vi) Prevention of child labour
vii) Differently abled
The planet concerns include
i) Climate change
ii) Energy
iii) Water
iv) Air pollution
v) Waste management
vi) Ozone layer depletion, etc.
The need to apply the concept of TBL is caused due to
i) Increased consumer sensitivity to corporate social behavior
ii) Growing demands for transparency from shareholders/stakeholders
iii) Increase environmental regulation
iv) Legal costs of compliances and defaults
v) Concerns over global warming
vi) Increased social awareness
vii) Awareness about and willingness for respecting human rights
viii) Medias attention to social issues
ix) Growing corporate participation in social upliftment
While profitability is a pure economic bottom line, social and environmental bottom lines are
semi or non - economic in nature so far as revenue generation is concerned but it has

certainly a positive impact on long term value that an enterprise commands.
But discharge of social responsibilities by corporate is a subjected matter as it cannot be
measured with reasonable accuracy.
Question 3(b)
(i) State the factors influencing Corporate Social Responsibility (CSR).
(ii) Would you advocate the following understandings with relation to CSR? Discuss.
Businesses invest the money, therefore they decide the modus operandi of the CSR
initiative
Financial resources alone can meet CSR needs of an enterprise.
CSR is interchangeable with corporate sponsorship, donation or other philanthropic
activities.
[5+5 = 10]
Answer:
(i) Many factors and influences, including the following, have led to increasing attention
being devoted to CSR:
1. Globalization coupled with focus on cross-border trade, multinational enterprises
and global supply chains is increasingly raising CSR concerns related to human
resources management practices, environmental protection, and health and safety,
among other things.
2. Governments and intergovernmental bodies, such as the United Nations, The OECD
and the ILO have developed compacts, declarations, guidelines, principles and other
instruments that outline social norms for acceptable conduct.
3. Advances in communications technology, such as the Internet, Cellular phones and
personal digital assistants, are making it easier to track corporate activities and
disseminate information about them. Non-governmental organizations now regularly
draw attention through their websites to business practices they view as problematic.
4. Consumers and investors are showing increasing interest in supporting responsible
business practices and a demanding more information on how companies are
addressing risks and opportunities related to social and environmental issues.
5. Numerous serious and high-profile breaches of corporate ethics have contributed to
elevated public mistrust of corporations and highlighted the need for improved
corporate governance, transparency, accountability, and ethical standards.
6. Citizens in many countries are making it clear that corporations should meet standards
of social and environmental care, no matter where they operate.
7. There is increasing awareness of the limits of government legislative and regulatory
initiatives to effectively capture all the issues that CSR addresses.
8. Businesses are recognizing that adopting an effective approach to CSR can reduce
risk of business disruptions, open up new opportunities, and enhance brand and
company reputation.
(ii) In the absence of a universally accepted definition for CSR, there are some myths that
surround the concept, and the ones stated are a few of the same. They should be dealt as
follows.

Myth # 1: Businesses invest the money; therefore they decide the modus operandi of the CSR
initiative
There is a notion that since businesses invest money in society, they are the one who will be
deciding upon the modus operandi of the CSR initiative. However this is not true. CSR driven
by the mandate of an enterprise alone may not generate desired results. Stakeholders must
be involved from the onset in defining an initiative to make it successful. Corporates must not
assume that they understand the needs of a community by taking them at face value;
stakeholders needs must be considered within the local context and culture.
Myth # 2: Financial resources alone can meet CSR needs of an enterprise.
In fact, financial resources are only part of the equation. Besides financial resources, it is
equally or even more important for the CSR programmes to be well defined and well
accompanied by adequate human resources if they are to meet the intended objectives.
Myth # 3: CSR is interchangeable with corporate sponsorship, donation or other philanthropic
activities.
The focus of responsible business practices in the profit sector is hitherto largely confined to
community charity-based projects.
While this may have been relevant for the historical context in the mid-90s when Carrolls
definition was coined, the current thinking of CSR has moved beyond philanthropy to in fact
en-compass all internal and external segments of business operations: employees, market
environment and community.
The rationale for CSR has been articulated in a number of ways. In essence, it is about building
sustainable businesses, which need healthy economies, markets and communities.
Question 3(c)
(i) Explain the importance of Ethics for a finance and accounting professional.
(ii) If you are an accounting professional in a large multinational corporation, what steps
would you undertake to create an ethical accounting environment?
[5+5 = 10]
Answer:
(i) The importance of Ethics for a finance and accounting professional may be discussed
as two-fold:
1. Public Responsibility:
Finance and Accounts is perhaps the only business function which accepts responsibility
to act in public interest. Finance and accounting professional's responsibility is not
restricted to satisfy the needs of any particular individual or organization. While acting in
public interest, it becomes imperative that the finance and accounting professional
adheres to certain basic ethics in order to achieve his objectives.
2. To restore Public Confidence:
Various accounting scandals witnessed during the past few years have put a serious
question mark on the role of the finance and accounting professional in providing the
right information for decision making both within and outside their respective
organizations.
As these finance and accounting professionals are in public practice, they should take
reasonable steps to identify circumstances that could pose the conflict of interest and
thus leading to follow unethical behavior.

(ii) The factors that are to be considered for creating an ethical accounting environment
are:
1. Employee Awareness:
Make the employees aware of their legal and ethical responsibilities.
Train and motivate employees towards ethical behaviour.
Encourage employees to report cases of violations, frauds, manipulations,
misappropriations, etc.
2. Reporting of Frauds: For reporting violations, manipulations, misappropriations, etc., without any fear of being reprimanded or fired,
provide facilities to employees.
3. Whistle Blowers:
A whistle blower is an employee /person who reports frauds, mismanagement or
creating good accounting environment in a business enterprise. Fair treatment and
appreciation of Whistle Blowers is necessary to check fraud.
Learning objectives
KNOWLEDGE
know
COMPREHENSION
understand
Verbs used
List
State
Define
Describe
Distinguish
Explain
LEVEL C

apply
your knowledge
ANALYSIS
have learned
SYNTHESIS
optimum
reasoning
EVALUATION
make decisions or
recommendations
Make a list of
Produce
Discuss

consideration
something
means
Find an answer to
Arrange in a table
between
Build up or compile
action
Interpret
Decide
Advise
Evaluate
Recommend
Identity
Illustrate
APPLICATION
Definition
Apply
Calculate
Demonstrate
Prepare
Reconcile
Solve
Tabulate
Analyse
Categorise
Compare
and contrast
Construct
Prioritise

Full Marks: 100
[20 Marks]
(a) Is a company incorporated outside India required to pay fees for registration of
documents?
3
(b) State whether contracts entered into by a company before registration continue to be
binding after incorporation of the company under the Companies Act, 2013?
3
(c) Shruti Furniture Limited was willing to purchase teakwood estate in Jharkhand State. Its
prospectus contained some important extracts from an expert report giving the number of
teakwood trees and other relevant information in the estate in Jharkhand State. The report
was found inaccurate. Mr. X purchased the shares of Shruti Furniture Limited on the basis
of the above statement in the prospectus. Will Mr. X have any remedy against the
company? When an expert will not be liable? State the provisions of the Companies Act, in
this respect.
3
(d) Mr. Om is a director of Vidhi Ltd. He intends to construct o residential building for his own
use. The cost of construction is estimated at ` 1.35 crores, which Mr. Om proposes to
finance partly from his own sources to the tune of ` 60 lacs and the balance ` 75 lacs from
housing loan to be obtained from a housing finance company. For the purpose of
obtaining the loan, he has approached the housing finance company which has in
principle agreed to grant the loan, but has put a condition. The condition put by the
housing finance company is that the Company Vidhi Ltd. of which Mr. Om is a director
should provide the guarantee for repayment of the loan and interest as per the terms of
the proposed agreement for granting the loan to Mr. Om. You are required to advise Mr.
Om on the matter with reference to the provisions of the Companies Act, 2013.
3
(e) State the provisions of the Insurance Act, 1938 relating to refund of deposit.
(f)
Do you consider business ethics to be a professional code?
(g) What responsibility towards public should a Management Accountant professional have?
3
Answer:
(a) As per section 385, where any provision contained in this Chapter (viz. Chapter XXIII
consisting of sections 379 to 393) requires registration of any document, there shall be paid to
the Registrar such fee, as may be prescribed.
As per Rule 8(2) of the Companies (Registration of Foreign Companies) Rules, 2014, fee as
provided in the Companies (Registration Offices and Fees) Rules, 2014 shall be paid to the
Registrar for registration of any document.

(b) As per section 369, the registration of a company in pursuance of Part I of Chapter XXI
shall not affect its rights or liabilities in respect of any debt or obligation incurred by the
company before registration. Similarly, any contract entered into by the company before
registration shall not be affected.
(c) Mr. X is entitled to repudiate the allotment since he purchased the shares relying on a
misstatement contained in the prospectus.
An expert is not liable if he proves that the prospectus was issued without his knowledge or
consent, and that on becoming aware of its issue, he forthwith gave a reasonable public
notice that it was issued without his knowledge or consent.
(d) As per section 185 of the Companies Act, 2013, no company shall, directly or indirectly,
give any guarantee in connection with a loan taken by a director. Section 185 does not
permit a company to give guarantee even with the approval of the Central Government.
However, the prohibition under section 185 shall not apply to a company, which, in the
ordinary course of its business, gives guarantees for the repayment of any loan.
In the given case, guarantee cannot be given by Vidhi Ltd. in respect of a loan advanced to
Mr. Om by a housing finance company, unless Vidhi Ltd., in the ordinary course of its business,
gives guarantees for the repayment of any loan.
(e) As per section 9, where an insurer has ceased to carry on in India all classes of insurance
business and his liabilities in India in respect of all classes of insurance business have been
satisfied or are otherwise provided for, the court may, on the application of the insurer, order
the return to the insurer of the deposit made by him under this Act.
(f) Business ethics is not a pure science but a professional practice, and society expects
businessmen to abide by the principles of a civil society, just as it expects professionals from other
areas such as medicine, bureaucracy, politics and sports to do so. Thus, instead of a value-free
business ethics, we have a value- loaded or value-based business practice.
(g) Members should accept the obligation to act in a way that will serve the public interest,
honour public trust and demonstrate commitment to professionalism. A distinguishing mark of a
profession is acceptance of its responsibility to the public. The accounting professions public
interest of clients, credit grantors, governments, employers, investors, the business and financial
community and others who rely on the objectivity and integrity of certified public accountants to
maintain the orderly functioning of commerce. This reliance imposes a public interest responsibility
on the professionals. The public interest is defined as a collective well being of the community of
people and institution the profession serves.
[60 Marks]
Question 2(a)
(i) Mr. Zeo has been arrested for a cognizable and non-bailable offence punishable for a term
of imprisonment for more than three years under the prevention of Money Laundering Act,
2002. Advise, as to how can he be released on bail in this case?
(ii) A producer company has received applications from Mr. Richard, a Director of the
company, and Mr. Pichai, a member of the Company, for grant of loan of ` 2,00,000 and `
25,000 respectively. Discuss the relevant provisions of the Companies Act, 1956 as to how the
applications for grant of loan will be disposed of by the Company.
(iii) Write a short note on non-disclosure of the source of information with respect to an

investigation of the Company, as per Companies Act, 2013.
[7+6+2 = 15]
Answer:
(i) Analysis of the case of Mr. Zeo as per Prevention of Money Laundering Act, 2002
(a) Conditions for release of accused on bail [Section 45(1)]
Notwithstanding anything contained in the Code of Criminal Procedure, 1973, no person
accused of an offence punishable for a term of imprisonment of more than 3 years under
Part A of the Schedule shall be released on bail or on his own bond unless (1) the Public Prosecutor has been given an opportunity to oppose the application for
such release; and
(2) where the Public Prosecutor opposes the application, the court is satisfied that there
are reasonable grounds for believing that he is not guilty of such offence and that he is
not likely to commit any offence while on bail.
(b) Conditions for release of a person aged less than 16 years [First Proviso to Section 45(1)]
Where a person who is under the age of 16 years is a woman or is sick or infirm, he may be
released on bail, if the special court so directs.
(c) Cognisance of offences [Second Proviso to Section 45(1)]
The Special Court shall not take cognisance of any offence punishable under section 4
except upon a complaint in writing made by (1) the Director; or
(2) any officer of the Central Government or State Government authorised in writing in this
behalf by the Central Government by a general or special order made in this behalf
by that Government.
(d) No power of police officer to investigate [Section 45(1 A)]
Notwithstanding anything contained in the Code of Criminal Procedure, 1973, or any
other provision of this Act, no police officer shall investigate into an offence under this Act
unless specifically authorised, by the Central Government by a general or special order,
and, subject to such conditions as may be prescribed.
(e) Other conditions for grant of bail [Section 45(2)]
The limitation on granting of bail specified in sub-section (1) is in addition to the limitations
under the Code of Criminal Procedure, 1973 or any other law for the time being in force
on granting of bail.
(ii) Loan to Mr. Richard, the director of the company
As per section 581R, the Board is authorised to do all such acts and things as the company is
entitled to do.
However, the Board shall not sanction any loan or advance, in connection with the business
activities of the Producer Company to any director or his relative.
As per section 581S, the members may sanction a loan to a director in annual general
meeting. Further, the conditions and limits of loan shall also be specified in the resolution so
passed in the annual general meeting.
As per section 581ZG, it shall be the duty of the auditor to report on the loans given by the
Producer Company to its directors.

As per section 581ZK, any loan or advance to any director or his relative shall be granted only
after the approval by the Members in general meeting.
In the present case, it is permissible for the Board to give a loan of ` 2,00,000 to Mr. Richard, a
director, only if such a loan is approved by the members in the annual general meeting, and
the conditions and limits of loan are specified in the resolution so passed in the annual general
meeting.
Loan to Mr. Pichai, a member of the company
The Board may, subject to the provisions made in articles, provide financial assistance to the
Members of the Producer Company by way of
(a) credit facility, to any Member, in connection with the business of the Producer Company,
for a period not exceeding 6 months,
(b) loans and advances, against security specified in articles to any Member, repayable
within a period exceeding 3 months but not exceeding 7 years from the date of
disbursement of Such loan or advances.
Accordingly, loan of ` 25,000 to Mr. Pichai can be made provided that
(a) such loan is secured by any security specified in the articles;
(b) such loan is repayable after 3 months but within 7 years.
(iii) As per section 457 of Companies Act, 2013, notwithstanding anything contained in any
other law for the time being in force, the Registrar, any officer of the Government or any other
person shall not be compelled to disclose to any court, Tribunal or other authority, the source
from where he got any information which (a) has led the Central Government to order an investigation; or
(b) is or has been material or relevant in connection with such investigation.
Question 2(b)
(i) Fun Toys Limited and Bright Toys Limited marketing their products in India propose to be
amalgamated. The enterprise created as a result of the said amalgamation will have
assets of value of ` 300 crore and turnover of ` 1000 crore. Examine whether the proposed
amalgamation attracts the provisions of the Competition Act, 2002?
(ii) Sundar, a citizen of India, left India for employment in Australia on 1st June 2007. Mr.
Sundar purchased a flat at New Delhi for ` 15 lakhs in September, 2008. His brother, Mr.
Satya employed in New Delhi, also purchased a flat in the same building in September,
2008 for ` 15 lakhs. Mr. Satya's flat was financed by a loan from a housing finance
company and the loan was guaranteed by Mr. Sundar. Examine with reference to the
provisions of Foreign Exchange Management Act, 1999, whether purchase of flat and
guarantee by Mr. Sundar are capital account transactions and whether these transactions
are permissible.
(iii) What power does the Central Government have to make Rules relating to winding up?
[4+6+5 = 15]
Answer:
(i) The given problem relates to section 5 of the Competition Act, 2002.
As per section 5, an amalgamation shall be a combination if the enterprise created as a result
of the amalgamation, shall have the assets of the value of more than ` 1,000 crores or

turnover more than ` 3,000 crores.
In the given case, the enterprise created as a result of the amalgamation will have assets of
value of ` 300 crore (i.e. less than the amount specified under section 5, viz. ` 1,000 crores)
and turnover of ` 1,000 crore (i.e. less than the amount specified under section 5, viz. ` 3,000
crores). Thus, as per the provisions of section 5, the said amalgamation does not amount to
'combination', and so such amalgamation shall come into effect without obtaining any
approval of the Competition Commission of India.
(ii) Capital account transaction means a transaction which alters the assets or liabilities,
including contingent liabilities, outside India of persons resident in India or assets or liabilities in
India of persons resident outside India. It also includes (a) acquisition or transfer of immovable property in India, other than a lease not exceeding 5
years, by a person resident outside India.
(b) giving of a guarantee or surety in respect of any debt, obligation or other liability incurred
by a person resident outside India.
In general, a capital account transaction is not permissible, unless otherwise provided in the
Act, rules or regulations made thereunder, or with the general or special permission of Reserve
Bank of India.
In the given case Mr. Sundar left India for employment in Australia in June 2007. Therefore, he
becomes a person resident outside India as from June 2007.
(a) The purchase of flat in India by Mr. Sundar (a person resident outside India) is a capital
account transaction. Therefore, this transaction shall be permissible in accordance with
the regulations framed in this behalf, i.e., Foreign Exchange Management (Acquisition
and Transfer of Immovable Property in India) Regulations, 2000.
Foreign Exchange Management (Acquisition and Transfer of Immovable Property in India)
Regulations 2000 imposes restrictions on a person resident outside India from acquiring
immovable property in India. However, Regulation 3 of these regulations permits a person
resident outside India to acquire any immovable property in India provided he fulfills both
the following conditions:
The person resident outside India is a citizen of India.
The immovable property acquired in India is not agricultural/plantation/farm house.
Therefore, in the instant case, the purchase of flat by Mr. Sundar is permissible under FEMA.
(b) Guarantee involves a long term commitment which alters the assets and liabilities of a
person and therefore it is considered as a capital account transaction and thus restricted
under FEMA.
Accordingly, Mr. Sundar can give a guarantee to the Housing Finance Company in
respect of purchase of flat by Mr. Satya with the permission of Reserve Bank of India.
(iii) Powers of the Central Government to make rules relating to winding up (Section 468 of the
Companies Act, 2013)
(a) The Central Government shall make rules for all matters relating to the winding up of
companies.
(b) The Rules shall be consistent with the Code of Civil Procedure, 1908.
(c) In particular, and without prejudice to the generality of the foregoing power, such rules
may provide for all or any of the following matters, namely:
1) as to the mode of proceedings to be held for winding up of a company by the
Tribunal;
2) for the voluntary winding up of companies, whether by members or by creditors;
3) for the holding of meetings of creditors and members;

4) for giving effect to the provisions of this Act as to the reduction of the capital;
5) generally for all applications to be made to the Tribunal under the provisions of this
Act;
6) the holding and conducting of meetings to ascertain the wishes of creditors and
contributories;
7) the settling of lists of contributories and the rectifying of the register of members where
required, and collecting and applying the assets;
8) the payment, delivery, conveyance, surrender or transfer of money, property, books or
papers to the liquidator;
9) the making of calls; and
10) the fixing of a time within which debts and claims shall be proved.
Question 2(c)
(i) State the formalities that has to be followed with respect to registration of prospectus of
Companies Incorporated outside India, as per provisions contained in the Companies Act,
2013.
(ii) A company created a floating charge of its current assets in favour of a bank to secure a
current account, which was in debit of ` 5 lakhs and also to secure further working Capital
facilities provided by the bank. The charge created on 1st January, 2013 was duly
registered with the Registrar of Companies. The bank advanced ` 10 lakhs subsequent to
the creation of charge. The company has gone into voluntary liquidation pursuant to a
resolution passed on 1st September, 2013. Examine the validity of the floating charge in
case it is a creditors voluntary winding up, but there is no fraudulent preference. Would
your answer be different, if it was a member's voluntary winding up?
(iii) The issued, subscribed and paid-up capital of Super Supplements Limited is ` 2 crore
consisting of 20,00,000 equity shares of ` 10 each. The said company has 800 members.
For the purpose of relief against oppression and mismanagement, a petition was
submitted before the appropriate authority duly signed by 90 members holding 1,00,000
equity shares of the said company. Subsequently, 30 members, who signed the petition,
withdrew their consent. Decide, under the provisions of the Companies Act, 1956 whether
the said petition is maintainable?
[3+7+5 = 15]
Answer:
(i) The provisions of Registration of Prospectus is contained in section 389 of Companies Act,
2013 and are explained as follows:
Conditions for issue or circulation of prospectus
No person shall issue, circulate or distribute in India any prospectus by which securities are
offered for subscription unless before such issue, circulation or distribution, (a) a certified copy of the prospectus is delivered to the Registrar for registration;
(b) the prospectus states on the face of it that a copy has been so delivered; and
(c) expert's consent to the issue of the prospectus (as required under section 388) and
such documents as may be prescribed are attached to the prospectus.
Manner of certification of prospectus
The copy of the prospectus shall be certified by Academics Department, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) Page 8

(a) the chairperson of the company; and
(b) 2 other directors of the company.
The provisions of section 389 shall apply with respect to any prospectus of a company (a) incorporated outside India (and whether or not it has established a place of business in
India); or
(b) to be incorporated outside India (and whether or not it will establish a place of business in
India).
(ii) As per section 534 of Companies Act, 1956, a floating charge created by the company
within 12 months preceding the commencement of its winding up shall be invalid. However,
this rule is subject to the following two exceptions:
(a) A floating charge shall not be invalid where it is proved that the company was solvent
immediately after the creation of the charge.
(b) A floating charge shall be valid upto the amount of any cash paid to the company
(whether at the time of creation of charge or thereafter) as a consideration for the
charge. Also, interest shall be allowed on that amount at the rate of 5% per annum or such
other rate as may be notified by the Central Government in the Official Gazette.
A company had created a floating charge of its assets in favour of a bank to secure a current
account which was in debit. The bank advanced monies to the company subsequent to the
creation of charge.
The bank would not have advanced such monies if the company had not given the security
(by way of creation of floating charge) to the bank. Therefore, it was held that money
advanced to the company was in consideration of creation of charge, and so the charge
was valid as it fell in the exception mentioned in section 534 [Re, Yeovil6love Co. Ltd. (1962) 3
All ER 400].
The facts of the given are exactly similar to the facts of the case discussed above. Therefore, it
can be said that the floating charge created by the company on 1st January, 2013 shall be
valid to the extent of ` 10 lakhs along with interest at the rate of 5% per annum or such other
rate as may be notified by the Central Government in the Official Gazette.
Section 534 falls under Chapter V of Part VII of the Companies Act, 1956. The Title of said
Chapter V reads, 'Provisions applicable to every mode of winding up'. Therefore, it is evident
that section 534 shall apply notwithstanding that it is members' voluntary winding up or
creditors' voluntary winding up.
(iii) As per section 399, in the case of a company having a share capital, members eligible to
apply for oppression and mismanagement shall be lowest of the following:
(a) 100 members; or
(b) 1/10th of the total number of members; or
(c) Members holding not less than 1/10th of the issued share capital of the company.
It must be noted that the term 'member' includes an equity shareholder as well as preference
shareholder.
The consent to be given by shareholder is reckoned at the beginning of the proceedings. The
withdrawal of consent by shareholder(s) during the course of proceedings does not affect the
maintainability of the application [Rajahmundri Electric Supply Corporation v Nageshwara
Rao AIR 1956 SC 213].
In the present case, the application is valid since it has been made by 90 members (being
more than the eligibility criteria of 1/10th of total number of members).
Such application shall remain valid despite the fact that some of the applicants have
subsequently withdrawn their consents [Rajahmundri Electric Supply Corporations
Nageshwara Rao AIR 1956 SC 213].
It has been assumed that the members making the application have paid all the calls due on
their shares.
Question 2(d)
(i) Discuss whether property of the company before registration vests in the company
incorporated under the Companies Act, 2013?
(ii) Examine the extent to which the legal representatives of a deceased director against
whom misfeasance proceedings were initiated by the liquidator of the company, under
the Companies Act 1956, can be held liable.
(iii) Answer the following with reference to a scheme of amalgamation of companies
explaining the relevant provisions of the Companies Act, 1956.
(a) Whether companies being amalgamated must be companies registered in India.
(b) What is the majority required for approving the scheme of amalgamation in a
meeting of members of a company called as per directions of the Court? Is the
scheme to be approved by preference shareholders?
(c) When will the Court order dissolution of the Transferor company?
[5+4+6 = 15]
Answer:
(i) As per section 368 of Companies Act, 2013, all the property belonging to the company
before registration, shall pass to the company incorporated under the Companies Act, 2013.
In other words, all the property vested in the company before registration of the company
shall vest in the company as incorporated under the Companies Act, 2013. The provisions of
section 368 shall apply to all property, whether movable or immovable as well as to all
actionable claims.
The effect of section 368 is that there is automatic vesting and divesting of the property. The
company (before registration) is divested of all the properties, and the company
incorporated under the Companies Act, 2013 is vested with all such properties. The vesting of
property is as a result of the statute, and therefore, no registered instrument of transfer is
necessary [Rama Sundari Ray v Syamendra Lal Ray, ILR (1947) 2 Cal 1].
If the constitution of a partnership firm is changed into that of a company by registering under
Part I of Chapter XXI of the Companies Act, 2013, there shall be statutory vesting of title of all
the property of the previous firm in the newly incorporated company without any need for a
separate conveyance deed or sale deed [Vali Pattabhirama Rao v Sri Ramanuja Ginning &
Rice Factory P. Ltd. (1968) 60 Com Cases 568 (AP-DB)].
(ii) Under section 543 of Companies Act, 1956, the Court has the power to initiate
misfeasance proceedings against any delinquent director or any other officer of the
company.
The Supreme Court has held that misfeasance proceedings initiated under section 543

against a director of a company in winding up can be continued on his death against his
legal heirs for the purpose of determining and declaring the loss or damage caused to the
company. The amount declared to be due in the misfeasance proceedings shall be realised
from the estate of the deceased in the hands of his legal representatives [Official Liquidator v
Parthasarathi Sinha (1983) 53 Comp Cas 163 (SC)]. However, such liability shall not extend to
any sum beyond the value of the estate of the deceased in their hands.
(iii)
(a) For effecting the reconstruction of a company or amalgamation of two or more
companies, an application shall be made to the Court under section 391 (Section 394).
The benefit of section 394 is available only if the transferee company (i.e., new company)
is a company within the meaning of Companies Act, 1956. However, the transferor
company may be anybody corporate, whether a company within the meaning of the
Companies Act, 1956 or not. As such, a foreign company can be a 'transferor company'
but not a 'transferee company'. Therefore, a scheme of amalgamation may provide for
transfer of foreign companies to Indian companies.
(b) The scheme shall be approved by a majority of the members, who are present and voting.
Such majority of members must also be members representing three-fourths in the value of
members present and voting at the meeting. It is to be noted that members not present in
the meeting or present in the meeting but remaining neutral are not to be counted
[Section 391(2)].
Section 391(2) uses the expression 'member', which includes a preference shareholder
also. As such, both equity and preference shares shall be taken into account. However, if
a separate meeting of preference shareholders and equity shareholders is ordered, then
the scheme shall be approved by preference shareholders and equity shareholders in
their separate meetings.
(c) The order of the Court may provide for the dissolution, without winding up, of any transferor
company [Section 394(1)]. However, the Court will not make such an order unless it
receives a report from the official liquidator to the effect that the affairs of the company
have not been conducted in a manner prejudicial to the interests of its members or to
public interest [Second Proviso to Section 394 (2)].
Question 2(e)
(i) Elite Ltd. is engaged in the business of construction. Arun, Barun and Kiran, directors of the
Elite Ltd. are holding 75% of the capital of this company. The company passed a resolution
at its general meeting that it would not be interested in a particular contract for
construction of a bridge. Subsequently, the same contract was obtained by Arun, Barun
and Kiran in their own names.
(ii) Shyam, a Director of Radha Studio Ltd., was appointed on 1st April, 2014. One of the terms
of appointment was that in the absence of adequacy of profits or if the company had no
profits in a particular year, he will be paid remuneration in accordance with Schedule V.
For the financial year ended 31st March, 2015, the company suffered heavy losses. The
company paid him a remuneration of ` 50 lacs for the financial year 2014-15.
The effective capital of the company is ` 150 crores. Referring to the provisions of
Companies Act, 2013, as contained in Schedule V, examine the validity of the above
payment of remuneration to Shyam.
(iii) The Board of Directors of Laxmi Jewellery Limited propose to donate ` 3,00,000 to a school
established exclusively for the benefit of children of employees and also donate ` 50,000
to a political party during the Financial year ending 31st March, 2010. The average net
profits during the three immediately preceding financial years is ` 40,00,000.

Examine with reference to the provisions of the Companies Act, 2013 whether the
proposed donations are within the powers of the Board of Directors of the Company.
[4+5+6 = 15]
Answer:
(i) The Majority Rule governs the internal management of the company. As such if any
wrong is done to the company, the proper plaintiff to institute a suit is the company itself and
the Court would not interfere at the instance of the individual shareholders [Foss v Harbottle
(1843) 2 Hare 461]. However, if the majority misuses its powers to defraud or oppress the
minority, an action can be brought by an individual member.
Three directors holding 75% of the share capital of the company used their positions as
directors and obtained a contract in their own names. As it amounted to breach of duty
towards the company, they called a general meeting in which a resolution was passed to the
effect that the company had no interest in the contract. It was held that directors utilised the
contract belonging to the company for their personal gain and it amounted to a fraud on the
minority. The company could claim profits realised by the directors [Cook Deeks (1916)1 AC
554].
The facts of the given case are identical to the facts specified in the above case and so it can
be said that the minority shareholders will succeed.
(ii) Where a company does not make any profits or its profits are inadequate, it may pay
remuneration to its managing director or whole time director or manager in accordance with
Section II of Part II of Schedule V.
The payment of remuneration as per Schedule V is possible only if the company has not made
any default in repayment of any of its debts (including public deposits) or debentures or
interest payable thereon for a continuous period of 30 days in the preceding financial year
before the date of appointment of such managerial person.
In the present case, the effective capital of the company is ` 150 crores. As per Schedule V, a
company having effective capital of ` 100 crore or more, but less than ` 250 crore may pay to
its managerial person, a maximum remuneration of ` 60 lakh per year. Thus, payment of ` 50
lakh for the financial year 2014-15 is within the limit specified under Section II of Part II of
Schedule V, and is, therefore, valid. No approval of the Central Government shall be required
for such payment.
(iii) As per section 181 of the Companies Act, 2013, without the prior consent of the members
in the general meeting, the Board shall not contribute to bona fide charitable and other
funds, if the amounts contributed in a financial year will exceed 5% of average net profits
during immediately preceding 3 financial years:
In the given case, donation of ` 3,00,000 to a school run exclusively for the benefit of children
of employees amounts to welfare expenses for the employees by which the employees are
likely to receive benefits, and there will be an inducement on the part of the employees to
increase the effort. As such, the donation of ` 3,00,000 is outside the purview of charitable
donations. Therefore, donations of ` 3,00,000 to the school established exclusively for the
benefit of children of employees is within the powers of the Board, and so the permission of
members in general meeting is not required.
As per section 182 of the Companies Act, 2013, a company shall not make a political
contribution unless all the following conditions are satisfied.

(a) The company is not a Government company.
(b) The company has been in existence for 3 or more financial years.
(c) The aggregate amount of political contribution in a financial year shall not exceed 7.5% of
average net profits during immediately preceding 3 financial years.
(d) The Board shall make a political contribution only by passing a resolution at a Board
meeting.
(e) The company shall disclose in its profit and loss account the amount of political
contribution and the name of the political party or the person to whom such amount has
been contributed.
In the given case, the company satisfies all the conditions prescribed under section 182 of the
Companies Act, 2013. Accordingly, it can make political donations upto ` 3,00,000 (being
7.5% of ` 40,00,000). As in the given case, the Board has donated only ` 50,000, the donation is
within the limits and is in accordance with section 182 of the Companies Act, 2013. The Board
shall make such political contribution only by passing a resolution at a Board meeting. Further,
adequate disclosure shall be made in the profit and loss account.
[20 Marks]
Question 3(a)
1. What is Project Governance? What are the benefits of Project Governance?
2. Corporate Social Responsibility is to be considered as an investment and not as a
charity Discuss
[4+6 = 10]
.
Answer:
1. Project Governance extends the principle of Governance into both the management of
individual projects via Governance structures, and the management of projects at the
business level, for example via Business Reviews of Projects. Today, many organisations are
developing models for Project Governance Structures, which can be different to a
traditional Organisation Structure in that it defines accountabilities and responsibilities for
strategic decision-making across the project. This can be particularly useful to project
management processes such as change control and strategic (project) decision-making.
When implemented well, it can have a significantly positive effect on the quality and
speed of decision making on significant issues on projects.
Benefits of Project governance:
Project governance will:
i) Outline the relationships between all internal and external groups involved in the
project.
ii) Describe the proper flow of information regarding the project to all stakeholders.
iii) Ensure the appropriate review of issues encountered within each project.
iv) Ensure that required approvals and direction for the project is obtained at each
appropriate stage of the project.
2. The originally defined concept of CSR needs to be interpreted and dimensionalised in the
broader conceptual framework of how the corporate embed their corporate values as a new
strategic asset, to build a basis for trust and cooperation within the wider stakeholder
community.
Though there have been evidences that record a paradigm shift from charity to a long-term

strategy, yet the concept still is believed to be strongly linked to philanthropy. There is a need
to bring about an attitudinal change in people about the concept.
By having more coherent and ethically driven discourses on CSR, it has to be understood that
CSR is about how corporates place their business ethics and behaviors to balance business
growth and commercial success with a positive change in the stakeholder community.
Several corporates today have specific departments to operationalise CSR. There are either
foundations or trusts or a separate department within an organisation that looks into
implementation of practices.
Being treated as a separate entity, there is always a flexibility and independence to carry out
the tasks. But often these entities work in isolation without creating a synergy with the other
departments of the corporate. There is a need to understand that CSR is not only a pure
management directive but it is something that is central to the company and has to be
embedded in the core values and principles of the corporate.
Whatever corporates do within the purview of CSR has to be related to core business. It has to
utilise things at which corporates are good; it has to be something that takes advantage of
the core skills and competencies of the companies. It has to be a mandate of the entire
organisation and its scope does not simply begin and end with one department in the
organisation.
Charity means the act of donating money, goods, time or effort to support a charitable cause
in regard to a defined objective. Charity can be equated with benevolence and charity for
the poor and needy. It can be any selfless giving towards any kind of social need that is not
served, underserved, or perceived as unserved or underserved. Charity can be by any
individual or by a corporate.
Corporate Social Responsibility is about how a company aligns their values to social causes by
including and collaborating with their investors, suppliers, employees, regulators and the
society as a whole. The investment in CSR may be on people centric issues and/or planet
issues. A CSR initiative of a corporate is not a selfless act of giving; companies derive long-term
benefits from the CSR initiatives and it is this enlightened self interest which is driving the CSR
initiatives in companies.
Question 3(b)
1. What is Corporate Governance? What is the need for Corporate Governance in India?
2. State the advantages of Good Corporate Citizenship.
[5+5 = 10]
Answer:
1. Corporate governance is:
(i) The system by which companies are directed and controlled -The Cadbury Report, 1992.
(ii) The process of supervision and control intended to ensure that the companys
management acts in accordance with the interests of shareholders -Parkinson, 1994.
(iii) Corporate Governance is the acceptance by management of the inalienable rights of
shareholders as the true owners of the corporation and of their own role as trustees on
behalf of the shareholders. It is about commitment to values, about ethical business
conduct and about making a distinction between personal and corporate funds in the

management of a company Report of N.R.Narayana Murthy Committee on Corporate
Governance constituted by SEBI (2003).
Need for Corporate Governance:
Corporate Governance is integral to the existence of the company. It is needed to create a
corporate culture of transparency, accountability and disclosure.
i.
ii.
iii.
iv.
v.
vi.
vii.
viii.
Corporate Performance: Improved governance structures and processes help ensure

quality decision-making, encourage effective succession planning for senior
management and enhance the long-term prosperity of companies, independent of
the type of company and its sources of finance.
Enhanced Investor Trust: Investors consider Corporate Governance as important as
financial performance when evaluating companies for investment.
Combating Corruption: Companies that are transparent, and have sound system that
provide full disclosure of accounting and auditing procedures, allow transparency in
all business transactions, provide environment where corruption will certainly fade out.
Better Access to Global Market: A Good Corporate Governance system attracts
investment from global investors, which subsequently leads to greater efficiencies in
the financial sector.
Enhancing Enterprise Valuation: Improved management accountability and
operational transparency fulfill investors expectations and confidence on
management and corporations, and return, increase the value of corporations.
Accountability: An Investor relation is essential part of good Corporate Governance.
Investors have directly/indirectly entrusted management of the company for creating
enhanced value for their investment.
Easy Finance from Institutions: Evidence indicates that well-governed companies
receive higher market valuations.
Reduced Risk of Corporate Crisis and Scandals: Effective Corporate Governance
ensures efficient risk mitigation system in place
2. Business cannot exist in isolation; business cannot be oblivious to societal development. The
social responsibility of business can be integrated into the business purpose so as to build a
positive synergy between the two.
i.
ii.
iii.
CSR creates a favourable public image, which attracts customers. Reputation or

brand equity of the products of a company which understands and demonstrates its
social responsibilities is very high. Customers trust the products of such a company and
are willing to pay a premium on its products. Organizations that perform well with
regard to CSR can build reputation, while those that perform poorly can damage
brand and company value when exposed. Brand equity is founded on values such as
trust, credibility, reliability, quality and consistency.
CSR activities have its advantages. It builds up a positive image encouraging social
involvement of employees, which in turn develops a sense of loyalty towards the
organization, helping in creating a dedicated work force proud of its company.
Employees like to contribute to the cause of creating a better society. Employees
become champions of a company for which they are proud to work.
Society gains through better neighbourhoods and employment opportunities, while
the organization benefits from a better community, which is the main source of its
workforce and the consumer of its products.

iv.
Public needs have changed leading to changed expectations from consumers. The
industry/business owes its very existence to society and has to respond to needs of the
society.
v.
The companys social involvement discourages excessive regulation or intervention
from the Government or statutory bodies, and hence gives greater freedom and
flexibility in decision-making.
vi.
The internal activities of the organization have an impact on the external environment,
since the society is an inter-dependent system.
vii.
A business organization has a great deal of power and money, entrusted upon it by
the society and should be accompanied by an equal amount of responsibility. In
other words, there should be a balance between the authority and responsibility.
viii.
The good public image secured by one organization by their social responsiveness
encourages other organizations in the neighbor hood or in the professional group to
adapt themselves to achieve their social responsiveness.
ix.
The atmosphere of social responsiveness encourages co-operative attitude between
groups of companies. One company can advise or solve social problems that other
organizations could not solve.
x.
Companies can better address the grievances of its employees and create
employment opportunities for the unemployed.
xi.
A company with its ear to the ground through regular stakeholder dialogue is in a
better position to anticipate and respond to regulatory, economic, social and
environmental change that may occur.
xii.
Financial institutions are increasingly incorporating social and environmental criteria
into their assessment of projects. When making decisions about where to place their
money, investors are looking for indicators of effective CSR management.
In a number of jurisdictions, governments have expedited approval processes for firms that
have undertaken social and environmental activities beyond those required by regulation.
Question 3(c)
1. Corporate Governance is about promoting fairness. Is it truly beneficial?
2. Write a short note on SA 8000.
[6+4 = 10]
Answer:
1. Corporate Governance deals with promoting corporate fairness, transparency and
accountability. It is concerned with structures and processes for decision-making,
accountability, control and behavior at the top level of the organizations. It influences how
the objectives of an organization are set and achieved, how risk is monitored and assessed
and how performance is optimized. It is truly beneficial and it has the following benefits:
1. Improved Financial Performance: Socially responsible business practices are linked to
positive financial performance.
2. Operating Cost Reduction: CSR initiatives can help to reduce operating costs.
3. Brand Image and Reputation: CSR helps a company to increase its brand image and
reputation among the public, which in turn increase its ability to attract investors and
trading partners. Proactive CSR Practices would lead to a favourable public image
resulting in various positive outcomes like consumer and retailer loyalty, easier acceptance

of new products and services, market access and preferential allocation of investment
funds.
4. Increased Sales & Customer Loyalty: Businesses must first satisfy customer's key buying
criteria, i.e., price, quality, safety and convenience.
5. Productivity and Quality: Improved working conditions, reduced environmental impacts or
increased employee involvement in decision-making, leads to (a) increased productivity,
and (b) reduced errors.
6. Ability to attract and retain employees: Companies perceived to have strong CSR
commitments find it easier to recruit and retain employees, resulting in reduction in
turnover and associated recruitment and training costs.
2. Social Accountability 8000:
SA 8000 is a comprehensive, global, verifiable performance standard for auditing and
certifying compliance with corporate responsibility.
The heart of the standard is the belief that all workplaces should be managed in such a
manner that basic human rights are supported and that management is prepared to accept
accountability for this.
SA 8000 is an international standard for improving working conditions. This standard is based
on the principles of international human rights norms as described in International Labour
Organisation Conventions, the UN Convention on the Rights of the Child and the Universal
Declaration of Human Rights.
The requirements of this standard apply regardless of geographic location, industry sector, or
company size.
Learning objectives
KNOWLEDGE
know
COMPREHENSION
understand
Verbs used
List
State
Define
Definition
Make a list of
Describe
Distinguish
Explain
Produce
Discuss

consideration
something
means
Find an answer to
Arrange in a table
between
Build up or compile
action
Interpret
Decide
Advise
Evaluate
Recommend
Identity
Illustrate
APPLICATION
LEVEL C

apply
your knowledge
ANALYSIS
have learned
SYNTHESIS
optimum
reasoning
EVALUATION
make decisions or
recommendations
Apply
Calculate
Demonstrate
Prepare
Reconcile
Solve
Tabulate
Analyse
Categorise
Compare
and contrast
Construct
Prioritise

Full Marks: 100
[20 Marks]
(a) Poppy Limited, a banking company maintained the record of all transactions for a period
of 3 years from the date of cessation of the transactions between the clients and the
company. Decide whether the Company has fulfilled its obligation under the provisions of
the Prevention of Money Laundering Act, 2002.
3
(b) Mrs. Sukla, a resident outside India, is likely to inherit from her father some immovable
property in India. Are there any restrictions under the provisions of the Foreign Exchange
Management Act, 1999 in acquiring or holding such property? State whether Mrs. Sukla
can sell the property and repatriate outside India the sale proceeds.
3
(c) Indus Inc. is a company registered in USA and carrying on Trading Activity, with Principal
Place of Business in Mumbai. Since the company did not obtain registration or make
arrangement to file Return, the State VAT Officer having jurisdiction, intends to serve show
cause notice on the Foreign Company. As Standing Counsel for the Department, advise
the VAT Officer on valid service of Notice.
3
(d) The Super Traders Association was constituted by two Joint Hindu Families consisting of 51
major and 5 minor members. The Association was carrying the business of trading as
retailers with the object for acquisitions of gain. The Association was not registered as a
company under the Companies Act or other law.
State whether Super Traders Association is having any legal status? Will there be any
change in the status of this Association if the members of the Super Traders Association is
subsequently reduced to 45.
3
(e) Desert Rose Limited submitted the documents for incorporation on 5th October, 2014. It
was incorporated and certificate of incorporation of the company was issued by the
Registrar on 20th October, 2014. The company on 14th October, 2014 entered into a
contract which created its contractual liabilities. The company denies the said liability on
the ground that company is not bound by the contract entered into prior to issuing of
certificate of incorporation. Decide under the provisions of the Companies Act, 2013
whether the company can be exempted from the said contractual liability.
3
(f)
In the long run those business who do not respond to societys needs favorably, will
survive. Comment
3
(g) How the meetings of the audit committee should be undertaken as per clause 49 of listing
agreement.
2
Answer:

(a) As per section 12, the records of prescribed transactions shall be maintained for a period
of 5 years from the date of such transaction (viz. the transaction between the clients and the
banking company).
In the given case, Poppy Limited has maintained the records of transactions only for a period
of 3 years from the date of cessation of the transactions. Thus, Poppy Limited has failed to
maintain the records for the period of 5 years as prescribed under section 12. Therefore,
Poppy Limited has defaulted in compliance of section 12.
(b) As per Section 6(5), a person resident outside India may hold, own or transfer any
immovable property situated in India if such property is inherited from a person resident in
India.
Accordingly, Mrs. Sukla is entitled to acquire as well as hold the immovable property in India
inherited by her. Also, Mrs. Sukla is entitled to sell the immovable property in India and
repatriate outside India the sale proceeds of such immovable property.
(c) The VAT Officer is advised to serve the show cause notice on the foreign company in
accordance with the provisions of section 383 of the Companies Act, 2013, i.e. by addressing
it to the person whose name and address had been delivered to the Registrar under section
380, and sending it to such person by (i) post; or
(ii) hand delivery; or
(iii) electronic mode, viz. e-mail.
(d) Super Traders Association is an illegal association since the number of adult members
exceeds 50.
Effect of subsequent reduction in number of members would not make any change in the
status of Super Traders Association, since an illegal association continues to be an illegal
association even though, subsequently, the number of members is reduced below 50.
(e) The company is not bound by the contract entered into on 20.10.2014 since a
pre-incorporation contract is not binding on the company, as the company was not in
existence when such contract was entered into. Thus, the company is exempted from the
said liability.
However, the company shall be bound by the contract entered into on 20.10.2014, if The
company, after incorporation, has adopted the pre-incorporation contract in accordance
with the provisions of Sec. 15 and 19 of Specific Relief Act, 1963.
(f) Society gives business the license to exist which may be revoked or amended at anytime
if the business fails to fulfill the expectations of the society. Thus, in order to retain its powers, a
business organization should fulfill its social responsibility. The iron law states that, in the long
run, those who do not use power in a manner which society considers responsible will tend to
lose it. The implication of the iron rule is that the business organizations must recognize that
avoiding social responsibility would lead to the gradual erosion of power. Hence, the given
statement is incorrect.
(g) The Audit Committee should meet at least four times in a year and not more than four
months shall elapse between two meetings. The quorum shall be either two members or one
third of the members of the audit committee whichever is greater, but there should be a
minimum of two independent members present.

[60 Marks]
Question 2(a)
(i) Examine the validity of the resolution passed at the Annual General Meeting of a public
company for payment of dividend at a rate higher than that recommended by the board of
directors.
(ii) Explain the manner in which the 'Accounting Standards' may be prescribed under the
Companies Act, 2013.
(iii) Abhishek Company Ltd. in its first general meeting appointed six directors whose period
of office is liable to be determined by rotation. Briefly explain the procedure and rules
regarding retirement of these directors.
[4+6+5 = 15]
Answer:
(i) As per Regulation 80 contained in Table F of Schedule I to the Companies Act, 2013, a
company in general meeting may declare dividends, but no dividend shall exceed the
amount recommended by the Board. Following conclusions are worth noting:
(a) The power to declare dividend vests in the members, but the members can exercise such
power only if the dividend is proposed/recommended by the Board.
(b) The rate of dividend proposed/recommended by the Board may be reduced by the
members.
(c) The rate of dividend proposed/recommended by the Board cannot be increased by the
members.
(d) Any provision in the articles, which authorises the members to declare dividend higher
than the rate recommended by the Board, is void.
Therefore, in the given case, the resolution passed at the Annual General Meeting declaring
dividend at a rate higher than that recommended by the Board of directors is not valid.
(ii) The Accounting Standards are prescribed under section 133 of the Companies Act, 2013.
The provisions of section 133 are explained as follows:
The power to prescribe the accounting standards vests with the Central Government.
Stages in prescribing the accounting standards are as follows:

(a) At the first stage, the Institute of Chartered Accountants of India (ICAI) recommends
the Standards of Accounting.
(b) At the second stage, these Standards of Accounting shall be examined by the
National Financial Reporting Authority (NFRA). NFRA may also make its own
recommendations.
(c) At the third stage, the Central Government examines the recommendations made by
NFRA. Then, the Central Government may prescribe, after consultation with NFRA, the
Accounting Standards.
The standards of accounting as specified under the Companies Act, 1956 shall be
deemed to be the accounting standards until accounting standards are specified by the
Central Government under section 133 of the Companies Act, 2013 (Rule 7(1) of the
Companies (Accounts) Rule, 2014).
Till the National Financial Reporting Authority is constituted under section 132 of the Act,
the Central Government may prescribe the standards of accounting or any addendum
thereto, as recommended by ICAI in consultation with and after examination of the
recommendations made by the National Advisory Committee on Accounting Standards
constituted under section 210A of the Companies Act, 1956 (Rule 7(2) of the Companies
(Accounts) Rule, 2014).
(iii) Not less than 2/3 rd of total number of directors shall be the directors whose period of
office is liable to determination by retirement by rotation (any fraction contained in that 2/3 rd
shall be rounded off as 1).
Such directors are referred to as rotational directors. However, the articles of a company may
provide for greater number of rotational directors. Articles may even provide that all the
directors shall be rotational directors [Section 152(6)].
As per 152(6), at the first annual general meeting and every subsequent annual general
meeting, 1/3rd (or nearest to 1/3 rd) of directors liable to retire by rotation shall retire from the
office. The directors liable to retire by rotation shall be those who have been longest in the
office. In case, two or more directors were appointed on the same day, the directors liable to
retire shall be determined by an agreement between them. In the absence of any such
agreement, their names shall be determined by lots.
In the given case, it is given that the first general meeting has appointed 6 directors whose
period of office is liable to be determined by rotation. It means that all the 6 directors
appointed in the first general meeting shall be the rotational directors. Therefore, 2 directors
(1/3rd of 6) shall retire at the ensuing annual general meeting. These directors shall be eligible
for reappointment.
A separate resolution shall be moved for reappointment of both the directors (Section 162 of
the Companies Act, 2013).
Question 2(b)
(i) A company is required to pay dividend to its shareholders within 30 days of its
declaration. State the circumstances when a company will not be deemed to have
committed any offence even if it does not pay within 30 days.
(ii) What are the legal provisions to be complied with, in respect to remuneration of auditors.
(iii) In Arjun Ltd. three Directors were to be appointed. The item was included in agenda for
the Annual General Meeting scheduled on 30th September, 2014, under the category of
'Ordinary Business'. All the three persons as proposed by the Board of Directors were elected
as Directors of the company by passing a 'single resolution' avoiding the repetition
(multiplicity) of resolution. After the three directors joined the Board, certain members
objected to their appointment and the resolution. Examine the provisions of Companies Act,
2013 and decide whether the contention of the members shall be tenable and whether both
the appointment of Directors and the 'single resolution' passed at the Company's Annual
General Meeting shall be void.
[6+5+4 = 15]
Answer:
(i)
(a) Time limit for payment of dividend - The dividend shall be paid within 30 days from the
date of declaration of dividend.

(b) Exceptions - In the following cases, no default is deemed to have been committed by the
company, even though the dividend is not paid within 30 days of its declaration:
1. Where dividend could not be paid by reason of the operation of any law.
2. Where a shareholder has given directions to the company regarding payment of
dividend, but those directions cannot be complied with.
3. Where dividend is lawfully adjusted by the company against any sum due to it from
the shareholder.
4. Where there is a dispute regarding the right to receive the dividend.
5. Where the non-payment of dividend is not due to any default of the company.
(c) Penalty for non-payment
1. Director: Every director who is knowingly a party to the default shall be liable for simple
imprisonment upto 2 years and a fine of ` 1,000 per day for each day of default.
2. Company: The Company shall be liable to pay simple interest @ 18% per annum during
the period for which the default continues.
(ii) The provisions relating to remuneration of auditors are explained as follows:
1. Remuneration to be fixed in general meeting - The remuneration of the auditor of a
company shall be fixed (a) in the general meeting; or
(b) in such manner as may be decided in the general meeting.
2. Remuneration to be fixed by the Board - In case, the first auditor is appointed by the
Board, the remuneration of the first auditor shall be fixed by the Board.
3. Certain sums to be included in remuneration
The remuneration shall, in addition to the fee payable to an auditor, include (a) the expenses, if any, incurred by the auditor in connection with the audit of the
company; and
(b) any facility extended to the auditor.
However, the remuneration shall not include any remuneration paid to the auditor for
any other service rendered by him at the request of the company.
(iii) At a general meeting, two or more persons cannot be appointed as directors by a single
resolution unless a resolution that appointment shall be so made has first been agreed to by
the meeting without any vote being cast against it. A resolution moved in contravention of
this provision shall be void, whether or not objection was raised at the time when such
resolution was passed (Section 162).
In the present case, appointment of 3 directors has been made by passing a single resolution.
The resolution is void since before moving the resolution for appointment of 3 directors by a
single resolution, no resolution was passed to the effect that the appointment of 3 directors
shall be made by a single resolution. It is immaterial that no member objected to such
appointments.
Thus, the contention of the members that the appointment of the 3 directors is void, is correct.
Also, the single resolution passed for appointments, is void.
Question 2(c)
(i) Is it possible for the Board of directors of the company to revoke the dividend declared at
the Annual General Meeting?

(ii) Is it possible for a retiring director to continue in his office beyond the date of the annual
general meeting which had to be adjourned due to disturbances at the meeting? Explain.
(iii) A Public Company secures residential accommodation for the use of its managing
director by entering into a license arrangement under which the company has to deposit a
certain amount with the landlord to secure compliance with the terms of the license
agreement. Can it be considered as a loan to a director?
[5+7+3 = 15]
Answer:
(i) No revocation of dividend
Revocation of dividend is not possible. Section 127 of the Companies Act, 2013 requires that
dividend once declared must be paid within 30 days of its declaration. Section 127 of the
Companies Act, 2013 also contains certain grounds on which non-payment of dividend does
not result in a penalty. 'Revocation of dividend' is not a ground for non-payment of dividend
as per Section 127 of the Companies Act, 2013. Therefore, dividend once declared becomes
a debt due from the company and so it cannot be revoked.
Exceptions
In the following cases, the declared dividend may be revoked:
(a) Where declaration of dividend is ultra vires (i.e., where dividend is declared although the
company has not earned sufficient profits), the declared dividend can be revoked.
However, if illegally declared dividend is paid, the directors shall be liable to indemnify the
company, i.e., they shall be personally liable.
(b) Where the company ceases to be a going concern, declared dividend may be revoked.
For example, if, after declaration of dividend, but before payment of dividend, certain
events happen which make the 'going concern' assumption invalid (e.g., loss of
undertaking of the company by fire), declared dividend may be revoked.
Complaint relating to non-payment of dividend
(a) Right to complain: Where an application for transfer of shares {i.e., transfer deed) is
presented to the company, but the company wrongfully refuses to transfer the shares,
complaint for non-payment of dividends can be made by the transferor and not by the
transferee.
(b) Jurisdiction of Court: Failure to pay dividend arises at the place where the registered office
of the company is situated. Therefore, only the court having jurisdiction over the registered
office can entertain the complaint (Hanuman Prasad Gupta v Hiralal).
(ii) At every annual general meeting, 1/3rd (or nearest to 1/3rd) of rotational directors shall
retire from office [Section 152(6)]. If the place of retiring director is not filled and the meeting
has not resolved not to fill the vacancy, the meeting shall be adjourned automatically to the
next week at the same time and place or if that day is a public holiday, then to next
succeeding day which is not a public holiday. If at the adjourned meeting also, the place of
retiring director is not filled and the meeting has not resolved not to fill the vacancy, the
retiring directors shall be deemed to be reappointed [Section 152(7)].
Where the company does not hold annual general meeting, the directors liable to retire at
the annual general meeting cannot continue in office [B.R. Kundra v Motion Pictures
Association (1976) 46 Comp Cas 339].

In the given case the annual general meeting has been duly convened and therefore the
directors have fulfilled their obligation of convening the annual general meeting. So, pending
the decision in the annual general meeting, a retiring director can continue in office even
after the date of annual general meeting. His reappointment depends upon the decision
taken in the adjourned annual general meeting and may be discussed as follows:
(a) If the adjourned meeting resolves to reappoint him, he shall be reappointed.
(b) If the resolution for the reappointment of retiring director is lost in the adjourned annual
general meeting, he shall not be reappointed.
(c) If no resolution is passed at the adjourned meeting relating to his appointment and the
adjourned meeting does not resolve not to fill the vacancy, he shall be automatically
reappointed. However, the automatic reappointment shall not apply in the following
cases:
(i) Where a resolution for his appointment was put and lost.
(ii) Where a resolution is required for his appointment.
(iii) Where he is disqualified for appointment.
(iv) Where the retiring director has, in writing, expressed his unwillingness to be
reappointed.
(v) Where a resolution in contravention of section 162 is passed.
(iii) As per section 185 of the Companies Act, 2013, no company shall, directly or indirectly,
make any loan to a director.
In the present case, the company has provided the managing director with a housing
accommodation. It does not amount to a loan because of the following reasons:
The company has not given any deposit or advance to the managing director. The
amount deposited with the landlord cannot be said to be an 'indirect loan' to the
managing director.
It is a usual practice to give a security deposit to the landlord with whom a rent or lease
agreement is entered into. Thus, the company has made the security deposit on account
of bonafide business considerations.
It is of no concern of the managing director as to the terms on which the company
secures residential accommodation for him.
It is the company and not the director who has entered into the lease agreement. Therefore,
the company can at anytime use the accommodation for any other purpose and the
managing director will have to vacate it, as and when desired by the company.
Question 2(d)
(i) Notice has been received from a member proposing himself for appointment as a
director after the issue of notice convening the annual general meeting. As a secretary of a
public company, how will you deal with the above situation?
(ii) Yash, one of the directors of the company, sends a letter to the company secretary for
convening the Board meeting at an early date. Comment.
(iii) Advise M/s Super Flop Ltd. in respect of payment of remuneration of ` 40,000 per month to
the whole time director of the company running in loss and having an effective capital of `
95.00 lacs.
[6+4+5 = 15]

Answer:
(i) Section 160 recognises the right of a person, who is not a retiring director, to stand for
directorship. A notice received under section 160 shall be valid, if it complies with the following
requirements:
The notice is given at least 14 days before the general meeting.
It is deposited at the registered office of the company.
The notice is signed by the person eligible to give notice.
A sum of ` 1 lakh or such higher amount as may be prescribed, is deposited along with the
notice.
As per Section 101, the notice of every general meeting shall be sent by the company to the
members at least 21 clear days before the meeting. However, section 160 does not require
that the notice to be given to the company under section 160 must be received by the
company before issue of notice of the general meeting by the company.
In the present case, the notice under section 160 has been received by the company from a
member after the company has issued the notice of the annual general meeting. The notice
given by the member shall be in accordance with the provisions of section 160 if it is received
by the company at least 14 days before the general meeting and the notice complies with
other requirements of section 160. In case, the notice given by the member is in accordance
with the provisions of section 160, the company shall inform its members about the
candidature of the proposed director by serving individual notices or by advertisement in
accordance with the provisions of section 160 read with Rule 13 of the Companies
(Appointment and Qualification of Directors) Rules, 2014.
(ii) Regulation 67 of Table F provides that any director may requisition a Board meeting. On
such requisition (a) the manager or the secretary shall summon the Board meeting; and
(b) any director may summon the Board meeting.
However, neither the Companies Act, 2013 nor Table F contains any provision regarding
postponement of a Board meeting or convening a Board meeting at an early date. Thus, a
Board meeting may be convened at an early date if the articles of the company contain a
provision in this regard. However, in the absence of any provision in the articles, the secretary
should consult the chairman or the managing director and discuss the suitability of holding the
Board meeting at an early date.
(iii) Remuneration to a whole time director or managing director may be paid by way of
monthly payment or/and specified percentage of net profits. However, except with the
approval of the company in general meeting, such remuneration shall not exceed
(a) 5% of net profits, if the company has one whole time director or managing director or
manager; or
(b) 10% of net profits, if the company has more than one whole time director or managing
director or manager, taken together.
Section II of Part II of Schedule V empowers a company to pay minimum remuneration to its
whole time director, managing director or manager, even in case of inadequacy of profits or
in case of a loss. As per Section II of Part II of Schedule V, the remuneration to a whole time
director depends upon the effective capital of the company. In case of a company having
an effective capital of less than ` 5 crore, the remuneration payable to whole time director
shall not exceed ` 30 Lakh per year.
In the given case, M/s Super Flop Ltd. has suffered a loss and so it may pay remuneration to its

whole time director in accordance with Section II of Part II of Schedule V. Since the effective
capital of the M/s Super Flop Ltd. is less than ` 5 crore, it may pay a maximum of ` 30 Lakh per
year to its whole time director. Since the remuneration proposed to be paid to the whole time
director is ` 40,000 per month, it is permissible, and therefore, no approval of the Central
Government is required.
Question 2(e)
(i) The Board of directors of M/s. Serious Consultants Limited, registered in Calcutta, proposes
to hold the next Board meeting in the month of December, 2014. They seek your advise in
respect of the following matters:
1. Can the Board meeting be held in Chennai, when all the directors of the company reside
at Calcutta?
2. Whether the Board meeting can be called on a national holiday and that too after
business hours as the majority of the directors of the company have gone to Chennai on
vacation.
3. Is it necessary that the notice of the Board meeting should specify the nature of business to
be transacted?
Advise with reference to the relevant provisions of the Companies Act, 2013.
(ii) The Central Government has powers to fix limit on remuneration of managerial personnel.
Comment.
(iii) Explain the duty of the Registrar to make a report on the inspection made by him.
[(2.5+3+2.5) + 4+3 = 15]
Answer:
(i) There is no provision in the Companies -Act, 2013 which requires that a Board meeting
shall be held (a) only on a day that is not a national holiday;
(b) only at the registered office of the company or at any other place within the city, town or
village in which the registered office of the company is situated;
(c) only during business hours.
The answer to the given problem is as under:
1. Section 96 requires that an annual general meeting shall be held only at the registered
office of the company or at any other place within the city, town or village in which the
registered office of the company is situated. However, there is no similar provision in respect of
holding of a Board meeting. As such, a Board meeting can be held anywhere in India or even
outside India.
2. As per section 174, if a Board meeting could not be held for want of quorum, then, unless
the article: otherwise provide, the meeting shall automatically stand adjourned to the same
day, time and place in the next week, or if that day is a national holiday, then to next
succeeding day, which is not a national holiday. It means that a Board meeting adjourned for
want of quorum can be held only on a day which is not a national holiday. However, there is
nothing in the Act which prohibits the holding of an original Board meeting on a national
holiday. Similarly, the Act does not require that a Board meeting shall be held only during
business hours.
In the instant case, the directors intend to hold a Board meeting on a national holiday and
after business hours, which is permissible.
3. No form or contents of notice has been specified by the Act. Agenda of a Board meeting
is not required to be sent along with the notice of a Board meeting unless there is some

express provision of the Ac which requires a specific notice to move a resolution at a Board
meeting.
Therefore, the notice of Board meeting need not specify the nature of business to be
transacted.
(ii) The Central Government or a company may, while according its approval under section
196, to any appointment or to any remuneration under section 197 in respect of cases where
the company has inadequate or no profits, fix the remuneration within the limits specified in
this Act, at such amount or percentage of profits of the company, as it may deem fit and
while fixing the remuneration, the Central Government or the company shall have regard to
the following:
(a) The financial position of the company
(b) The remuneration or commission drawn by the individual concerned in any other
capacity
(c) The remuneration or commission drawn by him from any other company
(d) Professional qualifications and experience of the individual concerned
(e) Such other matters as may be prescribed.
3. The duties of the Registrar is as follows:
(a) After the inspection of the books of account or an inquiry under section 206 and other
books and papers of the company under section 207, the Registrar or inspector shall
submit a report in writing to the Central Government along with such documents, as he
may deem fit.
(b) The report of the Registrar may include a recommendation that further investigation into
the affairs of the company is necessary. The Registrar shall state the reasons supporting
such recommendation.
[20 Marks]
Question 3(a)
(i)
Analyze CSR as a Corporate Brand
(ii) Discuss the relevance of OECD Guidelines for Corporate Governance of State-owned
enterprises.
[5+5 =10]
Answer
(i)
CSR as a Corporate Brand:
In an economy where corporates strive for a unique selling proposition to differentiate

themselves from their competitors, CSR initiatives enable corporates to build a stronger brand
that resonates with key external stake-holders customers, general public and the
government.
Businesses are recognising that adopting an effective approach to CSR can open up new
opportunities, and increasingly contribute to the corporates ability to attract passionate and
committed workforces.
Corporates in India are also realising that their reputation is intrinsically connected with how
well they consider the effects of their activities on those with whom they interact. Wherever
the corporates fail to involve parties, affected by their activities, it may put at risk their ability to
create wealth for themselves and society.

Therefore, in terms of business, CSR is essentially a strategic approach for firms to anticipate
and address issues associated with their interactions with others and, through those
interactions, to succeed in their business endeavours. The idea that CSR is important to
profitability and can prevent the loss of customers, shareholders, and even employees is
gaining increasing acceptance.
Further, CSR can help to boost the employee morale in the organisation and create a positive
brand-centric corporate culture in the organisation. By developing and implementing CSR
initiatives, corporates feel contented and proud, and this pride trickles down to their
employees.
The sense of fulfilling the social responsibility leaves them with a feeling of elation. Moreover it
serves as a soothing diversion from the mundane workplace routine and gives one a feeling of
satisfaction and a meaning to their lives.
(ii) The relevance of OECD Guidelines for Corporate Governance of State-owned enterprises:
Many of the developing countries still continue to have a dominant presence of state-owned
enterprises. Hence, OECD thought it appropriate to evolve a set of governance guidelines for
the state-owned enterprises as it did for the private enterprises in member countries.
According to OECD, A major challenge is to find a balance between the states responsibility
for actively exercising its ownership functions, such as, the nomination and election of the
board, while at the same time refraining from imposing undue political interference in the
management of the company. Another important challenge is to ensure that there is a level
playing field in markets where private sector companies can compete with the state-owned
enterprises, and that governments do not distort competition in the way they use their
regulatory or supervisory powers.
According to OECD, the guidelines suggest that the state should exercise its ownership
functions through a centralized ownership entity, or effectively co-ordinated entities, which
should act independently and in accordance with a publicly disclosed ownership policy. The
guidelines also suggest the strict separation of the states ownership and regulatory functions.
If properly implemented, these and other recommended reforms would go a long way to
ensure that state ownership is exercised in a professional and accountable manner, and that
the state plays a positive role in improving corporate governance across all sectors of our
economies. The result would be healthier, more competitive, and transparent enterprises.
The major recommendations in OECD guidelines are as discussed below:
Ensuring an effective legal and regulatory framework for state-owned enterprises
There should be a clear separation between the states ownership function and other
state functions that may influence the conditions for state-owned enterprises, particularly
with regard to market regulation.
State-owned Enterprises should not be exempt from the application of general laws and
regulations. Stakeholders including competitors should have access to efficient redress and
an even-handed ruling when they believe that their rights have been violated.
State-owned Enterprises should face competitive conditions regarding access to finance. Their
relations with state-owned banks, state-owned financial institutions, and other state-owned
companies, should be based on purely commercial grounds.
Question 3(b)
(i)
What is the role of SEBI in promoting Corporate Governance?
(ii) What is Corporate Citizenship? Is this fundamentally different from Corporate Social
Responsibility?

[5+5 = 10]
Answer
(i) The role of SEBI in promoting Corporate Governance:
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 standards of Corporate Governance, SEBI on the basis
of recommendations of the Committee and public comments received on the report and in
exercise of powers 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 and 2013, 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.
(ii) A new terminology that has been gaining grounds in the business community today is
Corporate Citizenship. Corporate citizenship is defined by the Boston College Centre for
Corporate Citizenship, as the business strategy that shapes the values underpinning a
companys mission and the choices made each day by its executives, managers and
employees as they engage with society.
According to this definition, the four key principles that define the essence of corporate
citizenship are:
Minimise harm,
Maximise benefit,
Be accountable and responsive to key stakeholders and
Support strong financial results.
Corporate citizenship, sometimes called corporate responsibility, can be defined as the ways
in which a companys strategies and operating practices affect its stakeholders, the natural
environment, and the societies where the business operates. In this definition, corporate
citizenship encompasses the concept of corporate social responsibility (CSR), which involves
companies, explicit and mainly discretionary efforts to improve society in some way, but is also
directly linked to the companys business model in that it requires companies to pay attention
to all their impacts on stakeholders, nature, and society. Corporate citizenship is, in this

definition, integrally linked to the social, ecological, political, and economic impacts that
derive from the companys business model; how the company actually does business in the
societies where it operates; and how it handles its responsibilities to stakeholders and the
natural environment.
Thus, corporate citizenship, similar to its CSR concept, is focusing on the membership of the
corporation in the political, social and cultural community, with a focus on enhancing social
capital. Notwithstanding the different terminologies and nomenclature used, the focus for
companies today should be to focus on delivering to the basic essence and promise of the
message that embodies these key concepts CSR and Corporate Citizenship.
Corporate Social Responsibility is not a fad or a passing trend, it is a business imperative that
many Indian companies are either beginning to think about or are engaging within one way
or another. While some of these initiatives may be labeled as corporate citizenship by some
organisations, their basic message and purpose is the same.
Question 3(c)
(i) Can whole life risk be analysed?
(ii) Discuss, Governance in India The Path Ahead
[5+5 = 10]
Answer
(i) Several methodologies are available to deal with WLCC risk analysis. The techniques that
can be used in WLCC risk assessment decision making might be summarised as deterministic,
probabilistic and AI. Deterministic methods measure the impact on project outcomes of
changing one uncertain key value or a combination of values at a time. In contrast,
probabilistic methods are based on the assumption that no single figure can adequately
represent the full range of possible outcomes of a risky investment (Fuller & Petersen 1996).
Rather, a large number of alternative outcomes must be considered and each possibility must
be accompanied by an associated probability from a probability distribution, followed by a
statistical analysis to measure the degree of risk. Using a deterministic approach, the analyst
determines the degree of risk on a subjective basis. AI methods differ from the above
approaches and use historical data to model cost and uncertainty in WLCC analysis. None of
these techniques can be applied to every situation. The best method depends on the relative
size of the project, availability of data and resources, computational aids and skills, and user
understanding of the technique being applied.
Following the identification, quantification and development of risk responses, the related
vulnerabilities of building assets need to be determined and planned for. This provides the
basis on which risk management plans and decisions are made. The risk management
planning process is concerned with putting in place the procedure for:
(i) What response actions are needed
(ii) When these response actions are needed
(iii) How these actions are implemented
(iv) Who is responsible for the implementation, control and monitoring of the actual progress
of risk responses and management strategies that have been developed to deal with the
identified risk.
(ii) Governance in India: The Path Ahead

The Indian economy on the eve of the Twelfth Plan is characterized by strong
macro-fundamentals and good performance over the Eleventh Plan period, though clouded
by some slowdown in growth in the current year with continuing concern about inflation and
a sudden increase in uncertainty about the global economy. The objective of the Eleventh
Plan was faster and inclusive growth and the initiatives taken in the Eleventh Plan period have
resulted in substantial progress towards both objectives. Inevitably, there are some
weaknesses that need to be addressed and new challenges that need to be faced. Some of
the challenges themselves emanate from the economys transition to a higher and more
inclusive growth path, the structural changes that come with it and the expectations it
generates. There are external challenges also arising from the fact that the global economic
environment is much less favourable than it was at the start of the Eleventh Plan. These
challenges call for renewed efforts on multiple fronts, learning from the experience gained,
and keeping in mind global developments. We focus on the backdrop of target setting and
areas of focus of the Eleventh Plan. India entered the Eleventh Plan period (2007-2012) with an
impressive record of economic growth. The vision for the Eleventh Plan prominently included
an improvement in governance. Over the years, the governments at the Centre and the
States have launched a large number of initiatives at substantial public expense to achieve
the objectives of growth with poverty alleviation and inclusiveness. Experience suggests that
many of these initiatives have floundered because of poor design, insufficient accountability
and also corruption at various levels. Increasingly, there is demand for effective
implementation without which expanded government intervention will be infructuous. The
strategy for the Eleventh Plan was therefore aimed at bringing about major improvements in
governance which would make government-funded programmes in critical areas more
effective and efficient. The best possible way of achieving this objective may be by involving
communities in both the design and implementation of such programmes, although such
involvement may vary from sector to sector. For achieving the vision of the Eleventh Plan, it is
extremely important to experiment with programme design to give more flexibility to decision
making at the local level. It is especially important to improve evaluation of the effectiveness
of how government programmes work and to inject a commitment to change their designs in
the light of the experience gained. Evaluation must be based on proper benchmarks and be
scientifically designed to generate evidence-based assessment of different aspects of
programme design. Along with greater transparency and feedback from community
participation, this is particularly important in the case of programmes delivering services
directly to the poor. Accountability and transparency are critical elements of good
governance. The Right to Information Act (RTI) enacted in 2005 empowers people to get
information and constitutes a big step towards transparency and accountability.
Answers to PTP_Final_Syllabus 2012_Dec 2014_Set 1
Academics Department, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament)
Pg 1
Learning objectives
KNOWLEDGE
know
COMPREHENSION
understand
Verbs used
List
State
Define
Describe
Distinguish
Explain
LEVEL C

apply
your knowledge
ANALYSIS
have learned
SYNTHESIS
optimum
reasoning
EVALUATION
make decisions or
recommendations
Make a list of
Produce
Discuss

consideration
something
means
Find an answer to
Arrange in a table
between
Build up or compile
action
Interpret
Decide
Advise
Evaluate
Recommend
Identity
Illustrate
APPLICATION
Definition
Apply
Calculate
Demonstrate
Prepare
Reconcile
Solve
Tabulate
Analyse
Categorise
Compare
and contrast
Construct
Prioritise
Pg 2

Full Marks: 100
against each question. All workings must form part of your answer. Assumptions, if any, must be
clearly indicated.
[20 Marks]
(i) Asha Pvt Ltd Co is having only 5 members. All the members of the company were travelling
by car to go to a business meeting. An accident took place and all of them died on the spot.
Answer with reasons with reference to Companies Act, 2013 whether the existence of Asha
Ltd. has also come to an end.
[3]
(ii) Virat Ltd. wants to be a small company. What are the conditions that need to be satisfied?
[3]
(iii) When can dividend be held in abeyance?
[3]
(iv) Mr. Angad, a former bank executive, was convicted by a court eight years ago for
embezzlement of funds and was sentenced to imprisonment for one year. Can Mr. Angad
become the director of Sushma Jewelers Ltd., a public company?
[3]
(v) Mr. Sundeep, a director states that he will not be able to attend the next Board meeting.
Advise whether notice is required to be sent to him.
[3]
(vi) Write a note on Smith Report (2003).
[3]
(vii) State the elements of Ethics.
[2]
Answer
(i) The existence of the company does not come to an end, since the existence of the
Company does not depend upon the life of any or all the members of the company. [Sec 9
of Companies Act, 2013]. The existence of a company can only come to an end only in
accordance with the provisions of law, viz. dissolution of the company.
Since one of the characteristics of a company is perpetual succession, the existence of the
company does not come to an end with the death of the members of Asha Ltd.
(ii) As per Sec 2(85) of Companies Act, 2013 a company shall be a small company only if it
satisfies any one or both of the following conditions:
Pg 3

1. Its paid up share capital does not exceed
` 50 lakhs; or
Such higher amount as may be prescribed (not being more than ` 5 crores)
2. Its turnover (as per the last profit and loss account)does not exceed
` 2 crores; or
Such higher amount as may be prescribed (not being more than ` 20 crores)
A company shall not be a small company, if, it is a
1. Public company; or
2. Holding Company of any company; or
3. Subsidiary company of any company; or
4. Company registered u/s 8 (viz. a non-profit company); or
5. Company or a body corporate governed by any special act.
Hence Virat ltd. cannot be a small company.
(iii) The object of section 126 of Companies Act, 2013 is to ensure that pending the transfer of
shares by the company, the right of the transferee to receive dividend, right shares and
bonus shares remains intact. The provisions of Section 126 are as follows1. Where a duly signed transfer deed is deposited with the company, but the transfer of
shares has not yet been registered, the company shall Transfer the dividend in relation to such shares to the Unpaid Dividend Account,
unless the registered shareholder authorizes the company to pay such dividend to
the transferee.
Keep in abeyance in relation to such shares any offer of rights shares or bonus shares.
2. Section 126 shall apply not withstanding anything contained in any other provision of the
Act.
(iv) A person is disqualified if he is convicted by a Court of any offence (whether involving moral
turpitude or otherwise) and sentenced to imprisonment for 6 months or more. However, such
disqualification shall remain in force for a period of 5 years only. [Section 164(1)(d) of
Companies Act, 2013]
In the present case Mr. Angad was convicted 8 years ago. Since the requirement of
164(1)(d) of Companies Act, 2013 are not satisfied, he is, at present, eligible to become a
director of Sushma Jewelers Ltd.
(v) As per section 173(3) of Companies Act, 2013, a meeting of the Board shall be called by
giving not less than 7 days notice in writing to every director at his address registered with
the company and such notice shall be sent by hand delivery or by post or by electronic
means.
Notice is to be sent to a director even if he waives his right to receive the notice [Re.
Portuguese Consolidated Copper Mines Ltd. (1889) 42 Ch D 160(CA)]. Thus, the notice of
Board meeting must be sent to Mr. Sundeep.
(vi) The Smith Review of Audit Committees, a group appointed by the financial reporting
council, reported in January 2003. The review made clear the important role of the audit
Pg 4

committee: While all directors have a duty to act in the interests of the company, the audit
committee has a particular role, acting independently from the executive, to ensure that the
interests of shareholders are properly protected in relation to financial reporting and internal
control. The review defined the audit committees role in terms of a high-level overview-it
needs to satisfy itself that there is an appropriate system of controls in place but it does not
undertake the monitoring itself .
(vii) Ethics fundamentally comprises of two elements:
Firstly, ethics refers to well founded standards of right and wrong that describe what
humans ought to do in terms of rights, obligations, benefits to society, etc.
Secondly, ethics refers to the study and development of ones ethical standards.
[60 Marks]
Question 2(a)
(i) The paid up share capital of Vishnu Private Ltd. is ` one crore consisting of 8,00,000 equity
shares of ` 10 each fully paid up and 2,00,000 cumulative preference shares of ` 10 each
fully paid up. Priya Pvt. Ltd. and Radha Pvt. Ltd. are holding 3,00,000 equity shares and
1,50,000 equity shares respectively in Vishnu Private Ltd. Priya Pvt. Ltd. and Radha Pvt. Ltd. are
the subsidiaries of Parvati Estates Pvt. Ltd. Examine with reference to the provisions of the
Companies Act, 2013 whether Vishnu Private Ltd. is a subsidiary of Parvati Estates Pvt. Ltd. Will
your answer be different, if Parvati Estates Pvt. Ltd. controls the composition of Board of
Directors of Vishnu Private Ltd.?
(ii) Ms. Preeti the secretary of Strong Limited issues a Share certificate in favour of Mr. Akshaye
purporting to be signed by the directors and the secretary and the seal of the company
affixed to it. In fact the secretary forged the signature of the directors and has affixed the
seal without authority. Can Mr. Akshaye hold the company liable for the shares covered by
the Share certificate?
(iii) With a view to issue shares to the general public a prospectus containing some false
information was issued by a company. Mr. Javed received a copy of the prospectus from
the company, but did not apply for allotment of any shares. The allotment of shares to the
general public was completed by the company within the stipulated period. A few months
later, Mr. Javed bought 2000 shares through the stock exchange at a higher price which
later on fell sharply. Javed sold these shares at a heavy loss. Mr. Javed claims damages
from the company for the loss suffered on the ground that the prospectus issued by the
company contained a false statement. Referring to the provisions of the Companies Act,
2013 examine whether Javed's claim for damages is justified.
(iv) The Board of directors of a company decides to pay 5% of issue price as underwriting
commission to the underwriters. On the other hand the articles of association of the
company permit only 3% commissions. The Board of directors further decides to pay the
Pg 5

commission out of the proceeds of the share capital. Are the decisions taken by the Board of
directors valid under the Companies Act, 2013?
(v) Define Sweat Equity Shares as per Companies Act, 2013.
[5+2+2+4+2= 15]
Answer
(i) Total Equity Share Capital of Vishnu Pvt. Ltd. is ` 80,00,000.
Equity Share Capital held by Priya Pvt. Ltd. in Vishnu Pvt. Ltd. is ` 30,00,000.
Equity Share Capital held by Radha Pvt. Ltd. in Vishnu Pvt. Ltd. is ` 15,00,000.
Equity Share Capital held by Parvati Estates Pvt. Ltd. in Vishnu Pvt. Ltd. is `45,00,000.
Since for the purpose of determining holding-subsidiary relationship, Equity Share Capital
held in Vishnu (Private) Ltd. by its Subsidiaries Priya Pvt. Ltd. (viz. ` 30,00,000) and Radha Pvt.
Ltd. (viz. ` 15,00,000) shall be considered.
Vishnu Pvt. Ltd. is a subsidiary of Parvati Estates Pvt. Ltd. Since Parvati Estates Pvt. Ltd. holds
more than one-half of ESC of Vishnu Pvt. Ltd.
Answer would remain same even if Parvati Estates Pvt. Ltd. controls the composition of Board
of Directors of Vishnu Pvt. Ltd.
(ii) Mr. Akshaye is not entitled to shares and he cannot hold the company liable for any loss
Since in case of forgery, there is not a defect in consent, but absence of consent and
therefore the share certificate issued by way of forgery is invalid. [Rubben v Great Fingall
Consolidated Company]
(iii) Mr. Javed is not an original allottee of shares [Sec 35 of Companies Act, 2013]
Since he purchased the shares from the market, and not from the company.
Mr. Javed cannot claim damages from the company
Since Mr. Javed is not an original allottee of shares;
Since Mr. Javed did not subscribe for shares on the faith of a misleading prospectus
[Peek v Gurney]
(iv) The company cannot pay underwriting commission of 5%
since the rate of underwriting commission cannot be more than 5% of issue price of
shares or such lower rate as prescribed under the articles (3% in the present
case);
since the maximum permissible underwriting commission in this case is 3%.
The company may pay underwriting commission out of the proceeds of the share capital
Pg 6

Since Rule 13 of the Companies (Prospectus and Allotment of Securities) Rules, 2014
expressly permits payment of underwriting commission out of the proceeds of the issue,
i.e. out of the proceeds of share capital.)
(v) As per section 2(88) of Companies Act, 2013, 'Sweat equity shares' means such equity shares
as are issued by a company to its directors or employees
(a) At a discount; or
(b) For consideration, other than cash,
For providing their know-how or making available rights in the nature of intellectual property
rights or value additions, by whatever name called.
Question 2(b)
(i) Srishti Ltd. is authorised by its articles to accept the whole or any part of the amount of
remaining unpaid calls from any member although no part of that amount has been called up.
'Arjun', a shareholder of the Srishti Ltd., deposits in advance the remaining amount due on his
shares without any calls made by Srishti Ltd.
Referring to the provisions of the Companies Act, 2013 state the rights and liabilities of Mr. Arjun,
which will arise on the payment of calls made in advance.
(ii) Mr. Vasu, the transferee, acquired 250 equity shares of BHARAT Limited from Mr. 'Sneh', the
transferor. But the signature of Mr. 'Sneh', the transferor, on the transfer deed was forged. Mr.
Vasu after getting the shares registered by the company is his name, sold 150 equity shares
to Mr. Anil' on the basis of the share certificate issued by BHARAT Limited. Mr. Vasu and
'Anil' were not aware of the forgery. State the rights of Mr. 'Sneh', Vasu, and 'Anil' against the
company with reference to the aforesaid shares.
(iii) Rahul had applied for the allotment of 1,000 shares in a company. No allotment of shares
was made to him by the company. Later on, without any further application from Rahul, the
company transferred 1,000 partly-paid shares to him and placed his name in the Register of
Members. Rahul, knowing that his name was placed in the Register of Members, took no
steps to get his name removed from the Register of Members. The company later on made
final call. Rahul refuses to pay for this call. Referring to the provisions of the Companies Act,
2013 examine whether his (Rahul's) refusal to pay for the call is tenable and whether he can
escape himself from the liability as a member of the company.
[6+5+4 = 15]
Answer
(i) Acceptance of calls in advance by Srishti Ltd. is valid (Sec. 50 of the Companies Act, 2013)
Since Srishti Ltd. has express provision in the articles authorising it to accept calls in
advance;
Since the power to receive calls in advance has been exercised for the benefit of the
company.
Pg 7

Rights and liabilities of Arjun:
Arjun shall not be entitled to any voting rights in respect of 'calls in advance' until the call
becomes presently payable (Sec. 50 of the Companies Act, 2013).
The dividend is paid on the nominal value of a share. However, Srishti Ltd. shall pay
dividend in proportion to the paid up capital held by each member, if the articles so
provide (Sec. 51 of the Companies Act, 2013).
Interest on calls in advance shall be paid to Arjun at such rate as may be specified in the
articles.
Arjun becomes an unsecured creditor of the company.
The amount paid as calls in advance is non-refundable.
The liability of Arjun to pay the future calls is extinguished to the extent of calls paid in
advance by him.
In case of surplus in winding up, before repayment of capital to the members, the
amount paid as calls in advance along with interest shall be repaid to Arjun.
(ii) Rights of Mr. Sneh
He can compel the company to restore his name on the register of members (since a forged
transfer is without any legal effect and the true owner continues to be the member of the
company).
Liabilities of Mr. Vasu
Vasu is liable to compensate the loss caused to the company since he had lodged the
forged transfer deed, even though he was not aware of the forgery.
Rights of Mr. Anil
The company can refuse to register Mr. 'Anil' as a member.
The company is liable to Mr. Anil since the company had issued share certificate to Mr.
Vasu, and therefore, the company shall be stopped from denying the liability accruing
to it from its own default.
(iii) Register of members is a prima-facie evidence of any matters directed or authorised to be
inserted therein by the Act [Sec. 95 of Companies Act, 2013].
Rahul is a member by estoppels
Since he knowingly permitted entering his name in the register of members.
Rahul is liable to pay the final call
Since a member by estoppel is liable to pay the unpaid calls.
Question 2(c)
(i) The Board of Directors of Sreeja Company Limited at its meeting declared a dividend on its
on its paid-up equity share capital which was later on approved by the company's Annual
General meeting. In the meantime the directors at another meeting of the Board decided by
passing a resolution to divert the total dividend to be paid to shareholders for purchase of
Pg 8

investments for the company. As a result dividend was paid to shareholders after 45 days.
Examining the provisions of the Companies Act, 2013, state:
1. Whether the act of directors is in violation of the provisions of the act and also the
consequences that shall follow for the above act of directors?
2. What would be your answer in case the amount of dividend to a shareholder is adjusted
by the company against certain dues to the company from the shareholder?
(ii) Mr. Prem recently acquired 76% of the equity shares of M/s Good-day Company Ltd. in the
hope of earning good dividend income. Unfortunately the existing Board of Directors has
been avoiding declaration of dividend due to alleged inadequacy of profits. Unconvinced,
Mr. Prem seeks permission of the company to allow him to examine the Books of Accounts,
which is summarily rejected by the Company. Examine and advise the provisions relating to
inspection of Books of Accounts and remedy available under Companies Act, 2013.
(iii) Mr. Ashu was appointed as managing director for life by the articles of association of a
private company incorporated on June, 2014. The articles also empowered Mr. Ashu to
appoint a successor. Mr. Ashu appointed, by will, Mr. Jay to succeed him after his death.
Can Mr. Jay succeed Mr. Ashu as managing director after the death of 'X? Analyze with
reference to Companies Act, 2013.
[5+6+4 = 15]
Answer
(i) As per section 127 of the Companies Act, 2013, the dividend shall be paid within 30 days
from the date of declaration of dividend. In case, the dividend warrant is posted by the
company within 30 days of declaration of dividend, it is considered to be a sufficient
compliance of section 127 of the Companies Act, 2013.
1. In the present case, Sreeja Company Limited has failed to pay the dividend within 30
days of declaration of dividend, and so, this amounts to violation of section 127 of the
Companies Act, 2013, attracting the penal provisions of section 127 of the Companies
Act, 2013, stated as under:
(a) Sreeja Company Limited is liable to pay simple interest @ 18% per annum.
(b) Every director who is knowingly a party to the default, is liable for imprisonment upto
2 years and is also liable for fine of not less than `1,000 per day for each day of
default.
2. As per section 127, there shall not be a contravention of section 127 where dividend is
lawfully adjusted by the company against any sum due to it from the shareholder.
Thus, where the amount of dividend is adjusted by the company against sums due to the
company from the shareholders, it shall not amount to a violation of section 127.
(ii) The present problem relates to section 128 of the Companies Act, 2013 read with Rule 4 of
the Companies (Accounts) Rules, 2014 and Regulation 89 of Table F contained in Schedule I.
1. As per section 128 read with Rule 4, a director of the company is entitled to inspect the
Pg 9

books of account of the company, but no member of the company is entitled to make
inspection of the books of account.
2. Regulation 89 of Table F reads as under:
(i) The Board shall from time to time determine whether and to what extent and at what
times and places and under what conditions or regulations, the accounts and books
of the company, or any of them, shall be open to the inspection of members not
being directors.
(ii) No member (not being a director) shall have any right of inspecting any account or
book or document of the company except as conferred by law or authorised by the
Board or by the company in general meeting.
In the given case, Mr. Prem has not been authorised to inspect the books of account by
the Board or by the members in the general meeting. Thus, Mr. Prem shall not have any
right to inspect the books of account even if he holds 76% of the equity shares of the
company.
3. Mr. Prem may, by using the majority of voting power held by him and complying with the
provisions of the Act, get appointed as a director of M/s Good-day Company Ltd., and
then, he shall be entitled (in the capacity of director) to make the inspection of books of
account.
(iii) No director shall assign his office to any other person. If he does, the assignment shall be void
[Section 166 of Companies Act, 2013].
The articles of a company empowered its managing director to appoint a successor. The
managing director appointed, by his will, Mr. Jay to succeed him as a managing director
after his death. The Court observed that a director is prohibited from assigning his office. The
word 'his' used in section 166 indicates that the prohibition applies only when an office held
by a director is assigned to any other person. Where a director dies, the office held by him
becomes vacant and therefore. Such office cannot be assigned to any other person.
Therefore, appointment of a new person in such office does not amount to an assignment
within the meaning of section 166. [Oriental Metal Pressing Pvt. Ltd. v B.K. Thakoor (1961) 31
Comp Cas 143].
The facts of the given case are identical to the facts discussed in the above case.
Accordingly, it can be said that appointment of Mr. Jay is valid and it does not amount to
an assignment of office by Mr. Ashu.
Question 2(d)
(i) On recommendation of the Board of Directors of Ganga Company Limited, Mr. Ranjan is
appointed at the company's Annual General Meeting held on 1st October, 2014 as auditor
for period of 10 years. A resolution to this effect was passed unanimously with no vote
against the resolution. Explaining the provisions of the Companies Act, 2013 relating to the
appointment and re-appointment of auditors:
1. Examine the validity of the above resolution.
2. What shall be your answer in case an audit firm Messrs Ranjan & Associates is appointed
Pg 10

as the company's auditor?
(ii) Mr. Azad is a director of Down Limited which failed to repay matured deposits from 1st April,
2014 onwards and the default continues. But Down Limited is regular in filing annual
accounts and annual returns. Mr. Azad is also a director of Hope Limited and Trust Limited.
Answer the following questions with reference to the relevant provisions of the Companies
Act, 2013:
1. Whether Mr. Azad is disqualified and if so, whether he is required to vacate his office of
director in Hope Limited and Trust Limited.
2. Is it possible for Board of directors of Faith Limited to appoint Mr. Azad as an additional
director at the Board meeting to be held on 15th May, 2015? Would your answer be
different if Mr. Azad ceased to be a director of Down Limited by resignation on 1st March,
2015?
State also the auditor's liability with regard to reporting of disqualification under section
164(2).
(iii) Andrew, one of the shareholder of a company, filed a civil suit in a Court for removal of
directors Bikash, Shraddha and Elle. Is the suit maintainable? Advice in the light of
[6+6+3 = 15]
Answer
(i) The present problem relates to section 139(1) and 139(2) of the Companies Act, 2013.
1. As per section 139(1), when any appointment of auditor is made at any AGM, the
auditor so appointed shall hold office till the conclusion of 6th AGM, with the AGM
wherein such appointment has been made being counted as the first AGM. At every
AGM (viz. 2nd, 3rd, 4th and 5th AGM), the matter relating to appointment of auditor shall
be placed before the members for ratification.
2. In case the company is covered under subsection (2) of section 139 (i.e. the concept of
rotation of auditors is applicable to the company), then, (a) No individual shall be appointed or reappointed as auditor for more than 1 term of 5
consecutive years.
(b) In case, the auditor is a firm, no audit firm shall be appointed or reappointed as
auditor for more than 2 terms of 5 consecutive years.
The given case is answered as under:
1. The resolution passed in the AGM appointing Mr. Ranjan as an auditor for a period of 10
years is not valid, since such appointment is in contravention of section 139(1) as well as
139(2). It is immaterial that in the AGM, no vote has been cast against the resolution.
2. The answer remains same even where the M/S Ranjan & Associates, an audit firm was
appointed as auditor, since section 139(1) as well as 139(2) do not permit appointment for
10 years. Even in case of an audit firm, the term shall be 5 years. However, on completion of
one term of 5 years, the audit firm may be reappointed for another term of 5 years.
Pg 11

(ii) As per section 164(2), a director of a company shall be disqualified from being reappointed
as a director in that company or appointed as a director in any other company, if the
company of which he is already a director fails to repay its deposits or interest thereon on
the due date and such failure continues for 1 year or more. Such disqualification shall remain
in force for a period of 5 years. As per section 167(1)(a), the office of a director shall become
vacant if he incurs any of the disqualifications specified under section 164.
In the given case Down Limited has failed to repay its deposits on the due date (i.e.
1.4.2014) and such default has continued for more than 1 year (i.e. beyond 31.3.2015).
Therefore Mr. Azad shall not be eligible to be appointed as a director in any other company or
reappointed in Down Limited after 31.3.2015 for a period of 5 years. Accordingly, Faith
Limited cannot appoint Mr. Azad as an additional director on 15.5.2015.
Mr. Azad cannot continue as a director in Down Limited, Hope Limited and Trust Limited.
His office of director shall become vacant on expiry of 31.3.2015
If Mr. Azad had ceased to be a director of Down Limited by resignation on 1st March, 2015,
he would have escaped the disqualification specified under section 164(2) and accordingly
Faith Limited could appoint Mr. Azad as an additional director on 15.5.2015.
As per section 143(3)(g) of the Companies Act, 2013, the auditor of the company shall state
in his report as to whether any of the directors of the company are disqualified from being
appointed as a director under section 164(2).
(iii) A Civil Court has no jurisdiction to entertain a suit for removal of a director since the matter
relates to the internal management of the company which is governed by the Companies
Act, 2013 [Khetan Industries Pvt. Ltd. v Manju Ravindra Prasad Khetan (1995) 16 CLA 169
(Bom)]. Section 169 has given to the shareholders necessary powers (subject to adequate
safeguards) to remove a director and thus a Civil Court has no jurisdiction to entertain a suit
for removal of a director.
Question 2(e)
(i) One of the directors of your company has been prosecuted for non-payment of sales tax by
the company. He intends to obtain relief under the Companies Act, 2013. Will he succeed?
(ii) Mr. Harris was appointed as a director of Imperial Woodens Ltd. with effect from 1st April,
2014. Since the company, namely, Imperial Woodens Ltd. wanted to take full advantage of
the wisdom and expertise of Mr. Harris, it offered him remuneration payable on monthly basis
and made an application to the Central Government for approval for payment of such
remuneration. Anticipating the approval of the Central Government, Imperial Woodens Ltd.
started paying such remuneration from the date of appointment and continued to do so till
31st March, 2015. The Central Government did not fully approve the remuneration proposed
by the company and restricted the same to a lower amount.
Pg 12

On scrutiny of the accounts, it was established that the company, till 31st March, 2015, has
paid to Mr. Harris a total sum of ` 1.20 lakhs in excess of the remuneration sanctioned by the
Central Government.
You are required to State with reference to the provisions of Companies Act, 2013 in respect
of recovery and waiver of recovery of the excess remuneration so paid, whether Mr. Harris
can keep the excess remuneration so received and under what conditions.
(iii) Mr. Ram goes abroad for four months from 4.1.2015 and an alternate director has been
appointed in his place. Advice as to sending of notice as required under section 173 of the
[6+6+3 = 15]
Answer
(i) The Court may, in its discretion, relieve an officer of the company from liability, if it appears
to the Court that (a) he is or may be liable for negligence, default, breach of duty, misfeasance or breach of
trust;
(b) he has acted honestly and reasonably; and
(c) having regard to all the circumstances of the case, he ought fairly to be excused.
Relief under section 463 of the Companies Act, 2013 cannot be extended in respect of any
liability under any Act, other than the Companies Act. The expression 'any proceedings'
occurring in section 463 of the Companies Act, 2013 cannot be read out of context and
treated in isolation, and must be confined to the Companies Act only.
Accordingly, section 463 of the Companies Act, 2013 applies to all legal proceedings under
the Companies Act only. Otherwise the application of section 463 of the Companies Act,
2013 would result in the penal provisions of other Acts being rendered ineffective.
Furthermore, if the parliament had intended that section 463 of the Companies Act, 2013
should apply to other Acts also, it would have specifically provided for it. It is a sound rule of
construction to confine the provisions of a statute to itself and therefore section 463 of the
Companies Act, 2013 cannot be availed in respect of any proceedings under any other Act
[Rabindra Chamariaw ROC(1992) 73 Comp Cas 257].
In the present case a director of the company has been prosecuted under the Sales Tax
Act. Since the application of section 463 is restricted to Companies Act only, the Court
cannot grant any relief to the directors.
(ii) As per section 197, if any director draws any remuneration in excess of the remuneration
approved by the Central Government, he shall refund such excess remuneration to the
company. Until such excess remuneration is refunded, he shall hold it in trust for the
company. The company shall not waive the recovery of any sum refundable to it (i.e. the
excess remuneration drawn by the director) unless permitted by the Central Government.
The answer to the given problem is as follows:
(a) Mr. Harris was appointed as a non-executive director. He was paid monthly
Pg 13

remuneration awaiting the approval of the Central Government. However, the
remuneration sanctioned by the Central Government was lesser than the remuneration
actually paid to Mr. Harris. As per section 197, Mr. Harris cannot keep remuneration
drawn by him which is in excess of the remuneration sanctioned by the Central
Government. Accordingly, he shall refund to the company ` 1,20,000. Until such refund is
made, he shall hold it in trust for the company. Further, the company cannot waive the
recovery of excess remuneration.
(b) However, if on an application made to the Central Government, the Central
Government permits the waiver of recovery of such excess remuneration, the company
may waive the recovery of excess remuneration, and then Mr. Harris shall have a right to
retain the excess remuneration drawn by him.
(iii) As per section 173(3), a meeting of the Board shall be called by giving not less than 7 days'
notice in writing to every director at his address registered with the company and such
notice shall be sent by hand delivery or by post or by electronic means. As can be seen,
section 173(3) does not specifically state that notice to an alternate director shall be served.
However, an alternate director is a director in his own right. He is not a proxy or
representative of the original director. The grounds of vacation of office also apply to him as
these apply to the original director, i.e. an alternate director shall vacate his office if he does
not attend all the Board meetings during a period of 12 months as per the provisions of
section 167(1)(b). Therefore, notice to an alternate director is to be given. Thus, notice shall
be served to both, the alternate director as well as the original director at their addresses
registered with the company.
[20 Marks]
Question 3(a)
(i) What is Corporate Citizenship? Is this fundamentally different from Corporate Social
Responsibility?
(ii) Discuss the OECD Guidelines for Corporate Governance of State-owned Enterprises.
[5+5 =10]
Answer
(i) A new terminology that has been gaining grounds in the business community today is
Corporate Citizenship. Corporate citizenship is defined by the Boston College Centre for
Corporate Citizenship, as the business strategy that shapes the values underpinning a
companys mission and the choices made each day by its executives, managers and
employees as they engage with society.
citizenship are:
1. Minimise harm,
2. Maximise benefit,
3. Be accountable and responsive to key stakeholders and
Pg 14

4. Support strong financial results.
Corporate citizenship, sometimes called corporate responsibility, can be defined as the ways in
which a companys strategies and operating practices affect its stakeholders, the natural
companies explicit and mainly discretionary efforts to improve society in some way, but is also
directly linked to the companys business model in that it requires companies to pay attention to
all their impacts on stakeholders, nature, and society. Corporate citizenship is, in this definition,
integrally linked to the social, ecological, political, and economic impacts that derive from the
companys business model; how the company actually does business in the societies where it
operates; and how it handles its responsibilities to stakeholders and the natural environment.
many Indian companies are either beginning to think about or are engaging with in one way or
another.
While some of these initiatives may be labeled as corporate citizenship by some organisations,
there basic message and purpose is the same.
(ii) According to OECD, a major challenge is to find a balance between the states responsibility
for actively exercising its ownership functions, such as, the nomination and election of the
board, while at the same time refraining from imposing undue political interference in the
management of the company. Another important challenge is to ensure that there is a level
playing field in markets where private sector companies can compete with the state-owned
enterprises, and that governments do not distort competition in the way they use their
regulatory or supervisory powers.
According to OECD, the guidelines suggest that the state should exercise its ownership functions
through a centralized ownership entity, or effectively co-ordinated entities, which should act
independently and in accordance with a publicly disclosed ownership policy. The guidelines
also suggest the strict separation of the states ownership and regulatory functions.
There should be a clear separation between the state's ownership function and other
SOEs should not be exempt from the application of general laws and regulations.
Stakeholders including competitors, should have access to efficient redress.
SOEs should face competitive conditions regarding access to finance. Their relations with
state-owned banks, state-owned financial institutions, and other state-owned
State acting as an owner
Pg 15

The state should act as an informed and active owner, and establish a clear and consistent
ownership policy, ensuring that governance of state-owned enterprises is carried out in a
transparent and accountable manner with the necessary degree of professionalism and
effectiveness.
The government should develop and issue an ownership policy that defines the overall
objectives of state ownership, the state's role in corporate governance of SOEs, and how
it will implement its ownership policy.
The government should not be involved in the day-to-day management of SOEs and
allow them full operational autonomy to achieve their defined objectives.
The state should let SOE boards exercise their responsibilities and respect their
independence.
The state should exercise its ownership rights according to the legal structure of each
company. Keeping this in mind, it should ensure that remuneration schemes for SOE
board members foster the long-term interest of the company, and can attract and
motivate qualified professionals.
Equitable treatment of shareholders
The SOEs should recognize the rights of all shareholders and in accordance with the OECD
principles of corporate governance, ensure their equitable treatment and equal access to
corporate information.
SOEs should observe a high degree of transparency towards all shareholders.
The co-ordinating or ownership entity and SOEs should ensure that all shareholders are
treated equally.
The participation of minority shareholders in shareholder meetings should be facilitated in
order to allow them to take part in fundamental corporate decisions, such as board
election.
Relations with stakeholders
The state ownership policy should fully recognize the state-owned enterprises' responsibilities
towards stakeholders and report their relations with them.
Listed on large SOEs, as well as SOEs pursuing important public policy objectives, should
report on stakeholder relations.
Transparency and disclosure
State-owned enterprises should observe high standards of transparency in accordance with the
OECD Principles of Corporate Governance.
SOEs should develop efficient internal audit procedures and establish an internal audit
function that is monitored by and reports directly to the board and to the audit
committee or the equivalent company organ.
SOEs, especially large ones, should be subject to an annual independent external audit
based on international standards. The existence of specific state control procedures dots
not substitute for an independent external audit.
Responsibilities of the boards of state-owned enterprises
The boards of state-owned enterprises should have the necessary authority, competencies, and
objectivity to carry out their function of strategic guidance and monitoring of management.
They should act with integrity and be held accountable for their actions.
Pg 16
The boards of SOEs should be assigned a clear mandate and ultimate responsibility for
the company's performance. The board should be fully accountable to the owners, act
in the best interest of the company, and treat all shareholders equally.
SOE boards should carry out their functions of monitoring of management and strategic
guidance, subject to the objectives set by the government and the ownership entity.
They should have the power to appoint and remove the CEO.
The boards of SOEs should be so composed that they can exercise objective and
independent judgement. Good practice calls for the chair to be separate from the
CEO.
SOE boards should carry out an annual evaluation to appraise their performance.
Question 3(b)
(i) The development of Corporate Governance in the UK was initially the findings of a trilogy of
codes. Explain the same in brief.
(ii) Family ownership of firms is the prevalent form of ownership in many countries around the
globe.
In view of the above statement, explain the concept and need of Ownership structures.
[5+5 =10]
Answer
(i) As in other countries, the development of Corporate Governance in the UK was initially the
findings of a trilogy of codes: the Cadbury Report (1992), the Greenbury Report (1995), and
the Hampel Report (1998). These are explained as under:
Cadbury Report (1992)
Following various financial scandals and collapses (Coloroll and Polly Peck, to name but two)
and a perceived general lack of confidence in the financial reporting of many UK companies,
the Financial Reporting Council, the London Stock Exchange, and the accountancy profession
established the Committee on the Financial Aspects of Corporate Governance in May 1991.
After the Committee was set up, the scandals at BCCI and Maxwell happened, and as a result,
the committee interpreted its remit more widely and looked beyond the financial aspects to
Corporate Governance as a whole. The Committee was chaired by Sir Adrian Cadbury and,
when the Committee reported in December 1992, the report became widely known as the
Cadbury Report.
The recommendations covered: the operation of the main board; the establishment,
composition, and operation of key board committees; the importance of, and contribution that
can be made by, non-executive directors; the reporting and control mechanisms of a business.
The Cadbury Report recommended a code of Best Practice with which the boards of all listed
companies registered in the UK should comply, and utilized a comply or explain mechanism.
This mechanism means that a company should comply with the code but, if it cannot comply
with any particular aspect of it, then it should explain why it is unable to do so. This disclosure
gives investors detailed information about any instances of non-compliance and enables them
to decide whether the companys non-compliance is justified.
Pg 17

Greenbury Report (1995)
The Greenbury committee was set up in response to concern at both the size of directors
remuneration packages and their inconsistent and incomplete disclosure in companies annual
reports. It made, in 1995, comprehensive recommendations regarding disclosure of directors
remuneration packages. There has been much discussion about how much disclosure there
should be of directors remuneration and how useful detailed disclosures might be. Whilst the
work of the Greenbury Committee focused on the directors of public limited companies, it
hoped that both smaller listed companies and unlisted companies would find its
recommendations useful.
Central to the Greenbury report recommendations were strengthening accountability and
enhancing the performance of directors. These two aims were to be achieved by (i) the
presence of a remuneration committee comprised of independent non-executive directors who
would report fully to the shareholders each year about the companys executive remuneration
policy, including full disclosure of the elements in the remuneration of individual directors; and (ii)
the adoption of performance measures linking rewards to the performance of both the
company and individual directors, so that the interests of directors and shareholders were more
closely aligned.
Since that time (1995), disclosure of directors remuneration has become quite prolific in UK
company accounts.
Hampel Report (1998)
The Hampel Committee was set up in 1995 to review the implementation of the Cadbury and
Greenbury Committee recommendations. The Hampel Committee reported in 1998. The
Hampel Report said: We endorse the overwhelming majority of the findings of the two earlier
committees. There has been much discussion about the extent to which a company should
consider the interests of various stakeholders, such as employees, customers, suppliers, providers
of credit, the local community, etc., as well as the interests of its shareholders. The Hampel report
stated that the directors as a board are responsible for relations with stakeholders; but they are
accountable to the shareholders. However, the report does also state that directors can meet
their legal duties to shareholders, and can pursue the objective of long-term shareholder value
successfully, only by developing and sustaining these stakeholder relationships.
The Hampel Report, like its precursors, also emphasized the important role that institutional
investors have to play in the companies in which they invest (investee companies). It is highly
desirable that companies and institutional investors engage in dialogue and that institutional
investors make considered use of their shares, in other words, institutional investors should
consider carefully the resolutions on which they have a right to vote and reach a decision based
on careful thought, rather than engage in box ticking.
(ii) In many countries, family-owned firms are prevalent. Corporate governance is of relevance
to family-owned firms, which can encompass a number of business forms including private
and publicly quoted companies, for a number of reasons. Family-owned firms may face
difficulties in initially finding appropriate independent non-executive directors but the
benefits that such directors can bring is worth the time and financial investment that the
family-owned firm will need to make.
Pg 18

One advantage of a family-owned firm is that there should be less chance of the type of
agency problems. This is because ownership and control rather than being split are still one and
the same, and so the problems of information asymmetry and opportunistic behaviour should (in
theory, at least) be lessened. As a result of this overlap of ownership and control, one would
hope for higher levels of trust and hence less monitoring of management activity should be
necessary. However, problems may still occur and especially in terms of potential for minority
shareholder oppression, which may be more acute in family-owned firms.
In family business group firms, the concern is that managers may act for the controlling family,
but not for shareholders in general. These agency issues are: the use of pyramidal groups to
separate ownership from control, the entrenchment of controlling families, and non-arms-length
transactions (aka tunneling) between related companies that are detrimental to public
investors.
Family Assembly
Family Council
Advisory Board
Board Of Directors
(Including Outside
Directors)
Possible stages in a family firms governance

The advantages of a formal governance structure are several. First of all, there is a defined
structure with defined channels for decision-making and clear lines of responsibility. Secondly,
the board can tackle areas that may be sensitive from a family viewpoint but which nonetheless
need to be dealt with - succession planning is a case in point (deciding who would be best to fill
key roles in the business should the existing incumbents move on, retire, or die). Succession
planning is important too in the context of raising external equity because, once a family
business starts to seek external equity investment, then shareholders will usually want to know
that succession planning is in place. The third advantage of a formal governance structure is
also one in which external shareholders would take a keen interest: the appointment of nonexecutive directors. It may be that the family firm, depending on its size, appoints just one, or
maybe two, non-executive directors. The key point about the non-executive director
appointments is that the persons appointed should be indepen-dent; it is this trait that will make
their contribution to the family firm a significant one. Of course, the independent non-executive
directors should be appointed on the basis of the knowledge and experience that they can
bring to the family firm: their business experience, or a particular knowledge or functional
specialism of relevance to the firm, which will enable them to add value and contribute to the
strategic development of the family firm. Another advantage of family-owned firms may be their
ability to be less driven by the short-term demands of the market. Of course, they still ultimately
need to be able to make a profit but they may have more flexibility as to when and how they
do so.
Cadbury (2000) sums up the three requisites for family firms to manage successfully the impacts
of growth: They need to be able to recruit and retain the very best people for the business, they
need to be able to develop a culture of trust and transparency, and they need to define logical
and efficient organisational structures. A good governance system will help family firms to
achieve these requisites.
Pg 19

Question 3(c)
(i) Write short notes on:
Whole Life Cycle Costing
Golden Parachute Proposals
(ii) What are the pros and cons in adopting Corporate Social Responsibility?
[(2.52)+5 = 10]
Answer
(i)
Whole Life Cycle Costing (WLCC):
Towards the late 1990s, the concepts of whole life costing (WLC) and whole life-cycle costing
(WLCC) emerged. The terms whole life costing and whole life-cycle costing are
interchangeable. WLCC is a new term that appears to have been adopted by many building
economists involved in the preparation of forecasts for the long-term cost assessments of capital
projects.
Whole life-cycle costing (WLCC) is a dynamic and ongoing process which enables the
stochastic assessment of the performance of constructed facilities from feasibility to disposal. The
WLCC assessment process takes into account the characteristics of the constructed facility,
reusability, sustainability, maintainability and obsolescence as well as the capital, maintenance,
operational, finance, residual and disposal costs. The result of this stochastic assessment forms
the basis for a series of economic and noneconomic performance indicators relating to the
various stakeholders interests and objectives throughout the life-cycle of a project.
Currently, the application of WLCC in the construction industry is still hindered significantly by the
lack of standard methods and the excuse of lack of sound data upon which to arrive at
accurate decisions. As a result, the output from WLCC models is looked on as unreliable.
Combined with WLCC, risk assessment should form a major element in the strategic decisionmaking process during project procurement and also in value analysis, especially in todays
highly uncertain business environment. WLCC decisions are complex and usually comprise an
array of significant factors affecting the ultimate cost decisions. WLCC decisions generally have
multiple objectives and alternatives, long-term impacts, multiple constituencies in the
procurement of construction projects, generally involve multiple disciplines and numerous
decision makers, and always involve various degrees of risk and uncertainty. Project cost, design
and operational decision parameters are often established very early in the life of a given
building project. The existing methods do not adequately quantify the true economic impacts of
many quantitative and qualitative parameters.
Golden Parachute Proposals:
Pg 20

The Securities and Exchange Commissions (the SEC) new disclosure and advisory vote
requirements for compensation based on or relating to merger and similar transactions, often
referred to as golden parachute arrangements, became effective for proxy statements and
other acquisition related filings initially filed on or after April 25, 2011 for Corporate Governance
in USA. The SEC adopted the rules to implement Section 951 of the Dodd-Frank Wall Street
Reform and Consumer Protection Act (the Dodd-Frank Act).
The Dodd-Frank Act requires companies to hold separate shareholder votes on potential
golden parachute payments when they seek approval for mergers, sales and certain other
transactions. In determining the recommendation with respect to a golden parachute proposal,
the 2013 Updates include the consideration of any existing change-in-control arrangements
maintained with named executive officers, rather than focusing only on the new or extended
arrangements. The list of features considered problematic has been refined. Recent
amendments that incorporate problematic features will tend to carry more weight in the overall
analysis. However, close scrutiny will also be given if multiple legacy problematic features are
present.
(ii) Pros & Cons of adopting Corporate Social Responsibility:
Corporate social responsibility refers to a method of running a company that seeks to address
not only profitability, but also the environmental and social consequences of the business. While
most corporate social responsibility concerns are directed at very large businesses, even small
and medium-sized businesses that employ a large number of local residents or participate in
environmentally problematic industries can face pressure to adopt corporate social
responsibility.
Costs
Cost represents one of the biggest arguments against adopting corporate social responsibility as
a policy. Programs to reduce environmental impact often require expensive changes in
equipment or ongoing costs without any clear way to recoup those losses. The decision to
maintain domestic production facilities or call centers or to buy from domestic producers rather
than outsource or move production overseas can drive up costs for a business. Additionally,
there is no clear evidence that adhering to a policy of corporate social responsibility generates
a significant increase in sales or profit.
Improved Company Reputation
Embracing a policy of corporate social responsibility, paired with genuine action, can serve to
build or improve the reputation of a business. If a companys behavior creates a negative
backlash that leads to lost profitability -- over environmental issues, for example -- corporate
social responsibility becomes a method to repair reputation damage and restore profitability. In
other cases, adopting such a policy works as part of a business essential brand, and consumers
often demonstrate more loyalty to brands that can demonstrate a commitment to
environmental concerns.
Pg 21

Shareholder Resistance
Some investors do look to acquire stock in socially responsible corporations, but, on the whole,
investors purchase stock on the expectations of turning a profit. While some companies, such as
Toyota and GE, have profited from corporate social responsibility, companies that adopt such
policies often prove as likely to lose money. Given the spotty track record of corporate social
responsibility in demonstrating profit increase, investors may resist attempts by executives to
move a company in that direction.
Better Customer Relations
One of the hallmarks of corporate social responsibility is staying involved in the communities
where the business operates. This community involvement goes a long way toward building trust
between customers and the business. If a business builds trust with its customers, they tend to
give the business the benefit of the doubt if something goes wrong, rather than assuming
malicious intent or raw negligence. Customers also tend to stick with businesses they trust, rather
than actively seeking out new companies, which helps keep a business profitable over the long
haul.
Pg 22
Answers to PTP_Final_Syllabus 2012_Jun 2015_Set 2
Pg 1
Learning objectives
KNOWLEDGE
know
COMPREHENSION
understand
Verbs used
List
State
Define
Describe
Distinguish
Explain
LEVEL C

apply
your knowledge
ANALYSIS
have learned
SYNTHESIS
optimum
reasoning
EVALUATION
make decisions or
recommendations
Make a list of
Produce
Discuss

consideration
something
means
Find an answer to
Arrange in a table
between
Build up or compile
action
Interpret
Decide
Advise
Evaluate
Recommend
Identity
Illustrate
APPLICATION
Definition
Apply
Calculate
Demonstrate
Prepare
Reconcile
Solve
Tabulate
Analyse
Categorise
Compare
and contrast
Construct
Prioritise
Pg 2

Full Marks: 100
clearly indicated.
[20 Marks]
(i) Manish applies for shares on the basis of prospectus which contains mis-statement. The
shares were allotted to him, who afterwards transfers them to Nishant. Can Nishant bring an
action for a recession on the ground of mis-statement? Decide under the provisions of
[3]
(ii) Gagan Ltd. an engineering company has distributed ` 20 lacs to scientific institutions for
furtherance of scientific education and research. Referring to the provisions of Companies
Act, 2013 decide whether the said distribution of money was ultra vires the company?
[3]
(iii) Arun, a member of Priya & co Ltd., holding some shares in his own name on which final call
money has not been paid, is denied by the company voting right at a general meeting on
the ground that the articles of association do not permit a member to vote if he has not paid
the calls on the shares held by him.
With reference to the provisions of Companies Act, 2013 examine the validity of companys
denial to Arun of his voting rights.
[3]
(iv) The minutes of the meeting must contain fair and correct summary of the proceedings
thereat. Can the chairman direct exclusion of any matter from the minutes? Some of the
shareholders insist on inclusion of certain matters which are regarded as defamatory of a
director of the company. The chairman declines to do so. State how the matter can be
resolved based on Companies Act, 2013.
[3]
(v) The apple producers from Kashmir have formed an association to control production of
oranges. Examine whether it will be considered as a cartel within the meaning of sec 2 of
the Competition Act, 2002.
(vi) Write a note on CSR reporting.
[3]
Pg 3

(vii) State the role of Audit Committee in regulating Corporate Governance.
[2]
Answer
(i) This case is based on the provisions of Sec 35 of Companies Act, 2013. Nishant is not the
original allottee of the shares, since he obtained the shares by way of transfer from Manish.
Nishant cannot claim damages from the company since Nishant is not an original allottee of
shares and he did not subscribe for shares on the faith of a misleading prospectus. [Peek v
Gurney]
(ii) Donation of ` 20 lacs for furtherance of scientific education and research is permissible since
it is incidental or ancilliary to the main object of the company and it is conducive to the
continued growth of the company as engineering goods manufacturers as was held in
Evans v Brunner, Mood & Co. Ltd.
(iii) The decision of the company is valid since the member is restrained from exercising his
voting right on one of the grounds specified under section 106 of Companies Act, 2013 (viz.
non-payment of calls on shares). And the ground restricting voting rights is contained in the
articles.
(iv) It relates to the provisions of Sec 118 of Companies Act, 2013. Chairman has the power to
determine whether a matter is defamatory of any person or not and to direct not to include
in the minutes any matter which is defamatory of any person. Hence, refusal by chairman is
valid since the matter discussed in General Meeting is, in the opinion of the Chairman,
defamatory of a director.
(v) As per Sec 2(c) of Competition Act, 2002, cartel includes an association of producers,
sellers, distributors, traders or service providers who, by agreement amongst themselves, limit
control or attempt to control the production, distribution, sale or price of, or, trade in goods
or provision of services. In the given case, the association that has been formed is that of
apple producers. It clearly falls within the definition of cartel as given under Sec 2(c) of
Competition Act, 2002.
(vi) CSR reports highlights the CSR activities undertaken by the entity and details of employees
who played a key role in achievement of CSR initiatives. CSR reporting reflects seriousness of
top management towards CSR. It helps the entity to build and reinforce trust with all the
stakeholders. CSR reports are aimed at increasing the awareness and importance of CSR.
CSR report also encourages internal efforts to achieve the CSR objectives.
(vii)The Audit Committee ensures and reports to the Board the adequacy of internal control
systems. It periodically reviews the financial statements. It periodically holds discussions with
Pg 4

the auditors relating to the internal control system, scope of audit and observation of
auditors.
[60 Marks]
Question 2(a)
(i) Sita & Co. Ltd. made a loss of ` 20 lakhs after providing for depreciation for the year ended
31st March, 2015 and as a result the company was not in a position to declare any dividend
for the said year out of profits. However, the Board of Directors of the company
announced the declaration of dividend of 15% on the equity shares payable out of the free
reserves. The paid up share capital of the company and its free reserves as on 31st March,
2015 are ` 2 crores and ` 10 crores respectively. The average dividend declared by the
company in the last three years is 25%. Examine the validity of declaration of Dividend.
(ii) The Board of directors of a company decides to revise the accounts which have been
submitted to the auditors, but the auditors have not yet given their report. Examine the validity.
(iii) How is the subsequent auditor appointed in case of a government company? Answer with
reference to Companies Act, 2013.
[8+2+5 = 15]
Answer
(i) The fundamental principle with respect to payment of dividend is that dividend is to be paid
only out of profits. In other words, the dividend can be paid only out of the following sources:
(a) Profits of current financial year
(b) Undistributed profits of previous financial years, i.e., accumulated profits of previous years
(c) Moneys provided by the Central Government or State Government in pursuance of a
guarantee given by it.
Payment of dividend out of reserves
As per Rule 3 of the Companies (Declaration and Payment of Dividend) Rules, 2014, dividend
can be declared out of the profits transferred to the reserves by complying with the following
conditions:
(a) The rate of dividend declared shall not exceed the average of the rates at which
dividend was declared by it in the 3 years immediately preceding that year.
(b) The total amount to be drawn from such accumulated profits shall not exceed l/10th of
the sum of its paid-up share capital and free reserves as appearing in the latest audited
financial statement.
Pg 5

(c) The amount so drawn shall first be utilised to set off the losses incurred in the financial
year in which dividend is declared before any dividend in respect of equity shares is
declared.
(d) The balance of reserves after such withdrawal shall not fall below 15% of its paid up share
capital as appearing in the latest audited financial statement.
(e) No company shall declare dividend unless carried over previous losses and depreciation
not provided in previous year or years are set off against profit of the company of the
current year.
The present case is discussed as under:
(a) The average rate of dividend declared by the company during the preceding 3 financial
years is 25%. So, for the current financial year, the rate of dividend shall not exceed 25%.
(b) The maximum amount that may be drawn from the reserves shall not exceed 10% of (`2
crore + `10 crore), i.e. `1.2 crore.
(c) Out of the amount drawn from the reserves (viz. ` 1.2 crore), loss for the current financial year
(viz. ` 0.20 crore) shall first be set off. Thus, maximum amount that can be utilized for dividend
shall be ` 1.2. crore less ` 0.20, viz. ` 1 crore (i.e. rate of dividend shall not exceed 50%).(d) After the dividend is declared out of reserves, the balance of reserves shall not fall below 15%
of paid up share capital, viz. 15% of ` 2 crore, viz. ` 30 lakh. Thus, maximum amount that can
be utilized for dividend shall be ` 10 crore less ` 20 lakh less ` 30 lakh, viz. ` 9.5 crore (i.e. rate
of dividend shall not exceed 475%).
(e) There is no carried over previous losses or depreciation.
Thus, in the present case, the company may distribute dividend at the rate of 25% in
accordance with the conditions contained in Rule 3 of the Companies (Declaration and
Payment of Dividend) Rules, 2014.
(ii) Where the auditors have not yet given their report, the Board may revise the accounts. The
revised accounts shall be approved by the Board and thereafter signed on behalf of the
Board in accordance with the provisions of section 134 of the Companies Act, 2013. Then,
the revised accounts shall be submitted to the auditors. The auditors' report shall be based
on the revised accounts submitted by the Board.
(iii) The provisions relating to appointment of subsequent auditor in case of a government
company are discussed as follows:
1. Applicability of Section 139(5) of Companies Act, 2013
Pg 6

(a) Government companies
(b) Any other company owned or controlled, directly or indirectly, by
(i) the Central Government; or
(ii) one or more State Government; or
(iii) partly by the Central Government and partly by one or more State Government.
2. Appointment or reappointment of auditor
In case of aforementioned companies, CAG shall, in respect of a financial year, appoint an
auditor duly qualified to be appointed as an auditor of companies under this Act, within 180
days from the commencement of the financial year.
3. Tenure
The auditor shall hold office till the conclusion of the AGM.
Question 2(b)
(i) M/s. Super India Ltd. issued shares of the nominal value of `10 per share, out of which `5 was
payable on application and balance `5 was payable on call. The call money was invited by
the Board of directors but some shareholders, including a non-executive director, failed to
pay the same within the prescribed period. Explain the status of director who defaulted in
paying call money. Answer with reference to Companies Act, 2013.
(ii) Mr. Abhinav is named as a director for life in the articles of association of M/s. Aarti Private
Limited which was incorporated on 1st April, 1977. The articles of association of the company
also provide that he cannot be removed by the members in general meeting. Some of the
members want to remove 'Abhinav' by passing an ordinary resolution in general meeting.
State with reference to the relevant provisions of the Companies Act, 2013 whether the
proposed action is valid.
(iii) Vibrant Ltd. has 12 Directors on its Board and has the following clause in its Article of
Association:
The question arising at any meeting of the Board of Directors or any Committee thereof shall
be decided by a majority of votes, except in cases where the Companies Act, 2013
expressly provides otherwise."
In one of the meeting of the Board of Directors of Vibrant Ltd 8 Directors were present. After
completion of discussion of matter, voting was done. 3 Directors voted in favour of the
motion, 2 Directors voted against the motion while 3 Directors abstained from voting.
State whether the motion was carried or not. It is clarified that the motion being voted up to
was not concerning a matter which requires consent of all the Directors present in the
meeting.
[4+5+6 = 15]
Pg 7

Answer
(i) As per section 167 read with section 164 of the Companies Act, 2013, a director shall vacate
his office if he fails to pay a call on the shares of the company held by him within 6 months
from the last day fixed for the payment of the call. Similarly, a person shall be disqualified
from becoming a director if he fails to pay a call on the shares of the company held by him
within 6 months from the last day fixed for the payment of the call (Section 164).
In the given case, a non-executive director has failed to pay a call on the shares of the
company. If the call is not paid for 6 months from the last date fixed for the payment of the call,
he shall vacate the office of director held by him. The vacation of office shall be automatic, i.e.
the non-executive director shall forthwith (i.e. immediately on expiry of 6 months from last date
of payment of call) vacate the office of director held by him. Also, in such a case, he shall be
disqualified from being appointed as a director in M/s Super India Ltd.)
(ii) Section 169 of Companies Act, 2013 gives a statutory right to the shareholders to remove any
director before the expiry of his term by following the prescribed procedure. It applies to
both public and private companies.
Any provision in the articles that a director shall not be removed, violates the statutory right
given to the shareholders, and is ultra vires the Act as provided by section 6 of Companies Act,
2013. Section 6 stipulates that the provisions of the Act have an overriding effect on clauses
contained in the memorandum, articles or any other agreement, if they are not in conformity
with the provisions of the Act.
The articles of a company entitled a director to hold office for life. The Court held that section
169 has been enacted to enable the shareholders to exercise control over the directors and
therefore the shareholders have been empowered to remove the directors. Therefore, the said
permanent director could be removed from the office [Tarlok Chand Khanna v Rajkumar
Kapoor (1983) 54 Comp Cas 12].
In the present case the articles of the company provide that Abhinav shall be a director holding
office for life and he shall not be removed by the members in general meeting. In view of the
over-riding effect of section 6, this clause is repugnant to section 169 and is therefore void.
Accordingly, the proposed action of removal of Abhinav by passing an ordinary resolution in
general meeting is valid subject to compliance of the procedure laid down in section 169.
(iii) As per Regulation 68 of Table F contained in Schedule I of Companies Act, 2013, except
where the Act requires a unanimous resolution, questions arising at a Board meeting shall be
decided by a majority of votes.
Pg 8

In the given case, the articles of Vibrant Ltd. contain a Regulation similar to Regulation 68 of
Table F. The articles of Vibrant Ltd. state that a resolution shall be deemed to be passed in a
Board meeting if it is approved by a majority of votes. In this regard, following points are worth
noting:
(a) In a Board meeting, every director has one vote only.
(b) Only those directors who are present in the meeting and vote on a resolution are
considered while determining majority, i.e. following directors are not considered while
ascertaining the result of a resolution:
A director who is absent at a Board meeting.
A director who abstains from voting.
In the given case, the company has 12 directors, out of which only 8 are present in the Board
meeting. Out of 8 directors present, 3 directors have voted in favour, 2 directors have voted
against the resolution, and 3 directors have abstained from voting. The directors absent in the
Board meeting, and the directors present but abstaining from voting shall be ignored. The
number of votes cast in favour of the resolution exceeds the number of votes cast against the
resolution, and therefore the said resolution is passed. Following assumptions have been made in
the above case:
(a) No director voting in favour of the resolution is interested in the resolution, as per the
provisions of section 184.
(b) At least 4 disinterested directors are present in the Board meeting to form the quorum
required at the time of passing the resolution (section 174).
(c) The resolution does not require consent of all the directors present in Board meeting.
Question 2(c)
(i) The Board of directors of ABC Ltd. met thrice in the year 2015 and the 4th meeting, though
called could not be held for want of quorum. Examine with reference to the relevant
provisions of the Companies Act, 2013, the following:
1. Whether any provisions of the Companies Act, 2013 have been contravened?
2. Is a director bound to attend the Board meetings and when his frequent absence from
the Board meetings may be excused?
(ii) Mr. Deva was appointed as the managing director of Sure Leather Industries Ltd. for a period
of five years with effect from 01.04.2012 on a salary of `12 lakhs per annum with other
perquisites. The Board of Directors of the company, oncoming to know of certain
questionable transactions, terminated the services of the managing director from 01.03.2015.
Mr. Deva termed his removal as illegal and claimed compensation from the company.
Meanwhile the company paid a sum of `5 lakhs on ad hoc basis to Mr. Deva pending
settlement of his dues. Discuss whether:
Pg 9

1. The company is bound to pay compensation to Mr. Deva, and, if so, how much.
2. The company can recover the amount of `5 lakhs paid on the ground that Mr. Deva is not
entitled to any compensation, because he is guilty of corrupt practices.
(iii) Discuss in brief the issue of certificate of registration of existing companies, under Companies
Act, 2013
[6+6+3 = 15]
Answer
(i)
1. The present problem relates to sections 173 and 174 of the Companies Act, 2013.
A. As per section 173, at least four Board meetings shall be held in each calendar year
and not more than 120 days shall intervene between two consecutive meetings of
the Board.
B.
As per section 174, if a Board meeting could not be held for want of quorum, then,
unless the articles of the company otherwise provide, the meeting shall automatically
stand adjourned (a) to the same day in the next week, or if that day is a national holiday, till the next
succeeding day, which is not a national holiday;
(b) at the same time;
(c) at the same place.
C. An adjourned Board meeting cannot be held, if the quorum is not present.

D. The issues raised in the given problem are answered as under:
Under the Companies Act, 2013, if a Board meeting is duly called but it is not held for
want of quorum, and as a consequence the minimum number of 4 Board meetings in a
calendar year as required under Section 173 is not held, it would amount to a
contravention of Section 174.
Conclusion: The Company has violated the provisions of section 173.
2. A director should endeavor to attend the maximum number of Board meetings. But he is
not duty bound to attend all the Board meetings.
However, if loss is caused to the company because of continuous absence of a director
from the meetings of the Board, it would amount to negligence and breach of duty.
Moreover, a director shall vacate his office if he absents himself, with or without obtaining
leave of absence from the Board, from all the Board meetings 'held during a period of 12
months [Section 167(1)(b)].
(ii) As per section 202 of Companies Act, 2013
Compensation can be paid only to a managing director or whole time director or manager.
Pg 10
The compensation payable shall not exceed the remuneration which he would have earned
if he had been in office for the unexpired residue of his term or for 3 years, whichever is
shorter.
Where the director has been guilty of fraud or breach of trust or gross negligence in the
conduct of the affairs of the company, he shall not be paid any compensation.
The answers to the given problem are as under:

1. The company is not bound to pay compensation to Mr. Deva if he has been found guilty of
any fraud or breach of trust. However, it is not proper for the company to withhold the
payment of compensation on the basis of allegations, unless there is a proper finding on the
involvement of Mr. Deva in corrupt practices.
The compensation payable shall not exceed `25 lakhs, i.e. at the rate of `12 lakhs per
annum for unexpired period of 25 months.
2. As per the decision in Bells v Lever Bros [1932] AC 161 House of Lords, the compensation of `5
lakh already paid by the company to Mr. Deva cannot be recovered back if the company
later comes to know that Mr. Deva was guilty of serious breaches of duty and corrupt
practices which would have entitled the company to end the employment of Mr. Deva
without any compensation. It was also held that the managing director was under no
obligation to disclose to the company the breach of duty so as to give an opportunity to the
company to remove him without paying compensation.
(iii) The provisions of Section 367, of Companies Act, 2013 with respect to certificate of
registration are as follows:
1. On compliance with the requirements with respect to registration, and on payment of
prescribed fees, the Registrar shall issue a certificate of registration to the existing
company.
2. The certificate shall be signed by the Registrar.
3. The certificate shall state that the company applying for registration has been
incorporated as a company under Companies Act, 2013.
4. The company shall be incorporated from the date of issue of the certificate.
5. In case the company has been registered as a limited company, the certificate shall
state that the company is a limited company.
Question 2(d)
(i) Explain the provisions relating to investigation into the affairs of a company as per
Pg 11

(ii) As per provisions of the Companies Act, 2013, what is the status of Star Ltd., a company
incorporated in London, U.K., which has a share transfer office at Mumbai? Would the case
have been the same, if Star ltd. would have been formed by Indian citizens, but it did not
have its Mumbai branch?
(iii) Examine, with reference to the provisions of the Foreign Exchange Management Act, 1999,
the residential status of the branches mentioned below:
1. Mita Limited, an Indian company having its Registered Office at Mumbai, India
established a branch at New York U.S.A. on 1st April, 2004.
2. Wella Ltd., a company incorporated and registered in London established a branch at
Chandigarh in India on 1st April, 2004.
3. Wella Ltd.'s Singapore branch which is controlled by its Chandigarh branch.
[5+4+6 = 15]
Answer
(i)
1.
Power of CG to order investigation [Section 210(1)]

Where the Central Government is of the opinion, that it is necessary to investigate into the
affairs of a company, (a) on the receipt of a report of the Registrar or inspector under section 208;
(b) on intimation of a special resolution passed by a company that the affairs of the
company ought to be investigated; or
(c) in public interest,
it may order an investigation into the affairs of the company.
2.
Duty of CG to order investigation [Section 210(2)]

Where an order is passed by a court or the Tribunal in any proceedings before it that the
affairs of a company ought to be investigated, the Central Government shall order an
investigation into the affairs of that company.
3.
Appointment of inspectors by CG [Section 210(3)]
For the purposes of this section, the Central Government may appoint one or more persons as
inspectors to investigate into the affairs of the company and to report thereon in such manner
as the Central Government may direct.
(ii) As per Section 2(42) of the Companies Act, 2013, 'foreign company' means any company or
body corporate incorporated outside India which (a) has a place of business in India whether by itself or through an agent, physically or
through electronic mode; and
(b) conducts any business activity in India in any other manner.
Pg 12

1. A share transfer office or share registration office constitutes a place of business (Section 386
of the Companies Act, 2013). Since, the company incorporated outside India has a share
registration office at Mumbai; the company is a foreign company.
2. In the later case, Indian citizens have formed a company outside India. Since, the company
has not established any place of business in India, and the company does not conduct any
business activity in India in any other manner, the company cannot be said to be a foreign
company. The fact that Indian citizens have formed a company in a foreign country is
immaterial in deciding whether the company is a foreign company or not.
(iii) Section 2(u)of FEMA, 1999 defines a 'person'. As per this definition, the following shall be
covered in the definition of a 'person':
(a) A company
(b) Any agency, office or branch owned by a 'person'.
Section 2(v) defines a 'person resident in India'. As per this definition, the following shall be
covered in the definition of a 'person resident in India':
(a) Any person or body corporate registered or incorporated in India.
(b) An office, branch or agency in India owned or controlled by a person resident outside
India.
(c) An office, branch or agency outside India owned or controlled by a person resident in
India.
1. Mita Limited as well as the New York branch of Mita Limited is a 'person'. Therefore,
residential status under FEMA shall be determined for each of them separately.
Mita Limited is incorporated in India. Therefore, it is a 'person resident in India'.
Mita Limited (a 'person resident in India') has established a branch outside India.
Therefore, the New York branch of Mita Limited falls under the clause 'an office, branch
or agency outside India owned or controlled by a person resident in India' and so the
New York branch is a 'person resident in India'.
2. Wella Ltd. as well as Chandigarh branch of Wella Ltd. is a 'person'. Therefore, residential
status under FEMA shall be determined for each of them separately.
Wella Ltd. (a foreign company) does not fall under any of the clauses of the definition of
a 'person resident in India'. Therefore, Wella Ltd. is a person resident outside India.
The Chandigarh branch of Wella Ltd. is a 'person resident in India' since it falls under the
clause 'an office, branch or agency in India owned or controlled by a person resident
outside India'.
Pg 13

3. The Singapore branch of Wella Ltd., though not owned, is controlled by the Chandigarh
branch. The Singapore branch is a 'person resident in India' since it falls under the clause 'an
office, branch or agency outside India owned or controlled by a person resident in India'.
Question 2(e)
(i) The Central Government, without referring the matter to the Supreme Court of India for
inquiry, removed a member of the Competition Commission of India on the ground that he
has become physically or mentally incapable of acting as a member. Decide, under the
provisions of the Competition Act, 2002, whether removal of the member by the Central
government is lawful?
(ii) Is the Authority required to furnish any returns to the Central Government, as per provisions of
IRDA Act, 1999?
(iii) State the provisions relating to incorporation of Insurance Association of India, as per
Insurance Act, 1938.
(iv) Point out the circumstances where under the following powers may be exercised by the
Securities and Exchange Board of India:
1. Prohibiting a company from issuing or publishing any document or advertisement
soliciting money from public for the issue of securities.
2. Pass cease and desist order in relation to any listed company.
What remedies are available to the companies against such orders under the Securities and
Exchange Board of India Act, 1992.
[4+4+3+4 = 15]
Answer
(i) Section 11 of the Competition Act, 2002 empowers the Central Government to remove the
Chairperson or any member of the Competition Commission of India in certain cases. One of
the grounds mentioned in section11 is, "where he has become physically or mentally
incapable of acting as a Member."
However, in the following two cases, the Chairperson or a Member may be removed from
office only if the matter is referred by the Central government to the Supreme Court, and the
Supreme Court makes an order that the Chairperson or Member ought to be removed:
1. Where he has acquired such financial or other interest as is likely to affect prejudicially his
functions as a Member.
Pg 14

2. Where he has so abused his position as to render his continuance in office prejudicial to
the public interest.
In the given case, the ground under which the Central Government has ordered removal of a
Member does not fall under any of the above two grounds. So, the matter is not required to be
referred to the Supreme Court. Therefore, the order of removal made by the Central
Government is valid and lawful.
(ii) The provisions of section 20 may be explained as follows:
1. Furnishing of returns, statements etc. [Section 20(1)]
The Authority shall furnish to the Central Government at such time and in such form and
manner as may be prescribed, or as the Central Government may direct to furnish such
returns, statements and other particulars in regard to any proposed or existing programme
for the promotion and development of the insurance industry as the Central Government
may, from time to time, require.
2. Furnishing of Report describing its activities [Section 20(2)]
Without prejudice to the provisions of sub-section (1), the authority shall, within 9 months
after the close of each financial year, submit to the Central Government a report giving a
true and full account of its activities including the activities for promotion and
development of the insurance business during the previous financial year.
3. Laying of Report before the Parliament [Section 20(3)]
Copies of the reports received under sub-section (2) shall be laid, as soon as may be after
they are received, before each House of Parliament.
(iii) The provisions relating to incorporation of Insurance Association of India are explained
below:
1. Insurance Association of India to be a body corporate [Section 64A(1)]
All insurers are hereby constituted a body corporate by the name of the Insurance
Association of India.
2. Members of the Association [Section 64A(2)]
All insurers shall be known as members of the Insurance Association of India.
3. Characteristics of the Association [Section 64A(3)]
The Insurance Association of India shall have perpetual succession and a common seal
and shall have power to acquire, hold and dispose of all property, both movable and
immovable, and shall by the said name sue and be sued.
Pg 15

(iv) Section 11D empowers SEBI to pass an order requiring a person to cease and desist from
committing or causing the violation of the Act or rules made thereunder. SEBI may pass a
cease and desist order by complying with the following 2 requirements:
(a) SEBI shall cause an inquiry to be made to determine whether any person has violated, or
is likely to violate, any provisions of this Act or any rules or regulations made thereunder.
(b) SEBI shall not pass a cease and desist order against any listed company or a public
company which intends to get its securities listed on any recognised stock exchange,
unless it has reasonable ground to believe that such company has indulged in insider
trading or market manipulation.
[20 Marks]
Question 3(a)
(i) The German Corporate Governance system is based around a dual board system.
Elucidate the statement.
(ii) Discuss the various reasons for Corporate Social Responsibility (CSR).
[5+5 = 10]
Answer
(i) The committee on corporate governance in Germany was chaired by Dr. Gerhard Cromme
and is usually referred to as the Cromme Report or Cromme Code. The code harmonizes a
wide variety of laws and regulations and contains recommendations and also suggestions
for complying with international best practice on Corporate Governance. The Cromme
Code was published in 2002 and was amended in 2005.
The German Corporate Governance system is based around a dual board system, and
essentially, the dual board system comprises a management board (Vorstand) and a supervisory
board (Aufsichtsrat).
The management board is responsible for managing the enterprise. Its members are jointly
accountable for the management of the enterprise and the chairman of the management
board co-ordinates the work of the management board. On the other hand, the supervisory
board appoints, supervises, and advises the members of the management board and is directly
involved in decisions of fundamental importance to the enterprise. The chairman of the
supervisory board co-ordinates the work of the supervisory board. The members of the
supervisory board are elected by the shareholders in general meetings. The co-determination
principle provides for compulsory employees representation. So, for firms or companies which
Pg 16

have more than five hundred or two thousand employees in Germany, employees are also
represented in the supervisory board which then comprises one-third employee representative
or one-half employee representative respectively. The representatives elected by the
shareholders and representatives of the employees are equally obliged to act in the enterprises
best interests.
The idea of employee representation on boards is not always seen as a good thing because the
employee representatives on the supervisory board may hold back decisions being made that
are in the best interests of the company as a whole but not necessarily in the best interests of the
employees as a group. An example, would be where a company wishes to rationalize its
operations and close a factory but the practicalities of trying to get such a decision approved
by employee representatives on the supervisory board, and the repercussions of such a decision
on labour relations, prove too great for the strategy to be made a reality.
(ii) The rationale for CSR has been articulated in a number of ways. In essence, it is about
building sustainable businesses, which need healthy economies, markets and communities.
The major reasons for CSR can be outlined as:
1. Globalisation
As a consequence of cross-border trade, multinational enterprises and global supply chains,
there is an increased awareness on CSR concerns related to human resource management
practices, environmental protection, and health and safety, among other things. Reporting on
the CSR activities by corporates is therefore increasingly becoming mandatory.
In an increasingly fast-paced global economy, CSR initiatives enable corporates to engage in
more meaningful and regular stakeholder dialogue and thus be in a better position to anticipate
and respond to regulatory, economic, social and environmental changes that may occur.
There is a drive to create a sustainable global economy where markets, labour and communities
are able to function well together and companies have better access to capital and new
markets.
Financial investors are increasingly incorporating social and environmental criteria when making
decisions about where to place their money, and are looking to maximise the social impact of
the investment at local or regional levels.
2. International Legal Instruments and Guidelines
In the recent past, certain indicators and guidelines such as the SA 8000, a social performance
standard based on International Labour Organization Conventions have been developed.
International agencies such as United Nations and the Organization for Economic Co-operation
and Development have developed compacts, declarations, guidelines, principles and other
instruments that set the tone for social norms for organisations, though these are advisory for
organisations and not mandatory.
Pg 17

One of the United Nations Millennium Development Goals calls for increased contribution of
assistance from country states to help alleviate poverty and hunger, and states in turn are
advising corporates to be more aware of their impact on society. In order to catalyze actions in
support of the MDGs, initiatives such as Global Compact are being put in place to
instrumentalise CSR across all countries.
As the worlds largest, global corporate citizenship initiative by the UN, the Global Compact, a
voluntary initiative is concerned with building the social legitimacy of business.
The Global Compact is a framework for businesses that are committed to aligning their business
operations and strategies with ten universally accepted principles that postulate that companies
should embrace, support and enact, a set of core values in the areas of human rights, labour
standards, the environment, and anti-corruption.
3. Changing Public Expectations of Business
Globally companies are expected to do more than merely provide jobs and contribute to the
economy through taxes and employment. Consumers and society in general expect more from
the companies whose products they buy. This is coherent with believing the idea that whatever
profit is generated is because of society, and hence mandates contributing a part of business to
the less privileged.
Further, separately in the light of recent corporate scandals, which reduced public trust of
corporations, and reduced public confidence in the ability of regulatory bodies and
organisations to control corporate excess. This has led to an increasing expectation that
companies will be more open, more accountable and be prepared to report publicly on their
performance in social and environmental arenas.
4. Corporate Brand
that resonates with key external stakeholders, customers, general public and the government.
Corporates in India are also realising that their reputation is intrinsically connected with how well
they consider the effects of their activities on those with whom they interact. Wherever the
corporates fail to involve parties, affected by their activities, it may put at risk their ability to
Therefore, in terms of business, CSR is essentially a strategic approach for firms to anticipate and
address issues associated with their interactions with others and, through those interactions, to
succeed in their business endeavors. The idea that CSR is important to profitability and can
prevent the loss of customers, shareholders, and even employees is gaining increasing
acceptance.
Pg 18

initiatives, corporates feel contented and proud, and this pride trickles down to their employees.
Question 3(b)
(i) Briefly discuss the various issues regarding the MoU System in Indian CPSEs.
(ii) The typical organizational structure of PSUs makes it difficult for the implementation of
corporate governance practices as applicable to other publicly-listed private enterprises.
In view of the above, list the difficulties encountered in governance.
[5+5 = 10]
Answer
(i) The Memorandum of Understanding (MoU) is a negotiated document between the
Government, acting as the owner of Centre Public Sector Enterprise (CPSE) and the
Corporate Management of the CPSE. It contains the intentions, obligations and mutual
responsibilities of the Government and the CPSE and is directed towards strengthening CPSE
management by results and objectives rather than management by controls and
procedures.
The beginnings of the introduction of the MoU system in India can be traced to the
recommendation of the Arjun Sengupta Committee on Public Enterprises in 1984. The first set of
Memorandum of Undertaking (MoU) was signed by four Central Public Sector Enterprises for the
year 1987-88. Over a period of time, an increasing number of CPSEs was brought within the MoU
system. Further impetus to extend the MoU system was provided by the Industrial Policy
Resolution of 1991 which observed that CPSEs will be provided a much greater degree of
management autonomy through the system of Memorandum of Undertaking.
Broadly speaking, the obligations undertaken by CPSEs under the MoU are reflected by three
types of parameters i.e., (a) financial (b) physical and (c) dynamic.
The Figure below clearly brings out the several challenges which the MoU system in India,
currently faces.
Pg 19

Issues regarding the MoU System in Indian CPSEs
Impact of
External
Environment
Making the
inclusion of
Offsetting
Parameters
Objective
Scientific
Setting of
the Base
Target
Pressured
functioning amongst
CPSEs due to
repetitions in the
financial parameters
Existing Balance Score

Card approach might
not be suitable in a
dynamic environment
Dark Lines Connect Broad Themes (Issues)
Dotted lines connect Sub-Themes (Issues)
Lack of MoU
as a Business
Review Tool
Concept of
Benchmarking
needs more
emphasis
PSUs lacking
in
appropriate
CSR initiatives
Lacks the ability to

foster Good
Governance
MoU instrument
lacks the ability to
propel New
Product/ Service
Development
Despite the overwhelming success of the MOU system, there is a need to strengthen the exercise
further to make it more value added. Some of the suggestions in this regard are as follows:
CPSEs may detract themselves from soft targeting. This could be seen from the fact that your
MOU goals set by most of the CPSEs are achieved in the third quarter of a financial year
itself.
The internal systems need to be revamped to contribute to MOU effectiveness. This may
mean making the internal budgeting, pricing, materials control, MIS, performance appraisal,
recruitment systems to be brought in line with the goals set in MOU.
There is a need to percolate MOU system down the line.
The wage negotiations should go beyond the managerial cadre in the same split and form
as in the case of the process followed relating to executives.
Balance scorecard concept should be stressed further to yield a composite MOU index.
Pg 20
The basic targets need to be fixed very carefully and questioning the very logic of taking the
previous years accomplishments as good.
(ii) While routine governance regulations become applicable for public sector companies
formed under the Companies Act, 1956 and come under the purview of SEBI regulations the
moment they mobilize funds from the public, the typical organizational structure of PSUs
makes it difficult for the implementation of corporate governance practices as applicable to
other publicly-listed private enterprises. The typical difficulties faced are:
The board of directors will comprise essentially of bureaucrats drawn from various
ministries which are interested in the PSU. In addition, there may be nominee directors
from banks or financial institutions who have loan or equity exposures to the unit. The
effect will be to have a board much beyond the required size, rendering decisionmaking a difficult process.
The chief executive or managing director (or chairman and managing director) and
other functional directors are likely to be bureaucrats and not necessarily professionals
with the required expertise. This can affect the efficient running of the enterprise.
Difficult to attract expert professionals as independent directors. The laws and regulations
may necessitate a percentage of independent component on the board; but many
professionals may not be enthused as there are serious limitations on the impact they
can make.
Due to their very nature, there are difficulties in implementing better governance
practices. Many public sector corporations are managed and governed according to
the whims and fancies of politicians and bureaucrats. Many of them view PSUs as a
means to their ends. A lot of them have turned sick due to overdoses of political
interference, even when their areas of operations offered enormous opportunities for
advancement and growth. And when the economy was opened up, many of them
lacked the competitiveness to fight it out with their counterparts from the private sector.
Question 3(c)
1. Influence of Cromme code on Corporate Governance in Germany
2. Risk and uncertainty in Whole Life Cycle Costing
(ii) According to Altered Images: The 2001 State of Corporate Responsibility in India Poll a
survey conducted by Tata Energy Research Institute (TERI), the evolution of CSR in India has
followed a chronological evolution of 4 thinking approaches. Explain the same.
[(2.5 2) + 5 = 10]
Answer
(i)
Pg 21

1. Influence of Cromme code on Corporate Governance in Germany:
The German corporate governance system could be termed an insider system. The German
Corporate Governance system is based around a dual board system, and essentially, the dual
board system comprises a management board (Vorstand) and a supervisory board (Aufsichtsrat).
accountable for the management of the enterprise and the chairman of the management board
co-ordinates the work of the management board. On the other hand, the supervisory board
appoints, supervises, and advises the members of the management board and is directly involved
in decisions of fundamental importance to the enterprise. The chairman of the supervisory board
co-ordinates the work of the supervisory board. The members of the Supervisory board are elected
by the shareholders in general meetings. The co-determination principle provides for compulsory
employees representation. So, for firms or companies which have more than five hundred or two
thousand employees in Germany, employees are also represented in the supervisory board which
then comprises one-third employee representative or one-half employee representative
respectively. The representatives elected by the shareholders and representatives of the
employees are equally obliged to act in the enterprises best interests.
The committee on corporate governance in Germany was chaired by Dr. Gerhard Cromme
and is usually referred to as the Cromme Report or Cromme Code. The code harmonizes a wide
variety of laws and regulations and contains recommendations and also suggestions for
complying with international best practice on Corporate Governance.
The Cromme Code was published in 2002 and is split into a number of sections, starting with a
section on shareholders and the general meeting. The Cromme Code also reflects some of the
latest developments in technology. The Cromme Code was amended in 2005.
Table: Key characteristics influencing German corporate governance
Feature
Key characteristic
Main business form
Public or private companies limited by shares
Predominant ownership structure
Financial and non-financial companies
Legal system
Civil law
Board structure
Dual
Important aspect
Compulsory
employee
representation
on
supervisory
board.
2. Risk and uncertainty in Whole Life Cycle Costing:
Pg 22

stochastic assessment of the performance of constructed facilities from feasibility to disposal.
WLCC decisions are complex and usually comprise an array of significant factors affecting the
ultimate cost decisions. WLCC decisions generally have multiple objectives and alternatives,
long-term impacts, multiple constituencies in the procurement of construction projects, generally
involve multiple disciplines and numerous decision makers, and always involve various degrees
of risk and uncertainty. Project cost, design and operational decision parameters are often
established very early in the life of a given building project. Often, these parameters are chosen
based on owners and project teams personal experiences or on an ad hoc static economic
analysis of the anticipated project costs. While these approaches are common, they do not
provide a robust framework for dealing with the risks and decisions that are taken in the
evaluation process. Nor do they allow for a systematic evaluation of all the parameters that are
considered important in the examination of the WLCC aspects of a project. The existing
methods also do not adequately quantify the true economic impacts of many quantitative and
qualitative parameters.
Decisions about building-related investments typically involve a great deal of uncertainty about
their costs and potential savings. Performing a WLCCA greatly increases the likelihood of
choosing a project that saves money in the long run. Yet, there may still be some uncertainty
associated with the WLCC results. WLCCAs are usually performed early in the design process
when only estimates of costs and savings are available, rather than certain dollar amounts.
Uncertainty in input values means that actual outcomes may differ from estimated outcomes.
There are techniques for estimating the cost of choosing the "wrong" project alternative.
Deterministic techniques, such as sensitivity analysis or breakeven analysis, are easily done
without requiring additional resources or information. They produce a single-point estimate of
how uncertain input data affect the analysis outcome. Probabilistic techniques, on the other
hand, quantify risk exposure by deriving probabilities of achieving different values of economic
worth from probability distributions for input values that are uncertain. However, they have
greater informational and technical requirements than do deterministic techniques. Whether
one or the other technique is chosen depends on factors such as the size of the project, its
importance, and the resources available. Since sensitivity analysis and break-even analysis are
two approaches that are simple to perform, they should be part of every WLCCA.
(ii) According to Altered Images: the 2001 State of Corporate Responsibility in India Poll, a
followed a chronological evolution of 4 thinking approaches:
Ethical Model (1930 1950): One significant aspect of this model is the promotion of trusteeship
that was revived and reinterpreted by Gandhiji. Under this notion the businesses were motivated
to manage their business entity as a trust held in the interest of the community. The idea
prompted many family run businesses to contribute towards socioeconomic development. The
efforts of Tata group directed towards the well being of the society are also worth mentioning in
this model.
Pg 23

Statist Model (1950 1970s): Under the aegis of Jawahar Lal Nehru, this model came into being in
the post independence era. The era was driven by a mixed and socialist kind of economy. The
important feature of this model was that the state ownership and legal requirements decided
the corporate responsibilities.
Liberal Model (1970s 1990s): The model was encapsulated by Milton Friedman. As per this
model, corporate responsibility is confined to its economic bottom line. This implies that it is
sufficient for business to obey the law and generate wealth, which through taxation and private
charitable choices can be directed to social ends.
Stakeholder Model (1990s Present): The model came into existence during 1990s as a
consequence of realisation that with growing economic profits, businesses also have certain
societal roles to fulfill. The model expects companies to perform according to triple bottom line
approach. The businesses are also focusing on accountability and transparency through several
mechanisms.
Pg 24
Pg 1

Learning objectives
KNOWLEDGE
know
COMPREHENSION
understand
Verbs used
List
State
Define
Describe
Distinguish
Explain
LEVEL C

apply
your knowledge
ANALYSIS
have learned
SYNTHESIS
optimum
reasoning
EVALUATION
make decisions or
recommendations
Make a list of
Produce
Discuss

consideration
something
means
Find an answer to
Arrange in a table
between
Build up or compile
action
Interpret
Decide
Advise
Evaluate
Recommend
Identity
Illustrate
APPLICATION
Definition
Apply
Calculate
Demonstrate
Prepare
Reconcile
Solve
Tabulate
Analyse
Categorise
Compare
and contrast
Construct
Prioritise
Pg 2

Full Marks: 100
clearly indicated.
[20 Marks]
(i) Nitya Builders Ltd decides to pay 2.5 percent of value of debentures as underwriting
commission to the underwriters but the articles of the company authorizes to pay only 2
percent underwriting commission on debentures. Comment on the validity based on
[3]
(ii) The object clause of Memorandum of Association of the XYZ (Pvt.) Ltd., authorized to do
trading in diamonds. The company, however, entered into partnership with Mr. Andy and
traded in diamonds and incurred liabilities to Mr. Andy. The company subsequently, refused
to admit the liability to Mr. Andy on the ground of ultra vires the company. Advice whether
stand of the company is legally valid and if so, gives reasons to support your answer.
[3]
(iii) Mr. Bakshi resided for a period of 170 days in India during the financial year 2013-14 and
thereafter went abroad. He came back to India on 1.04.2014., as an employee of a business
organization. What would be his residential status during the financial year 2014-15 under
FEMA, 1999?
[3]
(iv) During the year 2015, Excel ltd. held four meetings of the Board on 2nd January 2015, 10th
May, 2015, 16th October 2015 and 31st December 2015. Examine whether this was in
accordance with the provisions of Companies Act, 2013.
[3]
(v) Who is authorized to call a Board meeting?
[3]
(vi) State the core elements that CSR should cover.
[2]
(vii)State the responsibility of State Owned Enterprises in providing equitable treatment to

shareholders.
[3]
Answer
Pg 3

(i) As per the provisions contained in Rule 13 of the Companies (Prospectus and Allotment of
Securities) Rules, 2014, a company cannot pay underwriting commission of 2.5% since the
rate of underwriting commission cannot be more than 2.5% of issue price of debentures or
such lower rate as prescribed under the articles, i.e. 2% in the present case
Hence, the maximum permissible underwriting commission in this case is 2%.
(ii) The company is not liable to Mr. Andy since the partnership agreement for trading in
diamonds is an ultra vires contract, and is not binding on the company or the other party.
The power to enter into partnership is not an ancillary or incidental power. Such power can
be legally exercised by the company only if the object clause of memorandum expressly
authorizes the company to enter into partnership.
(iii) The residential status of an individual for a particular financial year is determined with
reference to his residence in India in the immediately preceding financial year. In the
problem given, Mr. Bakshi resided in India for less than 183 days in the financial year 2013-14.
Therefore, for the financial year 2014-15 he is a Person resident in India irrespective of the
purpose or duration of his stay. Unless an individual resides in India for more than 182 days in
the preceding financial year, he can in no case be termed as a person resident in India.
(iv) As per Sec 173(1) of Companies Act, 2013 at least four Board meetings shall be held in each
calendar year and not more than 120 days shall intervene between two consecutive
meetings of the Board.
In the present case the gap between two consecutive Board meetings held on 2nd January
2015 and 10th May, 2015 was more than 120 days, and also the gap between two
consecutive Board meetings held on 10th May and 16th October, was more than 120 days.
Hence section 173 has been violated.
(v) The Companies Act, 2013 does not contain any provision as to who can convene a Board
meeting. As per Regulation 67 of Table F, an individual director may requisition a Board
meeting. On such requisition of a director, the manager or secretary shall be duty bound to
summon a Board meeting. Any director (including the director requisitioning the Board
meeting) may also summon the Board meeting. The notice of the Board meeting should be
sent on behalf of the company.
(vi) The CSR Policy should normally cover following core elements:
1. Care for all Stakeholders
2. Ethical functioning
3. Respect for Workers Rights and Welfare
4. Respect for Human Rights
Pg 4

5. Respect for Environment
6. Activities for Social and Inclusive Development
(vii) The SOEs should recognize the rights of all shareholders and in accordance with the OECD
principles of corporate governance ensure their equitable treatment and equal access to
The coordinating or ownership entity and SOEs should ensure that all shareholders are
treated equally.

election
[60 Marks]
Question 2(a)
(i) Explain the power of the central Government to exempt a class of banks or financial
institutions, as per Sarfaesi Act, 2002.
(ii) Accounts and Balance Sheet along with auditor's reports has been filed with Reserve Bank of
India after nine months from the end of the period to which these relate. Comment on the
validity based on Banking Regulation Act, 1949.
(iii) Point out the circumstances where under the following powers may be exercised by the
Securities and Exchange Board of India:
1. Prohibiting a company from issuing or publishing any document or advertisement
soliciting money from public for, the issue of securities.
2. Pass cease and desist order in relation to any listed company.
What remedies are available to the companies against such orders under the Securities and
Exchange Board of India Act, 1992.
(iv) Examine with reference to the relevant provisions of the Competition Act, 2002 whether
Government department supplying water for irrigation to the agriculturists after levying
charges for water supplied (and not a water tax) can be considered as an 'enterprise'.
[4+3+4+4 = 15]
Answer
Pg 5

(i) The Provisions of section 31A of Sarfaesi Act, 2002 are explained as follows:
1. Nature of exemption
The Central Government may, by notification in the public interest, direct that any of the
provisions of this Act, (a) Shall not apply to such class or classes of banks or financial institutions; or
(b) Shall apply to the class or classes of banks or financial institutions with such
exceptions, modifications and adaptations,
as may be specified in the notification.
2. Laying a copy of Notification before Parliament
A copy of every notification proposed to be issued shall be laid in draft before each
House of Parliament, while it is in session, for a total period of 30 days which may be
comprised in one session or in two or more successive sessions, and if, before the expiry
of the session immediately following the session or the successive sessions aforesaid, both
Houses agree in disapproving the issue of the notification or both Houses agree in
making any modification in the notification, the notification shall not be issued or, as the
case may be, shall be issued only in such modified form as may agreed upon by both
the Houses.
(ii) As per section 31 of the Banking Regulation Act, 1949, the accounts and balance sheet
together with the auditor's report shall be furnished as returns to the Reserve Bank within 3
months from the end of the period to which they refer, viz. close of the financial year.
However, the Reserve Bank may extend the said period of 3 months by a further period not
exceeding 3 months.
In the given case, the required documents have not been filed with the Reserve Bank upto 9
months of close of the financial year. This amounts to contravention of section 31 of the
Banking Regulation Act, 1949.
(iii) SEBI may take the following measures for the protection of investors:
1. It may specify by regulations (a) the matters relating to issue of capital, transfer of securities and other matters
incidental thereto; and
(b) the manner in which such matters shall be disclosed by the companies;
2. It may, by a special or general order, (a) prohibit any company from issuing of prospectus, any offer document, or
advertisement soliciting money from the public for the issue of securities; and
(b) Specify the conditions subject to which the prospectus, such offer document or
Pg 6

advertisement, if not prohibited, may be issued.
3. It may specify the requirements for listing and transfer of securities and other matters
incidental thereto."
(iv) The given problem relates to section 2(h) of the Competition Act, 2002.
As per section 2(h), 'enterprise' means a person or a department of the Government, who or
which is, or has been, engaged in any activity, relating to the production, storage, supply,
distribution, acquisition or control of articles or goods, or the provision of services, of any kind,
or in investment, or in the business of acquiring, holding, underwriting or dealing with shares,
debentures or other securities of any other body corporate, either directly or through one or
more of its units or divisions or subsidiaries, whether such unit or division or subsidiary is
located at the same place where the enterprise is located or at a different place or at
different places, but does not include any activity of the Government relatable to the
sovereign functions of the Government including all activities carried on by the departments
of the Central Government dealing with atomic energy, currency, defence and space.
Thus, a Government department supplying water for irrigation to the agriculturists after
levying charges for water supplied is an 'enterprise'.
Question 2(b)
(i) Indian citizens incorporated a company in U.K. for the purpose of carrying on business there.
Examine with reference to the relevant provisions of the Companies Act, 2013 whether it is a
"Foreign Company". What would be your answer in case the U.K. company was incorporated
by a company registered in India?
(ii) What are the provisions relating to placing of annual report in the House(s) of State
Legislature where the Central a Government is not a member in a Government company, as
per Companies Act, 2013.
(iii) Mohan Company Limited decided to terminate the services of Mr. Dharmesh who was
employed as Sales Manager. The Company, however, feels that the Sales Manager may not
vacate the company's flat at Delhi. What action can be taken by the company under the
Companies Act, 2013 to regain possession of the flat? Is it necessary to take such action
before terminating the services of Mr. Dharmesh? Will it make any difference, if the flat is not
owned by the company, but taken on lease?
[4+5+6 = 15]
Answer
Pg 7

(i) As per Section 2(42) of the Companies Act, 2013, 'foreign company' means any company or
body corporate incorporated outside India which (a) has a place of business in India whether by itself or through an agent, physically or
through electronic mode; and
(b) conducts any business activity in India in any other manner.
Thus, for deciding as to whether a company is a foreign company or not, the criterion is to
see as to whether the company has established a place of business in India or not, and
whether the company conducts any business activity in India in any other manner, and/not
the persons who have incorporated the company.
In this case, Indian citizens have formed a company outside India. Since, the company has
not established any place of business in India, and the company does not conduct any
business activity in India in any other manner, the company cannot be said to be a foreign
The answer would have remained same even if the U.K. Company had been incorporated
by a company registered in India for the same reason as stated above.
(ii) The provisions relating to preparation and placing of annual report in the House(s) of the
State Legislature are contained in section 395 of the Companies Act, 2013. These provisions
are explained as follows:
1. Duties of the State Government
(a) Where the Central Government is not a member of a Government company, every
State Government which is a member of that company, or where only one State
Government is a member of the company, that State Government shall cause to be
prepared an annual report on the working and affairs of that Government
Company.
(b) The annual report shall be prepared within 3 months of the AGM of that Government
company.
(c) The State Government(s) shall lay before the House or both Houses of the State
Legislature
(i) a copy of the annual report;
(ii) a copy of the audit report; and
(iii) comments upon or supplement to the audit report, made by CAG.
2. Applicability of Section 395
Pg 8

The provisions of section 395 shall, so far as may be, apply to a Government company in
liquidation as they apply to any other Government company.
(iii) An officer or employee of a company shall be punishable with fine which may extend to `
10,000 in the following cases:
(a) where he wrongfully obtains possession of any property of a company; or
(b) where he being in the possession of any property of the company, wrongfully withholds it
or knowingly applies it to purposes other than those expressed or directed in the articles
and authorised by this Act.
The Court may order him to deliver any such property within a time to be fixed by the Court.
The questions raised in the present case are answered as follows:
1. The Company can file a complaint under section 452 of the Companies Act, 2013
requesting the Court to make an order for delivering the possession of the property to the
company.
2. The Supreme Court has held that section 452 of the Companies Act, 2013 applies both to
'existing officers or employees' and 'past officers or employees' (Baldev Krishna Sahiv
Shipping Corporation of India Ltd. (1987) 3 Comp LJ 57]. Therefore, complaint under
section 452 of the Companies Act, 2013 can be filed even if the services of Mr. Dharmesh
have been terminated.
3. Section 452 of the Companies Act, 2013 does not concern the aspect of title, but it is
exclusively confined to the aspect of possession. Accordingly, section 452 of the
Companies Act, 2013 shall apply to a property, which does not belong to the company,
but in respect of which the company is in exclusive possession. Accordingly, the
company can make a complaint under section 452 of the Companies Act, 2013 even if
the company is not the owner of the property but only has a leasehold right [Kannankadi
Gopal Krishna Nair v Prakash Chunder Juneja (1994) 81 Comp Cas 104].
Question 2(c)
(i) Prithvi Limited is paying remuneration to its non-executive directors at the rate of one
percent of the net profits of the company distributed equally among all the non-executive
directors. Is it possible for the company to pay minimum remuneration to non-executive directors
besides sitting fees in the event of loss in a financial year? Answer with reference to
Pg 9

(ii) The Board of directors of a public company in the private sector having made an average
profit of ` 1 crore during the last 3 financial years propose to donate during the current year `
40,000 to a general charitable fund.
Advise the Board of directors about their powers in respect of the above explaining the
relevant provisions of the Companies Act, 2013.
(iii) Advise the Board of directors of a public company about their powers in respect of the
following proposal explaining the relevant provisions of the Companies Act, 2013:
Delegating to the managing director of the company the power to invest surplus funds of
the company in the shares of some companies.
(iv) Mr. Singh was appointed as the managing director of a public limited company for a period
of 5 years effective from 1.04.2007. It is noticed that he performed certain acts on behalf of
the company after the expiry of his term. Some of the aggrieved parties have questioned the
validity of the managing director's acts. Advise, with reference to Companies Act, 2013.
[3+3+5+4 = 15]
Answer
(i) As per second proviso to Sec 197(1) of Companies Act, 2013, the remuneration of nonexecutive directors shall not exceed (a) 1% of net profits, if the company has employed a managing director or whole time
director or manager; or
(b) 3% of net profits, if the company has not employed any managing director, whole time
director and
Remuneration to a non-executive director may be paid only if the company has made
profits [sec 197(3) of Companies Act, 2013]. Schedule V does not empower a company to
pay remuneration to its non-executive directors where the company has suffered a loss.
There is no prohibition on payment of sitting fees even where the company has not earned
any profits or its profits are inadequate.
(ii) As per section 181 of the Companies Act, 2013, prior permission of the company in general
meeting shall be required, if the amount of charitable contribution exceeds 5% of average
net profits during preceding 3 financial years.
The donation of `40,000 to general charitable fund is not related to the business of the
company and is therefore subject to the restrictions imposed under section 181 of the
Companies Act, 2013. Accordingly, the donation shall not exceed 5% of average net profits
during immediately preceding 3 financial years, unless prior permission of the company in
Pg 10

general meeting is obtained. In the given case, donation upto `5,00,000 (being 5% of ` 1
crore) is permissible without obtaining prior permission of the company in general meeting.
Since, the Board has donated only ` 40,000, such donation is within the limits and does not
require the prior permission of the company in general meeting.
(iii) As per section 179(1) of the Companies Act, 2013, the Board is entitled to exercise all such
powers as the company is authorised to exercise. Similarly, the Board is authorised to do all
such acts and things as the company is authorised to do. However, the provisions of section
179(1) of the Companies Act, 2013 are subject to the other provisions of the Companies Act,
2013 (e.g. Sections 179(3), 180, 181 and 182 of the Companies Act, 2013).
As per section 179(3) of the Companies Act, 2013, the powers relating to investment of funds
of the company shall be exercised by the Board at a Board meeting only. However, such
power may be delegated by the Board, subject to the following:
(a) The power to invest the funds of the company may be delegated to a committee of
directors, managing director, manager, a principal officer of the company or a principal
officer of the branch office.
(b) The delegation of power shall be made by passing a resolution at a Board meeting.
(c) The Board may delegate such power subject to such conditions as it may deem fit.
However, as per section 186 of the Companies Act, 2013, acquisition of securities of any
body corporate shall be made by passing a unanimous resolution at a Board meeting only.
Therefore, as per section 186, the power to invest the funds in the shares of other companies
cannot be delegated.
In the present case, the power to invest surplus funds of the company in the shares of some
companies is proposed to be delegated to the managing director of the company. Such
delegation is not permissible in view of provisions of section 186 of the Companies Act, 2013.
(iv) Section 176 of Companies Act, 2013 validates the acts of a director if it is subsequently
discovered that
his appointment was invalid by reason of any defect or disqualification; or
his appointment was terminated by virtue of any provision contained in the Act or in the
articles.
However, the acts done by a director in his capacity as a managing director are not
validated under section 176, except the acts done in the capacity of a director.
Pg 11

Where a managing director ceased to hold his office, all his subsequent acts were held to
be invalid. It was not an irregular exercise of power, but exercise of power by a person who
had no authority at all [Varkey Souriar v Keraleeya Banking Co. Ltd. AIR 1957 Ker 97].
The facts in the present case are identical to the facts referred to in the above case. Thus,
the acts done by Mr. Singh, after the expiry of his term of office will not be valid.
Question 2(d)
(i) Seven Seas Company Ltd. in its annual general meeting appointed all its directors by
passing one single resolution. No objection was made to the resolution. Examine the validity
of appointment of directors explaining the relevant provisions of the Companies Act, 2013.
Will it make any difference, if Seven Seas Company was a private company?
(ii) Annual general meeting of Adarsh Ltd. has been scheduled in compliance with the
requirements of the Companies Act, 2013. In this connection, it has some directors who are
rotational and out of which some have been appointed long back, some have been
appointed on the same day,
Decide in this connection,
1. Which of the directors shall be retiring by rotation and be eligible for re-election?
2. In case two directors were appointed on the same day, how would you decide their
retirement by rotation?
3. In case the meeting could not decide how the vacancies caused by retirement to be
dealt with, what shall be consequences?
4. What will be your answer, assuming that the matter could not be decided even at the
adjourned meeting?
(iii) Vriddhi Ltd, requires your advice in relation to applicability of appointment of woman
director. Kindly advice with reference to Companies Act, 2013.
[4 + (2 4) + 3 =15]
Answer
(i) At a general meeting, two or more persons cannot be appointed as directors by a single
resolution unless a resolution that appointment shall be so made has first been agreed to by
the meeting without any 'vote being cast against it. A resolution moved in contravention of
this provision shall be void, whether or not objection was raised at the time when such
resolution was passed (Section 162 of Companies Act, 2013).
In the present case, all the members passed a single resolution appointing all the directors.
The resolution is void since before moving the resolution for appointment of all the directors
Pg 12

by a single resolution, no resolution was passed to the effect that all the directors shall be
appointed by a single resolution. It is immaterial that no member objected to the
appointment of all the directors by a single resolution.
As per section 176, the acts of these directors shall not be invalid till the defect in their
appointment is noticed by the company.
Section 162 applies to all companies, whether public or private. Therefore, the answer would
remain same even if the company in the present case is a private company.
(ii) The provisions relating to rotational directors, retirement of directors, reappointment of
directors end automatic reappointment are contained in section 152(6) and (7) of the
Companies Act, 2013. Applying these provisions, the given problem is answered as under:
1. Not less than 2/3rd of total number of directors (any fraction contained in that 2/3rd shall
be rounded off as one) shall be rotational directors. Out of these rotational directors,
l/3rd (or nearest to l/3rd) shall retire from office at every annual general meeting. A
director retiring by rotation may be reappointed at the same annual general meeting.
However, the company may, instead of reappointing the retiring director, appoint some
other person.
2. The directors liable to retire by rotation shall be those who have been longest in the
office. In case, two or more directors were appointed on the same day, the names of
directors liable to retire shall be determined (a) as per any agreement between them; or
(b) by lots, in the absence of any such agreement.
3. If the vacancy in the place of retiring director is not filled up and the meeting has not
resolved not to fill the vacancy, the annual general meeting shall adjourn to the next
week at the same time and place or if that day is a public holiday, then to next
succeeding day which is not a public holiday.
4. If at the adjourned meeting also, the vacancy in the place of retiring director is not filled
up and the meeting has not resolved not to fill the vacancy, the retiring director shall be
deemed to be reappointed. However, at an adjourned annual general meeting, a
retiring director shall not be deemed to be automatically reappointed in the following
cases:
Where a resolution for the reappointment of such director was put and lost.
Where the retiring director has, in writing, expressed his unwillingness to be
reappointed.
Where he is not qualified or is disqualified for appointment.
Pg 13

Where a resolution is required for his reappointment.
Where a resolution in contravention of section 162 is passed.
(iii) The provisions relating to appointment of woman director are contained in section 149 of the
Companies Act, 2013 read with Rule 3 of the Companies (Appointment and Qualification of
Directors) Rules, 2014. These provisions are explained as follows:
Applicability
Such class (es) of companies as may be prescribed, shall have at least 1 woman
director.
Following classes of companies have been prescribed for this purpose:

(i) Every listed company; and
(ii) Every public company having paid up share capital of ` 100 crore or more; and
(iii) Every public company having turnover of ` 300 crore or more.
For this purpose, the paid up share capital or turnover, as the case may be, as on the last
date latest audited financial statements shall be taken into account.
Hence, if Vriddhi qualifies any of the above criterions it should appoint a woman director.
Question 2(e)
(i) The Board of directors of a company decides to revise the accounts which have already
been adopted by the shareholders in annual general meeting. Advise.
(ii) Explain the concept of 'CSR' (Corporate Social Responsibility) as introduced by the
Companies Act, 2013. Examining the provisions of the Act and state the applicability,
constitution of CSR committee and its duties.
(iii) The Annual General Meeting of Supreme Limited declared a dividend at the rate of 30
percent payable on paid up equity share capital of the Company as recommended by
Board of Directors on 30th April, 2013. But the Company was unable to post the dividend
warrant to Mr. Rudra, an equity shareholder of the company, up to 30th June, 2013. Mr. Rudra
filed a suit against the Company for the payment of dividend along with interest at the rate
of 20 percent per annum for default period. Decide in the light of provisions of the
Companies Act, 2013 whether Mr. Rudra would succeed? Also state the directors' liability in
this regard under the Act.
[5+6+4 = 15]
Answer
Pg 14

(i) There is no provision in the Companies Act, expressly permitting or prohibiting revision or
reopening of accounts after adoption. Generally, reopening or rectification of accounts is
not permitted if the accounts have already been adopted at the annual general meeting.
The Institute of Chartered Accountants of India is also of this opinion; accordingly, accounts
once adopted by the members cannot be reopened, revised or rectified under any
circumstances.
However, the Department of Company Affairs (now Ministry of Corporate Affairs) has
permitted revision/rectification of accounts provided that
the revision is made for meeting the technical requirements of taxation laws or of any
other law;
such revision will result in true and fair view of state of affairs of the company;
the revised annual accounts shall be adopted in the subsequent annual general meeting
or extraordinary general meeting;
the revised annual accounts shall be filed with the registrar as per section 137 of the
(ii) The provisions relating to corporate social responsibility are contained in section 135 of the
Companies Act, 2013 read with the Companies (Corporate Social Responsibility Policy) Rules,
2014, as explained below:
1. Applicability
(a) Section 135 applies to a company (including a foreign company) only if it satisfies
one or more of the following criterion during any financial year.
(i) The net worth of the company is ` 500 crore or more.
(ii) The turnover of the company is ` 1,000 crore or more.
(iii) The net profit of the company is ` 5 crore or more.
(b) Every company which ceases to fulfill the above criteria for 3 consecutive financial
years shall not be required to (i) constitute CSR Committee; and
(ii) comply with the provisions contained in Section 135, till such time it meets the
criteria specified above.
2. Constitution of CSR Committee
(a) Every company to which section 135 is applicable, shall constitute a Corporate
Pg 15

Social Responsibility Committee of the Board (CSR Committee).
(b) The CSR Committee shall consist of 3 or more directors.
(c) Out of the 3 directors, at least 1 director shall be an independent director.
(d) An unlisted public company or a private company which is not required to appoint
an independent director (as per Section 149 of the Companies Act, 2013), shall have
its CSR Committee without any independent director.
(e) A private company having only 2 directors on its Board, shall constitute its CSR
Committee with 2 directors only.
(f) In case of a foreign company, the CSR Committee shall comprise of at 2 two persons
of which one person shall be a person resident in India authorised to accept on
behalf of the foreign company service of notices and other documents, and the
other person shall be nominated by the foreign company.
3.
Duties of the CSR Committee

(a) The CSR Committee shall formulate and recommend to the Board, a CSR Policy. CSR
Policy shall indicate the activities to be undertaken by the company as specified in
Schedule VII.
(b) CSR Committee shall recommend the amount of expenditure to be incurred on the
CSR activities to be undertaken by the company.
(c) CSR Committee shall monitor the CSR Policy of the company from time to time.
(d) The CSR Committee shall institute a transparent monitoring mechanism for
implementation of the CSR projects or programs or activities undertaken by the
company.
(iii) As per section 127 of the Companies Act, 2013, the dividend shall be paid within 30 days
from the date of declaration of dividend. In case, the dividend warrant is posted by the
company within 30 days of declaration of dividend, it is considered to be a sufficient
compliance of section 127 of the Companies Act, 2013.
In the present case, the company has failed to post the dividend warrant within 30 days of
declaration of dividend, and so, this amounts to contravention of section 127 of the
Companies Act, 2013, attracting the penal provisions of section 127 of the Companies Act,
2013, Stated as under:
1. Mr. Rudra has the right to sue the company for recovery of dividend along with interest.
However, the company shall be liable to pay simple interest @ 18% per annum, and not
20% per annum.
2. Every director who knowingly a party to the default, shall be liable for imprisonment upto
2 years and shall also be liable for fine of not less than `1,000 per day for each day of
default.
Pg 16
[20 Marks]
Question 3(a)
(i) Corporate Social Responsibility is to be considered as an investment and not as a charity
Elaborate the statement.
(ii) What is Whole Life-Cycle Costing Risk Management? Why it is not widely embraced?
[5+5 = 10]
Answer
(i) The originally defined concept of CSR needs to be interpreted and dimensionalised in the
broader conceptual framework of how the corporate embed their corporate values as a
new strategic asset, to build a basis for trust and cooperation within the wider stakeholder
community.
strategy, yet the concept still is believed to be strongly linked to philanthropy. There is a need
to bring about an attitudinal change in people about the concept.
By having more coherent and ethically driven discourses on CSR, it has to be understood
that CSR is about how corporates place their business ethics and behaviors to balance
business growth and commercial success with a positive change in the stakeholder
community.
Being treated as a separate entity, there is always a flexibility and independence to carry
out the tasks.
But often these entities work in isolation without creating a synergy with the other
departments of the corporate. There is a need to understand that CSR is not only a pure
management directive but it is something that is central to the company and has to be
embedded in the core values and principles of the corporate.
Whatever corporates do within the purview of CSR has to be related to core business. It has
to utilise things at which corporates are good; it has to be something that takes advantage
Pg 17

of the core skills and competencies of the companies. It has to be a mandate of the entire
organisation.
Charity means the act of donating money, goods, time or effort to support a charitable
cause in regard to a defined objective. Charity can be equated with benevolence and
charity for the poor and needy. It can be any selfless giving towards any kind of social need
that is not served, underserved, or perceived as unserved or underserved. Charity can be by
any individual or by a corporate.
Corporate Social Responsibility is about how a company aligns their values to social causes
by including and collaborating with their investors, suppliers, employees, regulators and the
society as a whole. The investment in CSR may be on people centric issues and/or planet
issues. A CSR initiative of a corporate is not a selfless act of giving; companies derive longterm benefits from the CSR initiatives and it is this enlightened self interest which is driving the
CSR initiatives in companies.
(ii) Whole life-cycle costing (WLCC) is rapidly becoming the standard method for the long-term
cost appraisal of buildings and civil infrastructure projects. With clients now demanding
buildings that demonstrate value for money over the long term, WLCC has become an
essential tool for those involved in the design, construction, operation and risk analysis of
construction projects.
WLCC risk management is one of the important issues facing building assets executives
today. As spending on building assets rises, asset owners become increasingly worried about
WLCC optimisation throughout the life span of facilities; consequently, they become highly
vulnerable to the risk of operational costs. Usually, when decision makers are faced with an
investment choice under uncertain conditions, their main concern is to avoid projects whose
actual economic outcome might be less favourable than what is acceptable, resulting in
the risk of missing out on potential investment opportunities.
Thus, the objective of WLCC risk management should be to assist decision makers in
evaluating whole life alternatives so that investment success is maximised. Usually traditional
methods are used to optimise this process. However, traditional approaches to risk
management have failed miserably because of their demand for mysterious statistical data
that the end user does not have (Koller 1999). The key to successful WLCC risk-process and
risk modelling is to build a WLCC framework that requires from the user nothing more than
they presently can provide. This can be a challenge that can be addressed through the use
of a variety of techniques. That is why it is important to use a combination of risk
management techniques (depending on the stage of assessment) for risk assessment in
WLCC, ranging from simple deterministic approaches to uncertainty assessment (e.g.
sensitivity and break even analysis methods which are easy to use and understand and
Pg 18

require no additional methods of computation beyond the ones used in LCC analysis), to
very sophisticated methods based on probabilities, artificial intelligence (AI) and a hybrid of
both techniques.
The reasons why it fails to embrace WLCC are:
The lack of universal methods and standard formats for calculating whole life costs.
The difficulty in integration of operating and maintenance strategies at the design
phase.
The scale of the data collection exercise, data inconsistency.
The requirement for an independently maintained database on performance and cost
of building components.
Question 3(b)
(i) What is Corporate Governance? What is the need for Corporate Governance in India?
(ii) Write a note on CSR Policy, expenditure and reporting as per Companies Act, 2013.
[5+5 = 10]
Answer
(i) Corporate governance is:
The system by which companies are directed and controlled - The Cadbury Report, 1992.
The process of supervision and control intended to ensure that the companys
management acts in accordance with the interests of shareholders - Parkinson, 1994.
Corporate Governance is the acceptance by management of the inalienable rights of
shareholders as the true owners of the corporation and of their own role as trustees on
behalf of the shareholders. It is about commitment to values, about ethical business
conduct and about making a distinction between personal and corporate funds in the
management of a company Report of N.R.Narayana Murthy Committee on Corporate
Governance constituted by SEBI (2003).
Pg 19

Corporate Performance: Improved governance structures and processes help ensure quality
decision-making, encourage effective succession planning for senior management and
enhance the long-term prosperity of companies, independent of the type of company and
its sources of finance.
Enhanced Investor Trust: Investors consider Corporate Governance as important as financial
performance when evaluating companies for investment.
Combating Corruption: Companies that are transparent, and have sound system that provide
full disclosure of accounting and auditing procedures, allow transparency in all business
transactions, provide environment where corruption will certainly fade out.
Better Access to Global Market: Good Corporate Governance systems attracts investment
from global investors, which subsequently leads to greater efficiencies in the financial sector.
Enhancing Enterprise Valuation: Improved management accountability and operational
transparency
fulfill
investors
expectations
and
confidence
on
management
and
corporations, and return, increase the value of corporations.

Accountability: Investor relations is essential part of good Corporate Governance. Investors
have directly/indirectly entrusted management of the company for creating enhanced
value for their investment.
Easy Finance from Institutions: Evidence indicates that well-governed companies receive
higher market valuations.
Reduced Risk of Corporate Crisis and Scandals: Effective Corporate Governance ensures
efficient risk mitigation system in place.
(ii)
CSR Policy(1) The CSR Policy of the company shall, inter-alia, include the following, namely :(a) a list of CSR projects or programs which a company plans to undertake falling within
the purview of the Schedule VII of the Act, specifying modalities of execution of such
project or programs and implementation schedules for the same; and
(b) monitoring process of such projects or programs:
Provided that the CSR activities does not include the activities undertaken in pursuance of
normal course of business of a company.
Pg 20

Provided further that the Board of Directors shall ensure that activities included by a
company in its Corporate Social Responsibility Policy are related to the activities included in
Schedule VII of the Act.
(2) The CSR Policy of the company shall specify that the surplus arising out of the CSR
projects or programs or activities shall not form part of the business profit of a company.
CSR ExpenditureCSR expenditure shall include all expenditure including contribution to corpus, for projects or
programs relating to CSR activities approved by the Board on the recommendation of its
CSR Committee, but does not include any expenditure on an item not in conformity or not in
line with activities which fall within the purview of Schedule VII of the Act.
CSR Reporting(1) The Boards Report of a company covered under these rules pertaining to a financial
year commencing on or after the 1st day of April, 2014 shall include an annual report on CSR
containing particulars specified in Annexure.
(2) In case of a foreign company, the balance sheet filed under sub-clause (b) of subsection (1) of section 381 shall contain an Annexure regarding report on CSR.
Question 3(c)
1. Corporate Governance in USA
2. Corporate Governance in Japan
(ii) The concept of Memorandum of Understanding (MoU) has been designed to provide
flexibility and autonomy to CPSEs such that it facilitates them in pursuing the objectives and
purposes, for which the enterprises have been set up.
In the light of the above statement, explain the concept of MoU in India.
[(2.5 2) + 5 =10]
Answer
(i)
1. Corporate Governance in USA
Pg 21

Corporate governance in the U.S. has changed dramatically since 1980. As a number of
business and finance scholars have pointed out, the corporate governance structures in
place before the 1980s gave the managers of large public U.S. corporations little reason to
make shareholder interests their primary focus. Before 1980, corporate managements
tended to think of themselves as representing not the shareholders, but rather the
corporation. In this view, the goal of the firm was not to maximize shareholder wealth, but to
ensure the growth (or at least the stability) of the enterprise by balancing the claims of all
important corporate stakeholders-- employees, suppliers, and local communities, as well as
shareholders.
The external governance mechanisms available to dissatisfied shareholders were seldom
used. Raiders and hostile takeovers were relatively uncommon. Proxy fights were rare and
didnt have much chance of succeeding. And corporate boards tended to be cozy with
and dominated by management, making board oversight weak.
Corporate Governance developments in USA:
1977 The Foreign Corrupt Practices Act
1979 US Securities Exchange Commission
1985 Treadway Commission
1992 COSO issued Internal Control Integrated Framework
2002 Sarbanes Oxley Act
The Dodd-Frank Wall Street Reform and Consumer Protection Act, 2010
Updates to its U.S. Corporate Governance Policy (the 2013 Updates)
2. Corporate Governance in Japan

Japans economy developed very rapidly during the second half of the twentieth century.
Particularly during the period 1985-89, there was a bubble economy, characterized by a sharp
increase in share prices and the value of land; the early 1990s saw the bubble burst as share
prices fell and land was devalued, as well as shareholders and landowners finding themselves
losing vast fortunes, banks found that they had severe problems too. The Japanese government
wished to restore confidence in the Japanese economy and in the stock market, and to attract
foreign direct investment to help regenerate growth in companies. Improved corporate
governance was seen as a very necessary step in this process.
Japans Corporate Governance System is often likened to that of Germany because banks can
play an influential role in companies in both countries. However, there are fundamental
differences between the systems, driven partly by culture and partly by the Japanese
shareholding structure with the influence of the keiretsu (broadly, associations of companies).
Charkham (1994) sums up three main concepts that affect Japanese attitudes towards
Corporate Governance: obligation, family, and consensus.
Pg 22

The Japan Corporate Governance Committee published its revised Corporate Governance
Code in 2001. The code had six chapters, which contained a total of 14 principles.
Summary of key characteristics influencing Japanese Corporate Governance
Feature
Key characteristic
Main business form
Public limited company
Keiretsu; but institutional investor ownership is increasing
Legal system
Civil Law
Board structure
Dual
Important aspect
Influence of keiretsu
In 2004, the Tokyo Stock Exchange issued the Principles of Corporate Governance for Listed
Companies. Charkham (2005) discusses the various changes that have taken place in the
context of Corporate Governance in Japan and states:
The important part the banks played has greatly diminished. In its place there are now better
structured boards, more effective company auditors, and occasionally more active
shareholders, an increase of interest, and, where appropriate, action on their part, might restore
the balance that the banks withdrawal from the scene has impaired.
In 2008, the Asian Corporate Governance Association (ACGA) published its White Paper on
Corporate Governance in Japan. It states, while a number of leading companies in Japan
have made strides in corporate governance in recent years, we submit that the system of
governance in most listed companies is not meeting the needs of stakeholders or the nation at
large in three ways:
By not providing for adequate supervision of corporate strategy;
By protecting management from the discipline of the market, thus rendering the
development of a healthy and efficient market in corporate control all but impossible;
By failing to provide the returns that are vitally necessary to protect Japans social safety netits pension system.
It then advocates six areas for improvement: shareholders acting as owners; utilizing capital
efficiently; independent supervision of management; pre-emption rights; poison pills and
takeover defences; shareholder meetings and voting.
(ii) The Memorandum of Understanding (MoU) System in India was introduced in the year 1986,
after the recommendations of the Arjun Sengupta Committee Report (1984). Twenty six years
after its inception, the MoU system has evolved and is being strengthened, through regular
reviews, to become a management tool that helps in performance evaluation as well as
performance enhancement of CPSEs in the country.
Pg 23

The concept of Memorandum of Understanding (MoU) has been designed to provide
flexibility and autonomy to Central Public Sector Enterprises (CPSEs) such that it facilitates
them in pursuing the objectives and purposes, for which the enterprises have been set up.
Accountability has to be understood in a wider sense by associating it with answerability for
the performance of the tasks and the achievement of targets negotiated mutually between
the Government and the CPSE. The rationale for MoU could be derived from principal/agent
theory. The principal (administrative ministry on behalf of real owners - the people) can only
observe outcomes and cannot measure accurately the efforts expended by the agent
(CPSE managers). Also the Principal can only, to a limited extent, distinguish the effects of
influences from other factors, which affect the performance. Therefore extensive intervention
by administrators, who might not be too knowledgeable about the nature of problems
confronting the enterprises, not only impacts productivity and profitability but also makes it
impossible to fix accountability for non-achievement of targets.
A negotiated incentive contract (MoU), hence, is viewed as a device to reveal information
and motivate managers to exert effort. Notwithstanding the spectacular performance of
CPSEs in several areas, there has been a sense of disillusionment with some aspects of CPSE
performance such as low profitability and lack of competitiveness. The extensive regulation
of CPSEs by government had stifled the initiative and growth of public sector. The Economic
Administration Reforms Commission (Chairman: L. K. Jha) had dwelt on issue of autonomy
and accountability. The Commission had recommended a careful re-consideration of extant
concepts and instrumentalities relating to the accountability of public enterprises with a view
to ensuring (a) that they do not erode the autonomy of public enterprises and thus hampers
the very objectives and purposes for which these enterprises have been set up and given
corporate shape and for which they are to be accountable; and (b) accountability has to
be secured in the wider sense of answerability for the performance of tasks and
achievements of results. The adoption of MoU system in India could be seen as an attempt
to operationalize this very vital recommendation.
In the backdrop of the dynamic external environment, world- wide competition and
globalization, it is critical that the MoU system is strengthened such that it facilitates the CPSEs
in becoming economically viable through efficient management and control. Hence, the
MoU system aims at offering autonomy to CPSEs and is designed such that it can aid in the
assessment of the extent to which mutually agreed objectives (Mandal, 2012) are achieved.
This section of the report traces the evolution of the MoU system through various committee
reports and highlights the major observations, along with the actions taken thereafter. This
would act as an indicator of the developments that have happened in the MoU system in
India and, through the study of extant literature, would also highlight the areas of concern
raised after each study.
Pg 24

1.
Arjun Sengupta Committee Report (1984)
2.
National Council of Applied Economic Research (2004)
3.
Report of the Working Group (2008)
4.
S.K. Roongta Committee Report (2011)
5.
Mankad Committee and Task Force (2012)
Pg 25

Full Marks: 100
clearly indicated.
[20 Marks]
(i) A public limited company has only seven shareholders, all the shares being fully paid-up.
All the shares of one such shareholder are sold by the court in an auction and purchased by
another shareholder. The company continues to carry on business thereafter. Discuss the
liabilities of the shareholders of the company under the Companies Act, 1956.
[3]
(ii)
Describe the following in light of the Companies Act, 2013.

A. Global Depository Receipts
B. Key Managerial Personnel
C. Sweat Equity Shares
[3]
(iii) The Registrar of Companies issued a certificate of Incorporation actually on 8th January,
2014. However, by mistake, the certificate was dated '5th January, 2014'. An allotment of shares
was made on 7th January, 2014. Could the allotment be declared void on the ground that it was
made before the company was incorporated, as per Companies Act, 1956?
[3]
(iv) The Memorandum of Association of a company was presented to the Registrar of
Companies for registration and the Registrar issued the certificate of incorporation. After
complying with all the legal formalities the company started a business according to the object
clause, which was clearly an illegal business. The company contends that the nature of the
business cannot be gone into as the certificate of incorporation is conclusive. Answer the
question whether company's contention is correct or not, as per Companies Act, 1956.
[3]
(v) The Directors of a company registered and incorporated in the name Dharti Textile Ltd;
desire to change the name of the company entitled 'National Textiles and Industries Ltd.'. Advise
as to what procedure is required to be followed under the Companies Act, 1956?
[3]
(vi) The institution of business exists only if it fulfills the societys expectations. Comment.
[3]
(vii) Business ethics helps to promote public reputation. Comment.
[2]
Answer:
(i) Out of the seven shareholders, the remaining six members would be personally liable for the
debts of the company since the number of members has reduced below statutory minimum, viz.
7; provided the company continues to carry on business for more than 6 months.
However, only such of the remaining 6 members shall be liable who were cognisant of the fact
of reduction in number of members; the members shall be liable only for such of the debts as
have been incurred by the company after a period of 6 months [Sec 45 of Companies Act,
1956].
Pg 1

(ii)
A. Global Depository Receipt - Gobal Depository Receipt means any instrument in the
form of a depository receipt, by whatever name called, created by a foreign depository
outside India and authorized by a company making an issue of such depository receipts.
B. Key managerial personnel - 'Key managerial personnel', in relation to a company,
means:
The Chief Executive Officer or the managing director or the manager;
The company secretary;
The whole time director;
The Chief Financial Officer; and
Such other officer as may be prescribed.
C. Sweat Equity Shares - 'Sweat equity shares' means such equity shares as are issued by a
company to its directors or employees at a discount or for consideration, other than
cash, for providing their know-how or making available rights in the nature of intellectual
property rights or value additions, by whatever name called.
(iii) The date of incorporation of the company is 5th January, 2014, since it is the date specified
in the certificate of incorporation. This date is to be considered even though the certificate of
incorporation was issued at a later date (Jubilee Cotton Mills Vs Lewis).
The date of allotment of the shares by the company is 7 th January, 2014. Hence the allotment of
the shares is valid since it has been made by the company after its incorporation.
(iv) The companys contention is not correct since, as per Sec. 35 of Companies Act, 1956,
certificate of incorporation is conclusive, but not memorandum, and accordingly any illegal
object contained in the object clause of memorandum does not become a legal object
because of operation of Sec. 35.
Thus, if the business carried on by the company is an illegal one, the company, its directors,
officers shall be liable for penalties as per law, and it shall not be a defense for the company
that such business is contained in the memorandum of association.
(v) The steps that are to be followed by Dharti Textile Ltd. As per section 21 of Companies Act,
1956 for name change are enumerated below:
1. Confirm availability of proposed name by filing Form No. 1A with the Registrar along with
prescribed fees of ` 500.
2. Pass a Special Resolution approving the change of name (if the proposed name is
available).
3. File a copy of Special Resolution with the Registrar within 30 days of passing Special
Resolution
4. Issue of fresh certificate of incorporation by the Registrar (on receipt of approval of
Central Government).
5. Change of name to be effective only when fresh certificate of incorporation is issued by
the Registrar.
(vi) According to Gandhiji, "a businessman has to act only as a trustee of the society for
whatever he has gained from the society. Everything finally belongs to the society." Society
bestows upon businesses the authority to own and use land and natural resources. In return,
society has the right to expect that business organisations will enhance the general interests of
consumers, employees and community.
Pg 2

Also, if a business organisation does not use its powers in a socially acceptable manner, that
power will be lost in the long run. This is called as 'Iron Law of Responsibility'. Thus, the statement
"The institution of business exists only if it fulfills the society's expectations" is correct.
(vii) It is in the long term interest of a business organisation to observe business ethics. Observing
business ethics serves as a strategic branding tool in differentiating from competitors. It helps an
entity to build trust with all its stakeholders. It also results in positive press coverage, thus
enhancing its reputation with the public, customers and within the business community. Thus, the
statement "Business ethics helps to promote public reputation" is correct.
[60 Marks]
Question 2(a):
(i) Star bank wants to acquire the financial assets of Moon Ltd. Is the bank or financial institution
bound to give notice of acquisition of financial asset to the obligor? State the provisions in this
regard with reference to SARFAESI Act, 2002.
(ii) The Board of directors of M/s. Intelligent Consultants Limited, registered in Chandigarh,
proposes to hold the next Board meeting in the month of May, 2014. They seek your advice in
respect of the following matters:
A. Can the Board meeting be held in Delhi, when all the directors of the company reside at
Chandigarh?
B. Whether the Board meeting can be called on a public holiday and that too after business
hours as the majority of the directors of the company have gone to Delhi on vacation.
C. Is it necessary that the notice of the Board meeting should specify the nature of business to
be transacted?
Advise with reference to the relevant provisions of the Companies Act,1956.
[6+9 = 15]
Answer:
(i) The provisions relating to giving of notice of acquisition of financial asset by the bank or
financial institution are explained below:
1. Notice of acquisition of financial asset to obligor [(Section 6(1)] :
The bank or financial institution may, if it considers appropriate, give a notice of acquisition of
financial assets by any securitisation company or reconstruction company, to the concerned
obligor and any other concerned person and to the concerned registering authority (including
Registrar of Companies) in whose jurisdiction the mortgage, charge, hypothecation, assignment
or other interest created on the financial assets had been registered.
2.
Duty of obligor to make payments to the securitisation or reconstruction company [Section

6(2)]
Where a notice of acquisition of financial asset under sub-section (1) is given by a bank or
financial institution, the obligor, on receipt of such notice, shall make payment to the concerned
securitisation company or reconstruction company, as the case may be, and payment made to
such company in discharge of any of the obligations in relation to the financial asset specified in
the notice shall be a full discharge to the obligor making the payment from all liability in respect
of such payment.
Pg 3

3. Money received by lender to be held in trust [Section 6(3)]
Where no notice of acquisition of financial asset under sub-section (1) is given by any bank or
financial institution, any money or other properties subsequently received by the bank or
financial institution, shall constitute monies or properties held in trust for the benefit of and on
behalf of the securitisation company or reconstruction company, as the case may be and such
bank or financial institution shall hold such payment or property which shall forthwith be made
over or delivered to such securitisation company or reconstruction company, as the case may
be, or its agent duly authorised in this behalf.
Hence the above procedures are required to be followed by Star Bank before acquisition of the
assets of Moon Ltd.
(ii) Unlike section 166, there is no provision which requires that a Board meeting shall be held (a) only on a day that is not a public holiday;
(b) only at the registered office of the company or at any other place within the city, town
or village in which the registered office of the company is situated;
(c) only during business hours.
A. Section 301 requires that the register of contracts shall be placed in each Board meeting.
However, the Department of Company Affairs (now Ministry of Corporate Affairs) has allowed
the companies to remove the register of contracts to any place provided adequate notice to
shareholders is given indicating the precise periods during which they can inspect the register of
contracts. Thus, in the instant case the Board meeting can be held in Delhi, even though all the
directors of the company reside in Chandigarh and the registered office is also situated at
Chandigarh provided adequate notice to shareholders is given and the inspection of register of
contracts is allowed to the shareholders.
B. As per section 288, if a Board meeting could not be held for want of quorum, then, unless the
articles otherwise provide, the meeting shall automatically stand adjourned to the same day,
time and place in the next week, or if that day is a public holiday, then to next succeeding day,
which is not a public holiday. It means that an adjourned Board meeting can be held only on a
day which is not a public holiday. However, there is nothing in the Act which prohibits the
holding of an original Board meeting on a public holiday. Similarly, the Act does not require that
a Board meeting shall be held only during business hours. However, the articles of the company
may provide otherwise.
In the instant case, the directors intend to hold a Board meeting on a public holiday and after
business hours. Unless the articles of the company provide otherwise, holding a Board meeting
on a public holiday and after business hours is permissible.
C. No form or contents of notice has been specified by the Act. Agenda of a Board meeting is
not required to be sent along with the notice of a Board meeting unless the Act requires a
specific notice to move a resolution at a Board meeting.
Therefore, the notice of Board meeting need not specify the nature of business to be
transacted, unless the articles otherwise require. However, the notice shall state the nature of
business to be transacted in the following cases:
a) Appointment of a person as a managing director if he is already a managing director or
manager in any other company (Section 316).
b) Appointment of a person as a manager if he is already a managing director or manager
in any other company (Section 386).
Pg 4

Question 2(b):
(i) The Board of Directors of Xee Ltd. has agreed in principle to grant loan worth ` 38 lakhs to
Mee Ltd. on the basis of the following information. Advise Xee Ltd. about the requirements to be
complied with under the Companies Act, 1956 for the proposed inter-corporate loan to Mee Ltd.
Sl. No.
Particulars
(i)
Authorised share capital
(ii)
Issued, subscribed and paid up capital
(iii)
Free reserves
Amount (`)
1,00,00,000
50,00,000
10,00,000
(ii) What are the consequences if a company makes inter-corporate loans and investments in
contravention of the provisions of section 372A of Companies Act, 1956?
(iii) Super Limited, a banking company maintained the record of all transactions for a period of
5 years from the date of cessation of the transactions between the clients and the company.
Decide whether the Company has fulfilled its obligation under the provisions of the Prevention of
Money Laundering Act, 2002.
(iv) Examine the validity of appointment of Mr. Bonny, a minor, as a director of Max (Private)
Limited, with reference to Companies Act, 1956.
[6+4+3+2 = 15]
Answer:
(i) Inter-corporate loans, investments etc. are governed by the provisions of section 372A. Firstly
to determine whether a special resolution is required for making fresh investments. This can be
determined as follows:
Particulars
Paid up capital of the company (A)
Free reserves (B)
Aggregate of paid up capital and free reserves (C)
60% of aggregate of paid up capital and free reserves (D)
Higher of (B) or (D), i.e. the ceiling limit for inter-corporate loans, investments
etc. without requiring a special resolution
Proposed Loan to Mee Ltd.
Amount (`)
50,00,000
10,00,000
60,00,000
36,00,000
36,00,000
38,00,000
Since the proposed Loan exceeds the ceiling given under section 372A, a special resolution is
required. The company shall adopt the following procedure for making Loan to Mee Ltd.:
(a) Unanimous approval of the Board shall be obtained by passing a resolution at a Board
meeting.
(b) A special resolution shall be passed in the general meeting.
The notice of special resolution shall state the specific limits, particulars of the company
to which loan is proposed to be given, specific source of funding and other relevant
details.
The company shall file a copy of special resolution with the registrar within 30 days of
passing the special resolution.
(c) The company shall obtain the prior approval of the Public Financial Institution, if any, from
whom it has taken a term loan.
(d) The company can make such investments only if no default in respect of Public deposits
Pg 5

is subsisting.
(e) The rate of interest on loan must not be less than the prevailing bank rate.
The prescribed particulars shall be entered in the register maintained under section 372A(5).
(ii) The provisions relating to contravention of section 372 A can be discussed as under:
1. Contravention of provisions relating to Register of loans etc.
The company and every officer of the company who is in default shall be punishable with
fine of ` 5,000 plus ` 500 for every day till the offence continues.
2. Contravention of other provisions
The company and every officer of the company who is in default shall be punishable with
imprisonment upto 2 years or with fine upto ` 50,000. However, if the loan is repaid in full, no
imprisonment shall be imposed, and where the loan is repaid in part, the imprisonment shall
be proportionately reduced. Further, any person who is knowingly a party to any
contravention shall be liable to indemnify the company for the repayment of the loan, or
the money which has become payable by the company.
(iii) As per section 12, the records of prescribed transactions shall be maintained for a period of
10 years from the date of such transaction (viz. the transaction between the clients and the
banking company).
In the given case, Super Limited has maintained the records of transactions only for a period of
5 years from the date of cessation of the transactions. Thus, Super Limited has failed to maintain
the records for the period of 10 years as prescribed under section 12. Therefore, Super Limited
has defaulted in compliance of section 12.
(iv) Section 274 disqualifies certain persons to act as a director. However, a minor is not covered
by this section. Also, there is no other provision in the Companies Act which disqualifies a minor
from acting as a director.
However, a person can be appointed as a director only if he has been allotted DIN. A minor is
not eligible to obtain DIN. Therefore, a minor cannot become a director in any company,
whether public or private.
Question 2(c):
(i) Mr. Devesh was appointed as the managing director of Casual Industries Ltd. for a period of
five years with effect from 1.4.2008 on a salary of ` 12 lakhs per annum with other perquisites. The
Board of Directors of the company, on coming to know of certain questionable transactions,
terminated the services of the managing director from 1.3.2011. Mr. Devesh termed his removal
as illegal and claimed compensation from the company. Meanwhile the company paid a sum
of ` 5 lakhs on ad hoc basis to Mr. Devesh pending settlement of his dues. Discuss with reference
to Companies Act, 2013, whether:
A. The company is bound to pay compensation to Mr. Devesh, and, if so, how much.
B. The company can recover the amount of ` 5 lakhs paid on the ground that Mr. Devesh is not
entitled to any compensation, because he is guilty of corrupt practices.
(ii) The Board of directors of a beverage company producing several kinds of soft drinks,
namely Priya Limited having a paid up capital of ` 25 lakhs appointed Nishi Limited as sole
selling agent for all its products in India without prior approval of the company in general
meeting without any condition that the appointment is subject to the approval of the company
in general meeting. Nishi Limited, its directors and their relatives are not holding any shares in
Pg 6

Priya Limited. Discuss whether the appointment of Nishi Limited as sole selling agent is valid.
State with reasons and reference to Companies Act, 1956, whether your answer will be different
if:
A. Nishi Limited are appointed as sole selling agents only for the State of Maharashtra, or for
whole of India; and
B. For only some of the products manufactured by Priya Limited or for the entire range of
products.
(iii) Explain as per provisions of Companies Act, 1956, whether companies being amalgamated
must be Companies registered under Companies Act, 1956.
[6+6+3 = 15]
Answer:
(i) As per section 202 of the Companies Act, 2013 Compensation can be paid only to a managing director or whole time director or manager.
The compensation payable shall not exceed the remuneration which he would have earned
if he had been in office for the unexpired residue of his term or for 3 years, whichever is
shorter.
Where the director has been guilty of fraud or breach of trust or gross negligence in the
conduct of the affairs of the company, he shall not be paid any compensation.
The answers to the given problem are as under:
A. The company is not bound to pay compensation to Mr. Devesh if he has been found guilty
of any fraud or breach of trust. However, it is not proper for the company to withhold the
payment of compensation on the basis of allegations, unless there is a proper finding on the
involvement of Mr. Devesh in corrupt practices.
The compensation payable shall not exceed ` 25 lakhs, i.e. at the rate of ` 12 lakhs per annum
for unexpired period of 25 months.
B. As per the decision in BeIl v Lever Bros [1932] AC 161 House of Lords, the compensation of `
5 lakh already paid by the company to Mr. Devesh cannot be recovered back if the company
later comes to know that Mr. Devesh was guilty of serious breaches of duty and corrupt
practices which would have entitled the company to end the employment of Mr. Devesh
without any compensation. It was also held that the managing director was under no obligation
to disclose to the company the breach of duty so as to give an opportunity to the company to
remove him without paying any compensation.
(ii) The legal position of Priya and Nishi Ltd.:
A. Appointment of a sole selling agent must be made subject to the condition that his
appointment shall be approved by the company in the first general meeting held after his
appointment. The provisions regarding incorporation of this condition are mandatory. If there
is no such condition, the agreement will be void ab initio even if the appointment is
approved by the general meeting [Arantee Manufacturing Corporation v Bright Bolts Pvt.
Ltd. AIR (1967) 37 Comp Cos 758; Department Circular No. 12(11)-CL.- VI/68, dated
6.11.1968].
B. The provisions of section 294 shall apply irrespective of the fact that Appointment of sole selling agent is restricted to a particular area or extends to the
whole of India;
Pg 7
Sole selling agent is appointed in respect of some of the products or the entire range of
products of the company.
In the given case, Nishi Ltd. has been appointed by the Board without any condition regarding
approval of their appointment in the general meeting. Therefore, the appointment is invalid. It is
immaterial as to whether the appointment of sole selling agent is for the State of Maharashtra or
extends to the whole of India. Similarly, whether Nishi Ltd. is appointed for some of the products
or entire range of the products of the company is immaterial.
(iii) For effecting amalgamation of two or more companies, an application shall be made to
the Court under section 391 (Section 394). The benefit of section 394 is available only if the
transferee company (i.e. new company) is a company within the meaning of Companies Act,
1956. However, the transferor company may be any body corporate, whether a company
within the meaning of the Companies Act, 1956 or not. As such, a foreign company can be a
transferor company but not a transferee company. Therefore, a scheme of amalgamation
may provide for transfer of foreign companies to Indian Companies. Thus, it is not necessary that
the companies being amalgamated must be companies registered under Companies Act,
1956; it is sufficient if the amalgamated company is a company registered under Companies
Act, 1956.
Question 2(d):
(i) A Public Company secures residential accommodation for the use of its managing director
by entering into a license arrangement under which the company has to deposit a certain
amount with the landlord to secure compliance with the terms of the license agreement. Can it
be considered as a loan to a director? Discuss with reference to Companies Act, 2013.
(ii) What are Special Courts? What are the powers of Special Courts with respect to offence of
money laundering? Discuss with reference to prevention of Money Laundering Act, 2002.
(iii) Referring to the provisions of section 397, of Companies Act, 1956, examine whether the
following acts of the company would amount to oppression:
A. Allotment of shares by directors of the company by which existing majority is reduced to
minority.
B. Allotment of shares by directors of the company by which existing minority are made to
majority
C. A share sale agreement was executed by Vansh, an NRI. The shares and transfer deed was
handed over to an escrow agent. The sale was subject to RBI permission. The shares were not
transferred for 6 years, since RBI permission was not received. Vansh, after waiting for a long
period of time raises the issue and complains of oppression in the capacity of a member. As per
the agreement the sale was unconditional. During the above period Vansh did not exercise any
right as shareholder, nor did the company treat him as a member.
[5+4+6 = 15]
Answer:
(i) As per section 185 of the Companies Act, 2013, no company shall, directly or indirectly,
make any loan to a director.
In the present case, the company has provided the managing director with a housing
accommodation. It does not amount to a loan because of the following reasons:
The company has not given any deposit or advance to the managing director. The amount
deposited with the landlord cannot be said to be an 'indirect loan' to the managing
Pg 8

director.
It is a usual practice to give a security deposit to the landlord with whom a rent or lease
agreement is entered into. Thus, the company has made the security deposit on account of
bonafide business considerations.
It is of no concern of the managing director as to the terms on which the company secures
residential accommodation for him.
It is the company and not the director who has entered into the lease agreement. Therefore,
the company can at anytime use the accommodation for any other purpose and the
managing director will have to vacate it, as and when desired by the company.
(ii) The provisions relating to Special Courts are contained in section 43 of the Act, as explained
below:
A. Power of CG to designate Special Court(s) [Section 43(1)]:
The Central Government, in consultation with the Chief Justice of the High Court, shall, for
trial of offence punishable under section 4 by notification designate one or more Courts of
Session as Special Court or Special Courts for such area or areas or for such case or class or
group of cases as may be specified in the notification.
In this sub-section, 'High Court' means the High Court of the State in which a Sessions Court
designated as Special Court was functioning immediately before such designation.
B. Power of Special Court to try any other offence [Section 43(2)]:
While trying an offence under this Act, a Special Court shall also try an offence, other than
an offence referred to in sub-section (1), with which the accused may, under the Code of
Criminal Procedure, 1973, be charged at the same trial.
(iii) Issue of further shares amounts to oppression if it is proved that the idea of issuing further
shares was to benefit one group to the detriment of the other [Piercy v Mill(s) & Co. (1920) 1 Ch
77]. Further issue of shares must be made for the benefit of the company. If the directors use
their fiduciary power of issuing shares for an extraneous purpose like maintenance and
acquisition of control over affairs of the company, it would amount to oppression [Needle
Industries Case]. It is not open to directors to issue and allot shares in a manner by which an
existing majority of shareholders is reduced to minority. If the issue of shares disturbs the existing
majority of the shareholders and if it is not bonafide, it will amount to oppression [Re Gluco series
(P) Ltd.]
A. Thus allotment of shares by directors of the company by which the existing majority is
reduced to minority shall amount to oppression, if the directors acted malafide.
B. Allotment of shares by directors by which the existing minority shareholders are made
majority shall amount to oppression, if the directors acted malafide.
C. When a share sale agreement was executed by an NRI and the scrips and transfer deed
were handed over to an escrow agent as such sale was subject to RBI permission and full
consideration money was received, then such a person after lapse of about 5 years, cannot
raise an issue of oppression in the capacity of a member, as the transfer remained in abeyance
awaiting RBI permission. On fact, the sale of shares was unconditional and unrestricted, and
there was no clause to render the sale agreement infructuous after lapse of any stipulated time.
Also, during the long intervening period neither the NRI exercised any right as a share holder nor
the company treated him as a member [Rajiv Mehta v Group 4 Securities Hindustan (P) Ltd
(1998), 18 SCL 89 CLB]. The facts are similar to the stated case and therefore, it can be said that
there is no oppression.
Pg 9

Question 2(e):
(i) Solomon Ltd., a reputed Public Company, had advanced a certain sum of money to one of
its Directors, Mr. Gold on certain terms and conditions and fixing the time limit for repayment
thereof. Now, Mr. Gold has approached the company with a request to extend the time limit for
repayment of the balance loan amounting to ` 12,00,000 by another 6 months. Who, as per
Companies Act, 2013 is authorized to grant the extension as requested by Mr. Gold?
(ii) Briefly explain the meaning of the term 'investigation' and the kinds of investigations that
can be ordered under the Companies Act, 1956?
(iii) The managing director of a company is convicted of an offence involving moral turpitude.
He prefers an appeal against conviction. Can he continue as managing director pending
disposal of the appeal? Can the appellate Court remove the disqualification or stay the same
pending the disposal of the appeal? Discuss in light of Companies Act, 1956.
(iv) Explain briefly the powers of the Central Government to issue directors to the IRDA, as per
IRDA Act 1999.
[2+4+5+4 = 15]
Answer:
(i) As per section 180(1) (d) of the Companies Act, 2013, approval of the members by passing
a special resolution is required in case a company intends to extend the time for repayment of a
debt payable by a director. In the given case, the unpaid amount of the loan of `12,00,000
amounts to debt payable by the director, Mr. Gold. And hence extension of time for repayment
of debt of `12,00,000 requires approval of the members in general meeting by passing a special
resolution.
(ii) Investigation of affairs of a company means investigation of all its business affairs, profit and
loss account, and assets including goodwill, contracts and transactions, investments and other
property interests and control of subsidiary companies too.
The object of an investigation is to discover something which is not apparently visible to the
naked eye. If the allegations are apparent from the balance sheet of the company, no
investigation need be ordered. Prima facie evidence should lead to the conclusion that an
investigation is necessary.
Kinds of investigations:
An investigation can be ordered by the Central Government under sections 235, 237 and 247 of
the Companies Act, 1956. These investigations can be classified as follows:
A. Investigations into affairs of the company (Sections 235 and 237).
B. Investigation of ownership of the company (Section 247).
(iii) The grounds of vacation of office of a director are contained in section 283. However, a
managing or whole time director is subject to additional grounds of vacation of office as
contained in section 267.
If a whole time director or a managing director is convicted by a Court of an offence involving
moral turpitude, he shall vacate his office (Section 267). Even a day's imprisonment or a mere
fine of one rupee will attract this section if the offence involves moral turpitude.
Under section 283, when a director is convicted of any offence involving moral turpitude
(resulting in imprisonment of 6 months or more), the order does not become effectual if an
Pg 10

appeal is filed by the director against the order of the Court. The order becomes effectual only
when the appeal, as well as the second appeal, if any, is finally disposed off. However, no such
privilege has been given under section 267. As such, the order of conviction under section 267
becomes effective as soon as order is pronounced. Thus, filing of an appeal against the
conviction order would not save a whole time director or managing director from vacating the
office.
The operation of section 267 takes effect as soon as conviction for an offence involving moral
turpitude is recorded by a Court. The order of conviction does not on the mere filing of an
appeal disappear and it cannot be held that section 267 applies only to a final order of
conviction. As such, the managing director cannot continue pending the appeal. Further, he
shall be eligible to be again appointed as a managing director only if the appellate Court
suspends the order of conviction. As such, where the appellate Court suspends merely the
execution of the sentence, the managing director shall remain disqualified for appointment
[Rama Narang v Ramesh Narang (1995) 83 Comp Cos 194].
The facts of the present case are similar to the facts of the case discussed above. In the light of
the decision given in the above case, it appears that the managing director cannot continue
pending the disposal of appeal. However, if specific order is sought for removal of
disqualification, the appellate Court may suspend the order of conviction, in which case he
shall be eligible to be again appointed as a managing director.
(iv) The provisions of section 18of IRDA Act, 1999 may be explained as follows:
1. Nature of directions and their binding effect [Section 18(1)]
Without prejudice to the foregoing provisions of this Act, the Authority shall, in exercise of its
powers or the performance of its functions under this Act, be bound by such directions on
questions of policy, other than those relating to technical and administrative matters, as the
Central Government may give in writing to it from time to time:
Opportunity to Authority before giving directions [Proviso to Section 18(1)]. The Authority shall, as
far as practicable, be given an opportunity to express its views before any direction is given
under this sub-section.
2. 'Question of policy or not' to be decided by the Central Government [Section 18(2)]
The decision of the Central Government, whether a question is one of policy or not, shall be
final.
[20 Marks]
Question 3(a):
(i) Corporate Governance is about promoting fairness. Is it truly beneficial?
(ii) Write a short note on SA 8000.
[6+4 = 10]
Answer:
(i) Corporate Governance deals with promoting corporate fairness, transparency and
accountability. It is concerned with structures and processes for decision-making,
accountability, control and behavior at the top level of the organizations. It influences how the
Pg 11

objectives of an organization are set and achieved, how risk is monitored and assessed and
how performance is optimized. It is truly beneficial and it has the following benefits:
1. Improved Financial Performance: Socially responsible business practices are linked to positive
financial performance.
2. Operating Cost Reduction: CSR initiatives can help to reduce operating costs.
3. Brand Image and Reputation: CSR helps a company to increase its brand image and
reputation among the public, which in turn increase its ability to attract investors and trading
partners. Proactive CSR Practices would lead to a favourable public image resulting in various
positive outcomes like consumer and retailer loyalty, easier acceptance of new products and
services, market access and preferential allocation of investment funds.
4. Increased Sales & Customer Loyalty: Businesses must first satisfy customer's key buying criteria,
i.e., price, quality, safety and convenience.
5. Productivity and Quality: Improved working conditions, reduced environmental impacts or
increased employee involvement in decision-making, leads to (a) increased productivity, and
(b) reduced errors.
6. Ability to attract and retain employees: Companies perceived to have strong CSR
commitments find it easier to recruit and retain employees, resulting in reduction in turnover
and associated recruitment and training costs.
(ii) Social Accountability 8000:
SA 8000 is a comprehensive, global, verifiable performance standard for auditing and
certifying compliance with corporate responsibility.
The heart of the standard is the belief that all workplaces should be managed in such a
manner that basic human rights are supported and that management is prepared to accept
accountability for this.
SA 8000 is an international standard for improving working conditions. This standard is based
on the principles of international human rights norms as described in International Labour
Organisation Conventions, the UN Convention on the Rights of the Child and the Universal
Declaration of Human Rights.
The requirements of this standard apply regardless of geographic location, industry sector, or
company size.
Question 3(b):
(i) Explain the importance of Ethics for a finance and accounting professional.
(ii) If you are an accounting professional in a large multinational corporation, what steps would
you undertake to create an ethical accounting environment?
[5+5 = 10]
Answer:
(i) The importance of Ethics for a finance and accounting professional may be discussed as
two-fold:
1. Public Responsibility:
Pg 12

Finance and Accounts is perhaps the only business function which accepts responsibility to
act in public interest. Finance and accounting professional's responsibility is not restricted to
satisfy the needs of any particular individual or organization. While acting in public interest, it
becomes imperative that the finance and accounting professional adheres to certain basic
ethics in order to achieve his objectives.
2. To restore Public Confidence:
Various accounting scandals witnessed during the past few years have put a serious
question mark on the role of the finance and accounting professional in providing the right
information for decision making both within and outside their respective organizations.
As these finance and accounting professionals are in public practice, they should take
reasonable steps to identify circumstances that could pose the conflict of interest and thus
leading to follow unethical behavior.
(ii) The factors that are to be considered for creating an ethical accounting environment are:
1. Employee Awareness:
Make the employees aware of their legal and ethical responsibilities.
Train and motivate employees towards ethical behaviour.
Encourage employees to report cases of violations, frauds, manipulations,
misappropriations, etc.
2. Reporting of Frauds: For reporting violations, manipulations, misappropriations, etc., without any fear of being reprimanded or fired,
provide facilities to employees.
3. Whistle Blowers:
A whistle blower is an employee /person who reports frauds, mismanagement or
creating good accounting environment in a business enterprise. Fair treatment and
appreciation of Whistle Blowers is necessary to check fraud.
Question 3(c):
(i) Write a short note on Memorandum of Understanding and Public Sector Enterprises.
(ii) Discuss the difficulties faced in Governance by state owned businesses.
[5+5 = 10]
Answer:
(i) Memorandum of Understanding and Public Sector Enterprises:
After Independence, Public Sector Enterprises (PSEs) were set up in India with an objective to
promote rapid economic development through the creation and expansion of infrastructure by
the government. With different phases of development, the role of PSEs has changed and their
operations have extended to a wide range of activities in manufacturing, engineering, steel,
heavy machinery, machine tools, fertilizers, drugs, textiles, pharmaceuticals, petro-chemicals,
extraction and refining of crude oil and services such as telecommunication, trading, tourism,
warehousing, etc. as well as a range of consultancy services. While there have been many PSEs
that have performed very well in competition with private sector enterprises, there are also
many PSEs that have performed very poorly. In an economic environment that has changed
considerably in the last two decades, the role of PSEs has changed and they have been
increasingly guided to reduce their dependence on the Government. They have been listed on
Pg 13

the stock exchange and few of them have been privatized. The Government has provided PSEs
the necessary flexibility and autonomy to operate effectively in a competitive environment.
However, there are a few issues with the operation and management of PSEs which still persist
and need to be attended to. There is a need to develop a mechanism on how government
can get an efficient Indian presence in the sectors where the private sector investments are not
forthcoming especially in strategic areas where developing capabilities is essential if India has to
play its rightful role among the among the nations of the world.
(ii) Difficulties Encountered in Governance in state owned businesses
Routine governance regulations become applicable for public sector companies formed under
the Companies Act, 1956 and come under the purview of SEBI regulations the moment they
mobilize funds from the public. The typical organizational structure of PSUs makes it difficult for the
implementation of corporate governance practices as applicable to other publicly-listed
private enterprises. The typical difficulties faced are:
The board of directors will comprise essentially bureaucrats drawn from various ministries
which are interested in the PSU In addition, there may be nominee directors from banks or
financial institutions who have loan or equity exposures to the unit. The effect will be to have
a board much beyond the required size, rendering decision-making a difficult process.
The chief executive or managing director (or chairman and managing director) and other
functional directors are likely to be bureaucrats and not necessarily professionals with the
required expertise. This can affect the efficient running of the enterprise.
may necessitate a percentage of independent components on the board; but many
professionals may not be enthused as there are serious limitations on the impact they can
make.
Due to their very nature, there are difficulties in implementing better governance practices.
Many public sector corporations are managed and governed according to the whims and
fancies of politicians and bureaucrats. Many of them view PSUs as a means to their ends. A
lot of them have turned sick due to overdoses of political interference, even when their
areas of operations offered enormous opportunities for advancement and growth. And
when the economy was opened up, many of them lacked the competitiveness to fight it out
with their counterparts from the private sector.
Pg 14

Roll No............
Full Marks: 100
No. of Printed Pages...

Corporate Laws & Compliance
Time Allowed: 3 hours
This paper contains 3 questions. All questions are compulsory, subject to

instruction provided against each question. All workings must form part of your
answer. Assumptions, if any, must be clearly indicated.
(1) Answer all questions: [20 marks]

(a) Explain the term executive directors and non-executive directors.
(3 Marks)
Answer:
The expressions 'executive director' and 'non-executive director' have not been used in the
Companies Act, 1956 or the Companies Act, 2013. Generally, these terms are used as follows:
1. Executive directors
The directors who are in the employment of the company are called as executive directors or
inside directors. A whole time director and managing director are covered in this category of
directors. The inside directors possess in-depth knowledge about the affairs of the company.
They are generally connected with the policy formulation of the company and take active
interest in the day-to-day affairs of the company. They have personal involvement with the
company since their remuneration depends on the successful operations of the company.
2. Non-executive directors
Directors who are not in the employment of the company are called as non-executive directors
or part time directors or outside directors. This category includes professional directors and
nominee directors. These directors have generally diverse experience and backgrounds. They
provide independent thinking, wider knowledge and perspective to the company. They are
appointed not to work full time under a contract of service. They are not intimately connected
with the company except through attending the Board meetings. They have an unbiased attitude
towards the working of the company.
(b) At an annual general meeting of your company, one of the directors being badly heckled by
irate shareholders had tendered his resignation orally which was accepted by the majority of
members present at the meeting. Can the director continue in his office after the annual
general meeting?
(3 Marks)
Answer:
The Company Act has not made any provision regarding resignation of a director. Thus, resignation
by a director is controlled by the rules made by the articles, if any. Where the articles of a
company are silent, it has been held that a resignation shall be effective if it is addressed to the
company and acceptance of resignation is not necessary.
Page 1

Where a director tendered his resignation orally at a general meeting and it was accepted at the
general meeting, it was held that the resignation was effective even if it was not in writing. As
such, the director who had tendered his resignation could not withdraw it except with the consent
of the general meeting [Latchford Premier Cinema Ltd. v Ennion (1931) 2 Ch 409].
Thus, in the given case the director who had orally tendered the resignation at an annual general
meeting cannot continue in office.
(c) Mr. Bipin goes abroad for four months from 4.4.1999 and an alternate director has been
appointed in his place. Advice as to sending of notice as required under section 286. (3 Marks)
Answer:
Notice of every Board meeting shall be given in writing to every director for the time being in India
and to every other director at his usual address in India (Section 286). As can be seen, section 286
does not specifically state that notice to an alternate director shall be served. However, an
alternate director is a director in his own right. He is not a proxy or representative of the original
director. The grounds of vacation of office also apply to him as these apply to the original director,
e.g., an alternate director shall vacate office if he does not attend the Board meetings as
contemplated by section 283(1)(g). As such, it is implied that notice to an alternate director is to
be given. Thus, notice should be served to both, the alternate director as well as the original
director. Notice to Mr. Bipin Ram, who is outside of India, shall be served at his usual address in
India.
(d) What are the provisions regarding preservation of accounts and records of a company which has been
amalgamated with any other company?
(3 Marks)
Answer:
The object of section 396A is to prevent the practice of destroying incriminating accounts and
records of the company which has been amalgamated with another company.
The books and papers of a company which has been amalgamated with, or whose shares have been
acquired by, another company shall not be disposed of without the prior permission of the Central
Government. Before granting such permission, the Central Government may appoint a person to
examine the books and papers for the purpose of ascertaining whether they contain any evidence of
the commission of an offence in connection with the promotion, formation or management of the
affairs of the company or its amalgamation or the acquisition of its shares?
(e) What provision has been made under section 15A of the SEBI act, 1992 in connection with penalty
for failure to furnish information or returns?
(3 Marks)
Answer:
A person shall be liable to a fine of ` 1,00,000 per day or ` 1 crore, whichever is less, if he fails to(a) furnish any document, return or report to the SEBI, as required under the Act, rules or
regulations made thereunder; or
(b) file any return or furnish any information, books or other documents within the time
Page 2

specified under the Act, rules or regulations made thereunder; or
(c) maintain the books of account or records as required under the Act, rules or regulations
made thereunder.
(f) Explain the need for Social Responsibility.
(2 Marks)
Answer:
Need for Social Responsibility

Today, businessmen are aware that society is the biggest force which controls the entire business
operations, right from acquisition of land to final produce. They now feel that they cannot operate
in societal isolation. Profit still being the major determinant for business houses, it is extremely
difficult to strike a balance between the conflicting needs of business this earning profit and
society's need to take care of its many constituents. The success of a business depends on the
growth of the society because the goods and services of business are ultimately consumed by the
society. So, an organisation must initiate steps which will ultimately lead to economic upliftment of
the people. Although at the initial stage of investment for such welfare measures it may appear to
be a losing proposition, in the long run, it will have a twin positive effectthe image of the
organisation will be enhanced and there will be an economic resurgence of the people through
adoption of such welfare measures which will create a new set of consumers for their products.
Another contribution which society expects from the business community is qualitative
improvement of the product. This necessitates huge investment in research and development, which
government alone cannot afford. Accordingly, business organisations should come out with liberal
contribution for setting up research laboratories for product quality improvement. In addition,
business houses should shun unethical practices such as price rigging of the product through
hoarding and creating scarcity, quality deterioration due to adulteration, and resorting to
advertisements which lead to formation of biased attitude. As business is now considered to be a
part of social order, it itself will determine its ethical standards through cross-current
interactions.
(g) What are the requirements to strengthen Corporate Governance?
(2 Marks)
Answer:
Requirements to strengthen corporate governance
The following are some of the requirements meant for strengthening corporate governance:
1.
Enforcement of rights by minority shareholders: Shareholders activism have to be encouraged

so as to enhance the shareholders' value in the long run.
2. Quality of audit: There is an imperative need on the part of the Government to strengthen the
quality of audit so as to make the Auditor accountable for the disclosure of information in the
annual reports and to monitor the working of Audit Firms.
3. Ensuring the independence of directors: An appropriate and acceptable system has to be
designed to ensure the independence of directors to discharge their duties as per the
requirements of the law.
Page 3

4. Awareness for adoption of corporate governance practices: Efforts have to be made for
propagation of corporate governance norms amongst entrepreneurs for better compliance.
5. Amendment to bankruptcy laws: There is a need to amend bankruptcy laws for prompt
implementation of provisions.
6. Accountability of the board to stakeholders: The Board of Directors as well as the CEOs and
CFOs are made accountable for the discharge of their duties with the proper use of their
rights within the powers.
7. Upgrading the efficacy of systems: Adequate care has to be exercised to ensure the quality
and effectiveness of the legal, administrative and regulatory framework.
8. Report on corporate governance: To make a statutory compliance for the listed companies to
compulsorily obtain a report on Corporate Governance Rating (CGR) from a Credit Rating Agency
in India.
(2) Answer any four questions: [4 x 15 = 60 marks]

(a)(i) Your company has been approached by its foreign collaborators who have three U.S.
based directors on your Board with the idea that they would appoint a single individual based
in India to act as an alternate for all the three U.S. based director. Advice by indicating the
feasibility of the idea, the voting rights to be enjoyed by the proposed alternate director,
and the sitting fees payable to him.
(5 Marks)
Answer:
An alternate director can be appointed only if any of the directors of the company is absent for not
less than 3 months from the State in which Board meeting are ordinarily held (Section 313). But,
section 313 does not contain any specific provision either prohibiting or authorising an individual to
be appointed as an alternate director for more than one director.
The appointment of one person as an alternate director for three U. K. based directors would not
be in the interest of good corporate governance. Also, it would adversely affect the interests of
company, since this would limit the deliberations in the Board meeting. Moreover, only one person
would exercise three votes and this would probably result in giving of all the three votes either in
favour of the resolution or against the resolution.
In the given case if one individual is appointed as an alternate director for the three foreign
directors, he will have three votes. However, he shall be entitled to receive the sitting fees in
respect of one director only.
(ii) State the kind of approval required for the following transactions under the Foreign
Exchange Management Act, 1999:
(A) T wants to draw US $20,000 to make donation to a charitable trust situated in South
Korea.
(B) Q requires US $ 5,000 to make payment related to call back services of telephone.
(5 Marks)
Page 4

Answer:
Any person may sell or draw foreign exchange to or from an authorised person if such sale or
drawal is a current account transaction. However, the Central Government may in public interest
and in consultation with the RBI, impose such reasonable restrictions for current account
transactions as may be prescribed (Section 5). The Central Government has framed Foreign
Exchange Management (Current Account Transactions) Rules, 2000. The Rules stipulate some
prohibitions and restrictions on drawal of foreign exchange for certain purposes. In the light of
provisions of these rules, the answer to the given problem is as follows:
(A) As per Rule 5 read with Schedule III of Foreign Exchange Management (Current Account
Transactions) Rules, 2000, prior approval of Reserve Bank of India is required for drawal of
foreign exchange, exceeding US$ 5,000 per financial year for donations.
Therefore, Mr. T can obtain $ 20,000 for making donation to a charitable trust situated in
South Korea with the permission of Reserve Bank of India. However, prior approval of the
Reserve Bank of India shall not be required if drawal of additional US Dollar 15,000 is made out
of funds held in Resident Foreign Currency (RFC) Account.
(B) Rule 3 read with Schedule I of Foreign Exchange Management (Current Account Transactions)
Rules, 2000 prohibits drawal of foreign exchange for payments related to call back services of
telephones. Therefore, payment of US $ 5,000 for 'call back services' of telephone is
prohibited.
(iii) Whether appointment of Controller of Insurance is compulsory? Explain.
(5 Marks)
Answer:
The provisions relating to appointment of Controller of Insurance is explained as below:
1.
Appointment on supersession of IRDA [Section 2B(1)]

If at any time, the Authority is superseded under sub-section (1) of section 19 of the Insurance
Regulatory and Development Authority Act, 1999, the Central Government may, by notification
in the Official Gazette, appoint a person to be the Controller of Insurance till such time the
Authority is reconstituted under section 19(3) of the said Act.
2. Factors to be considered at the time of appointment of Controller of Insurance [Section 2B(2)]
In making any appointment of Controller of Insurance, the Central Government shall have due
regard to the following considerations, namely, whether the person, to be appointed has had
experience in industrial, commercial or insurance matters and whether such person has actuarial
qualification.
(b)(i) In case of appointment of directors of a company, all the directors were not voted on
individually, but were appointed by one resolution and no shareholder objected to it. Discuss
the position under the provision of the Companies Act.
(5 Marks)
Answer:
At a general meeting, two or more persons cannot be appointed as directors by a single resolution
unless a resolution that appointment shall be so made has first been agreed to by the meeting
Page 5

without any vote being cast against it. A resolution moved in contravention of this provision shall be
void, whether or not objection was raised at the time when such resolution was passed (Section 162
of the Companies Act, 2013). In the present case, all the members passed a single resolution
appointing all the directors. The resolution is void since before moving the resolution for
appointment of all the directors by a single resolution, no resolution was passed to the effect that
all the directors shall be appointed by a single resolution. It is immaterial that no member objected
to the appointment of all the directors by a single resolution. As per section 176 of the Companies
Act, 2013, the acts of these directors shall not be invalid till the defect in their appointment is
noticed by the company.
Section 162 of the Companies Act, 2013 applies to all companies, whether public or private.
Therefore, the answer would remain same even if the company in the present case is a private
company.
(ii) What shall be the composition of the Insurance Regulatory and Development authority?
(5 Marks)
Answer:
The composition of the Authority may be explained as follows:
1.
Chairperson and Members [Section 4(1)]

The Authority shall consist of the following members, namely:
(a) a Chairperson;
(b) not more than 5 whole time members;
(c) not more than 4 part-time members,
to be appointed by the Central Government from amongst persons of ability, integrity and
standing who have knowledge or experience in life insurance, general insurance, actuarial
science, finance, economics, law, accountancy, administration or any other discipline which would,
in the opinion of the Central Government, be useful to the Authority.
2. Requirement as to specialised areas [Section 4(2)]

The Central Government shall, while appointing the Chairperson and the whole-time members,
ensure that at least one person each is a person having knowledge or experience in life
insurance, general insurance or actuarial science, respectively.
(iii) Examine the validity of the resolution passed at the Annual General Meeting of a public
company for payment of dividend at a rate higher than recommended by the board of
directors.
(5 Marks)
Answer:
As per Regulation 85 contained in Table A of Schedule I to the Companies Act, 1956, the company
in general meeting may declare dividends, but no dividend shall exceed the amount recommended by
the Board. Following conclusions are worth noting:
Page 6

(a) The power to declare dividend rests with the members, but the members can exercise such
power only if the dividend is proposed by the Board.
(b) The rate of dividend proposed by the Board may be reduced by the members.
(c) The rate of dividend proposed by the Board cannot be increased by the members.
(d) Any provision in the articles, which authorises the members to declare dividend higher than the
rate recommended by the Board, is void.
Therefore, in the given case, the resolution passed at the Annual General Meeting declaring
dividend at a rate higher than that recommended by the Board of directors is not valid.
(c)(i) Examine whether the following companies can be considered as Foreign Companies under
the Companies Act, 1956:
(A) A company which is incorporated outside India employs agents in India but has no place of
Business in India.
(B) A company incorporated outside Indian having shareholders who are all Indian citizens.
(C) A company incorporated in India but all the shares are held by foreigners.
(5 Marks)
Answer:
As per section 591(1), a company shall be a foreign company if (a) it is incorporated outside India; and
(b) it has established a place of business in India.
(i) Employing agents in India does not amount to establishment of a place of business in India.
Thus, the company is hot a foreign company since it has not established any place of business in
India.
(ii) A company incorporated outside India does not become a foreign company by the mere fact
that all its shareholders are Indian citizens. Assuming that the company has not established any
place of business in India, the company is not a foreign company.
(iii) A company incorporated in India is a 'company' within the meaning of section 2(20) of the
Companies Act, 2013. It cannot become a foreign company by the mere fact that all the shares
of the company are held by foreigners.
(ii) State whether a banking company is required to file with the registrar its accounts and
balance sheet.
(5 Marks)
Answer:
As per section 32, where a banking company in any year furnishes its accounts and balance-sheet in
accordance with the provisions of section 31, it shall at the same time send to the registrar 3
copies of such accounts and balance-sheet and of the auditor's report, and where such copies are
so sent, it shall not be necessary to file with the registrar, in the case of a public company, copies
Page 7

of the accounts and balance-sheet and of the auditor's report, and, in the case of a private
company, copies of the balance-sheet and of the auditor's report as required by sub-section (1) of
section 220 of the Companies Act, 1956; and the copies so sent shall be chargeable with the same
fee and shall be dealt with in all respects as if they were filed in accordance with that section.
(iii) Mr. Sandip is an Indian Citizen. He has been residing in India since his birth. He left
India on 25th February, 2011 for pursuing business management in America for 2 years. He
comes back on 24th February, 2013. What is his residential status for the financial years
2010-11, 2011-12, 2012-13 and 2013-14?
(5 Marks)
Answer:
The given problem can be answered as follows:
(a) Financial year 2000-01. Mr. Sandip resided in India for the whole year in the preceding financial
year, i.e., 1999-2000. His leaving India for pursuing business management for 2 years would not
exclude him from the definition of 'Person resident in India' because he is not going outside
India for any of the following purposes:
(i) for or on taking up employment outside India, or
(ii) for carrying on outside India a business or vocation outside India, or
(iii) for any other purpose, in such circumstances as would indicate his intention to stay outside
India for an uncertain period. Therefore, Mr. Sandip is a person resident in India for the
financial year 2000-01.
(b) Financial year 2001-02. He resided in India for more than 182 days in the preceding financial
year, i.e., 2000-01. Therefore, he is a 'Person resident in India' for the financial year 2001-02.
It is immaterial that he is outside India for the whole financial year 2001-02.
(c) Financial year 2002-03. Mr. Sandip did not reside in India at all in the preceding financial year,
i.e., 2001-02. Therefore, he shall be a 'Person resident outside India' for the financial year
2002-03.
(d) Financial year 2003-04. Mr. Sandip resided for less than 183 days in the preceding financial
year, i.e., 2002-03. Therefore, he shall be a 'Person resident outside India' for the financial
year 2003-04.
(d)(i) M/s. Sahara Fertilizers Ltd. proposes to acquire equity shares of XYZ Ltd. worth `19
lakhs. On the basis of the following information advise Sahara Fertilizers Ltd. about the
requirements to be complied with under Companies Act, 1956 for the proposed investment in
XYZ Ltd.:
Authorised Share Capital
`50,00,000
Issued, subscribed and paid-up capital
`25,00,000
Free Reserves
`5,00,000.
(5 Marks)
Page 8

Answer:
Inter-corporate loans and investments are governed by the provisions of section 372A. First
determine whether a special resolution is required for making fresh investments. This can be
determined as follows:
`
Particulars
Paid up capital of the company (A)
Free reserves (B)
25,00,000
5,00,000
Aggregate of paid up capital and free reserves (C)
30,00,000
60% of aggregate of paid up capital and free reserves (D)
18,00,000
Higher of (B) or (D), i.e. the ceiling limit for inter-corporate loans, investments
etc. without requiring a special resolution
18,00,000
Proposed investment in equity shares of XYZ Limited
19,00,000
Since the proposed investment exceeds the ceiling limit, a special resolution is required. The
company shall adopt the following procedure for making investments in XYZ Ltd.:
(a) Unanimous approval of the Board shall be obtained by passing a resolution at a Board meeting.
(b) A special resolution shall be passed in the general meeting.
The notice of special resolution shall state the specific limits, particulars of the company to
which loan is proposed to be given, specific source of funding and other relevant details.
The company shall file a copy of special resolution with the registrar within 30 days of
passing the special resolution.
(c) The company shall obtain the prior approval of the Public Financial Institution, if any, from
whom it has taken a term loan.
(d) The company can make such investments only if no default in respect of Public deposits is
subsisting.
(e) The prescribed particulars shall be entered in the register maintained under section 372A(5).
(ii) Is a stock exchange compulsorily required to be corporatized and demutualised? (5 Marks)

Answer:
The provisions relating to section 4A are explained hereunder:
1.
Requirement of Section 4A
Every recognised stock exchange shall be corporatised and demutualised before the appointed
date.
2. Consequences of non-compliance of Section 4A

(a) Applicability of Section 4B. Every recognised stock exchange shall be corporatised and
demutualised as per section 4B.
(b) Relaxation by SEBI. SEBI may specify another appointed date in respect of a recognised
stock exchange if it is satisfied that such recognised stock exchange was prevented by
Page 9

sufficient cause from being corporatised and demutualised.
3. Meaning of 'appointed date'
(a) 'Appointed date' means the date appointed by SEBI by notification in the Official Gazette.
(b) Different 'appointed dates' may be appointed for different recognised stock exchanges.
(iii) What shall be the composition of Competition Commission of India?
(5 Marks)
Answer:
The composition of Competition Commission of India may be explained as follows:
1.
Chairperson and Members

The Commission shall consist of a Chairperson and not less than two and not more than 6 other
Members to be appointed by the Central Government:
2. Qualifications and experience of the Chairperson and Members

The Chairperson and every other Member shall be a person of ability, integrity and standing and
who has special knowledge of, and such professional experience of not less than 15 years in,
international trade, economics, business, commerce, law, finance, accountancy, management,
industry, public affairs or competition matters, including competition law and policy, which in
the opinion of the Central Government, may be useful to the Commission.
3. Terms of employment
The Chairperson and other Members shall be whole-time Members.
(e)(i) State, with reason, whether the following are debts for the purpose of section 433(e)
of the Companies act, 1956:
(A) Contingent or conditional liability.
(B) Non-payment of dividend declared.
(C) Non-payment of salary to an employee.
(D) Non-payment to a creditor of a disputed liability.
(5 Marks)
Answer:
The Court may order the winding up of a company under any of the circumstances mentioned under
section 433(a) to (f). Section 433(e) provides that a company may be wound up by the Court if it is
unable to pay its debts. Section 434 specifies the circumstances in which the company shall be
deemed to be unable to pay its debts.
(i) Contingent or conditional liability
A debt must be a definite sum of money payable immediately or at a future date. A contingent
or conditional liability is not a debt, unless the contingency or condition has already happened
[Registrar of Companies v Kavita Benefit Private Limited(1978) 48 Comp Cas 231].

(ii) Non-payment of dividend declared
On declaration, the dividend becomes a debt payable by the company. Non-payment of dividend
entitles the shareholder to apply for winding up of the company [Hariprasad (C) v Amalgamated
Commercial Traders (Private) Ltd. (1964) 34 Comp Cas 209]. Therefore, non-payment of
dividend declared would amount to a debt for the purpose of winding up petition.
(iii) Non-payment of salary to an employee
Non-payment of salary to an employee of the company is not a debt for the purpose of section
433(e) [Pawan Kumar Khullar v Kaushal Leather Board Ltd. AIR 1966 MP 85]. However, a
contrary decision has been given by the A.P. High Court in which the Court construed the word
'debt as a sum which is to be recovered from a person who is obliged to make the payment and
accordingly the Court held that unpaid salary is a debt [B.5. Damagry v VIF Airways Ltd.]. It
seems that A.P. High Court judgment is realistic and reflects the intention of the legislature.
(iv) Non-payment to a creditor of a disputed liability
Where a debt is bona fide disputed by the company and the Court is satisfied with the
company's defence, a winding up order will not be made [Piara Singh (S) v S.H.R. Properties Pvt.
Ltd. (1993) 10 CLA 83]. If a debt is bona fide disputed there cannot be a neglect to pay. The
Court shall consider the following principles'.
(a) Whether the defence of the company is in good faith and is of some substance.
(b) Whether the defence is likely to succeed in point of law.
(c) Whether the company has produced prima facie proof of the facts on which the defence
depends [Kirpal Singh v Sutlej Land Finance Pvt. Ltd. (1989) 66 Comp Cos 841].
(ii) What are the powers of the High Court to enforce its orders relating to compromise and
arrangement?
(5 Marks)
Answer:
Section 392 has conferred wide powers on the Court to remove the obstacles and difficulties for
the proper working of the scheme. These powers are discussed as follows:
1.
Power to give directions to the company

Where a compromise or arrangement is proposed, the Court may order that a meeting of
creditors or members or any class of them be called, held and conducted in the manner directed
by the Court (Section 391). If the Court gives such directions, then the provisions of the
Companies Act will not apply to that extent. However, Court has no power to dispense with the
holding of the meeting even though the shareholders unanimously approve the scheme [Re,
Southern Automotive Corporation Pvt. Ltd. (1960) 30 Comp Cas 119].
2. Power to stay any suit or proceedings

The Court may stay the commencement or continuation of any suit or proceedings against the
company until the application is finally disposed of (Section 391).

3. Power to order winding up
If, after sanctioning the scheme, the Court is satisfied that the sanctioned scheme has become
unworkable even after an honest effort, the Court may wind up the company. The power can be
exercised suo motu or on the application of the company or its creditors or any person
interested in the affairs of the company (Section 392).
4. Power to supervise and modify the scheme
After sanctioning a scheme of compromise or arrangement, the Court may exercise the
following powers:
(a) To supervise the carrying out of the scheme.
(b) To modify or vary the sanctioned scheme so that it becomes workable.
(c) To ask for a report on the working of the scheme. On consideration of such report, the
Court may give such directions as it thinks fit (Section 392).
(iii) What measures can a securitization or reconstruction company adopt for the purpose of
asset reconstruction?
(5 Marks)
Answer:
The measures for asset reconstruction, as contained in Section 9 of the Act, are explained below:
Without prejudice to the provisions contained in any other law for the time being in force, a
securitisation company or reconstruction company may, for the purposes of asset reconstruction,
having regard to the guidelines framed by the Reserve Bank in this behalf, provide for any one or
more of the following measures, namely:
(a) the proper management of the business of the borrower, by change in, or takeover of, the
management of the business of the borrower;
(b) the sale or lease of a part or whole of the business of the borrower;
(c) rescheduling of payment of debts payable by the borrower;
(d) enforcement of security interest in accordance with the provisions of this Act;
(e) settlement of dues payable by the borrower;
(f) taking possession of secured assets in accordance with the provisions of this Act.

(3) Answer any two questions: [2 x 10 = 20 marks]
(a) Evaluate the concept of Social Responsibility of Business.
(10 Marks)
Answer:
Evolution of the Concept of Social Responsibility of Business
The evolution of the concept of social responsibility of business is the result of different stages of
struggle. Business began merely as an institution for the purpose of making money. Man was
considered successful so long as he made money and kept himself out of jail. He felt no particular
obligation and acknowledged no responsibility to the public. As an owner of his business, he thought
that he had a perfect right to do what he pleased with the money he earned. Social norms and
attitudes had very little influence on the practice of management. Even in USA, business ventures
like those of John D. Rockfeller, G.F. Swift, J.P. Morgan are noted for their flagrant disregard of
society, the individual worker, and competitive business firms.
But by 1920s, the position changed and the word 'service' became the slogan of innumerable
business clubs and associations. At the same time, business, leaders as a whole were becoming
increasingly conscious of the fact that the public was an integral part of the general business
scheme. The sense of service, thus, qualified and modified the greed for profit. Economic orders
came to recognise social order as their very foundation. It is now increasingly recognised that what
is not for the public good is not for the good of business.
The second element that helped the evolution process was the purchasing power of the public. The
demand of the public meant nothing unless backed by purchasing power. Industry had come to
understand that one of its proper functions was to manufacture and distribute purchasing power,
besides manufacturing and distributing merchandise. The most important effect of this change in
the attitude was a new business policy which demanded a persistent tendency towards higher wages
and lower prices. Thus, the new social responsibilities of business came to be recognised.
Yet, one more element in this evolution process has been the rise of new relationship between the
public and business. The era of purely private business for private profits has gone. Business has a
duty to report to the public whose money it is constantly seeking, in order to conduct the business
itself. According to Nicholas N. Eberstadt (1973):
Today's corporate social responsibility movement is a historical swing to re-create social contract
of power with responsibility, and as such...the most important reform of our time.
To Keith Davis (1973), "Social responsibility has become the hallmark of mature, global civilization.
(b) What are the important legislations that govern corporate governance in India? (10 Marks)
Answer:
The following are some of the important legislations that govern corporate governance:
The Companies Act, 1956
The Companies Act, 1956 is the principal legislation that governs the companies. Its objectives are:
Standard of business integrity
Conduct in the promotion and management of companies
Disclosure of all reasonable information relating to the affairs of the company
Effective participation
Shareholders and their protection of interest
Performance and management
Governance
The Competition Act, 2002

The objectives of the Competition Act, 2002 include:
Prohibition of anti-competitive agreements
Prohibition of abuse of dominant position
Regulation of combination.
The Securities and Exchange Board of India (SEBI) Act, 1992

SEBI has been instituted by the Securities and Exchange Board of India Act, 1992 with the
following objectives:
Protect the interests of investors or securities
Promote the development of the securities market
Regulate the securities market
Investors' education
Regulation of intermediaries
Protect investors against unfair and fraudulent trade practices
Provide a grievance redressal mechanism
The Foreign Exchange Management Act (FEMA), 1999

The Foreign Exchange Management Act, 1999 came into effect on June 1, 2000 and it replaced the
Foreign Exchange Regulation Act (FERA), 1973. While the objective of FERA was to conserve the
foreign exchange resources, FEMA facilitated external trade and payments and promoted orderly
maintenance of the foreign exchange market in India. The highlights of the new Act are given
below:
1.
FEMA is more transparent in its application. It has laid down the areas where specific
permission of the Reserve Bank/Government of India is required. A person can, thus, remit
funds, acquire assets, and incur liability in accordance with the specific provisions laid down in
the Act or the notifications issued by the Reserve Bank/Government of India under the Act
without seeking approval of Reserve Bank/ Government of India.
2. Application of FEMA may be seen broadly from two angles: (i) capital account transactions and
(ii) current account transactions, capital account transactions will be regulated by the Reserve
Bank and they relate to movement of capital, e.g. transactions in property and investments, and
lending and borrowing money. Current account transactions are those which do not fall in the

capital account category. They which are permitted freely subject to a few restrictions as given
below:
(a) RBI permission would be required when they exceed a certain ceiling.
(b) Need permission of Government of India appropriate authority irrespective of the amount.
(c) There are seven types of current account transactions which are prohibited and no
transaction can, therefore, be undertaken relating to them. These include transactions
relating to lotteries, football pools, and banned magazines.
Significant features: The Foreign Exchange Management Act and Rules give full freedom to a
person resident in India who was earlier resident outside India to hold or own or transfer any
foreign security, shares or immovable property situated outside India and acquired when he/she
was resident there. Similar freedom is also given to a resident who inherits such security or
immovable property from a person resident outside India. The exchange drawn can also be used
for purposes other than for which it is drawn provided drawal of exchange is otherwise
permitted for such purpose. Certain prescribed limits have been substantially enhanced. For
instance, residents now going abroad for business purposes or for participating in
conferences/seminars will not need Reserve Bank's permission to avail foreign exchange up to
US$ 25,000 per trip irrespective of the period of stay; basic travel quota has been increased
from the existing US$ 3000 to US$ 5000 per calendar year.
The Foreign Contribution (Regulation) Act, 1976
The foreign contribution (Regulation) Act, 1976 has been brought in to regulate the acceptance and
utilisation of foreign contribution or foreign hospitality by certain persons or associations. The
purpose of the regulation is to ensure that parliamentary institutions, political associations,
academic and other voluntary organisations as well as individuals working in the important areas of
national life function in a manner consistent with the values of the Sovereign Democratic Republic.
The Act extends to the whole of India, in addition to the:
(a) citizens outside India, and
(b) associates, branches or subsidiaries outside India, of companies or bodies corporate,
registered or incorporated in India.
The Consumer Protection Act, 1986
Consumer is a stakeholder of a company who deals with the company's product or services. It is the
responsibility of the government to protect their interest and rights. The basic objectives of the
consumer protection Act, 1986 are:
The right to be protected against marketing of goods and services which are hazardous to life
and property
The right to be informed about the quality, quantity, purity, standard, and price of goods or
services
Protect the consumer against unfair trade practices
Consumer education
Consumer redressal

The Environment (Protection) Act, 1986
Environmental degradation has become a very serious issue in recent years. The need for covering
all aspects of the environment resulted in the enactment of the Environment (Protection) Act,
1986. This need has been internationally recognised and a decision to protect and improve
environment was taken at the United Nations Conference on Human Environment at Stockholm in
June 1972. The mankind has been exploiting, using and abusing earth for centuries. Rapid
industrialisation and population explosion are the key factors for environmental degradation. If the
environmental pollution is not checked on controlled, the quality of life will deteriorate and earth
would become uninhabitable. Environmental legislation intends to control the environmental
degradation to improve quality of life and health of the inhabitants.
(c)(i) List out the key features of the Kumar Mangalam Birla Committees Report on Corporate
Governance.
(5 Marks)
Answer:
The Kumar Mangalam Birla Committee Report
Strengthening of disclosure norms for initial public offer
Providing information in Director's report for utilisation of funds
Declaration of quarterly results
Mandatory appointment of Compliance Officer
Disclosure of material and price-sensitive information
Disclosure of material events
Copy of abridged balance sheet to all shareholders
Guidelines for preferential allotment
Regulation for fair and transparent framework for takeovers and substantial acquisition
Audit committee
Frequency of meetings and quorum
Independent, and Nominee Directors in the Board
(ii) State the composition of board as per Clause 49 of Listing Agreement.
(5 Marks)
Answer:
Composition of Board
In the present competitive environment, corporates have to be extraordinary careful in choosing
the balanced composition of the board, particularly, age of the members of the board, professional
competencies of the members and experience as members of the board. To make the board truly
effective, it must be balanced in several aspects. A good board always works as an interdisciplinary,
jointly working consulting group where everybody has been given an opportunity to exhibit his
expertise and professional competence. The test of a balanced group depends on whether the

requisite technical, legal, financial, and managerial skills are represented on the board.
Representation of different age groups on the board will definitely strengthen the board as a
whole. For the board, the better age range shall be from 40 to 75 years. Every board is expected
to have:
Experienced members
Combination of young and senior members
Men of integrity and sincerity
People of proven performance capacity
Willingness to work
Well versed in duties and responsibilities pertaining to both statutory and non-statutory
compliances
Answer to PTP_Final_Syllabus 2012_Jun2014_Set 1

PAPER 13 Corporate Laws and Compliance
Full Marks: 100
The figures in the margin on the right side indicate full marks.
SECTION A
[Answer to Q.No.1 is compulsory and attempt any 4 from the rest]
1.
(a) 'X' was appointed as managing director for life by the articles of association of a
private company incorporated on 1st June, 1970. The articles also empowered 'X' to appoint a
successor. 'X' appointed, by will, 'S to succeed him after his death. Can 'S' succeed 'X' as
managing director after the death of 'X'?
[3]
(b) The issues, subscribed and paid-up share capital of XYZ Ltd. Is Rs. 10 lakhs consisting of
90,000 equity shares of Rs. 10 each fully paid up and 10,000 preference shares of Rs. 10 each
fully paid up. Out of members of company, 400 members holding one preference share each
and 50 members holding 500 equity shares applied for relief under sections 397 and 398 of the
Companies Act, 1956. As on the date of petition, the company had 600 equity shareholders and
5,000 preference shareholders.
Examine whether the above petition under sections 397 and 398 is maintainable. Will your
answer be different, if preference shareholders have subsequently withdrawn their consent ? [6]
(c) The subscribed share capital of ABC Company Ltd at the end of the financial year ending
31.3.2012 was Rs. 25 crores, out of which 2 Public Financial Institutions were holding share capital
amounting to Rs. 4 crores. During the financial year 2012-13 the company through public issue of
shares raised its subscribed capital by additional Rs. 70 crores. Out of Rs. 70 crores, the 2 Public
Financial Institutions were further allotted shares amounting to Rs. 22 crores, raising the total
contribution of these two institutions to Rs. 26 crores before the date of the companys closure of
books for AGM scheduled for 15.9.2013, where Auditors were to be appointed.
The company as usual, by getting an ordinary resolution passed appointed the Auditors. A group
of shareholders of the company allege that the appointment of Auditors is violative of certain
provisions of the Companies Act, 1956. They, however, did not raise any objection to the
appointment of auditors at the previous AGM held on 10.9.2012.
(i) Whether the contention of the shareholders is tenable?
(ii) If the contention of shareholders be tenable, what action should the company take for
the appointment of Auditors at the AGM scheduled for 15.9.2013 ?
[6]
Answer 1 (a) :
No director shall assign his office to any other person. If he does, the assignment shall be void
(Section 312).
The articles of a company empowered its managing director to appoint a successor. The
managing director appointed, by his will, Mr. S to succeed him as a managing director after his
death. The Court observed that a director is prohibited from assigning his office. The word 'his'
used in section 312 indicates that the prohibition applies only when an office held by a director
is assigned to any other person. Where a director dies, the office held by him becomes vacant
and therefore such office cannot be assigned to any other person. Therefore, appointment of a
new person in such office does not amount to an assignment within the meaning of section 312.
Page 1

[Oriental Metal Pressing Pvt. Ltd. v B.K. Thakoor (1961) 31 Comp Cas 143]. The facts of the given
case are identical to the facts discussed in the above case. Accordingly, it can be said that
appointment of 'S' is valid and it does not amount to an assignment of office by 'X'.
Answer 1 (b):
As per section 399, in the case of a company having a share capital, members eligible to apply
for oppression and mismanagement shall be lowest of the following :
(i) 100 members ; or
(ii) 1/10 th of the total number of members; or
(iii) Members holding not less than 1/10 th of the issued share capital of the company
It must be noted that the term member includes an equity shareholder as well as preference
shareholder.
The consent to be given by shareholder is reckoned at the beginning of the proceedings. The
withdrawal of consent by shareholder during the course of proceedings does not affect the
maintainability of the application [Rajahmundri electric Supply Corporation v Nageshwara Rao
AIR 1956 SC 213].
In the present case, the shareholding pattern of the company is as follows :
(i)
Rs. 9,00,000 equity share capital held by 600 members
(ii)
Rs. 1,00,000 preference share capital held by 5,000 members
(iii)
Rs. 10,00,000 total share capital held by 5,600 members
The application alleging oppression and mismanagement has been made by the members as
follows :
Number of members making the application:
Preference shareholders
400
Equity shareholders
50
Total members
450
Amount of share capital held by the members making the application :
Preference share capital
4,000 (400 preference shares of RS. 10 each)
Equity share capital
5,000 (500 equity shares of Rs. 10 each)
Total capital
9,000
The application shall be valid if it has been made by the lowest of the following :
(i)
100 members
(ii)
560 members (being 1/10th of 5,600)
(iii)
Members holding Rs. 1,00,000 share capital (being 1/10th of Rs. 10,00,000)
As is evident, the application made by 450 members meets the eligibility criteria specified under
section 399, and therefore the application is maintainable.
Such application shall remain valid despite the fact that some of the applicants have
subsequently withdrawn their consents [Rajahmundri electric Supply Corporation v Nageshwara
Rao AIR 1956 SC 213].
It has been assumed that the members making the application have paid all the calls due on
their shares.
Answer 1 (c):
Section 224A of the Act, provides that in the case of a company in which twenty-five present or
more of the subscribed share capital is held, whether singly or in any combination, by :
Page 2

(a) A public financial institution or a Government Company or Central Government or any
State Government, or
(b) Any financial or other institution established by any provincial or State Act in which a
State Government holds not less than fifty-one percent of the subscribed share capital,
or
(c) A nationalized bank or an insurance company carrying on general insurance business.
The appointment of an auditor or auditors shall be in the annual general meeting by a special
resolution only.
If the company fails to pass a special resolution, it shall be deemed that no auditor or auditors
had been appointed by the company at its annual general meeting and the Central
Government will be empowered to make the appointment.
(i) For AGM held on 10.9.2012 :
The holding of Public Financial Institution was Rs. 4 crores Rs. 25 crores = 16%.
Hence, Sec 224A is not attracted. Hence, appointment of Auditor(s) by an Ordinary Resolution is
valid.
For AGM held on 15.9.2013 :
The holding of Public Financial Institution will be Rs. 26 crores Rs. 95 crores = 27.37%.
Hence, special resolution is required to be passed for appointment of Auditor(s), in terms of Sec
224A. Appointment by way of Ordinary Resolution is not valid. Hence, the Shareholders
contention is tenable.
(ii) Where a company is required to appoint an Auditor at an AGM by passing a special
resolution, but omits or fails to pass such resolution due to any reason, it shall be deemed that no
Auditor has been appointed by the company at its AGM and the provisions of Section 224 (3) of
the Act will be attracted. [Section 224A (2)]
Section 224(3) of the Act provides that where at an annual general meeting no auditor or
auditors are appointed or re-appointed, the Central Government may appoint a person to fill
the vacancy. For this purpose, the company is charged with the responsibility of intimating the
above fact to the Central Government within seven days from the date of such meeting. The
company and every officer of the company who is in default in this respect are punishable with
fine which may extend to Rupees five thousand.
2.
(a) The liability of members may become unlimited and several, even in the case of a
limited liability company explain.
[4]
(b) In relation to winding up of a Company incorporated under the Companies Act 1956,
explain clearly the meaning of the term Overriding Preferential Payments. Examine and decide
whether the following debts of a Company under the winding up shall be Preferential Payments
and shall be paid in priority to the claim of Unsecured Creditors
Wages amounting to `30,000 only of an Employee for services rendered for a period of 8
Months within the preceding 12 Months next before the relevant date.
`1 Lakh due to an employee from Provident Fund and `50,000 towards Gratuity.
`20,000 payable by the Company on account of expenses incurred in respect of
investigation held u/s 235.
[6]
(c) The board meeting of MNO Ltd. was held on 10th May, 2008 at Chennai at 11 a.m. At the time of
starting the board meeting the number of directors present were 7. The total number of directors
were 10. The board transacted ten items in the board meeting. At 12 noon after the completion of
Page 3

four items in the agenda 4 directors left the meeting. Examine the validity of these transactions
explaining the relevant provisions of the Companies Act, 1956.
[5]
Answer 2 (a) :
The liability of members may become unlimited and several, even in the case of a limited liability
company. If, at any time, the number of members of a company is reduced below the statutory
minimum (seven in the case of a public company and two in the case of a private company),
and the company carries on business for more than six months while the number is so reduced,
every person who is a member of the company at the time the company so carries on business
after those six months and is aware of that fact shall be severally (individually) liable for the
payment of companys debts, contracted during that time. Thus, in this case, the privilege of
limited liability of shareholders is lost.
However, it may be noted that the personal liability of the members will arise only after the expiry
of six months from the date of reduction of membership below the statutory minimum. [Section
45].
Answer 2 (b):
Preferential Payments u/s 530
1) Wages and Salaries of Employees: All wages or Salary (whether by way of time or piece
work, or whether wholly or partly by way of commission) of any employee, in respect of
services rendered to the Company. The following conditions / restrictions apply in this regard
(i) The amount should be due for a period not exceeding 4 months within the 12 months
before the relevant date.
(ii) The amount should not exceed `20,000 in the case of any one claimant. [GSR 30(E)
dated 17-02-1997]
Note: Any remuneration in respect of a period of holiday or of absence from work through
sickness or other good cause shall be deemed to be wages in respect of services rendered to
the Company during that period.
2) Dues from Employee Welfare Funds: All sums due to any Employee from a Provident Fund,
Pension Fund, Gratuity Fund or any other Fund for the welfare of the employees, maintained
by the company.
3) Investigation Expenses: Expenses of any investigation held in pursuance of Sec. 235 or 237, so
far as they are payable by the Company.
In the given case,
Salary / Wage shall be restricted to least of the following
(i) 4 Months Wages = `15,000 (i.e., `30,000 x 4/8 = `15,000)
(ii) Notified Amount = `20,000. Hence `15,000 is preferential.
Entire amount due under PF and Gratuity is Preferential.
Entire Investigation expenses u/s 235 is preferential.
Page 4

Answer 2 (c):
As per section 287(2), the quorum for a Board meeting shall be higher of(a) 1/3rd of total strength (any fraction contained in that one-third shall be rounded off as one);
or
(b) 2 directors.
Total strength' means the total strength of the Board of directors of a company, as reduced by
the number of directors whose places are vacant at that time.
Quorum has to be present at the time of transacting each and every business. It is not enough
that a quorum was present at the commencement of the meeting. Therefore, where quorum is
present at the beginning of the meeting, but some of the directors leave the meeting, so that
remaining directors do not constitute quorum, any subsequent resolutions will be invalid.
In the given case, total strength is 10. Quorum for the Board meeting held on 10 th May, 2008 shall
be 1/3rd of 10 directors, i.e. 3.33, taken as 4 directors. Since 7 directors were present at the time
of commencement of the Board meeting, the Board meeting has been validly held.
However, after transacting 4 items on agenda, 4 directors left, because of which the number of
directors present has fallen below the quorum required. Since, quorum is required at the time of
transacting each and every business, the remaining 6 agenda items cannot be validly discussed
and voted upon. Therefore, resolutions passed in respect of these 6 agenda items are void, and
have no legal effect.
3. (a) A French manufacturing company desirous of setting up its branch office at Pune,
seeks your advice on the object for which the company may be allowed to set up the
desired branch office. Advise the company about the procedure as required under the
Foreign Exchange Management Act, 1999 to be followed in this regard.
[7]
(b) Mr. MKS was a member of the Competition Commission of India. He ceased to be such
member on 31st May, 2013. Thereafter, he was offered the post of Executive Director with
appropriate remuneration and perquisites in the following organizations to join his duties on
and from 1st September, 2013:
(i) HIL Ltd, a private sector public limited company, whose case was disposed off by the
Competition Commission under the provisions of the Competition Act, 2002 in the
month of March, 2013.
(ii) Life Insurance Corporation of India.
[3]
(c) The Balance Sheet of M/s. Quick Bucks Ltd. As at 31.3.2013 disclosed the following details :
(i) Share Capital Rs. 200 Crores
(ii) Reserves and Surplus Rs. 800 Crores
The company has issued in the year 2008, fully convertible debentures of Rs. 150 Crores,
which are due for conversion in the year 2013. The company proposes to issue bonus shares
in the ratio of 1:1. Explain briefly the SEBI guidelines to be followed by the company.
[5]
Answer 3 (a):
As per section 6, the Reserve Bank may, by regulations, prohibit, restrict, or regulate
establishment in India of a branch, office or other place of business by a person resident outside
India, for carrying on any activity relating to such branch, office or other place of business. In
exercise of such power, the Reserve Bank of India has framed Foreign Exchange Management
(Establishment in India of Branch or Office or other Place of Business) Regulations, 2000.
The provisions of Foreign Exchange Management (Establishment in India of Branch or Office or
other Place of Business) Regulations, 2000 are explained below:
Page 5

1. RBI may permit a company engaged in manufacturing and trading activities abroad to set
up Branch Office in India with the following objectives:
(a) To represent the parent company or other foreign companies in various matters in India,
e.g., acting as buying or selling agents in India.
(b) To conduct research work in the area in which the parent company is engaged.
(c) To undertake export and import trading activities.
(d) To promote possible technical and financial collaborations between the Indian
companies and overseas companies.
(e) Rendering professional or consultancy services.
(f) Rendering services in information technology and development of software in India.
(g) Rendering technical support to the products supplied by the partner or group
companies.
2. Approval of the RBI is required for establishment in India of branch or office or other place of
business by a person resident outside India.
3. A person resident outside India desiring to establish a branch or liaison office in India shall
apply to the RBI in Form No. FNC 1.
4. A foreign company may open Branch Office in India if all the following conditions are
satisfied:
(a) The office can act as a channel of communication between the Head Office abroad
and parties in India. It is not allowed to undertake any business activity in India and
cannot earn any income in India.
(b) Expenses of the Branch Office are to be met entirely through inward remittances of
foreign exchange from the Head Office abroad.
(c) Permission to set up Branch Office is initially granted for a period of 3 years and this
period may be extended from time to time by the Regional Office in whose jurisdiction
the Branch Office is set up.
(d) The Branch Office shall file with the concerned Regional Office an Annual Activity
Certificate issued by a Chartered Accountant.
1. No approval of the RBI is necessary for a banking company if such company has obtained
necessary approvals under the provisions of the Banking Regulation Act, 1949.
2. No approval of the RBI is necessary for establishment of a branch or unit in Special Economic
Zones to undertake manufacturing and service activities, if the following conditions are
satisfied:
(a) Such units are functioning in those sectors in which 100% Foreign Direct Investment (FDI) is
permitted.
(b) Such units comply with Part IX of the Companies Act, 1956 (Sections 592 to 602).
(c) Such units function on a stand-alone basis, i.e., such unit will be isolated and restricted to
the Special Economic Zone alone and no business activity or transaction will be allowed
outside the Special Economic Zones in India.
(d) In the event of winding up of business and for remittance of winding up proceeds, the
branch shall approach an authorised dealer.
Answer 3 (b):
As per Section 12, the Chairperson and other members shall not, for a period of two years,
accept any employment connected with the management or administration of any enterprise
which has been a party to any proceeding before the Commission under this Act. However, the
said restriction shall not apply where the Chairperson or any member is offered an employment
in a corporation established by or under any Central, State or Provincial Act.
In the present case, HIL Ltd. Is an enterprise which has been a party to any proceeding before
the Commission. Therefore, Mr. MKS cannot join HIL Ltd. Upto 31 st May, 2015 (i.e., upto 2 years of
cessation of his office of member). However, LIC is a corporation established by a Central Act,
Page 6

and so the restriction on employment of Chaiman or a member shall not apply where
appointment is made in LIC. Therefore, Mr. MKS can join LIC.
Answer 3 (c):
Chapter IX consisting of Regulations 92 to 95 of Securities and Exchange Board of India (Issue of
Capital and Disclosure Requirements)Regulations, 2009 contains the Regulations for issue of
bonus shares.
Applying the provisions contained in these Regulations to the given problem, M/s. Quick Bucks
Ltd. can make a bonus issue in the ratio of 1:1 as follows :
(i) The articles of M/s. Quick Bucks Ltd. must authorize it to issue the bonus shares, if there is no
provision in the articles authorizing the company to issue bonus shares, firstly, the articles
shall be amended by passing a special resolution.
(ii) Steps for determining whether any increase in Authorised share capital is required.
(a) Paid up share capital as on 31st March, 2013
200 Crores
(b) Paid up capital (after conversion of Rs. 150 crores fully convertible
debentures, assuming that these debentures shall be converted into
share capital of Rs. 100 crores)
350 Crores
(c) Proposed bonus issue 1 share for every share held
(d) Post bonus issue capital
700 Crores
Assumed that authorized share capital of M/s. Quick Bucks Ltd. is Rs. 700 crores, or more, no
increase in authorized share capital is required.
(iii) Sources of issue of bonus shares
Reserve and surplus (since free reserves built out of the genuine profits can be used for
issue of bonus issue)
800 Crores
Since the sources for issue of bonus shares (Rs. 800 crores) is sufficient to issue bonus shares
(Rs. 350 crores), the proposed issue can be made.
(iv) Other legal requirements for issue of bonus shares are as under
(a) A resolution shall be passed by the Board in a duly convened Board meeting
(b) The bonus shall be issued within 6 months of passing the board resolution
(c) After the issue of bonus shares, the company shall file with SEBI a compliance
certificate duly signed by the statutory auditor of the company or a secretary in whole
time practice.
(v) The bonus issue can be made if there is o default in
(a) Payment of interest or principal in respect of fixed deposits and interest on existing
debentures or principal on redemption thereof; and
(b) Payment of statutory dues of the employees such as contribution to provident fund,
gratuity, bonus etc.
4.
(a) Three persons X, Y and Z formed a scheme of developing barren land. Under the
scheme, X and Y were to incorporate a company and Z, a professional, was to provide loan
equivalent to the capital brought in by X and Y. The loan part was essential for giving shape to
the scheme. Can Z be regarded as one of the promoters of the company ?
[4]
(b) A Public Company has been declaring dividend at the rate of 20% on equity shares during
the last 5 years. The company has not made adequate profits during the year ended 31, 2013,
but it has got adequate reserves which can be utilized for maintaining the rate of dividend at
20%. Advise the company as to how it should go about if it wants to declare dividend at the rate
of 20% for the year 2012-13. Would your answer be different if the company utilized only the
profits made in the previous years and retained in the profit and loss account for the purpose of
payment of dividend at the rate of 20% for the year 2012-13?
[7]
Page 7

(c) The Directors of Khalsa Electronics Ltd. allotted to themselves certain Rights Shares for which
no application was made by certain shareholders as required u/s 81. Discuss the validity of their
action specially in view of the fact that market price of shares of his company is 40% above par.
[4]
Answer 4 (a):
The expression promoter has not been defined under the Companies Act. Section 62(6) (a)
defines the expression promoter to mean a promoter who was a party to the preparation of
the prospectus or of a portion thereof containing the untrue statement, but does not include
any person by reason of his acting in a profession capacity in procuring the formation of the
company.
To be a promoter one need not necessarily be associated with the initial formation of the
company, one who subsequently helps to arrange floating of its capital will equally be regarded
as a promoter. A person who does not take a prominent part may also have so acted in the
formation of a company as to bring himself under the term promoter.
However, the person assisting the promoters by acting in a professional capacity do not thereby
become promoters themselves. Thus, a solicitor who drafts the articles or the accountant who
values assets of a business to be purchased are merely giving professional assistance to the
promoter. However, where he goes further than this, for example, by introducing his clients to a
person who may be interested in purchasing shares in the proposed company, he would be
regarded as promoter.
In the given case, the scheme is such that it cannot be completed without the loan being
provided by Z to the company and Z has already agreed to provide loan to the company on
incorporation. Therefore, Z has necessarily participated in the formation of the company even
though not being in professional capacity. Hence, Z can be regarded as a Promoter of the
company.
Answer 4 (b):
The fundamental principle with respect to payment of dividend is that dividend is to be paid
only out of profits. In other words, the dividend can be paid only out of the following sources :
(i) Profits of current financial year
(ii) Undistributed profits of previous financial years, i.e., accumulated profits of previous years
(iii) Moneys provided by the Central Government or State Government in pursuance of a
Payment of dividend out of reserves :
Dividend can be declared out of the profits transferred to the reserves only if
(i) Previous approval of the Central Government is obtained; or
(ii) Such payment is made in accordance with such rules as may be prescribed by the Central
Government this behalf, i.e., The Companies (Declaration of Dividend out of Reserves)
Rules, 1975, which are detailed hereunder :
In the event of inadequacy of absence of profits in any year, a company may declare
dividend out of the accumulated profits earned by it is previous years and transferred by it to
the reserves, subject to the following conditions :
(i) The rate of dividend must not exceed the lower of
(a) Average of the rates of dividend declared by the company in immediately preceding 5
financial years; or
(b) 10%
(ii) The amount to be withdrawn from reserves must not exceed 1/10 th of aggregate of paid
up capital and free reserves. Further, the amount so withdrawn shall be first utilized to set off
the losses incurred in the financial year, and the balance amount can only be utilized for
the declaration of dividend.
Page 8

(iii) The balance of reserves after such withdrawal, shall not fall below 15% of paid up share
capital.
In the present case, the company intends to distribute dividend at the rate of 20%. But as per the
provisions discussed in point (i) above, the rate of dividend declared cannot exceed 10%, i.e.,
the rate of dividend declared out of reserves can be a maximum of 10%. Thus, the company
cannot declare dividend @ 20% out of reserves.
Payment of dividend by utilizing credit balance of Profit and Loss Account
Carried forward profits which have not been transferred to the reserves (i.e., credit balance in
the Profit and Loss Account) can be utilized for payment of dividend without any restriction.
Such utilization would not amount to withdrawal of profits from reserves.
Thus, the company can declare dividend @ 20% for the year 2012-13 out of accumulated profits
retained in the Profit and Loss Account without any restriction.
Answer 4 (c):
Right refers to the entitlement of the existing shareholders to receive invitation of offer or
subscription to the shares of a company in case of further issue of capital by the company,
before being offered to others. This is called as the Right of pre-emption.
If the shareholder does not inform the company of his decision within the stipulated time, he shall
be deemed to have declined the offer. If the shareholder declines or is deemed to have
declined or if the person in whose favour the renunciation is made declines to buy the shares,
the companys directors may dispose of those shares in such manner as they may think fit.
If a member did not respond to offers made by company, it has to be necessarily held that he
was not inclined to subscribe to additional shares, thereby impliedly consenting for allotment of
shares to others [R. Khemka v. Deccan Enterprises (P) Ltd. 1998 16 SCL 1 (AP)]
In the given case the Directors of Khalsa Electronics Ltd. allotted to themselves certain Rights
Shares for which no application was made by certain shareholders as required u/s 81. With the
reference to the above discussion it can be said that the allotment would be valid unless it is
proved that the shares were allotted to Directors on terms unfavourable to the company.
5. (a) Can an auditor be disqualified for indebtedness in the following cases?
(i) Where he is recovering his fees on a progressive basis even though the job is not complete.
(ii) Where the auditor's firm has purchased goods from the auditee company and not paid for
them for over six months.
[4]
(b) A company wants to provide financial assistance to its employees to enable them to
subscribe for fully paid shares of the company. Does it amount to purchase of its own share? If,
the instant case, the company itself purchases to redeem its Preference Shares, does it amount to
acquisition of its own shares ?
[4]
(c) Indian citizens incorporated a company in London for the purpose of carrying on business
there. Examine with reference to the relevant provisions of the Companies Act, 1956 whether it is
a Foreign Company. What would be your answer in case the London company was
incorporated by a company registered in India ?
[4]
(d) on 1st January 2013 the Board of Directors of Amir Co Ltd. Appointed Mr. J as sole selling agent
of the accompany for a period of 4 years. On 8th March 2013, Amir Co Ltd. In its general meeting
disapproved the appointment of Mr. J as sole selling agent of the company.
(i) What are the circumstances when compensation for loss of office is prohibited to a sole selling
agent ?
Page 9

(ii) Is Mr. J entitled to payment of compensation for loss of office ?
[3]
Answer 5 (a):
As per section 226(3), a person who is indebted to the company for an amount exceeding
`1,000 shall be disqualified for appointment as an auditor.
(i) An auditor can receive the audit fees on a progressive basis in accordance with a resolution
passed by the general meeting even though the audit is not complete. In such a case, he
cannot be said to indebted to the company and thus he does not vacate his office.
(ii) Where an auditor purchases goods from the company on credit he will be said to be
indebted to the company in respect of such credit purchases, notwithstanding the fact that
such credit period is normally allowed to all the customers by the company [ICAI, Guidance
Note on Independent Auditors]. Where the firm is indebted to the company, each and
every partner of the firm is deemed to have been indebted. Thus, if the amount outstanding
exceeds `1,000 the auditor shall vacate his office.
Answer 5 (b):
Sub section (2) of Section 77 disallows a public company and a private subsidiary of a public
company to give loan or provide financial assistance (directly or indirectly) to any person to
enable him to purchase or subscribe companys own shares or shares of its holding company.
Thus, whereas companies have now been allowed to purchase their own shares, they are still
not permitted to finance the purchase of their shares, directly or indirectly.
However, the aforesaid provisions regarding the prohibition to buy its own shares or give loans or
provide financial assistance shall not affect the making by a company of loans to persons (other
than directors or managers) bona fide in the employment of the company or its holding
company to be held by themselves by way of beneficial ownership.
However, the loan made to any employee for this purpose shall not exceed his salary or wages
at that time for a period of six months [Sec 77 (3)].
In the given case, providing financial assistance to its employees to enable them to subscribe for
fully paid shares of the company will not amount to purchase of own shares.
Section 77 applies both for Preference and Equity Shares. However, redemption of Preference
Shares is not in violation of Section 77.
Answer 5 (c):
As per Section 591, a company shall be a foreign company if
(i) It is incorporated outside India; and
(ii) It has established a place of business in India
Thus, for deciding as to whether a company is a foreign company or not, the criterion is to see as
to whether the company has established a place of business in India or not, and not the persons
who have incorporated the company.
In this case, Indian citizens have formed a company outside India. Since, the company has not
established any place of business in India, the company cannot be said to be a foreign
The answer have remained same even if the London company had been incorporated by a
company registered in India for the same reason as stated above.

Answer 5 (d):
As per section 294A, a sole selling agent shall not be entitled to any compensation for
premature termination of the agency brought about in any of the following circumstances :
(i) Where the appointment of sole selling agent is not approved in the first general meeting
held after his appointment.
(ii) Where the sole selling agent resigns because of the reconstruction or amalgamation of the
company and is appointed as the sole selling agent of the reconstructed or amalgamated
company.
(iii) Where the sole selling agent resign voluntarily.
(iv) Where the sole selling agent is guilty of fraud or breach of trust or gross negligence in the
conduct of his duties.
(v) Where the sole selling agent has instigated or is directly or indirectly responsible for the
termination of the sole selling agency.
6. (a) After serious disagreement and difference of opinion among the shareholders of the
company in the last annual general meeting, some of the directors took the steps as noted
below. Discuss the validity and effect of the following:
(i) Mr. John, the managing director sends his notice of resignation.
(ii) Mr. Paul, an ordinary director verbally resigns and not in writing.
(iii) Mr. David, another ordinary director, had sent his resignation, but withdrew it before the
Board meeting was held for accepting his resignation.
[6]
(b) M/s ABC Ltd. had power under its memorandum to sell its undertaking to another company
having similar objects. The Articles of the company contained a provision by which directors
were empowered to sell or otherwise deal with the property of the company. The Shareholders
passed an ordinary resolution for the sale of its assets on certain terms and required the directors
to carry out the sale. The Directors refused to comply with the wishes of the shareholders where
upon it was contended on behalf of the shareholders that they were the principal and directors
being their agents were bound to give effect to their decision. Based on the above facts, decide
the following issues, having regard to the provisions of the Companies Act, 1956 and case laws.
(i) Whether the contention of shareholders against the non-compliance of their wishes by the
directors is tenable.
(ii) Can shareholders usurp the powers which by the articles are vested in the directors by
passing a resolution in the general meeting?
[6]
(c) All statements in a prospectus issued by ABC Co Ltd. were literally true, but it failed to
disclose that the dividends stated in it as paid were not paid out of trading profits, but out of
realized capital profits. An allottee of shares wanted to avoid the contract on the ground that the
prospectus did not disclose this fact which, in his opinion, was very material. Would he succeed?
[3]
Answer 6 (a):
The resignation takes effect immediately without any need for its acceptance where the articles
do not contain any provision relating to resignation of directors or where the articles allow the
director to resign at any time. However, a managing director cannot resign by merely sending a
resignation. His resignation becomes effective only when the company accepts the resignation
and relieves him from the office. This is because he occupies two positions, viz., one that of a
director and other that of an employee of the company. An employee cannot resign at his
pleasure by giving notice. Instead, his resignation is required to be approved and accepted by

the company to relieve him from his duties and responsibilities [Achutha Pai v ROC(1966) 36
Comp Cas 598].
Any form of resignation, whether oral or written, is sufficient, provided the intention to resign is
clear. However, it is advisable that the resignation is in writing and states the time from which it is
to take effect. A verbal resignation shall be effective, if it is made in the general meeting and is
accepted at the general meeting [Latchford Premier Cinema Ltd. v Ennion (1931) 2 Ch 409]. A
resignation once made cannot be withdrawn except with the consent of the shareholders or
the Board of directors even if such withdrawal is sought before the general meeting or the Board
considers the resignation [Glossop v Glossop (1907) 2 Ch 370].
Thus, in the given problem
(i) The managing director, Mr. John, cannot resign merely by giving a notice. He shall continue
as managing director until his resignation is accepted.
(ii) Mr. Paul is an ordinary director and so a verbal notice of resignation is sufficient in his case.
The resignation shall be effective from the date of notice of resignation.
(iii) Mr. David cannot withdraw his resignation without the consent of the company even though
such withdrawal was sought before the Board considered his resignation.
Answer 6 (b):
The Board has the absolute power to do all things other than those that are expressly required to
be done by the company in general meeting (Section 291).
As per section 293, without the prior consent of the shareholders in general meeting, Board shall
not sell, lease or otherwise dispose of the whole, or substantially the whole, of one or more
undertakings of the company. The section has been framed negatively; it states that Board shall
not exercise such power without the concurrence of the shareholders in general meeting. It
does not imply that a consent or even a direction by the shareholders would make it obligatory
on the Board to exercise such power.
The power to sell the assets of the company is vested in the Board of directors. If in the opinion of
the Board, it is not in the best interest of the company to sell its assets, the Board is not bound to
do so, notwithstanding the fact that the company in general meeting has resolved that the
assets should be sold [Pothen v Hindustan Trading Corpn. (P) Ltd. (1967) 37 Comp Cas 6 (Ker)].
The given problem is answered as follows:
(i) The Board is the supreme body having the management of the company. The Board has the
absolute power to do all things except those that are expressly required to be done by the
company in general meeting. The shareholders cannot interfere in the day to day
management of the company. The shareholders cannot supersede or usurp the Board's
powers, or instruct it as to how it shall exercise its powers.
Also, as per Sec. 293, the power to sell, lease or otherwise dispose of any undertaking of the
company is vested with the Board, though the Board can exercise such power only with the
consent of the shareholders in general meeting. Thus, it is evident that a direction by the
shareholders does not make it obligatory for the Board to exercise such power.
If in the opinion of the Board, it is not in the best interest of the company to sell its assets, the
Board is not bound to do so, notwithstanding the fact that the company in general meeting
has resolved that the assets should be sold [Pothen v Hindustan Trading Corpn. (P) Ltd.].

Thus, the contention of the shareholders is not tenable.
(ii) The powers of management are vested in the Board of directors; the Board alone can
exercise such powers. Even a unanimous resolution of the shareholders will not enable the
shareholders to exercise the powers of the Board. The shareholders cannot interfere in the
day to day management of the company. Thus, the shareholders cannot usurp the powers
vested in directors.
Answer 6 (c):
According to section 65(1) of the Companies Act, 1956 where the omission from a prospectus of
any matter is calculated to mislead the prospectus shall be deemed in respect of such omission,
to be a prospectus in which an untrue statement is included.
The given problem is based on the facts of Rex v Kylsant [1932] 1 K.B. 42 where all the statements
included in the prospectus issued by the company were literally true. One of the statements
disclosed the rates of dividends paid for a number of years. But, dividends had been paid not
out of trading profits but out of realized capital profits. This material fact was not disclosed. Held,
that the prospectus was false in material particulars and Lord Kylsant, the managing director
and chairman, who knew that it was false, was held guilty of fraud.
So, in the given case, the allottee can avoid the contract on the same ground.
SECTION B
[Answer any five questions from Q.No.7 (a) to (f)]
7.
(a) Describe the role of stock exchange in Corporate Governance ?
[5]
(b) What is the relationship between CSR and sustainability ?
[5]
(c) Why Corporate Governance is required in Banks ?
[5]
(d) What are the difficulties encountered in governance in state owned business ?
[5]
(e) Corporate Social Responsibility is not charity explain.
[5]
(f) Write short note on Corporate Citizenship.
[5]
Answer 7 (a):
Stock exchanges have established themselves as promoters of corporate governance
recommendations for listed companies. Demutualisation and the subsequent self-listing of
exchanges have spurred debate on the role of exchanges. The conversion of exchanges to
listed companies is thought to have intensified competition. And, the sharper competition has
forced the question of whether there is a risk of a regulatory ''race to the bottom".
Also exchanges are uneasy about the prospect of having to continue performing their
traditional regulatory and other corporate governance enhancing functions amid a shrinking
revenue base. Therefore extension of role and wider responsibility are always welcome.

Following points show relevance of role of Stock Exchanges in the Corporate Governance:
1.Stock exchanges in the region developing rapidly; new exchanges being established
2. Stock exchanges remain government owned entities
3. CG codes proliferating, some no longer voluntary
4. Regulatory or enforcement powers of exchanges limited
5. Room for strengthening of listing rules
6. Disclosure of listed companies requires further attention
7. No evidence of race to the bottom, need to align with industry peers
THE TRADITIONAL ROLE OF EXCHANGES IN CORPORATE GOVERNANCE
Historically, the main direct contribution of exchanges to corporate governance has been listing
and disclosure standards and monitoring compliance. The regulatory function of stock
exchanges was in the past mostly limited to issuing rules and clarifying aspects of existing
frameworks. The standard-setting role of stock exchanges was essentially exercised through the
issuance of listing, ongoing disclosure, maintenance and de-listing requirements. On the
enforcement side, stock exchanges have shared their regulatory function with capital market
supervisory agencies. In addition to overseeing their own rules, stock exchanges were assigned
the role of monitoring the compliance with legislation and subsidiary securities regulation. Since
the promulgation of the SEBI, stock exchanges have often enlarged their regulatory role to
embrace a wider palette of corporate governance concerns. They have contributed to the
development of corporate governance recommendations and encouraged their application to
listed companies. The objective of the following part of the article is to summarize these key
channels for exchanges contributions to good corporate governance in listed companies.
THE EVOLVING ROLE OF EXCHANGES IN RESPECT OF CORPORATE GOVERNANCE
1. Exchanges act as a source of corporate governance related regulation
Exchanges provide complementary rationales for establishing themselves as a source of
corporate governance-related regulations. In essence, by raising transparency and
discouraging illegal or irregular practices, exchanges are act as regulatory authorities. The
regulatory function of exchanges is exercised in the context of an existing legal framework.
Exchanges' ability to introduce and enforce regulations is obviously circumscribed by the
authority of the relevant market regulators. To the extent that the relevant laws or securities
regulation already address corporate governance of listed companies, the role of exchange
regulation can therefore only be complementary. For instance, rules on prospectus issuance
follow largely from SEBI Prospectus Directive which may have further limited the scope of
standards setting by exchanges. Even in jurisdictions where exchanges are empowered to issue
regulations, they may be subject to an approval by another regulatory authority, e.g., in the
India, proposed changes to exchange rules must be filed with the SEBI.
2. Exchanges played a central role in the effective implementation of national corporate
governance codes
Corporate Governance is concerned with holding the balance between economic and social
goals and between individual and communal goals. The corporate governance framework is
there to encourage the efficient use of resources and equally to require accountability for the
stewardship of those resources. The aim is to align as nearly as possible the interests of
individuals, corporations and society. One of the first among such endeavors was the CII Code
for Desirable Corporate Governance developed by a committee chaired by Rahul Bajaj. The
committee was formed in 1996 and submitted its code in April 1998. Later SEBI constituted two
committees to look into the issue of corporate governance the first chaired by Kumar
Mangalam Birla that submitted its report in early 2000 and the second by Narayana Murthy three

years later. The SEBI committee recommendations have had the maximum impact on changing
the corporate governance situation in India. The Narayana Murthy committee worked on further
refining the rules. The Exchange has brought about unparalleled transparency, speed &
efficiency, safety and market integrity. It has set up facilities that serve as a model for the
securities industry in terms of systems, practices and procedures.
3. Compliance requirements
Listed companies have to comply with rules and regulations of concerned stock exchange and
work under the vigilance (i.e. supervision) of stock exchange authorities. Clause 49 of the listing
agreement with stock exchanges provides the code of corporate governance prescribed by
SEBI for listed Indian companies. With the introduction of clause 49, compliance with its
requirements is mandatory for such companies. Exchanges have played a pioneering role in the
development of the Indian securities market.
4. Awareness raising efforts have also played a role
Some exchanges have been actively involved in increasing the awareness around the value of
good corporate governance. For instance, The National Stock Exchange (NSE) a leading stock
exchange covering various cities and towns across the country has established & organized
training sessions and other educational projects in order to increase the awareness of securities
market & good governance practices and the Code of Best Practice for Listed Companies.
Such programmes not only serve the general public but also require corporates to maintain
good governance in light of investor awareness. In the same way an equally important
accomplishment of BSE Limited is its nationwide investor awareness campaign - "Safe Investing in
the Stock Market" under which awareness campaigns and dissemination of information through
print and electronic medium is undertaken across the country. BSE Limited also actively
promotes the securities market awareness campaign of the Securities and Exchange Board of
India.
Answer 7 (b):
Relation between CSR & Sustainable Development
CSR is an integral part of sustainable development. Exactly where it fits in is vigorously debated,
mainly because the concept of sustainable development also has many different
interpretations. This diagram, illuminates CSRs relationship with sustainable development.
Corporate Responsibility
(Sustainable Development)
Corporate Financial
Responsibility
Corporate
Environment
Responsibility
Corporate
Social
Responsibility

The basic idea to incorporate the sustainability aspect into business management should be
grounded in the ethical belief of give and take to maintain a successful company in the longterm. As the company is embedded in a complex system of interdependences in- and outside
the firm, this maintaining character should be fulfilled due to the companys commitment in
protecting the environment or reducing its ecological footprint and due to the general
acceptance of its corporate behaviour by society in- and outside of the firm.
It is recommended that CSR is to be used as social strand of the SD-concept which is mainly built
on a sound stakeholder approach. CSR focus especially on the corporate engagement realizing
its responsibilities as a member of society and meeting the expectations of all stakeholders.
The concept of SD on a corporate level is stated as Corporate Sustainability which is based on
the three pillars economic, ecological and social issues, therefore, the social dimension is named
CSR. The corporate orientation on sustainability is specially affected by external influences due
to the specific sustainability orientation on a macro-level:
Legal/Institutional: laws, human rights, etc.
Technological: new technologies
Market: suppliers, competitors, customers, trends
Societal: NGOs, society
Cultural: attitudes, behavior
Environmental: nature, availability of resources
Answer 7 (c):
If we examine the need for improving corporate governance in banks, two reasons stand out: (i)
Banks exist because they are willing to take on and manage risks. Besides, with the rapid pace of
financial innovation and globalisation, the face of banking business is undergoing a seachange. Banking business is becoming more complex and diversified. Risk taking and
management in a less regulated competitive market will have to be done in such a way that
investors' confidence is not eroded, (ii) Even in a regulated set-up, as it was in India prior to 1991,
some big banks in the public sector and a few in the private sector had incurred substantial
losses. This, along with the massive failures of non-banking financial Companies (NBFCs), had
adversely impacted investors' confidence.
Moreover, protecting the interests of depositors becomes a matter of paramount importance to
banks. In other corporates, this is not and need not be so for two reasons: (i) The depositors
collectively entrust a very large sum of their hard-earned money to the care of banks. It is found
that in India, the depositor's contribution was well over 15.5 times the shareholders' stake in banks
as early as in March 2001. This is bound to be much more now. (ii) The depositors are very large in
number and are scattered and have little say in the administration of banks. In other corporates,
big lenders do exercise the right to direct the management. In any case, the lenders' stake in
them might not exceed 2 or 3 times the owners' stake.
Banks deal in people's funds and should, therefore, act as trustees of the depositors. Regulators
the world over have recognised the vulnerability of depositors to the whims of managerial
misadventures in banks and, therefore, have been regulating banks more tightly than other
corporates.
To sum up, the objective of governance in banks should first be protection of depositors' interests
and then be to "optimise" the sharehodlers' interests. All other considerations would fall in place
once these two are achieved.

As part of its ongoing efforts to address supervisory issues, the Basel Committee on Banking
Supervision (BCBS) has been active in drawing from the collective supervisory experience of its
members and other supervisors in issuing supervisory guidance to foster safe and sound banking
practices. The committee was set up to reinforce the importance for banks of the OECD
principles, to draw attention to corporate governance issues addressed by previous committees,
and to present some new topics related to corporate governance for banks and their
supervisors to consider.
Banking supervision cannot function effectively if sound corporate governance is not in place
and, consequently, banking supervisors have a strong interest in ensuring that there is effective
corporate governance at every banking organisation. Supervisory experience underscores the
necessity of having the appropriate levels of accountability and checks and balances within
each bank. Put plainly, sound corporate governance makes the work of supervisors infinitely
easier. Sound corporate governance can contribute to a collaborative working relationship
between bank management and bank supervisors.
Answer 7 (d):
While routine governance regulations become applicable for public sector companies formed
under the Companies Act, 1956 and come under the purview of SEBI regulations the moment
they mobilize funds from the public, the typical organizational structure of PSUs makes it difficult for
the implementation of corporate governance practices as applicable to other publicly-listed
The board of directors will comprise essentially of bureaucrats drawn from various ministries
make.
when the economy was opened up, many of them lacked the competitiveness to fight it
out with their counterparts from the private sector.
Answer 7 (e):
The originally defined concept of CSR needs to be interpreted and dimensionalised in the
community.

strategy, yet the concept still is believed to be strongly linked to philanthropy. There is a need to
bring about an attitudinal change in people about the concept.
the tasks.
But often these entities work in isolation without creating a synergy with the other departments of
the corporate. There is a need to understand that CSR is not only a pure management directive
but it is something that is central to the company and has to be embedded in the core values
and principles of the corporate.
utilise things at which corporates are good; it has to be something that takes advantage of the
core skills and competencies of the companies. It has to be a mandate of the entire
organisation.
While conceptualisation and implementation seem firmly underway, evaluation is still taking a
back seat. There is a need to incorporate an evaluation plan, which along with presenting a
scope of improvement in terms of fund utilisation and methodology adopted for the project,
measures the short and long term impact of the practices.
While there have been success stories of short term interventions, their impact has been limited
and have faded over a period of time. It is essential for corporates to adopt a long term
approach rather than sticking to short term interventions, involving the companies and
employees in the long-term process of positive social transition.
A clearly defined mission and a vision statement combined with a sound implementation
strategy and a plan of action firmly rooted in ground realities and developed in close
collaboration with implementation partners, is what it takes for a successful execution of CSR.
An area that can be looked upon is the sharing of best practices by corporates. A plausible
framework for this could be bench-marking. While benchmarking will help corporates evaluate
their initiatives and rank them, it will also provide an impetus to others to develop similar kind of
practices. Credibility Alliance, a consortium of voluntary organisations follows a mechanism of
accreditation for voluntary sector. Efforts have to be directed towards building a similar kind of
mechanism for CSR as well.
Sustainable development, like building a successful business, requires taking the long-term view.
The KPMG International Survey of Corporate Responsibility Reporting 2005 showed that voluntary
reporting on sustainability is on the increase across all the countries. Sustainability Reporting is
emerging as a key vehicle to implement CSR and measure its progress in organisations.

As we move forward, increasing numbers of companies are expected to issue Sustainability
Reports, with the scope of issues broadening from purely environmental reporting to a more
comprehensive coverage of the environmental, social and economic dimensions.
There is a strong corporate initiative on joining the Global Compact Society in India, as well, with
43 Indian companies having already joined Global Compact as of January 2008.
Answer 7 (f):
A new terminology that has been gaining grounds in the business community today is Corporate
Citizenship. So what is corporate citizenship and is this fundamentally different from corporate
social responsibility? Corporate citizenship is defined by the Boston College Centre for Corporate
Citizenship, as the business strategy that shapes the values underpinning a companys mission
and the choices made each day by its executives, managers and employees as they engage
with society.
citizenship are: (i) Minimise harm (ii) Maximise benefit (iii) Be accountable and responsive to key
stakeholders (iv) Support strong financial results.

SECTION A
1. (a) Star Ltd. is authorized by its articles to accept the whole or any part of the amount of
remaining unpaid calls from any member although no part of that amount has been called
up. A shareholder deposits in advance the remaining amount due on his shares without any
calls made.
Referring to the provisions of the Companies Act, 1956, state the rights and liabilities of the
shareholder, which will arise on the payment of calls made in advance.
[3]
(b) Bridge Ltd. Is an infrastructure company with paid up capital and free reserve of ` three
crores and one and half crores respectively. The Board of directors granted a loan of ` 1
crores to Satyam Ltd and also gave a guarantee to IFCI for giving a loan of ` 1.50 crores to
Nelson Ltd. Bridge Ltd. has not given any other loan or guarantee to anyone. A group of
shareholders of Bridge Ltd. objected to the above deals on the ground that they are violative
of the provisions of the Companies Act, 1956. Applying the provisions of the said enactment
relating to inter-corporate loans and investments in the given case, decide:
(i) Whether the objection raised by the shareholders is tenable?
(ii) Would your answer be the same in case the amount of loan granted is ` 1.50 crores and
the guarantee given is for an amount of ` 2 crores?
(iii) What would be your answer in case Bridge Ltd. is a private company not being the
subsidiary of any public limited company?
[2+1+1=4]
(c) In the context of Court rulings in the matter of merger, answer the following :
(i) Whether exchange ratio approved by shareholders of merging companies can be
questioned by a small group of dissenting shareholders?
(ii) Whether transferor company is justified in excluding assets held on lease and license
arrangement, from those transferred to the transferee company?
[2+2=4]
(d) The Board of Directors of a public limited company borrowed in excess of the limits as
laid down by the Companies Act, 1956. The money was utilized for genuine purposes in the
interests of the company. Can the company repudiate the liability being ultra vires the
director ?
[4]
Answer 1.
(a) The following rights and obligations will arise on the payments of calls made in advance :
No voting right shall be available in respect of such call in advance until such call
become presently payable.
The shareholder becomes an unsecured creditors in respect of amount so paid by him.
Interest on such amount can be paid only if it is authorized by Articles and that also at
a rate so mentioned therein.
Liability due from the shareholder in respect of any future call shall come to an end.
Member who has paid such call is entitled to recover the amount in event of winding
up prior to repayment of capital by company.
The member upon all or in part of the moneys so advanced, may receive interest at
such rate not exceeding, unless the company in general meeting shall otherwise
Page 1

direct, 6% p.a., as may be agreed upon between the Board and the member paying
the sum in advance.
(b) Intercorporate loans and investments are governed by the provisions of Section 372A. As
per section 372A(8), the provisions of section 372A do not apply to a company established
with the object of providing infrastructural facilities.
The answer to the given problem if given as under :
(i) The company Bridge Ltd. Is an infrastructure company. The provisions of section 372A do
not apply to an infrastructure company. Accordingly, the provisions of section 372A are
not required to be complied with by Bridge Ltd. Therefore, the objection raised by the
shareholders that the company has violated the provisions of section 372A, is not
tenable.
(ii) The answer shall remain the same even if the amount of loan granted is Rs. 1.50 crores
and guarantee given is Rs. 2 crores, since the provisions of section 372A are not
attracted at all to Bridge Ltd.
(iii) In case Bridge Ltd. Were a private company, then also there would be no contravention
of section 372A since section 372A does not apply to a private company.
(c) i) No; Hindustan Lever Employees Union v. Hindustan Lever Ltd. [1994] 4 Comp. LJ 228 (Bom.),
the Bombay High Court held that where the exchange ratio has been approved by an
overwhelming majority of shareholders and there is no basis to doubt their judgment and the
valuation having been also confirmed to be fair by the firm of auditors, the objections of the
same cannot be sustained.
ii) Yes; the Supreme Court in Hindustan Lever Employees Union v. Hindustan Lever Ltd. [1995]
83 Comp. Cas. 30 held that the leasehold assets and properties held by a company were
neither transferable nor heritable; they are in the nature of a personal privilege. Accordingly,
the transferor company was justified in excluding them.
(d) Section 293(1)(d) restricts the power of the Board of Directors to borrow money upto the
aggregate of paid-up capital of the company and its free reserves. Where this limit is
exceeded, the consent of the general meeting is required. As per section 293(5), if such limit
is exceeded but the consent of the general meeting is not obtained, then no debt incurred
by the company in excess of this limit shall be valid or effectual, unless the lender proves that
(i) He advanced the loan in good faith; and
(ii) He did not have any knowledge that such limit had been exceeded.
If the borrowing by the directors is ultra vires their power, the directors may be personally
liable in damages to the lender, on the ground of breach of warranty of authority. Where the
borrowing is unauthorized, the company will be liable to repay. If it is shown that the money
had gone in the hands of the company [Lakshmi Ratan Cotton Mills Co Ltd. V J.K. Jute Mills
Co. Ltd (1957) 27 Comp Cas 660, AIR 1957 All 311].
In the present case, the money has been used by the company for genuine business
purposes. Thus, the company cannot repudiate its liability to repay the money.
2. (a) XYZ Ltd., over years, enjoys high reputation and its General Reserve is many times more
than the paid up capital of the Company. There is apprehension of cornering the shares of
Page 2

the company by some persons likely to result in change in the Board of Directors which may
be prejudicial to the public interest.
Advise, as to how can XYZ Ltd. block the transfer of shares of the company under the
provisions of the Companies Act, 1956.
[8]
(b) In the general meeting of X Ltd., held on 02.05.2013, Mr. Adi was appointed as a director.
On that day, he was not holding any equity shares in X Ltd. As per the articles of association
of X Ltd., the share qualification is the holding of 500 equity shares. On 15.06.2013 Mr. Adi
applied for 1,000 equity shares in X Ltd. and the shares were allotted on 10.07.2013. Mr. Adi
claims that he was holding the qualification shares within the time specified in Companies
Act. Discuss the validity of the arguments of the director.
[4]
(c) The auditor of the ACB Company resigned his office on 31 st Nov. 2011, while the financial
year of the company ends on the 31 st March 2012. Explain how the auditor will be
appointed?
[3]
Answer 2.
(a) Section 250 confers wide powers on the Company Law Board to prevent any change in the
Board of Directors of a company if it is of the opinion that such change is prejudicial to
public interest. Broadly, section 250 seeks to prevent an undesirable takeover. The Company
Law Board in empowered to exercise its powers in the following two cases :
I. Where the transfer of shares has already taken place
(i) At whose instance can Company Law Board act ? The Company Law Board has
the power to impose restrictions suo moto. No reference by the Central
Government or complaint by any other person is required.
(ii) Conditions The Company Law Board has the power to impose certain restrictions
if it is satisfied that
A transfer of shares in a company has taken place
As a result of such transfer of shares, a change in the composition of the
Board of Directors is likely to take place; and
Any such change in the composition of Board would be prejudicial to the
public interest.
(iii) Nature of restrictions The Company Law Board may direct that
The voting rights in respect of those shares shall not be exercisable for the
specified period not exceeding 3 years;
No resolution passed or action taken to effect a change in the composition
of the Board of directors before the date of the order shall have effect
unless confirmed by the Company Law Board.
(iv) Variation of order The Company Law Board may, at any time, vary or rescind any
order made by it. An intimation shall be served on the company about the
variation of the order within 14 days.
II. Where transfer of shares is likely to take place
(i) At whose instance can Company Law Board act ? The Company Law Board has
the power to impose restrictions suo moto. No reference by the Central
Government or complaint by any other person is required.
(ii) Conditions The Company Law Board has the power to impose certain restrictions
if
It has reasonable ground to believe that a transfer of shares in a company is
likely to take place;
As a result of such transfer of shares, a change in the composition of Board
would be prejudicial to the public interest.
Page 3

(iii) Nature of restrictions The Company Law Board may direct that any transfer of
shares in the company during such period not exceeding 3 years as may be
specified in the order, shall be void.
(iv) Variation of order The Company Law Board may, at any time, vary or rescind any
order made by it. An intimation shall be served on the company about the
variation of the order within 14 days.
(b) There is no statutory requirement that a director must hold qualification shares. Share
qualification is to be obtained by a director only if the articles of the company so require. A
director shall obtain share qualification within 2 months of appointment. Nominal amount of
qualification shares shall not exceed `5,000 or nominal value of one share, where it exceeds
`5,000 (Section 270). The office of a director shall become vacant where he fails to acquire
the qualification shares within 2 months of appointment (Section 283).
A person cannot be said to be qualified in respect of qualification shares until he is registered
as holder of the shares [Channel Collieries Trust Ltd. v Dover St. Margarets and Martin Mill
Light Rly. Co. (1914) 2 Ch 506; Ram Autar Jalan v Coal Products of India Ltd. (1970) 40 Comp
Cas 715 (SC)].
Accordingly, where the Board of directors approves the transfer of shares in the name of a
director but the shares are not registered in the name of the director within 2 months from
the date of his appointment, he cannot be said to have acquired the qualification shares in
the prescribed time.
In the given case, Mr. Adi was appointed as a director on 02.05.2013 and therefore he must
obtain the qualification shares on or before 02.07.2013. Mr. Adi applied for shares on
15.06.2013, but was registered as a shareholder only on 10.07.2013. As on 02.07.2013, he
cannot be said to be a holder of qualification shares. As per section 283, the office of a
director shall become vacant where he fails to acquire the qualification shares within 2
months of appointment. Accordingly, the argument of Mr. Adi is not correct and he shall
vacate the office of the director on 03.07.2013.
(c) A vacancy in the office of auditor, for any reason otherwise than retirement on expiry of
term, is referred as Casual Vacancy, if a casual vacancy arises in the office of auditor due to
death, insanity, disqualification or insolvency, etc., but not by resignation, section 224(6)
empowers the Board of directors to fill the same. Till the vacancy so caused, is filled, the
remaining auditor or auditors, if any, may act.
Where a casual vacancy results on account of resignation, the vacancy can be filled only in
the general meeting. The auditor appointed in a casual vacancy shall hold office until
conclusion of the next annual general meeting held after their appointment.
3. (a) Shri Basu was appointed as a Member of the CCI by Central Government. He has a
professional experience in international business for a period of 11 years, which is not a
proper qualification for appointment of a person as Member. Pointing out this defect in the
constitution of CCI, Mr. Sen, against whom CCI gave a decision, wants to invalidate the
proceedings of CCI. Examine whether Mr. Send will succeed.
[3]
Page 4

(b) X Co. Ltd., a closely held company comprised of two groups of shareholders one
foreign and the other Indian. The foreign group holds 60% and the Indian 40% of the shares of
the company. As per Articles of Association of the company both groups had equal
managerial powers. the relationship between the two groups soured and the operations of
the company reached a deadlock. The Indian group, therefore, approached the Company
Law Board for action against the foreign group for oppression. Referring to the provisions of
the Companies Act, 1956 and/or the decided case laws, discuss (i) Whether the contention of oppression against the foreign group by the India group is
tenable?
(ii) What are the powers of the Company Law Board in this regard?
[2+3=5]
(c) Wealth Bank of India, a Nationalised Bank, acquired a building from Mr. Shyam on 1st
Dec, 2008 in discharging a term loan advanced to him, who had mortgaged the said
building as security and failed to repay the loan. The building was given on rent to various
companies by Mr. Shyam. Now, the bank wants to keep the building as it is and earn the
rent. With the reference to the provisions of the Banking Regulation Act, 1949, state, whether
the bank can do so.
[4]
(d) The Smart Traders Association was maintained by a joint Hindu Family consisting of 21
major and 4 minor members. The Association is carrying the business for earning profits and
they were not registered as a Company under the Companies Act, 1956 or other law. State
whether Smart Traders Association is having any legal status ? Will there be any change in
the status of the Association if the members of the Smart Traders Association subsequently
reduced to 15? Support your answer with the correct provision of law.
[3]
Answer 3.
(a) As per section 15 of the Competition Act, 2002, no act or proceeding of the CCI shall be
invalid merely by reason of
(i) Any vacancy in the CCI, or
(ii) Any defect in the constitution of the CCI, or
(iii) Any defect in the appointment of a person acting as a Chairperson or as a Member, or
(iv) Any irregularity in the procedure of the CCI not affecting the merits of the case.
In the given case, Mr. Basu should have got atleast 15 years experience in the field of
international business. However, the defect in the appointment of Shri Basu acting as a
Member, shall not invalidate the proceedings of CCI. Hence, Mr., Sen will not be able to
succeed in his claim.
(b) An application seeking relief from the Company Law Board must make out a prima facie
case that the degree of oppression is so severe that there is just and equitable ground for
winding up of the company. The answer to the given problem is as follows :
(i) Both the India group and foreign groups are equally strong, and one is unable to
oppress the other. As such, there may be a deadlock, but not oppression. It is not a
case for winding up of the company and so relief under section 397 is not available
[Gnanasambandam (CP) v Tamiland Transports (Coimbatore) Pvt. Ltd. (1971) 41 Comp
Cas 26]. Thus, the contention of the Indian group that the foreign group is acting in a
manner oppressive to the Indian group is not tenable.
(ii) The powers of the Company Law Board under section 397 are discretionary in
character. Company Law Board may order the foreign group to buy out the minority
group shareholding at the fair price with necessary permission as was held in
Page 5

Yashovardhan Saboo v Groz Beckert Saboo Ltd. (1993) 1 Comp LJ 20. However, where
there was deadlock in the management of private limited company and both the
parties failed to buy the other group, the company was wound up under just and
equitable clause [Kishan Lal Ahuja v Surech Kumar Ahuja]. Thus, in the given case, if
both the groups fail to exercise the option to buy the other group, Company Law Board
may order the company to be wound up.
(c) As per section 9, no banking company shall hold any immovable property howsoever
acquired, except such as is required for its own use, for any period exceeding 7 years from
the acquisition thereof or any extension of such period as in this section provided, and such
property shall be disposed of within such period or extended period, as the case may be.
As per Proviso to Section 9, the Reserve Bank may in any particular case extend the
aforesaid period of 7 years by such period not exceeding 5 years where it is satisfied that
such extension would be in the interests of the depositors of the banking company.
In the given case, Wealth Bank proposes to keep the building for earning rent from tenants,
and not for its own use. In view of the provisions of section 9, Wealth Bank of India cannot
keep the building permanently with it for the purpose of earning rent from tenants. It shall
have to dispose of the building within 7 years from the date of its acquisitions, i.e., on or
before 31st December 2015.
However, if the approval of the Reserve Bank is obtained, it may continue to hold the
building till such extended period as is sanctioned by the Reserve Bank. The Reserve Bank
shall not permit the Wealth Bank to hold the property beyond 31 st December, 2020.
(d) As per Section 11 of the Companies Act, 1956, no company, association or partnership
consisting of more than 10 persons for the purpose of carrying on Banking Business and
more than 20 persons for carrying on any other business, can be formed unless it is
registered under the Companies Act or is formed in pursuance of some other Indian Law.
As an exception to the above mentioned provision a Joint Hindu Family carrying on any
business, for earning profits with any number of Members without being registered or formed
in pursuance of any Indian Law, will not be an illegal association.
In the given case, section 11 will not apply and even if the association is not registered
under the Companies Act, 1956, will be considered as a legal association. There will be no
change in legal status in case of subsequently reduction in the number of members.
4.
(a) Tintin Ltd. issued convertible debentures during the financial year 2011-12 wants to alter
the terms of redemption. Is it permissible under the provision of SEBI (Securities and
Exchange Board of India) regulations?
[2]
(b) The object clause of the Memorandum of a company empowers it to carry on distillery
business and any other business that is allied to it. The company wants to alter its
Memorandum so as to include the cinema business in its objects clause. Advise the
company.
[4]
(c) Section 14(2) of the Insurance Regulatory and Development Authority Act, 1999 specifies
the powers and functions of the Insurance Regulatory and Development Authority. List out
those powers and functions of the Authority.
[7]
(d) At an Annual General Meeting held on 20.09.2012, an auditor was appointed to hold
office up to the conclusion of next Annual General Meeting. The next Annual General
Page 6

Meeting was convened on 15.09.2013 but stood adjourned without transacting any
business. Does the retiring auditor continue in office?
[2]
Answer 4.
(a) No issuer shall alter the terms (including the terms of issue) of Specified Securities which may
adversely affect the interest of the holders of that specified securities. However alteration
permissible if
Written consent is obtained from the Holders of not less than 3/4 th of the Specified
Securities of that class, or
With the sanction of a Special resolution passed at a meeting of the Holders of the
Specified Securities of that class.
(b) Section 17(1) of the Companies Act, 1956 permits alteration of Memorandum to carry on
some business which under existing circumstances may conveniently or advantageously be
combined with the business of the company. Thus, section 17(1) does not prohibit a
company to diversify in areas other than those specified in the Memorandum. But the
business sought to be added must be such which can conveniently or advantageously be
combined with the business of the company.
The Punjab high Court in Punjab Distilling Industries Ltd. v. Registrar of Companies, [1963] 33
Comp. Cas. 811 [where an alteration to the Memorandum of Association to carry on a new
business was not confirmed because it had nothing to do even remotely with the existing
business and it could not be said that the new business would be conducive to and
economical or efficient in doing the existing business] held that the cinema business could
not be either conveniently or advantageously combined with the distillery business, and
therefore change of objects. Accordingly, alteration shall not be allowed.
(c) The powers and functions of the Insurance Regulatory and Development Authority shall
include,
(i)
issue to the applicant a certificate of registration, renew, modify, withdraw, suspend or
cancel such registration;
(ii) protection of the interests of the policy-holders in matters concerning assigning of
policy, nomination by policy-holders, insurable interest, settlement of insurance
claim, surrender value of policy and other terms and conditions of contracts of
insurance;
(iii) specifying requisite qualifications, code of conduct and practical training for
intermediary or insurance intermediaries and agents;
(iv) specifying the code of conduct for surveyors and loss assessors;
(v) promoting efficiency in the conduct of insurance business;
(vi) levying fees and other charges for carrying out the purposes of this Act;
(vii) calling for information from, undertaking inspection of, conducting inquiries and
investigations including audit of the insurers, intermediaries, insurance intermediaries
and other organisations connected with the insurance business;
(viii) specifying the form and manner in which books of account shall be maintained and
statement of accounts shall be rendered by insurers and other insurance
intermediaries;
(ix) regulating investment of funds by insurance companies;
(x) regulating maintenance of margin of solvency;
(xi) adjudication of disputes between insurers and intermediaries of insurance
intermediaries;
Page 7

(xii) supervising the functioning of the Tariff Advisory Committee
(xiii) specifying the percentage of life insurance business and general insurance business to
be undertaken by the insurer in the rural or social sector; and
(xiv) exercising such other powers as may be prescribed.
(d) According to section 224(1) of the Companies Act, 1956, an auditor appointed at an Annual
General Meeting holds office from the conclusion of that Annual General Meeting to the
conclusion of the next Annual General Meeting. In the given case, the auditor was to hold
office up to the conclusion of the Annual General Meeting duly convened but which stood
adjourned. As the adjourned meeting is merely a continuation of the original meeting, the
Annual General Meeting remains unconcluded and the retiring auditor continues to hold the
office till the conclusion of the meeting.
5. (a) State whether there is any restriction under the Foreign Exchange Management Act, 1999
in respect of drawal of foreign exchange for payments due on account of amortization of
loans in the ordinary course of business.
[2]
(b) Pigmi Ltd. Co. issued and published its prospectus to invite the investors to purchase its
shares. The said prospectus contained false statement. Mr. A purchased some partly paid
shares of the company in good faith on the Stock Exchange. Subsequently, the company
was wound up and the name of Mr. A was in the list of contributors. Decide:
(i) Whether Mr. A is liable to pay the unpaid amount?
(ii) Can Mr. A sue the directors of the company to recover damages?
[3]
(c) M/s Naira Infotech Ltd. was incorporated on 01.04.2012. No General Meeting of the
company has been held so far. Explain the provisions of the Companies Act, 1956 regarding
the time limit for holding the first Annual General Meeting of the Company and the power of
the Registrar to grant extension of time for the First Annual General Meeting.
[4]
(d) Mr. Lal has been arrested for a cognizable and non bailable offence punishable for a
term of imprisonment for more than three years under the Prevention of Money Laundering
Act, 2002. Advise, as to how can he be released on bail in this case?
[3]
(e) A public limited company has only seven shareholders, all the shares being paid-up in
full. All the shares of one such shareholder are sold by the Court in an auction and
purchased by another shareholder. The company continues to carry on its business,
thereafter. Discuss the liabilities of the shareholders of the company.
[3]
Answer 5.
(a) As per section 6 of the Foreign Exchange Management Act, 1999, the Reserve Bank of India
(RBI) shall not impose any restriction on the drawal of foreign exchange for (i) payments
due on account of amortisation of loans, or (ii) for depreciation of direct investments in the
ordinary course of business. Hence the transaction is permissible under the Foreign Exchange
Management Act.
(b) (i) Yes, Mr. A is liable to pay the unpaid amount on the shares. As Mr. A has purchased
partly paid shares, so he is liable for the remaining part of the shares. At the time of winding
up he is liable to contribute as a contributory.
Page 8

(ii) No, Mr. A cannot sue the directors to recover damages for the misstatement. The
shareholder must have relied on the statement in the prospectus in applying for shares.
In the present case, Mr. A purchased shares in good faith on the stock exchange. He had
not relied on the statement in prospectus. So he cannot sue.
(c) According to Section 166 of the Companies Act, 1956, every company shall hold its first
Annual General Meeting within a period of 18 months from the date of incorporation.
In given case, Naira Infotech Ltd. was incorporated on 01.04.2012, the first annual general
meeting of the company should be held on or before 30.09.2013.
Even though the Registrar of Companies is empowered to grant extension of time for a
period not exceeding 3 months for holding the Annual General Meeting, such a power is not
available to the Registrar in the case of the first Annual General Meeting.
Consequently, company and its directors will be liable for the default if the Annual General
Meeting was held after 30.09.2013.
(d) A person accused of an offence punishable for a term of imprisonment of more than three
years under the Part A of the Schedule to the Prevention of Money Laundering Act shall not
be released on bail or on his own bond unless
(i) The public prosecutor has been given an opportunity to oppose the application for
such release, and
(ii) Where the public prosecutor opposes the application, the Court is satisfied that there
are reasonable grounds for believing that
He is not guilty of such offence, and
He is not likely to commit any offence while on bail.
However the following persons may be released on bail, if the Special Court so directs
(i) Person who is under 16 years of age, or
(ii) A woman, or
(iii) Person who is sick or infirm.
(e) The problem in question relates to reduction of membership below the statutory minimum.
Section 12 of the Companies Act, 1956 requires a public company to have a minimum of
seven members. If at any time the membership of a public company falls below seven and it
continues its business for more than six months, then according to section 45 of the
Companies Act, 1956 every such member who was aware of this fact, would be individually
(personally) liable for all debts contracted after six months.
Thus, in the above problem, the remaining six members shall incur personal liability for the
debts contracted by the company:
(i) If they continued to carry on the business of the company with that reduced
membership (i.e., 6) beyond six months period;
(ii) Only those members who knew of this fact of reduced membership shall be liable. For
instance, one of the members who were abroad and thus not aware of those facts, shall
not be liable.
(iii) The liability shall extend only to the debts contracted after six months from the date of
auction of that member's shares.
Page 9

6. (a) The Promoters of a Company to be registered under the Companies Act, 1956 having its
main object of carrying or the business as manufacturer and stockist of Iron and Steel,
proposes that the names of the Companies is to be "PQR Iron & Steel Bank Limited". You are
required to state with reference to the provisions of the Banking Regulation Act, 1949,
whether the said Company with the proposed name can be registered.
[2]
(b) M/s. Alian Limited was wound up with effect from 15.04.2013 by an order of the Court. Mr.
X, who ceased to be a member of the company from 01.07.2012, has received a notice from
the liquidator that he should deposit a sum of ` 5,000 as his contribution towards the liability
on the shares previously held by him. In this context explain whether Mr. X can be called a
contributory and whether he can be made liable and whether there is any limitation on his
liability.
[4]
(c) The working of Mega Stock Exchange Association Ltd. is not being carried on by its
Governing Board in public interest. On receipt of representations from various Investors and
investors' Association, the Central Government is thinking to withdraw the recognition
granted to the said Stock Exchange. You are required to state the circumstances and
procedure for withdrawal of such recognition as per the provisions of Securities Contracts
(Regulation) Act, 1956 in this regard.
[5]
(d) On scrutiny of the sole selling agency agreement of ABC Company Ltd., with P, the
Central Government finds that the agreement is prejudicial to the interests of the company
and cancels it. P consults you as the advisability of challenging the order of the Central
Government. Please advise P as to the chances of his successfully challenging the order of
the Central Government.
[4]
Answer 6:
(a) As per section 7(1) of the Banking Regulation Act, 1949, no company other than a banking
company shall use as part of its name or, in connection with its business any of the words
"bank", "banker" or "banking".
In the given case, the main object of the proposed company is to carry on the business of
manufacturing and acting as stockist of iron and steel. The proposed company is not a
banking company as defined u/s 5(c) of the Act.
In view of the provisions of section 7(1), the name ' PQR Iron & Steel Bank Limited' is not
permissible.
(b) The term 'contributory' means every person liable to contribute to the assets of a company in
the event of its being wound up. The liability of a past member is secondary and arises only
when it appears to the Court that the present members are unable to satisfy the
contributions required to be made by them.
In the present case, Mr. X ceased to be a member of the company from 01.07.2012 and the
winding up commences on 15.04.2013. As on the date of commencement of winding up,
one year has not elapsed since he ceased to be a member, and therefore he shall be
treated as a past member. However, Mr. X shall not be liable to contribute
(i) in respect of any debt or liability of the company contracted after he ceased to be a
member;

(ii) unless it appears to the Court that the present members are unable to satisfy the
contributions required to be made by them;
(iii) anything more than the amount remaining unpaid on the shares held by him, i.e., if his
shares are fully paid, he shall incur no liability.
(c) Section 5 of the Securities Contracts (Regulation) Act, 1956 empowers the Central Government
to withdraw the recognition granted to a stock exchange. The procedure for withdrawal of
recognition is as follows:
(i)
If, considering the interest of the trade or the public interest, the Central Government is
of the opinion that the recognition granted to a stock exchange should be withdrawn, it
shall serve a written notice on the governing body of the stock exchange.
(ii)
The notice shall specify the reasons for the proposed withdrawal of recognition.
(iii)
The Central Government shall give an opportunity of being heard to the governing
body of the stock exchange.
(iv) If the Central Government is satisfied that the recognition should be withdrawn, it may,
by notification in the Official Gazette, withdraw the recognition granted to the stock
exchange.
(v) No withdrawal of recognition shall affect the validity of any contract entered into or
made before the date of the notification. In respect of any contract which is
outstanding as on the date of notification, the Central Government may, after
consultation with the stock exchange, make such provision as it deemed fit.
(d) Section 294(5) of the Companies Act, 1956 empowers the Central Government to enquire
into the terms and conditions of the appointment of a sole selling agent. It can make
variations in the terms and conditions if it is satisfied that these are prejudicial to the interest
of the company.
The proceeding undertaken by the Central Government must be guided by the principles of
natural justice. The Central Government must give the sole selling agent an opportunity of
being heard before making any order prejudicial to him.
Section 294 does not authorise the Central Government to cancel the appointment of a sole
selling agent.
In the given case, P is advised to challenge the order of the Central Government on the
following grounds:
(i) No opportunity of being heard was given to P. Since, the order of the Central
Government violates the principles of natural justice, it is void.
(ii) The order does not merely vary the terms but cancels the entire agreement. Since, the
Central Government has no power to cancel a sole selling agency, the action of the
Central Government is ultra-vires the Companies Act and is void.
SECTION B
7. (a) State the benefits of Corporate Social Responsibility (CSR).

(b) Define Corporate Governance. Write the core objectives of Corporate Governance.
[5]
[5]
(c) Describe the core elements which should be covered by Corporate Social Responsibility
(CSR) as per the Corporate Social Responsibility Voluntary Guidelines, 2009.
[5]
(d) List the steps which must be applied to every aspects of the Whole Life-cycle Costing
(WLCC).
[5]
(e) Clarify the following statements:
[5]
(i) Codification of Corporate Governance in India started with the recommendations of
Kumar Mangalam Birla Committee.
(ii) Corporate Social Responsibility is distinct from corporate philanthropy.
(f) Describe the factors responsible for increasing attention towards Corporate Social
Responsibility by the Corporates.
[5]
Answer 7(a):
The benefits of Corporate Social Responsibility (CSR):
1.
The Law of Responsibility: Society gives business its license to exist and this can be
amended or revoked at any time if it fails to live up to expectations.
2.
Enhanced Brand Image and Reputation: Customers are drawn to brands and companies
with good reputations.
3.
Checks Government regulation/ Controls: Regulation and control are costly to business,
both in terms of energy and money. Any failure of businessmen to assume
social
responsibilities invites government to intervene and regulate or control their activities.
4.
Reduced Operating Costs: Some CSR initiatives can reduce operating costs dramatically.
For example, many recycling initiatives cut waste-disposal costs and generate income by
selling recycled materials.
5.
Improved Financial Performance: Companies which are socially responsible carry a good
image in eyes of customers as well as business arena which ultimately end up in improving
the financial performance of companies.
Answer 7(b):
Corporate Governance: There is no single, accepted definition of Corporate Governance. There
are substantial differences in definition according to which country we are considering.
Corporate governance is about promoting corporate fairness, transparency and Accountability.
The term governance relates to a process of decision making and implementing the decisions in
the interest of all stakeholders. It basically relates to enhancement of corporate performance
and ensures proper accountability for management in the interest of all stakeholders.
The core objectives of Corporate Governance:
1.
Transparency According to this objective, every step shall be taken to ensure that timely
and accurate information is imparted to all concerned.
2. Participation Steps shall be taken to provide adequate information to shareholders and to


ensure their participation in policy matters.
3. Legal Adherence All legal policies and rules shall be duly complied.
4. Effectiveness Entire management shall contribute and try to use fairness and honesty with
stakeholders so that Effective governance can be attained.
Answer 7(c):
Each business entity should formulate a Corporate Social Responsibility (CSR) policy to guide its
strategic planning and provide a roadmap for its CSR initiatives, which should be an integral part
of overall business policy and aligned with its business goals. The policy should be framed with
the participation of various level executives and should be approved by the Board.
The CSR Policy should normally cover following core elements:
1. Care for all Stakeholders: The companies should respect the interests of, and be responsive
towards all stakeholders, including shareholders, employees, customers, suppliers, project
affected people, society at large etc. and create value for all of them. They should develop
mechanism to actively engage with all stakeholders, inform them of inherent risks and
mitigate them where they occur.
2. Ethical functioning: The governance systems of companies should be underpinned by Ethics,
Transparency and Accountability. They should not engage in business practices that are
abusive, unfair, corrupt or anti-competitive.
3. Respect for Workers Rights and Welfare: Companies should provide a workplace
environment that is safe, hygienic and which upholds the dignity of employees. They should
provide all employees with access to training and development of necessary skills for career
advancement, on an equal and non-discriminatory basis. They should uphold the freedom
of association and the effective recognition of the right to collective bargaining of labour,
have an effective grievance redressal system, should not employ child or forced labour and
provide and maintain equality of opportunities without any discrimination on any grounds in
recruitment and during employment.
4. Respect for Human Rights: Companies should respect human rights for all and avoid
complicity with human rights abuses by them or by third party.
5. Respect for Environment: Companies should take measures to check and prevent pollution;
recycle, manage and reduce waste, should manage natural resources in a sustainable
manner and ensure optimal use of resources like land and water, should proactively respond
to the challenges of climate change by adopting cleaner production methods, promoting
efficient use of energy and environment friendly technologies.
6. Activities for Social and Inclusive Development: Depending upon their core competency
and business interest, companies should undertake activities for economic and social
development of communities and geographical areas, particularly in the vicinity of their
operations. These could include: education, skill building for livelihood of people, health,
cultural and social welfare etc., particularly targeting at disadvantaged sections of society.
Answer 7(d):

The following steps must be applied to every aspect of the Whole Life-cycle Costing (WLCC)
with the help of Operational Research (OR) methods which consist of a number of well-defined
scientific steps:
(1)
(2)
(3)
(4)
Formulation of the problem, establishing the objectives and any constraints that may apply;
Building a model that represents the system under analysis;
Using the model in order to obtain a solution to the problem;
Comparing a solution obtained by means of the model with that in current use;
(5) Evaluating the results and monitoring the performance of the system through changing
conditions.
Answer 7(e):
(i) The Kumar Mangalam Birla Committee Report was the first formal and comprehensive
attempt to evolve a Code of Corporate Governance, in the context of prevailing conditions
of governance in Indian companies, as well as the state of capital markets at that time.
The recommendations of the Kumar Mangalam Birla Committee, led to inclusion of Clause
49 in the Listing Agreement in the year 2000. These recommendations, aimed at improving
the standards of Corporate Governance, are divided into mandatory and nonmandatory
recommendations.
(ii) Philanthropy means the act of donating money, goods, time or effort to support a charitable
cause in regard to a defined objective. Philanthropy can be equated with benevolence
and charity for the poor and needy. Philanthropy can be by an individual or by a corporate.
Corporate Social Responsibility (CSR) on the other hand is about how a company aligns their
values to social causes by including and collaborating with their investors, suppliers,
employees, regulators and the society as a whole. A CSR initiative of a corporate is not a
selfless act of giving; companies derive long-term benefits from the CSR initiatives and it is this
enlightened self interest which drives the CSR initiatives in companies.
Answer 7(f):
The following are the few factors and influences which have led to increasing attention being
devoted to Corporate Social Responsibility (CSR) by the Corporates:
(i)
Globalization coupled with focus on cross-border trade, multinational enterprises and

global supply chains is increasingly raising CSR concerns related to human resource
management practices, environmental protection, and health and safety, among other
things.
(ii)
Advances in communications technology, such as the Internet, cellular phones and

personal digital assistants, are making it easier to track corporate activities and
disseminate information about them. Non-governmental organizations now regularly
draw attention through their websites to business practices they view as problematic.
(iii)
Consumers and investors are showing increasing interest in supporting responsible

business practices and are demanding more information on how companies are
addressing risks and opportunities related to social and environmental issues.

(iv)
Citizens in many countries are making it clear that corporations should meet standards of
social and environmental care, no matter where they operate.
(v)
Businesses are recognizing that adopting an effective approach to CSR can reduce risk
of business disruptions, open up new opportunities, and enhance brand and company
reputation.

Full Marks: 100
The figures in the margin on the right side indicate full marks.
SECTION A
[Q.No.1 is compulsory and attempt any 4 from the rest]
Question 1:
Mr. Anand is an auditor and he has ventured newly into this area. He is having the following
issues in his mind. You are requested to guide him in resolving his issues, stating relevant sections
and laws.
a) He wishes to undertake audit work as well as work as employee with Firm ABC, an auditing
firm.
b) He wishes to join Firm ABC as a partner, what would be his ceiling limit.
c) He wants to compute and understand which of the following companies shall be/ not be
taken into consideration for calculating specified number of audits.
i) Audit of a Private Company
ii) Guarantee Companies not having Share Capital
iii) Audit of a Non-Profit Company
iv) Special Audits
v) Audit of foreign companies
vi) Branch Audits
vii) Company Audit where he is appointed as a Joint Auditor.
d) He wants to know, that as a member of ICAI, is there any other restrictions on him as a matter
of self regulation in matter of inclusion/exclusion of audit of Private Companies for
calculating the specified number of assignments.
e) Would the rules be different from case (d) above had he joined a CA Firm.
f) He also wishes to accept an offer to become the first auditor of Xee Ltd. What are the
procedures that the Board of Directors and Mr. Anand need to undertake.
[1+2+3+1+4+4]
Answer:
(a) Restriction on Appointment [Sec.224(lB)]: No Company or its Board of Directors shall appoint
or re-appoint any person or Firm as its Auditors if -,
(a) Such person is in full time employment elsewhere, or
(b) Such person or Firm holds the office of Auditor of the specified number of Companies or
more than the specified number of Companies.
In the case of a Firm of Auditors, 'Specified Number of Companies' means the number of
Companies specified for every Partner of the Firm who is not in full time employment elsewhere.
Hence, Mr. Anand cannot undertake the work of audit and be employed with Firm ABC at the
same time.
(b) Ceiling Limit: The ceiling limit is 20 Company Audits per person. Of this 20, not more than 10
shall be in respect of Companies having Paid-Up Capital of ` 25 Lakhs or more. Further, in
addition to this, Mr. Anand has to keep the following points in mind

Situation
(i) If he works for Firm ABC, and
Firm ABC is a
Partnership
Firm
(ii) When he is a Partner in a
number of Firms including
Firm ABC
Ceiling Limit
Ceiling Limit shall be 20 Company Audits per Partner who is
not in full-time employment elsewhere.
Ceiling Limit shall be 20 Company Audits on his account in
all the Firms together in which he is Partner or Proprietor.
(iii) Where he is a Partner of Firm Ceiling Limit shall not exceed 20 Company Audits in his
ABC and also holds office in individual capacity and all Firms taken together.
his individual capacity
(c) Computation of Ceiling Limit:

Included Audits
i) Part Audit: When an Auditor is
appointed to audit even a part of a
Company's accounts, the part will be
considered as a unit of audit for the
purpose of calculation of the ceiling.
ii) Joint Audit: When two or more
Auditors are appointed as Auditors,
each of the Joint Auditors is
considered a Part Auditor for the
purpose. Hence, any joint audit held
by an Auditor will be included as one
audit unit.
iii) Sec.25 Companies: Audit of NonProfit Companies would be included
for the purpose of ceiling.
Excluded Audits
Branch Audit: Audit of a Branch of Company
is not included in the computation of the
ceiling.
ii) Audit of Corporations, which are not
Companies, shall not be included for ceiling
purpose.
iii) Audit of Foreign Companies shall not be
included.
iv) Guarantee Companies: Company Limited by
Guarantee and not having Share Capital will
not be included in the ceiling.
v) Private Companies: Audit of Private Limited
Companies will not be included for ceiling u/s
224(1B).
vi) Special Audit u/s 233A or Investigation of
Companies will not be included for ceiling
purposes.
Hence the following would not be included in computing the ceiling limit.
i) Audit of a Private Company
ii) Guarantee Companies not having Share Capital
iii) Special Audits
iv) Audit of foreign companies
v) Branch Audits
i)
(d) Restrictions as per ICAI Notification 53/ 2001: As per the ICAI Notification, a CA in practice will
be guilty of professional misconduct, if he holds at any time, the appointment of more than 30
audit assignments, including audit of Private Companies. This restriction is intended to uphold the
principles of fairness and to provide equitable opportunities to all practicing members. [Note:
This provision is an additional restriction under the CA Act and does not override the Companies
Act.]
(e) In case of a CA Firm:
1. In case of CA Firm, the ceiling limit is 30 Audits per Partner, including audit of Private
Companies.
2. Where a member is a Partner in more than one CA Firm, all the Firms in which he is a Partner
will be together entitled to 30 Company audits in his account.
3. Where a Partner of a Firm also accepts audits in his individual capacity / Proprietary Firm, the
total number of Company audits should not exceed 30 in his individual capacity /

Proprietary Firm and all Partnership Firms taken together.
4. As specified in Sec. 224(1B), out of the above 30, the audits of Public Companies having
paid up capital of ` 25 Lakhs or more, shall not exceed 10.
5. For this purpose, Joint Audits held will be construed as one audit unit for each of the Joint
Auditors.
6. Audit of Head Office and Branches or one or more Branches of the same Company will be
construed as one audit only.
7. The number of Partners of a firm on the date of acceptance of audit assignment shall be
taken into account for computing the ceiling for the Firm.
8. A CA in full time employment elsewhere shall not be taken into account while computing
the ceiling for the Firm.
(f) Becoming the First auditor of Xee ltd:
In case Mr. Anand wants to be the first auditor of Xee Ltd. the following points needs to be
complied with.
1. Appointment by Board: Sec. 224(5) specifies that the Board of Directors can appoint the First
Auditor(s) of a Company.
2. Time of Appointment: The appointment shall be made by the Directors, within 1 month from
the date of incorporation of the Company.
3. Tenure of Office: The First Auditor(s) shall hold office till the conclusion of the first AGM.
4. Failure: If the Board fails to appoint the First Auditor(s) within 1 month of registration, the
Company in General Meeting is empowered to make the appointment.
5. Members' Power of Removal: The Company may, at a general meeting, remove such an
Auditor or all or any of them and appoint another or others in his or their place, on a
nomination being made by any member of the Company. For this purpose, notice should
be given to the members of the Company, not less than 14 days before the date of the
meeting.
6. Provision in Articles: An Auditor cannot be appointed as First Auditor(s) simply because his
name has been stated in the Articles of Association.
7. Intimation: The Company need not send any statutory intimation to the First Auditor(s), of
their appointment within 7 days. Notice of appointment can be sent in the ordinary course
of business within reasonable time.
8. Acceptance: The First Auditor(s) are themselves not required to inform the ROC about their
acceptance or refusal of such an appointment.
Question 2:
(a) Wee Ltd. has suffered a Net Loss for the year. The Directors however declared and paid an
Interim Dividend at 30% based on the half-yearly performance. Comment.
(b) Board of Directors of M/s. ABee Ltd, in its meeting held on 29th May 2013, declared an
interim dividend payable on paid up Equity Share Capital of the Company. In the Board
Meeting Scheduled for 10th June 2013, the Board wants to revoke the said declaration. You
are required to state with reference to the provisions of the Companies Act, 1956 whether
the Board of Directors can do so.
(c) ROC has received a complaint from a group of Creditors of a Company. The complaint
alleges that the Directors of the Company, in order to prevent the unearthing of their
embezzlement of Company's funds, are engaged in falsification and destruction of original
accounting books and records. The Complainants urged the ROC to seize the accounting
books and records of the Company so that the Directors may not be able to tamper the
same. You are required to state the powers, if any, of the ROC and inspector in this respect.
(d) Can Central Government investigate into the affairs of a company?
[4+4+6+1]

Answer:
(a) In declaration of interim dividend, in case there is a net loss the following points needs to be
considered.
i) Factors: In declaration and payment of Interim Dividend, the Management has to
consider whether - (a) there is a favorable trend of profits in the current year as that in the
past years, and (b) there is a reasonable anticipation that the year would close with a
surplus at least as that in the previous year.
ii) Effect of Interim Dividend: The fact that the Company has suffered a Net Loss at the end
of the year indicates that the Directors have miscalculated the performance of the
Company about the second half of the year. Hence, the following possibilities arise in this
case Dividend
out
of
Past The amount of profits should be sufficient enough to cover Accumulated Profits where (a) Transfer to Reserves as per Rules, and
sufficient balance is available in (b) Payment of Interim Dividend of 30%.
the P&L A/c.
The Auditor has to verify compliance with the Transfer to
Reserve Rules and procedure for payment of Interim
Dividend.
Dividend out of Reserves The balance in P&L Account could be sufficient to declare
where sufficient balance is not dividend but not for Transfer of Profits to Reserves.
available in the P&L A/c.
In such case, Dividend can be declared out of Reserves,
subject to a maximum of 10% only.
Hence, the Auditor has to report non-compliance with the
Rules in this case, as the actual rate of dividend is 30%.
Dividend out of Capital - where Where there is no balance in the P & L A/c and there are no
there is no balance in the P&L reserves available, the Interim Dividend constitutes a
A/c and Reserves
payment out of Capital.
The Auditor should qualify his report mentioning the fact that
the Interim Dividend has been paid out of Capital.
(b)As per Sec. 2(14A), Dividend includes any Interim Dividend. Therefore, all the provisions
applicable to final dividend shall equally apply to interim dividend.
Principle: Interim Dividend, once declared, like Final Dividend, is a debt due from the Company.
Accordingly, once declared, Interim Dividend cannot be revoked except under the same
circumstances in which the final dividend can be revoked. The amount of Interim Divi dend is to
be compulsorily deposited in a separate bank account, within 5 days of passing the Board
Resolution declaring the Interim Dividend [Sec. 205(1A)].
Conclusion: As per Sec.207, dividend must be paid within 30 days of its declaration. Thus, Interi m
Dividend must also be paid within 30 days of its declaration, i.e. within 30 days of date of passing
the Board Resolution declaring the Interim Dividend. In the instant case, on declaration of
Interim Dividend by the Board in a Board Meeting held on 29th May 2013, the liability of the
Company to pay the Interim Dividend has become certain, and the payment of Interim
Dividend must be made within next 30 days, viz. on or before 28th June 2013. Therefore,
revocation of Interim Dividend in the Board Meeting held on 10th June is not possible.
(c)
Particulars
Seizure by ROC u/s 234A
Seizure by Inspector u/s 240A
1. Belief
2.Basis
belief
ROC / Inspector can inspect, if it has reasonable ground to believe that books
and papers of, or relating to, any Company or other Body Corporate, Managing
Director or Manager of such Company or other Body Corporate, may be - (a)
destroyed, (b) mutilated, (c) altered, (d) falsified, or (e) secreted.
of Upon
information
in
ROC's In the course of investigation u/s
possession or otherwise.
235/237/239/247.
3.
ROC / Inspector may make an application to the First Class Magistrate or
Application
Presidency Magistrate having jurisdiction, for an order for the seizure of such
to Magistrate books and papers.
After considering the application and hearing the ROC/Inspector", if necessary,
the Magistrate may, by order, authorize the ROC / Inspector (a) to enter, with such assistance as may be required the place or places where
4. Order by
such books and papers are kept,
Magistrate
(b) to search that place of those places in the manner specified in the order,
and
(c) to seize such books and papers as ROC/Inspector considers necessary.
Inspector shall retain the books and papers
5. Period of ROC shall return the books and for such period not later than the
retention papers within 30 days of such conclusion of investigation, as he considers
of books seizure, and inform the Magistrate necessary. Thereafter, he shall return the
& papers of such return.
same, and inform the Magistrate of such
return.
Before returning books & papers,
ROC may (a) take copies of, or extracts
6.Taking
from them, or
Before returning books & papers, Inspector
Copies, &
(b) place identification marks on may place identification marks on them or
other
them or any part thereof, or
any part thereof.
powers
(c) deal with the same in such
other manner as he considers
necessary.
Note: Other provisions of Code of Criminal Procedure, 1898 relating to searches or seizures shall
also apply.
(d) The Central Government delegates its powers u/s 240(l)(a), u/s 240(1A), u/s 240(2)(b) and
u/s 240(3) of the Companies Act, 1956, to the Director, Serious Fraud Investigation Office only in
respect of those cases wherein the Central Government appoints officers of SFIO as Inspectors,
to investigate into the affairs of a company u/s 235 or u/s 237.
Question 3:
a) M/s Bee Ltd. a company registered in the State of West Bengal desires to shift its registered
office. State the laws and the provisions to be followed if the change occurs under the
following conditions:
i) Change from one place to another within the same city.
ii) Change from one city to another within the same state.
iii) Change of jurisdiction of ROC.
iv) Change of state.
b) The Articles of Association of a Limited Company provided that 'X' shall be the Law Officer of
the company and he shall not be removed except on the ground of proved misconduct. The
company removed him even though he was not guilty of misconduct. Decide, whether
company's action is valid.

c) Article of a Public company clearly stated that Mr. L will be the life time solicitor of the
company. Company in its General Meeting of shareholders resolved unanimously to appoint
Mr. M in place of Mr. L as the solicitor of company by altering its AOA. State with reasons,
whether the company can do so? If L files a case against the company for removal as
solicitor, will he succeed?
d) The Secretary of a Company issued a share certificate to 'A under the Company's seal with his
own signature and the signature of a Director forged by him. A Borrowed money from 'B' on
the strength of this certificate. 'B' wanted to realize the security and requested the company to
register him as a holder of the shares. Explain whether 'B' will succeed in getting the share
registered in his name.
[9+1+3+2]
Answer:
a)
ALTERATION OF REGISTERED OFFICE CLAUSE [Section 17]
(i) Change within
1. A resolution of the Board of Directors is required to be passed.
the same city,
town or village 2. Notice of new location must be given to the Registrar within 30 days of
the Change under form 18.
[Section 146]
1. Special resolution is required to be passed at a general meeting of the
(ii) Change from
shareholders.
one City, town
or
village
to 2. Filing of Copy of Special Resolution with ROC within 30 days
another
within 3. Notice of New Location Notice of the new location must be given to
the same ROC
the Registrar within 30 days of change under form 18.
and same State
[Section 146]
(iii)
Change from
the jurisdiction of
one ROC to the
jurisdiction
of
another
ROC
within the same
State. [Section
146 &17A]
1. Special resolution is required to be passed at a general meeting of the

shareholders.
2. Confirmation of Regional Director to be obtained. The Regional
Director must convey his confirmation within 4 weeks from the date of
receipt of application for such change.
3. Filing of Copy of Special Resolution with ROC within 30 days
4. Certified copy of the confirmation by Regional director together with
a printed copy of the altered memorandum of association to be filled
with ROC within 2 months of the date of confirmation.
5. Notice of the new location must be given to the Registrar within 30
days of change under form 18.
1. A special resolution is required to be passed by the company at its
general meeting. Copy thereof shall be filled with ROC within 30 days.
2. Such alteration must be confirmed by the Company Law Board

3. Copy of the order of the CLB must be filed by the company with the
(iv) Change from
ROC of both the States. Thereafter, the Registrar of each State shall
one state to
registered proposed alteration.
another
4. The Registrar of the State where the office was originally situated shall
send Registrar of the other State all records and documents relating to
company
5. When the registered office of the company is shifted to its new
location, the notice of same must be given to the Registrar of
Companies within 30 days of the shifting office under form 18.

6. A resolution of the Board of Directors is required to be passed
b) According to the provisions of Section 36, 'X' cannot enforce the right conferred on him by
the articles against the company. Hence the action taken by the company (i.e. removal of
'X' even though he was not guilty of misconduct) is valid.
c) According to Section 36 of Company Act 1956, upon registration, the Memorandum and
Articles of Association bind the company and its members to the same extent as if they had
been signed by the company and each member respectively. -Consequences of this shall
be as follow:i) Members bound to the Company-This view was also held in the case of Boreland's
Trustee v Steel Brothers and Co. Ltd.
ii) Company bound to the members- Company is also bound to its members in same
manner as members are bound to it
iii) Company not liable to outsider-Section 36, only create a contract between a company
and members, thus company may alter its AOA for any term as concerned with a
contract along with an outsider
In given case Article of the Public company clearly stated that Mr. L will be the life time solicitor
of company. Company in its General Meeting of shareholders resolved unanimously to appoint
Mr. M in place of Mr. L as the solicitor of company by altering its AOA.
Conclusion: Based upon the provisions of Sec 36, we can conclude that the Company is entitled
to remove Mr. L and he cannot succeed in bringing a suit against the company
This view was also taken in leading case of [Eley v Positive Government Life Assurance Co. Ltd]
d) Share certificate is not binding on company as it contained forged signatures. Thus no title
could be transferred to A even if he is a bona fide purchaser since as per the general rule
forgery is nullity (It means if any signatures are forged, it shall be taken as if no signatures are
there, thus no tile can be transfer to transferee). This view was also held in the case of
Rubben v Great Fingal Consolidated. Hence B would not succeed in having the shares in his
name.
Question 4:
a) Rajesh, who is a resident of New Delhi, sent a transfer deed, for registration of transfer of
shares to the company at the address of its Registered Office in Mumbai on 13.05.2013. He
did not receive the shares certificates till14.09.2013. He lodged a criminal complaint in the
Court at New Delhi. Decide, under the provisions of the Companies Act, 1956, whether the
Court at New Delhi is competent to take action in the said matter.
b) 'A' commits forgery and thereby obtains a certificate of transfer of shares from a company
and transfers the shares to 'B' for value acting in good faith. Company refuses to transfer the
shares to 'B'. Whether the company can refuse? Decide the liability of 'A' and of the
company towards 'B'. In the light of the above state the meaning and consequences of a
forged transfer.
c) ABC Company refuses to register transfer of shares made by Mr. A to Mr. B. The company
does not even send a notice of refusal within the prescribed time. Has the aggrieved party
any rights against the company for such refusal. Advice.
d) The Board of Directors of a company decided to pay 5% of issue price as underwriting
commission to the underwriters. On the other hand the Articles of Association of the
company permit only 3% commission. The Board of Directors further decides to pay the
commission out of the proceeds of share capital. Are the decisions taken by the Board of
Directors valid under the Companies Act, 1956?

e) When can a Public Company offer the new shares (further issue of shares) to persons other
than the existing shareholders of the Company? Can these shares be offered to Preference
Shareholders?
[3+4+4+2+2]
Answer:
a) According to section 113(1) every company shall within two months after the application for
the registration of transfer of any such shares, deliver the certificates to its shareholders.
In the case of a listed company under the listing agreement this period has been reduced to 30
days. Hence legal steps can be taken by Rajesh.
In the case of H.V. Jaya Ram v ICICI Ltd. It was held that cause of action for failure to deliver
share certificate arises where the registered office of the company is situated and not in the
jurisdiction of the Court located in the place where the complaint resides. Accordingly in the
present case also, the Court in New Delhi cannot entertain the complaint against a company
having its registered office in Mumbai.
b) Any forged transfer does not give the transferee concerned any title to the shares.
Although the innocent purchaser acting in good faith could validly and reasonably assume that
the person named in the certificate is the owner of the shares. Still the illegality cannot be
converted into legality.
Therefore, in this case company is right to refuse to do the transfer of the shares in the name of
the transferee B.
Forged Transfer
Meaning:
Forged Transfer means, transfer of shares made on the basis of forged transfer deed.
The instrument of transfer is said to be forged when transferor's signatures bearing on it are
forged.
Consequences of Forged Transfer:
1. Restoration of name of: True owner can compel the company to restore his name to the
register.
2. Claim to Dividend: True owner can also claim any dividend which may not have been paid
to him during the intervening period.
3. Right of Bona fide Purchaser:
If the company had issued a share certificate to the transferee on a forged transfer and he
further sold them to another buyer who has acted in good faith, then the purchaser will
have no right to be registered as shareholder.
However, he can claim damages from the company on the ground since he has acted on
the faith of the share certificate issued by the company.
Company in turn can claim damages from the person who has submitted said forged
transfer deed to it.
c) Remedies available to aggrieved party against refusal to register the transfer of shares by
ABC Company:
1. In case ABC is a private company [Section 111]
Transferor or the transferee may prefer an appeal to Company Law Board. The appeal should
be in writing and should be filed within the prescribed time.
Meaning of Prescribe Time:
i) Where the company gives a notice of refusal: Appeal should be filed within 2 months of
the receipt of such notice, and

ii) Where the company does not give any notice of refusal: Appeal should be filed within 4
months from the date on which the instrument of transfer was delivered to the company.
2. In case ABC is a public company [Section 111A]:
In case a public company without any sufficient cause, refuses to register a transfer of shares
within 2 months from the date on which, the instrument of transfer was delivered to the
company, the transferee may make an application to the Company Law Board to register such
transfer.
3. Right to Appeal where the transfer of security effected in contravention of certain law: Where
any transfer has been affected in contravention of provisions contained under SEBI Act, 1992 or
SICA or any other law for the time being in force. The Company, participants, investor or SEBI
may make an appeal to Company Law Board within a reasonable time to rectify the register or
records of the company or depository within.
4. Power of Company Law Board:
Company Law Board may direct the company or the depository to rectify the register or
the Records of ownership.
Company Law Board may also suspend the voting rights in respect of the securities subject
to enquiry in case enquiry has not yet completed.
d) According to the provisions of Section 76 of the Companies Act, 1956:
i) The payment of commission should be authorized by the articles.
ii) The amount of commission should not exceed, in case of shares, 5% of the price at which
the shares have been issued or the amount or rate authorized by the articles whichever is
less, and in case of debentures, it should not exceed 2%
Based upon the provisions of the above section, we can conclude that the Board of Directors
decision to pay 5% is not valid, since the payment cannot exceed 3% as provided in the Articles
of the company.
Secondly, decision of the Board to pay the commission out of capital is valid since underwriting
commission can be paid both out of capital as well as out of profits. [Madan Lal Fakir Chand Vs
Shree Changdeo Sugar Mills Ltd]
e) From the wordings of Section 81, of Companies Act, 1956 it is quite clear that the further issue
of shares can be issued only to equity shareholders, unless a certain specific procedure as stated
in law has been adopted for issue of these shares to outsiders. This specific procedure would
essentially include passing a special resolution in the general meeting and obtaining more votes
for the agenda than against the agenda. Therefore, in general issue of these shares cannot be
offered to preference shareholders.
Question 5:
a) K Ltd was in process of incorporation. Promoters of the company signed an agreement for
purchase of certain furniture for company and payment was to be made to the supplier of
the furniture after incorporation of the company. The company was incorporated and the
furniture was received and used by it. Shortly after incorporation, company went into
liquidation and debt could not be paid. As a result supplier sued the promoters. Examine
whether the promoters can be held liable under following situations:i) Where company has adopted the contract after incorporation
ii) Where company entered into a fresh contract after incorporation
b) A company was incorporated on 6th October, 2013. The certificate of incorporation of the
company was issued by the Registrar on 15th October, 2013. The company on 10th October,

2013 entered into a contract which created its contractual liability. The company denies from
the said liability on the ground that company is not bound by the contract entered into prior
to issuing of certificate of incorporation. Decide, under the provisions of the Companies Act,
1956, whether the company can be exempted from the said contractual liability.
c) The Memorandum of Association of a company was presented to the Registrar of Companies
for registration and the Registrar issued the certificate of incorporation. After complying with
all the legal formalities the company started a business according to the object clause,
which was clearly an illegal business. The company contends that the nature of the business
cannot be gone into as the certificate of incorporation is conclusive. Answer the question
whether company's contention is correct or not.
d) The Central Government, without referring the matter to the Supreme Court of India for
inquiry, removed a member of the Competition Commission of India, on the ground that he
has become physically or mentally incapable of acting as a member. Decide under the
provisions of Competition Act, 2002 whether the removal of the member is valid.
[7+3+3+2]
Answer:
a) According to Company Act 1956, any contract which is entered into by the promoters for
and on behalf of the proposed company before its incorporation shall be regarded as Preincorporation contract.
Provisions regarding these contracts can be discussed as follow:1. The Company is not bound by the Preliminary Contract: In case of [Re English and Colonial
Produce Ltd], it was held that Company cannot be held liable for the preliminary contracts,
A company is not bound by the preliminary contracts even if the company has taken the
benefit of the work on its behalf under the contract.
2. The Company cannot Enforce Preliminary Contracts: In the case of [Natal Land Co. v Pauline
Colliery Syndicate], it was held that other party is also not liable to company through preincorporation contract, here in this stated case
The owner of a piece of land agreed to lease it to a company to be formed by
promoters.
The promoters later on formed a company.
Subsequently 'owner' refused to grant the lease to the company.
It was held that the company cannot sue 'owner' and cannot claim specific
performance as it was not even in existence when the lease was signed.
Thus, preliminary contracts cannot be enforced by or against the company.
3. Personal Liability of Promoters: In the case of (Kelner v Baxter), it was held that promoters
shall be personally liable with any such contract. This is because one cannot enter into any
contract on behalf of any person who is not in existence. Therefore, for any such contract;
promoters shall be personally liable for the performance.
However, liability of promoter shall come to an end where after incorporation company
adopt the contract according to Sec 15 and Sec 19 of Specific Relief Act 1963.
Based upon above provision, we can conclude as follow:i) Since in the given case company has adopted the contract after incorporation, thus
company shall be liable for the contract so entered.
ii) Situation where company enter into a fresh contractWhere a company enter into a fresh contract after incorporation, then liability of promoters
shall come to an end and company shall become liable with this contract.
This view was also taken in case of [Howard v Patent Ivory Manufacturing Co.]
b) Section 35 provides that a certificate of incorporation issued by the Registrar is conclusive as
to all administrative acts relating to the incorporation and as to the date of incorporation.
Case of [Jubilee Cotton Mills v Lewis]

Thus based upon the above, we can conclude that even though Certificate of
incorporation was issued on 15th Oct, however it contained a date as 6th Oct. Therefore
company shall be considered as registered on 6th only and consequently contract so
entered was a valid contract
c) Though a certificate of incorporation is a conclusive evidence of its registration, but, it does
not mean that all its objects are legal.
In Bowman v Secular Society Ltd., the court held that the statute does not provide that all or
any of the objects specified in the memorandum, if otherwise illegal, would be rendered
legal by the certificate.
Therefore, the contention of the company that the nature of business cannot be gone into
after the certificate of incorporation has been obtained is not tenable.
d) The order of removal made by Central Government is valid and lawful on the following
grounds:
i) Since CG has ordered removal under the ground, that he has become physically or
mentally incapable of acting as a member.
ii) Since removal under such ground does not require CG to refer the matter to the Supreme
Court for inquiry.
Question 6:
a) Useful Ltd. had taken a loan of ` 2 crore from ABC Bank secured by some assets. The
company has defaulted in the matter of payment of some installments of loan as per terms of
the loan agreement. The bank has filed a petition in the High Court on the ground that the
company is unable to pay its debts.
The company opposes the petition for winding up on the ground that it has employed 1000
workers, paid their salaries regularly and that it has paid all the tax dues to the Government.
The company has further contended that if the company is compelled to repay the loan
immediately, it will cripple the company causing hardships to employees and other persons
having business dealings with the company. The company is also supported by some major
creditors.
Explain the circumstances under which the company may be ordered to be wound up by
the Court on the ground of inability to pay its debts and whether the bank will succeed in this
case.
b) Young Bank is a newly formed bank. The constitution of its Board of Directors is mostly
graduates and under-graduates. Is the constitution as per The Banking Regulations Act,
1949? Discuss. Also the Bank wants to reconstitute its board and retire some of its directors.
What are the provisions as per law?
c) Mr. A was a member of the Competition Commission of India. On the basis of information
that he had acquired such financial interest as was likely to affect prejudicially his functions
as a member of the Commission, the Central Government appointed an officer to hold an
inquiry. On the basis of report of the said officer the Central Government issued an order of
removal of Mr. A. Decide whether the action of the Central Government is in order under the
provisions of the Competition Act, 2002?
d) Ajay Ltd. is being wound up by the court. All the assets of the company have been charged
to the companys bankers to whom the company y owes 1 crore. The company owes the
following amounts to others:
i) Dues to workers `25 lakhs
ii) Taxes payable to Government `5 lakh
iii) Unsecured creditors - `10 lakhs
You are required to compute with reference to the provisions of the Companies Act, 1956
the amount each kind of creditors is likely to get if the amount realized by the official

liquidators from the secured assets and available for distribution among the creditors is only `
80 lakhs.
[3+6+3+3]
Answer:
a) The company is unable to pay its debts, and it has defaulted in payment of the installments
of its Bank loan.
The court may not order winding-up in this case as:
The power of the court to order winding up is discretionary.
Since the court shall consider the interest of 1000 employees, temporary cash crisis,
loss of taxes to the Government, loss of production, loss of business, probable
hardships on other creditors, and public policy.
If the court decides that it is not in the interest of justice to wind up the company.
[Tata Iron and Steel Co. V Micro Forge (India) Ltd.]
b) BOARD OF DIRECTORS TO INCLUDE PERSONS WITH PROFESSIONAL OR OTHER EXPERIENCE (Sec.
10A), as per Banking Regulation Act, 1949:
51% or more directors to be specialized in certain specified areas [Sec. 10A (2)] i.e.
Not less than 51% of the total number of members of the Board of Directors of a banking
company shall consist of persons, who shall have special knowledge or practical
experience
in respect of one or more of the following matters, namely:
agriculture and rural economy,
co-operation,
small-scale industry,
accountancy,
banking,
economics,
finance,
law,
any other matter the special knowledge of, and practical experience, which would, in
the opinion of RBI, be useful to the banking company.
Minimum 2 directors to be specialised in certain specified areas [Proviso to Sec. 10A (2)]
It shall also be ensured that out of the aforesaid number of Directors, not less than 2 shall be
persons having special knowledge or practical experience in respect of agriculture and rural
economy, co-operation or small-scale industry.
Reconstitution of Board if requirements not fulfilled [Sec. 10A (3)]
If, in respect of any banking company, the requirements, as laid down in sub-section (2), are
not fulfilled at any time, the Board of Directors of such banking company shall re-constitute
such Board so as to ensure that the said requirements are fulfilled.
Retirement of directors by lots to ensure reconstitution [Sec. 10A (4)]
If, for the purpose of re-constituting the Board under sub-section (3), it is necessary to retire
any Director or Directors, the Board may, by lots drawn in such manner as may be
prescribed, decides which Director or Directors shall cease to hold office and such decision
shall be binding on every Director of the Board.
c) CG has the power to remove Mr. A:
Since Sec. 11 empowers CG to remove the Chairperson or any member of the Commission on
various grounds specified u/s 11 including the ground "where the Chairperson or the member

has acquired such financial or other interest as is likely to affect prejudicially his functions as a
Member or Chairperson."
Procedure for removal of Mr. A:
i) CG shall make a reference to the Supreme Court.
ii) The Supreme Court shall order holding of an enquiry. The enquiry shall be held in
accordance with the procedure prescribed by the Supreme Court.
iii) The Supreme Court may make an order for removal of Mr. A.
d)
(i) The amount overriding preferential payments ( `1 crore due to secured creditors and `25
lakhs due to workers), hence a total of `1.25 crore
(ii) Since the amount realized is `80 lakhs and it is not sufficient to pay the overriding preferential
payments in full, the workmens dues and dues payable to secured creditors shall abate in
equal proportions, i.e., the payments to workmen and secured creditors should be in the
proportion of amount owed by the company to them ( i.e. 100:25). Therefore, workers shall
be paid `16 lakhs and secrured creditos should be paid `64 lakhs.
(iii) No payments shall be made to the Government authorities towards taxes payable or to
unsecured creditors.
SECTION B
Question 7:
a) Discuss the difficulties faced in Governance by state owned businesses.
b) Analyze CSR as a Corporate Brand
c) State the reason for failure of construction industry to embrace Whole Life Cycle Costing
d) Describe the core elements to be covered under CSR Policy
e) Write a short note on Memorandum of Understanding and Public Sector Enterprises.
f) Discuss the relevance of OECD Guidelines for Corporate Governance of State-owned
enterprises.
[55]
Answer:
a) Difficulties Encountered in Governance in state owned businesses
Routine governance regulations become applicable for public sector companies formed under
the Companies Act, 1956 and come under the purview of SEBI regulations the moment they
mobilize funds from the public. The typical organizational structure of PSUs makes it difficult for the
implementation of corporate governance practices as applicable to other publicly-listed
The board of directors will comprise essentially bureaucrats drawn from various ministries
may necessitate a percentage of independent components on the board; but many

make.
b) CSR as a Corporate Brand:
themselves from their competitors, CSR initiatives enable corporates to build a stronger
brand that resonates with key external stake-holders customers, general public and the
government.
Corporate in India are also realising that their reputation is intrinsically connected with how well
acceptance.
c) Reason for failure of construction industry to embrace WLCC
Currently, the application of Whole Life Cycle Costing (WLCC) in the construction industry is still
hindered significantly by the lack of standard method and the excuse of lack of sound data
upon which to arrive at accurate decisions. As a result, the output from WLCC models is looked
on as unreliable. A Government report issued by the Building Research Establishment on Whole
Life Costing identified several factors that presently act as barriers to applying WLCC:
The lack of universal methods and standard formats for calculating whole life costs
The difficulty in integration of operating and maintenance strategies at the design phase
The scale of the data collection exercise, data inconsistency
The requirement for an independently maintained database on performance and cost of
building components.
These barriers might be directly related to the absence of adequate knowledge of WLCC
processes and mechanisms. There may also be a lack of willingness from stakeholders to set up
appropriate mechanisms to solve these problems. If, for example, all building occupiers were
required to submit annual running cost profiles, the risk associated with WLCC techniques could
be significantly reduced (Bird 1987). In fact, White (1991) argues the case for performance
profiles and in particular, highlights again the requirements for a universal construction data

information system. One could argue that a plethora of WLCC models does exist but the
common denominator in practical application and development is lack of appropriate
information or know-how to use and develop models with existing information.
It seems to be worth noting how both the academic and practical schools of thought in the
industry need to get their own houses in order if significant steps are to be taken in the wider
applications of WLCC. Newton (1991) in his work in cost modelling procedures highlights the
need for a methodological and organised framework for such research activities. The sheer
complexity of many models lends little to practical application and in many cases, if not the
majority, the lack of available good quality data prohibits further development. In terms of the
practitioners, they need to be willing to encourage clients and building occupiers into adopting
a more holistic approach to running cost control so that procedures can be put in place to aid
all those requiring WLCC cost profiles.
d) The core elements to be covered under CSR Policy
The core elements to be covered under CSR Policy is as follows:
1. Care for all Stakeholders - The companies should respect the interests of, and be responsive
towards all stakeholders, including shareholders, employees, customers, suppliers, project
affected people, society at large etc. and create value for all of them. They should develop
mechanism to actively engage with all stakeholders, inform them of inherent risks and mitigate
them where they occur.
2. Ethical functioning - Their governance systems should be underpinned by Ethics, Transparency
and Accountability. They should not engage in business practices that are abusive, unfair,
corrupt or anti-competitive.
3. Respect for Workers Rights and Welfare - Companies
should
provide
a
workplace
environment that is safe, hygienic and humane and which upholds the dignity of employees.
They should provide all employees with access to training and development of necessary skills
for career advancement, on an equal and non-discriminatory basis. They should uphold the
freedom of association and the effective recognition of the right to collective bargaining of
labour, have an effective grievance redressal system, should not employ child or forced labour
and provide and maintain equality of opportunities without any discrimination on any grounds in
recruitment and during employment.
4. Respect for Human Rights - Companies should respect human rights for all and avoid
complicity with human rights abuses by them or by third party.
5. Respect for Environment - Companies should take measures to check and prevent pollution;
recycle, manage and reduce waste, should manage natural resources in a sustainable manner
and ensure optimal use of resources like land and water, should proactively respond to the
challenges of climate change by adopting cleaner production methods, promoting efficient
use of energy and environment friendly technologies.
6. Activities for Social and Inclusive Development - Depending upon their core competency
and business interest, companies should undertake activities for economic and social
development of communities and geographical areas, particularly in the vicinity of their
operations. These could include: education, skill building for livelihood of people, health, cultural
and social welfare etc., particularly targeting at disadvantaged sections of society.
e) Memorandum of Understanding and Public Sector Enterprises:

After Independence, Public Sector Enterprises (PSEs) were set up in India with an objective to
promote rapid economic development through the creation and expansion of infrastructure by
the government. With different phases of development, the role of PSEs has changed and their
operations have extended to a wide range of activities in manufacturing, engineering, steel,
heavy machinery, machine tools, fertilizers, drugs, textiles, pharmaceuticals, petro-chemicals,
extraction and refining of crude oil and services such as telecommunication, trading, tourism,
warehousing, etc. as well as a range of consultancy services. While there have been many PSEs
that have performed very well in competition with private sector enterprises, there are also
many PSEs that have performed very poorly. In an economic environment that has changed
considerably in the last two decades, the role of PSEs has changed and they have been
increasingly guided to reduce their dependence on the Government. They have been listed on
the stock exchange and few of them have been privatized. The Government has provided PSEs
the necessary flexibility and autonomy to operate effectively in a competitive environment.
However, there are a few issues with the operation and management of PSEs which still persist
and need to be attended to. There is a need to develop a mechanism on how government can
get an efficient Indian presence in the sectors where the private sector investments are not
forthcoming especially in strategic areas where developing capabilities is essential if India has to
play its rightful role among the among the nations of the world.
f) The relevance of OECD Guidelines for Corporate Governance of State-owned enterprises:
Many of the developing countries still continue to have a dominant presence of state-owned
enterprises. Hence, OECD thought it appropriate to evolve a set of governance guidelines for
the state-owned enterprises as it did for the private enterprises in member countries. According
to OECD, A major challenge is to find a balance between the states responsibility for actively
exercising its ownership functions, such as, the nomination and election of the board, while at
the same time refraining from imposing undue political interference in the management of the
company. Another important challenge is to ensure that there is a level playing field in markets where
private sector companies can compete with the state-owned enterprises, and that governments
do not distort competition in the way they use their regulatory or supervisory powers.
also suggest the strict separation of the states ownership and regulatory functions. If properly
implemented, these and other recommended reforms would go a long way to ensure that state
ownership is exercised in a professional and accountable manner, and that the state plays a
positive role in improving corporate governance across all sectors of our economies. The result
would be healthier, more competitive, and transparent enterprises.
There should be a clear separation between the states ownership function and other state
functions that may influence the conditions for state-owned enterprises, particularly with
regard to market regulation.
State-owned Enterprises should not be exempt from the application of general laws and
regulations. Stakeholders including competitors should have access to efficient redress and
an even-handed ruling when they believe that their rights have been violated.
State-owned Enterprises should face competitive conditions regarding access to finance.
Their relations with state-owned banks, state-owned financial institutions, and other stateowned companies, should be based on purely commercial grounds.

SECTION A
1. (a) Anita Ltd. and Binita Ltd. entered into a scheme of amalgamation by which Anita Ltd.
would transfer its entire undertaking to Binita Ltd. However, the Central Govt. raised an
objection that unless the Objects Clause of the companies are similar, and Memorandum
empowers to do so, the scheme of amalgamation cannot be permitted. Is the contention of
the Central Govt. correct?
[3]
(b) Mr. Ram, a Director of XYZ Ltd., requested by providing an advance information for leave
of absence expressing his inability to attend the next Board meeting. Advise whether notice
is required to be sent to him.
[2]
(c) Amal, Vimal, Chapal and Dhabal are Directors of ABCD Ltd. Chapal and Dhabal did not
attend the Board Meeting which was properly convened. At the said Board Meeting, two
Additional Directors was appointed. They are the wife and brother of Amal and Vimal
respectively, the Directors who attended the Board Meeting. Explain whether the Directors
who attended the Board Meeting are entitled to vote on the subject-matter and whether the
appointment of Additional Directors is valid.
[4]
(d) The board of Directors of GF Projects Ltd. , a company whose Shares are listed on the
Delhi Stock Exchange proposes to give loans to a sister Company in excess of the limit
prescribed u/s 372A (1). The next AGM of the Company is due only after 6 months. Since the
Board is anxious to complete the formalities quickly without waiting for the date of next AGM,
advise the board about the steps to be taken to comply with the legal requirements under
the Companies Act, 1956.
[6]
Answer 1(a):
There is no statutory condition that the Objects Clause of both amalgamating companies should
be similar. Infact, the purpose of amalgamation may be to enter into new areas of activity/lines
of business (within the powers stipulated by the MoA), without starting a new undertaking afresh.
Hence, non-similarity of Objects Clause of amalgamating companies cannot be a valid
objection.
In the case of EITA India Ltd. AIR 1997 Cal 208, United Bank of India Vs united India Credit & Devt
Co. Ltd. 47 CC 689 Hari Krishna Lohia Vs Hoolungoree Tea Company 47 CC 458, it was held that
To amalgamate with another company is a power of the company, and not merely an
object. This right to amalgamate is derived from the Statute itself, and no separate provision in
the Companys MoA is required. Sec. 394 gives full jurisdiction to the Court to sanction
amalgamation, even though there may be no power in the objects clause of MoA.
In view of the above discussion, the objections of the Central Govt. are not valid.
Answer 1(b):
Notice of every Board meeting shall be given in writing to every director for the time being in
India and to every other director at his usual address in India (Section 286).
Notice is to be sent to a director even if he waives his right to receive the notice [Re, Portuguese
Consolidated Copper Mines Ltd. (1889) 42 Ch D 160 (CA)]. Thus, the notice of Board meeting
must be sent to Mr. Ram.
Directorate of Studies, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament)
Page 1

Answer 1(c):
In view of the opinion of Madras High Court & Tribunal Letter cited below, the appointment of
relatives of Amal & Vimal as Additional Directors is not valid.
The question is whether the appointment of Additional Director would come within the scope of
the word contract or arrangement, in order to consider the Director to be interested. The
Court concluded that appointment as Director does not come within the scope of the
expression contract (because the position of a Director may be conferred on a person by any
method other than contract), but it would amount to arrangement. So, the attending
Directors became Interested Directors. Appointment of their relatives as Additional Directors was
null and void Madras Tube Co. Ltd. Vs Harikrishna Somani 1 Comp LJ 195 (Mad).
It will be a clearly unsound Company practice if a Director, whose near relative is proposed to
be appointed to the Board, were to participate in the discussions at the Board Meeting and
vote on the proposal for such appointment L.No. 8/46/(300) 64-PR dated 27-01-1965.
Note: Contrary opinion is taken by Bombay High Court
Appointment as an Additional Director of a person who is related to a Director does not violate
the requirements of Sec. 300(1), because such appointment does not constitute any contract
or arrangement of the Company with the Sitting Director. The Sitting Director is entitled to
participate and vote Shailesh Harilal Shah Vs. Matushree Textiles ltd. 82 CC 5 (Bom).
Answer 1(d):
Loans above the ceiling limit u/s 372A(1) can be made only with the previous approval by a
Special Resolution in the General meeting. So, the following steps are to be taken by the
Company:
1. According to Rule 4 of Companies (Passing of the Resolution by postal Ballot) Rules, 2001,
Postal Ballot is mandatory in case of a Listed Company for transacting a business relating to
giving loans in excess of the limits prescribed u/s 372A(1). As the above Company is a Listed
Company, it must take steps for passing a special resolution through postal ballot in
accordance with the aforesaid Rules. [Sec. 192A].
2. Notice of such resolution to be sent to members should indicate specific limits, particulars of
Company to which loan is to be given, specific sources of funding and such other details.
3. In addition to special resolution, prior approval of the Board of Directors is required u/s 372A.
All Directors present at the Board meeting must vote in favour of the resolution.
4. Prior approval should be obtained from Public Financial Institution from whom loans have
been taken.
5. Interest Rate to be charged by the Company shall not be less than the prevailing Bank Rate
specified by RBI u/s 49 of the RBI Act.
6. Prescribed particulars must be entered in the Register maintained u/s 372A(5), within
specified time limits.
7. A copy of the special resolution should be filed with the RoC.
2. (a) One of the members of AB Ltd. has proposed the name of Mr. Fern for appointment as a
director of the company in the Annual General Meeting and given a notice under section 257
of the Companies Act, 1956. Mr. Fern is one of the partners of Fern & Fern, Chartered
Accountants, who are the retiring auditors of the company. But the audit of the company is
being looked after by another partner of the firm. Examine whether Fern & Fern can be
reappointed as auditors, if Mr. Fern is appointed as director.
[4]
Page 2

(b) Unique Technologies Ltd. has been wound up and the Official Liquidator has been asked
to take charge of the Company. Briefly explain the relevant provisions regarding filing of
Statement of Affairs in relation to the Company in liquidation.
[8]
(c) Examine the validity of the following appointment made by Board of Dhanavan Ltd.
Buddhiman Ltd. is a Subsidiary Company of Dhanavan Ltd. in which Mr. Pratik Sen is a
Director. Mr. Pratik Sen has been appointed as Manager Research & Development in
Dhanavan Ltd. on a Monthly Salary `2.5 Lakhs per month with effect from 1st April 2013.
What would be your answer is case ABC Ltd. is a Subsidiary of Buddhiman Ltd.
[3]
Answer 2(a):
The present problem relates to section 226 of the Companies Act, 1956.
The legal position
1. As per section 226, a person shall be disqualified to be appointed or reappointed as an
auditor of the company if he is an officer or employee of the company.
2. As per section 2(30), a director is an officer of the company.
3. As per section 257, any member of a public company can give a notice proposing the
appointment of any person (whether a member or not) as a director of the company.
The given case
1. Mr. Fern is a partner in the firm 'Fern & Fern', 'Fern & Fern' are the retiring auditors of the
company, and they are seeking reappointment in the forthcoming annual general meeting.
2. The name of Mr. Fern has been proposed as a director by a member by giving a notice under
section 257. Mr. Fern has been appointed as a director in the annual general meeting.
Conclusion
On appointment as a director, Mr. Fern becomes an officer of the company. Therefore, Mr. Fern
and any firm in which Mr. Fern is a partner, is disqualified to be re-appointed as auditors of the
company.
Answer 2(b):
Sec. 454 deals with Statement of Affairs to be made to Official Liquidator, in a compulsory
winding-up. The provisions are summarized as under:
1.
Situations: A Statement of Affairs of the Company shall be made out and submitted to the
Official Liquidator, where the Court has:
(a) made a winding-up order, or
(b) appointed the Official Liquidator as Provisional Liquidator.
2.
Contents: The Statement of Affairs shall be in the prescribed form, with the following
particulars:
(a) Assets of the Company [Cash balance in Hand and at Bank, and Negotiable Securities, if
any, held by the Company, should be separately stated]
(b) Debts and Liabilities of the Company,
(c) Names, Residences and Occupations of its Creditors, with break-up of Secured and
Unsecured Debts, [In case of Secured Debts, particulars of securities given, whether by
Company or an Officer thereof, their value and dates on which they were given, should
Page 3

be stated.]
(d) Debts due to the Company, and the Names, Residences and Occupations of the
persons from whom they are due and the amount likely to be realised on account
thereof,
(e) Such further or other information as may be prescribed, or as the Official Liquidator may
require.
3.
Verification: The Statement shall submitted and verified (by an affidavit) by one or more
Directors, Manager, Secretary or other Chief Officer of the Company, on the relevant date.
Further, the Official Liquidator may require any of the following persons to verify the
statement:
(a) Present or Past Officers of the Company,
(b) Persons who have taken part in the formation of the Company at any time within
preceding 1 year,
(c) Present or Past Employees of the Company within preceding 1 year, and are, in the
opinion of the Official Liquidator, capable of giving the information required,
(d) Present or Past Officers / Employees of any other Company, which is an Officer of the
Company to which the statement relates.
4.
Time Limit: The statement shall be submitted within 21 days from the relevant date. The
Official Liquidator or the Court may, for special reasons, extend this time upto 3 months.
Note: For this purpose, "Relevant Date" means:
Where Provisional Liquidator is appointed
is not appointed
Relevant Date
Date of appointment of Provisional Liquidator
Date of winding-up order
5.
Reimbursement of Cost: Any person making, or concurring in making, the Statement and
Affidavit u/s 454 shall be entitled to receive the costs and expenses incurred in preparation
of the Statement. The amount, as considered reasonable by him, shall be paid by the
Official / Provisional Liquidator, out of the assets of the Company.
6.
Default: Default in complying with Sec.454, without reasonable excuse, is punishable with
imprisonment upto 2 years, and /or fine upto `1,000 for every day during which the default
continues.
7.
Inspection: Any Creditor or Contributory shall be entitled to inspect the Statement of Affairs,
and to a copy thereof or extract therefrom, on payment of the prescribed fee. Any person
untruthfully so stating himself to be a Creditor or Contributory shall be guilty of an offence u/s
182 of Indian Penal Code, and shall be punishable accordingly.
8. Application of Sec.454 to voluntary winding-up [Sec. 511A]: Provisions of Sec. 454 shall, so far
as may be, apply to every voluntary winding-up as they apply to winding-up by the Court
except that reference to:
(a) the Court shall be omitted,
(b) the Official Liquidator or Provisional Liquidator shall be construed as reference to the
Liquidator, and
(c) the "Relevant Date" shall be construed as reference to the date of commencement of
winding-up.
Page 4

Answer 2(c):
It can be assumed Mr. Pratik sen is a Director either in Dhanavan Ltd. or Buddhiman Ltd., as the
same is not clear in the question. The effect of the appointment of Mr. Pratik Sen in Office or
place of Profit (OPP) in Dhanavan Ltd. u/s 314(1) is analyzed as follows:
Mr. Pratik sen is a
Director in:
Dhanavan Ltd.
Buddhiman Ltd.
Case A: Dhanavan Ltd. Holding,

Buddhiman Ltd. - Subsidiary
Appointment of Mr. Pratik Sen in
Dhanavan Ltd. in OPP is covered
u/s 314(1). Shareholders approval
required u/s 314(1).
Appointment of Mr. Pratik Sen
(Director of Subsidiary) in
Dhanavan Ltd. (Holding) is not
covered by sec. 314(1). Hence,
OPP can be held in Holding
Company Dhanavan Ltd.
Case B: Buddhiman Ltd. Holding,

Dhanavan Ltd. - Subsidiary
Appointment of Mr. Pratik Sen in
Dhanavan Ltd. in OPP is covered u/s
314(1). Shareholders approval
required u/s 314(1).
Appointment of Mr. Pratik Sen
(Director of Subsidiary) in Dhanavan
Ltd. (Holding) is covered by sec.
314(1). Hence, restriction applies.
However, restriction will not apply if
the remuneration received from the
Subsidiary in respect of such OPP
(held in the Subsidiary) is paid over
to the Subsidiary or its Holding
Company.
3. (a) Union Bank of India, a National Bank, acquired on 1st January 2002 a Building, fully
occupied by various tenants, from Mr. Rahul, the owner of the Building in discharging of a
Term Loan advanced to Mr. Rahul, who had mortgaged the said building as security with the
said Bank and failed to repay the Loan. The said Bank wants to keep the Building
permanently with it and earn the rent from tenants. You are required to state with reference
to the provisions of the Banking Regulation Act, 1949 whether the said Bank can do so.
[4]
(b) Life Policy cannot be questioned after the expiry of 2 years from the date on which it was
effected.
Explain with reference to Section 45 of the act.
[4]
(c) A Public Company has been declaring dividend at the rate of 20% on equity shares
during the last 5 years. The company has not made adequate profits during the year ended
31st March, 2013, but it has got adequate reserves which can be utilised for maintaining the
rate of dividend at 20%.
Advise the Company as to how it should go about if it wants to declare dividend at the rate
of 20% for the year 2012-13.
Would your answer be different if the company utilised only the profits made in the previous
years and retained in the profit and loss account for the purpose of payment of dividend at
the rate of 20% for the year 2012-13?
[7]
Answer 3(a):
As per section 9, no banking company shall hold any immovable property howsoever acquired,
except such as is required for its own use, for any period exceeding 7 years from the acquisition
thereof or any extension of such period as in this section provided, and such property shall be
disposed of within such period or extended period, as the case may be.
Page 5

As per Proviso to Section 9, the Reserve Bank may in any particular case extend the aforesaid
period of 7 years by such period not exceeding 5 years where it is satisfied that such extension
would be in the interests of the depositors of the banking company.
In the given case, Union Bank proposes to keep the building for earning rent from tenants, and
not for its own use. In view of the provisions of section 9, Union Bank of India cannot keep the
building permanently with it for the purpose of earning rent from tenants. It shall have to dispose
of the Building within 7 years from the date of its acquisition, i.e. on or before 31 st December,
2009.
However, if the approval of the Reserve Bank is obtained, it may continue to hold the Building till
such extended period as is sanctioned by the Reserve Bank. The Reserve Bank shall not permit the
Union Bank to hold the property beyond 31st December, 2014.
Answer 3(b):
Inaccurate or false particulars: An insurer shall not call in question a Life Insurance Policy after
the expiry of 2 years from the date on which it was effected on the ground that (a) a
statement made in the proposal for insurance, or (b) in any report of a Medical Officer, or
Referee, or Friend of the insured, or in any other document leading to the issue of the policy, was
inaccurate or false. [Sec. 45]
Exception: The above provision does not apply if the Insurer shows that such statement was on(a) A material matter or suppressed facts which it was material to disclose, and
(b) That it was fraudulently made by the policy-holder, and
(c) That the policy-holder knew at the time of making it that the statement was false or that it
suppressed facts which it was material to disclose.
Only if all the 3 conditions are satisfied conjointly the insurer can repudiate after 2 years LIC Vs.
G.M.Chennabasamma.
LIC challenged a policy after 2 years after its issue. It was in evidence that the assured
fraudulently suppressed facts. It was held that the LIC was not liable Mithoolal Vs. LIC (SC 1962).
Held that If a period of 2 years has expired from the date on which the policy of life insurance
was effected, that policy cannot be called in question by an insurer on the ground that a
statement made in the proposal for insurance or on any report of a medical officer or referee, or
a friend of the insured, or in any other document leading to the assure of the policy, was
inaccurate or false. LIC Vs. Janaki Ammal (Mad HC 1968).
Note:
(a) Policies issued in India shall be subject to law in force in India.
(b) The insurer can notify the Policyholder of the options available to him in case of nonpayment of premiums.
(c) The Life Policy Holders have the right to seek for Medical Reports procured by the Insurer.
Answer 3(c):
The fundamental principle with respect to payment of dividend is that dividend is to be paid
only out of profits. In other words, the dividend can be paid only out of the following sources:
(a) Profits of current financial year
(b) Undistributed profits of previous financial years, i.e., accumulated profits of previous years
Page 6

(c) Moneys provided by the Central Government or State Government in pursuance of
Payment of dividend out of reserves
Dividend can be declared out of the profits transferred to the reserves only if:
(a) previous approval of the Central Government is obtained; or
(b) such payment is made in accordance with such rules as may be prescribed by the Central
Government in this behalf, i.e.. The Companies (Declaration of Dividend out of Reserves)
Rules, 1975, which are detailed hereunder:
In the event of inadequacy or absence of profits in any year, a company may declare
dividend out of the accumulated profits earned by it in previous years and transferred by it to
the reserves, subject to the following conditions:
(a) The rate of dividend must not exceed the lower of:
(i) average of the rates of dividend declared by the company in immediately preceding 5
financial years; or
(ii) 10%.
(b) The amount to be withdrawn from reserves must not exceed 1/10 th of aggregate of paid up
capital & free reserves. Further, the amount so withdrawn shall be first utilised to set off the
losses incurred in the financial year, and the balance amount can only be utilised for the
declaration of dividend.
(c) The balance of reserves, after such withdrawal, shall not fall below 15% of paid up share
capital. In the present case, the company intends to distribute dividend at the rate of 20%.
But as per the provisions discussed in point (a) above, the rate of dividend declared cannot
exceed 10%, i.e. the rated dividend declared out of reserves can be a maximum of 10%.
Thus, the company cannot declare dividend @ 20% out of reserves.
4. (a) Mr. X is a director of M/s ABC Ltd. He has approached M/s Housing Finance Co. Ltd. for
the purpose of obtaining a loan of `50 lacs to be used for construction of building his
residential house. The loan was sanctioned subject to the condition that M/s ABC Ltd. should
provide the guarantee for repayment of loan installments by Mr. X. Advise Mr. X.
[6]
(b) The Board of Directors of M Limited propose to donate `3,00,000 to a school established
exclusively for the benefit of the children of employees and also donate `50,000 to a political
party during the financial year ending 31st March 2010. The average net profit determined in
accordance with the provisions of section 349 and 350 of the Companies Act, 1956 during
the immediately preceding three financial years is `40,00,000. Examine with reference to the
provisions of the Companies Act, 1956 whether the proposed donations are within the powers
of the Board of Directors of the Company.
[5]
(c) ABC Limited wants to appoint PQR Private Limited as its sole selling agent for Southern
India. Mr. Goodword, director of ABC Limited is also a director in PQR Private Limited. Advise
the company about the compliances required under the Companies Act.
[4]
Answer 4(a):
As per section 295, a public company shall not, directly or indirectly, make any loan to a
director without obtaining the previous approval of the Central Government. Also, if a
company wishes to give a guarantee or provide any security in connection with a loan made
by any other person to a director, it requires the previous approval of the Central Government.
Page 7

Moreover, where a company gives a guarantee to a body corporate, it shall comply with the
provisions of section 372A.
The following legal requirements must be complied with in the present case:
1. The Board shall consider the contract relating to giving of guarantee to M/s Housing Finance
Co. Ltd. Since Mr. X is interested, he shall disclose his interest, shall not be counted in quorum,
and shall not vote (Sections 299 and 300). Necessary entries will be made in the register of
contracts (Section 301).
2. M/s ABC Ltd. shall make an application to the Central Government for approval under
section 295. Only on receipt of the approval of the Central Government, M/s ABC Limited
will give the guarantee to M/s Housing Finance Co. Ltd (Section 295).
3. Following requirements of section 372A shall also be fulfilled:
(a) A resolution shall be passed at a Board meeting with the consent of all the directors
present in the meeting.
(b) Approval of Public Financial Institution, if applicable, shall be obtained.
(c) The company shall ensure that no default in compliance with section 58A (relating to
pubic deposits) is subsisting.
(d) If the ceiling limit specified under section 372A (60% of aggregate of paid up capital and
free reserves or 100% of free reserves, whichever is higher) is exceeded, a special
resolution shall be passed in the general meeting.
Answer 4(b):
Charitable Contribution
A contribution by a company is said to be charitable contribution if it is made without any
object of availing any benefit for the company or for its employees and the object of
contribution does not have any direct relation with the business of the company. In the given
case contribution is to be made for the school which is exclusively for the benefit of the
employees children. Therefore, it cannot be considered as charitable contribution within the
meaning of section 293(1)(e). It is purely a business decision and the Board of Directors of the
company is empowered to take such a decision.
Political Contribution
Limit of political contribution
As per section 293A, an eligible company can make political contribution up to 5% of average
net profit of immediately preceding three financial years, in a financial year.
In the given case, average net profit of the company during preceding three financial years is
`40,00,000. The Board is empowered to make political contribution to the tune of `2,00,000 being
5% of the average net profit of preceding three years. Since the political contribution proposed
is only `50,000, it is well within the powers of the Board to make this contribution.
Procedure
Every political contribution is required to be approved only in a Board meeting by way of a
resolution and full disclosure of the name of political party and amount contributed shall be
made in the profit and loss account.
Page 8

Answer 4(c):
In this case applicability of section 297, 299, 300 and 314 needs to be examined.
Section 297 is not attracted because it is applicable in relation to contracts or agreements for
sale or purchase of goods. When a person acts as an agent of another, as in the given case,
there is no sale/purchase between them.
In accordance with section 299, Mr. Goodword will have to make disclosure of his interest in the
Board meeting in which the proposed appointment is discussed and consequently provision of
section 300 will also be applicable.
As far as section 314 is concerned, depending upon the detailed terms and conditions, subsection (1B) may be applicable. If it is applicable, then appointment requires prior approval of
members by special resolution. Otherwise, the appointment shall be made in a board meeting
by a resolution subject to the approval of members in the next general meeting.
5. (a) M/s Ahana Private Limited was incorporated in the year 2001 under the Companies Act,
1956 by 3 brothers, namely, Amit, Anil and Akhlesh. All the three were Promoter-directors
named in the Articles of Association and subscribed for 100 shares each in the company
through Memorandum of Association. Thereafter, from time to time, further shares were
allotted in proportion of one-third to each of them and in due course, the company started
earning substantial profits. Due to greed of money, the two brothers, namely, Amit and Anil,
joined hands together to assume complete control of the company, leaving their brother,
Akhlesh in lurch. Both the brothers got further shares allotted to themselves, thereby their joint
shareholding increased from 662/3% to 90%, while the shareholding of Akhlesh got reduced
from the erstwhile 331/3% to 10%. No notice of any Board Meeting was sent to Akhlesh, who
was sidelined and was also removed as a Director.
Aggrieved by the decisions taken by his two brothers at his back, Akhlesh seeks your advice
for taking out appropriate proceedings before the court or judicial authority of competent
jurisdiction. Also suggest the nature of reliefs he may claim while filing his case.
[6]
(b) Some of the Indian citizens in U.K. joined to commence a business by incorporating a
company in U.K. for the purpose of carrying on business there. Examine with reference to the
relevant provisions of the Companies Act, 1956 whether it is a "Foreign Company".
What would be your answer in case the U.K. Company was incorporated by a company
registered in India?
[4]
(c) RBI receives a complaint that an authorized person has submitted incorrect statements
and information to the RBI in respect of receipt and utilization of Foreign Exchange. Explain
the powers of the RBI with regard to inspection of records of the above authorized person.
Also state the duties of the authorized person.
[5]
Answer 5(a):
Issue of further shares amounts to oppression if it is proved that the idea of issuing further shares
was to benefit one group to the detriment of the other [Piercy v Mill(s) d Co. (1920) 1 Ch. 77].
Further issue of shares must be made for the benefit of the company. If the directors use their
fiduciary power of issuing shares for an extraneous purpose like maintenance or acquisition of
control over the affairs of the company, it would amount to oppression [Needle Industries Case].
It is not open to the directors to issue and allot shares in a manner by which an existing majority
Page 9

of shareholders is reduced to a minority. If the issue of shares disturbs the existing majority of the
shareholders and if it is not bonafide, it will amount to oppression [Re, Glaco Series (P)Ltd.].
In the given case, further shares have been allotted to Amit and Anil without simultaneous offer
to other members (Akhlesh) on pro-rata basis. Such single act of issue of further shares shall have
a continuous effect, and so it amounts to oppression, especially if, the Board meeting at which
the further shares are allotted is held without complying with the requirements of section 286,
and the member who was not offered further shares was also removed from directorship
[Bhagirath Agarwala v Tara properties P. Ltd.]. Therefore, Akhlesh should file an application with
the Company Law Board for claiming relief from oppression.
Answer 5(b):
As per section 591, a company shall be a foreign company if:
(a) it is incorporated outside India; and
(b) it has established a place of business in India.
Thus, for deciding as to whether a company is a foreign company or not, the criterion is to see
as to whether the company has established a place of business in India or not, and not the
persons who have incorporated the company.
In this case, Indian citizens have formed a company outside India. Since, the company has not
established any place of business in India, the company cannot be said to be a foreign
The answer would have remained same even if the U.K. Company had been incorporated by a
company registered in India for the same reason as stated above.
Answer 5(c):
RBIs powers of inspection [Sec. 12]: RBI may, at any time, cause an inspection to be made, by
any of its officer specially authorized in writing in this behalf, of the business of any Authorised
Person as may appear to it to be necessary or expedient for the purpose of:
(a) verifying the correctness of any statement, information or particulars furnished to the RBI,
(b) obtaining any information or particulars which such Authorised Person has failed to furnish on
being called upon to do so,
(c) securing compliance with the provisions of this Act or Rules/Regulations/Direction/Order
made thereunder.
Duties of Authorised Person:
(a) To produce to any Officer/Inspector, such books, accounts and other documents as may be
specified, under the Act/Regulations.
(b) To furnish any information/statement/particulars required by RBI/Authorised Officers under
the Act/Regulations.
6. (a) Discuss the powers and role of Audit Committee as per Clause 49 of the Listing
agreement.
[8]
(b) Sunflower Ltd. decided to terminate the services of Mr. Dinesh, who was employed as
Sales Manager. However, the Company feels that the Sales Manager may not vacate the
Companys flat at Mumbai. What action can be taken by the Company under the
Page 10

Companies Act, to regain possession of the flat? Is it necessary to take such action under the
Act before terminating the services of Mr. Dinesh? Will it make any difference, if the flat is not
owned by the Company, but taken on lease?
[7]
Answer 6(a):
As per clause 49 of the Listing Agreement,
Powers of Audit Committee:
The audit committee shall have powers, which should include the following:
1.
To investigate any activity within its terms of reference.
2.
To seek information from any employee.
3.
To obtain outside legal or other professional advice.
4.
To secure attendance of outsiders with relevant expertise, if it considers necessary.
Role of Audit Committee:

The role of the audit committee shall include the following:
1.
Oversight of the companys financial reporting process and the disclosure of its financial
information to ensure that the financial statement is correct, sufficient and credible.
2.
Recommending to the Board, the appointment, re-appointment and, if required, the

replacement or removal of the statutory auditor and the fixation of audit fees.
3.
Approval of payment to statutory auditors for any other services rendered by the statutory
auditors.
4.
Reviewing, with the management, the annual financial statements before submission to
the board for approval, with particular reference to:
a.
Matters required to be included in the Directors Responsibility Statement to be

included in the Boards report in terms of clause (2AA) of section 217 of the
Companies Act, 1956
b.
Changes, if any, in accounting policies and practices and reasons for the same
c.
Major accounting entries involving estimates based on the exercise of judgment by

management
d.
Significant adjustments made in the financial statements arising out of audit findings
e.
Compliance with listing and other legal requirements relating to financial statements
f.
Disclosure of any related party transactions
g.
Qualifications in the draft audit report.
5.
Reviewing, with the management, the quarterly financial statements before submission to
the board for approval
5A.
Reviewing, with the management, the statement of uses / application of funds raised
through an issue (public issue, rights issue, preferential issue, etc.), the statement of funds
utilized for purposes other than those stated in the offer document/prospectus/notice and
the report submitted by the monitoring agency monitoring the utilisation of proceeds of a
public or rights issue, and making appropriate recommendations to the Board to take up
steps in this matter.
6.
Reviewing, with the management, performance of statutory and internal auditors,

adequacy of the internal control systems.
Page 11

7.
Reviewing the adequacy of internal audit function, if any, including the structure of the
internal audit department, staffing and seniority of the official heading the department,
reporting structure coverage and frequency of internal audit.
8.
Discussion with internal auditors any significant findings and follow up there on.
9.
Reviewing the findings of any internal investigations by the internal auditors into matters
where there is suspected fraud or irregularity or a failure of internal control systems of a
material nature and reporting the matter to the board.
10.
Discussion with statutory auditors before the audit commences, about the nature and
scope of audit as well as post-audit discussion to ascertain any area of concern.
11.
To look into the reasons for substantial defaults in the payment to the depositors,
debenture holders, shareholders (in case of non payment of declared dividends) and
creditors.
12.
To review the functioning of the Whistle Blower mechanism, in case the same is existing.
12A. Approval of appointment of CFO (i.e., the whole-time Finance Director or any other person
heading the finance function or discharging that function) after assessing the
qualifications, experience & background, etc. of the candidate.
13.
Carrying out any other function as is mentioned in the terms of reference of the Audit
Committee.
Explanation (i): The term related party transactions shall have the same meaning as
contained in the Accounting Standard 18, Related Party Transactions, issued by The
Institute of Chartered Accountants of India.
Explanation (ii): If the company has set up an audit committee pursuant to provision of the
Companies Act, the said audit committee shall have such additional functions / features
as is contained in this clause.
Answer 6(b):
The given problem relates to sec. 630 of the Companies Act.
As per sec. 630, if any Officer or Employee of a Company:
(a) Wrongfully obtains possession of any property of a Company, or
(b) Having any such property in his possession, wrongfully withholds it or knowingly applies it to
purposes other than those expressed or directed in the AoA and authorized by the Act.
On the complaint of the Company or any Creditor/Contributory, he shall be punishable with fine
upto `10,000.
The court trying the offence may also order such Officer/Employee to deliver up or refund, within
a specified time, any such property wrongfully obtained or wrongfully withheld or knowingly
misapplied, or in default, to suffer imprisonment for a term upto 2 years. [Sec. 630(2)].
In the given case,
1. Right of Company: The Company or any Creditor/Contributory, can file a suit u/s 630 against
the Sales Manager, if he refuses to vacate the premises provided by the Company. The
Court trying the offence may also order such Officer/Employee to deliver up or refund, within
a specified time, any such property wrongfully obtained or wrongfully withheld or knowingly
misapplied, or in default, to suffer imprisonment for a term upto 2 years.
2. Employees include Past Employees also: In the above case, it is possible to initiate action
even after termination of services of Mr. Dinesh.
Page 12

The term Officer or Employee in section 630 applies to both the existing and past Officers or
Employees if such Officers or Employees either: (a) wrongfully obtain possession of any
property of the Company, or (b) having obtained such property during the course of
employment, withhold the same after termination of employment. [Baldev Krishna Sahi Vs.
Shipping Corporation of India Ltd. (SC)].
3. Action permissible for Leasehold Property: It is not necessary that the property in question
should be owned by the company. Even if the Company exercises only a leasehold right,
the provisions of Sec. 630 can be invoked. [P.V.George Vs. Jayems Engineering Co (P) Ltd.]
SECTION B
7. (a) Corporate Social Responsibility is to be considered as an investment and not as a
charity Elaborate the statement.
[5]
(b) What is Whole Life-Cycle Costing Risk Management? Why does it fails to embrace WLCC?
[5]
(c) What is Corporate Governance? What is the need for Corporate Governance in India? [5]
(d) Mention the core elements of CSR Policy as per the CSR Voluntary Guidelines 2009.
(e) Write short notes on:
(i) Corporate Governance in USA
(ii) Corporate Governance in Japan
[5]
[2.5*2=5]
(f) The concept of Memorandum of Understanding (MoU) has been designed to provide
flexibility and autonomy to CPSEs such that it facilitates them in pursuing the objectives and
purposes, for which the enterprises have been set up.
In the light of the above statement, explain the concept of MoU in India.
[5]
Answer 7(a):
The originally defined concept of CSR needs to be interpreted and dimensionalised in the
community.
strategy, yet the concept still is believed to be strongly linked to philanthropy. There is a need to
bring about an attitudinal change in people about the concept.
the tasks.
Page 13

But often these entities work in isolation without creating a synergy with the other departments of
the corporate. There is a need to understand that CSR is not only a pure management directive
but it is something that is central to the company and has to be embedded in the core values
and principles of the corporate.
utilise things at which corporates are good; it has to be something that takes advantage of the
core skills and competencies of the companies. It has to be a mandate of the entire
organisation.
Charity means the act of donating money, goods, time or effort to support a charitable cause in
regard to a defined objective. Charity can be equated with benevolence and charity for the
poor and needy. It can be any selfless giving towards any kind of social need that is not served,
underserved, or perceived as unserved or underserved. Charity can be by any individual or by a
corporate.
Corporate Social Responsibility is about how a company aligns their values to social causes by
including and collaborating with their investors, suppliers, employees, regulators and the society
as a whole. The investment in CSR may be on people centric issues and/or planet issues. A CSR
initiative of a corporate is not a selfless act of giving; companies derive long-term benefits from
the CSR initiatives and it is this enlightened self interest which is driving the CSR initiatives in
companies.
Answer 7(b):
Whole life-cycle costing (WLCC) is rapidly becoming the standard method for the long-term cost
appraisal of buildings and civil infrastructure projects. With clients now demanding buildings that
demonstrate value for money over the long term, WLCC has become an essential tool for those
involved in the design, construction, operation and risk analysis of construction projects.
WLCC risk management is one of the important issues facing building assets executives today.
As spending on building assets rises, asset owners become increasingly worried about WLCC
optimisation throughout the life span of facilities; consequently, they become highly vulnerable
to the risk of operational costs. Usually, when decision makers are faced with an investment
choice under uncertain conditions, their main concern is to avoid projects whose actual
economic outcome might be less favourable than what is acceptable, resulting in the risk of
missing out on potential investment opportunities.
Thus, the objective of WLCC risk management should be to assist decision makers in evaluating
whole life alternatives so that investment success is maximised. Usually traditional methods are
used to optimise this process. However, traditional approaches to risk management have failed
miserably because of their demand for mysterious statistical data that the end user does not
have (Koller 1999). The key to successful WLCC risk-process and risk modelling is to build a WLCC
framework that requires from the user nothing more than they presently can provide. This can be
a challenge that can be addressed through the use of a variety of techniques. That is why it is
important to use a combination of risk management techniques (depending on the stage of
assessment) for risk assessment in WLCC, ranging from simple deterministic approaches to
uncertainty assessment (e.g. sensitivity and break even analysis methods which are easy to use
and understand and require no additional methods of computation beyond the ones used in
LCC analysis), to very sophisticated methods based on probabilities, artificial intelligence (AI)
and a hybrid of both techniques.
The reasons why it fails to embrace WLCC are:
The lack of universal methods and standard formats for calculating whole life costs.
Page 14
The difficulty in integration of operating and maintenance strategies at the design phase.
The scale of the data collection exercise, data inconsistency.
The requirement for an independently maintained database on performance and cost of
building components.
Answer 7(c):
Corporate governance is:
The system by which companies are directed and controlled - The Cadbury Report, 1992.
The process of supervision and control intended to ensure that the companys management
acts in accordance with the interests of shareholders - Parkinson, 1994.
Corporate Governance is the acceptance by management of the inalienable rights of
shareholders as the true owners of the corporation and of their own role as trustees on behalf
of the shareholders. It is about commitment to values, about ethical business conduct and
about making a distinction between personal and corporate funds in the management of a
company Report of N.R.Narayana Murthy Committee on Corporate Governance
constituted by SEBI (2003).

Corporate Performance: Improved governance structures and processes help ensure quality
decision-making, encourage effective succession planning for senior management and
enhance the long-term prosperity of companies, independent of the type of company and
its sources of finance.
Enhanced Investor Trust: Investors consider Corporate Governance as important as financial
performance when evaluating companies for investment.
Combating Corruption: Companies that are transparent, and have sound system that provide
full disclosure of accounting and auditing procedures, allow transparency in all business
transactions, provide environment where corruption will certainly fade out.
Better Access to Global Market: Good Corporate Governance systems attracts investment
from global investors, which subsequently leads to greater efficiencies in the financial sector.
Enhancing Enterprise Valuation: Improved management accountability and operational
transparency fulfill investors expectations and confidence on management and
corporations, and return, increase the value of corporations.
Accountability: Investor relations is essential part of good Corporate Governance. Investors
have directly/indirectly entrusted management of the company for creating enhanced
value for their investment.
Easy Finance from Institutions: Evidence indicates that well-governed companies receive
higher market valuations.
Reduced Risk of Corporate Crisis and Scandals: Effective Corporate Governance ensures
efficient risk mitigation system in place.
Answer 7(d):
The CSR Policy should normally cover following core elements:
1.
Care for all Stakeholders

The companies should respect the interests of, and be responsive towards all stakeholders,
including shareholders, employees, customers, suppliers, project affected people, society at
large etc. and create value for all of them. They should develop mechanism to actively
Page 15

engage with all stakeholders, inform them of inherent risks and mitigate them where they
occur.
2.
Ethical functioning
Their governance systems should be underpinned by Ethics, Transparency and
Accountability. They should not engage in business practices that are abusive, unfair,
corrupt or anti-competitive.
3.
Respect for Workers Rights and Welfare

Companies should provide a workplace environment that is safe, hygienic and humane
and which upholds the dignity of employees. They should provide all employees with
access to training and development of necessary skills for career advancement, on an
equal and non-discriminatory basis. They should uphold the freedom of association and the
effective recognition of the right to collective bargaining of labour, have an effective
grievance redressal system, should not employ child or forced labour and provide and
maintain equality of opportunities without any discrimination on any grounds in recruitment
and during employment.
4.
Respect for Human Rights

Companies should respect human rights for all and avoid complicity with human rights
abuses by them or by third party.
5.
Respect for Environment

Companies should take measures to check and prevent pollution; recycle, manage and
reduce waste, should manage natural resources in a sustainable manner and ensure
optimal use of resources like land and water, should proactively respond to the challenges
of climate change by adopting cleaner production methods, promoting efficient use of
energy and environment friendly technologies.
6.
Activities for Social and Inclusive Development

Depending upon their core competency and business interest, companies should
undertake activities for economic and social development of communities and
geographical areas, particularly in the vicinity of their operations. These could include:
education, skill building for livelihood of people, health, cultural and social welfare etc.,
particularly targeting at disadvantaged sections of society.
Answer 7(e):
(i) CORPORATE GOVERNANCE IN USA
Corporate governance in the U.S. has changed dramatically since 1980. As a number of
business and finance scholars have pointed out, the corporate governance structures in
place before the 1980s gave the managers of large public U.S. corporations little reason to
make shareholder interests their primary focus. Before 1980, corporate managements
tended to think of themselves as representing not the shareholders, but rather the
corporation. In this view, the goal of the firm was not to maximize shareholder wealth, but to
ensure the growth (or at least the stability) of the enterprise by balancing the claims of all
important corporate stakeholders-- employees, suppliers, and local communities, as well as
shareholders.
The external governance mechanisms available to dissatisfied shareholders were seldom
used. Raiders and hostile takeovers were relatively uncommon. Proxy fights were rare and
didnt have much chance of succeeding. And corporate boards tended to be cozy with
and dominated by management, making board oversight weak.
Page 16

Corporate Governance developments in USA:
1977 The Foreign Corrupt Practices Act
1979 US Securities Exchange Commission
1985 Treadway Commission
1992 COSO issued Internal Control Integrated Framework
2002 Sarbanes Oxley Act
The Dodd-Frank Wall Street Reform and Consumer Protection Act, 2010
Updates to its U.S. Corporate Governance Policy (the 2013 Updates)
(ii)
CORPORATE GOVERNANCE IN JAPAN
Japans economy developed very rapidly during the second half of the twentieth century.
Particularly during the period 1985-89, there was a bubble economy, characterized by a sharp
increase in share prices and the value of land; the early 1990s saw the bubble burst as share
prices fell and land was devalued, as well as shareholders and landowners finding themselves
losing vast fortunes, banks found that they had severe problems too. The Japanese government
wished to restore confidence in the Japanese economy and in the stock market, and to attract
foreign direct investment to help regenerate growth in companies. Improved corporate
governance was seen as a very necessary step in this process.
Japans Corporate Governance System is often likened to that of Germany because banks can
play an influential role in companies in both countries. However, there are fundamental
differences between the systems, driven partly by culture and partly by the Japanese
shareholding structure with the influence of the keiretsu (broadly, associations of companies).
Charkham (1994) sums up three main concepts that affect Japanese attitudes towards
Corporate Governance: obligation, family, and consensus.
The Japan Corporate Governance Committee published its revised Corporate Governance
Code in 2001. The code had six chapters, which contained a total of 14 principles.
Summary of key characteristics influencing Japanese Corporate Governance
Feature
Key characteristic
Main business form
Public limited company
Keiretsu; but institutional investor ownership is increasing
Legal system
Civil Law
Board structure
Dual
Important aspect
Influence of keiretsu
In 2004, the Tokyo Stock Exchange issued the Principles of Corporate Governance for Listed
Companies. Charkham (2005) discusses the various changes that have taken place in the
context of Corporate Governance in Japan and states:
The important part the banks played has greatly diminished. In its place there are now better
structured boards, more effective company auditors, and occasionally more active
shareholders, an increase of interest, and, where appropriate, action on their part, might restore
the balance that the banks withdrawal from the scene has impaired.
In 2008, the Asian Corporate Governance Association (ACGA) published its White Paper on
Corporate Governance in Japan. It states, while a number of leading companies in Japan
have made strides in corporate governance in recent years, we submit that the system of
governance in most listed companies is not meeting the needs of stakeholders or the nation at
large in three ways:
Page 17
By not providing for adequate supervision of corporate strategy;
By protecting management from the discipline of the market, thus rendering the
development of a healthy and efficient market in corporate control all but impossible;
By failing to provide the returns that are vitally necessary to protect Japans social safety netits pension system.
It then advocates six areas for improvement: shareholders acting as owners; utilizing capital
efficiently; independent supervision of management; pre-emption rights; poison pills and
takeover defences; shareholder meetings and voting.
Answer 7(f):
The Memorandum of Understanding (MoU) System in India was introduced in the year 1986, after
the recommendations of the Arjun Sengupta Committee Report (1984). Twenty six years after its
inception, the MoU system has evolved and is being strengthened, through regular reviews, to
become a management tool that helps in performance evaluation as well as performance
enhancement of CPSEs in the country.
The concept of Memorandum of Understanding (MoU) has been designed to provide flexibility
and autonomy to Central Public Sector Enterprises (CPSEs) such that it facilitates them in
pursuing the objectives and purposes, for which the enterprises have been set up.
Accountability has to be understood in a wider sense by associating it with answerability for the
performance of the tasks and the achievement of targets negotiated mutually between the
Government and the CPSE. The rationale for MoU could be derived from principal/agent theory.
The principal (administrative ministry on behalf of real owners - the people) can only observe
outcomes and cannot measure accurately the efforts expended by the agent (CPSE
managers). Also the Principal can only, to a limited extent, distinguish the effects of influences
from other factors, which affect the performance. Therefore extensive intervention by
administrators, who might not be too knowledgeable about the nature of problems confronting
the enterprises, not only impacts productivity and profitability but also makes it impossible to fix
accountability for non-achievement of targets.
A negotiated incentive contract (MoU), hence, is viewed as a device to reveal information and
motivate managers to exert effort. Notwithstanding the spectacular performance of CPSEs in
several areas, there has been a sense of disillusionment with some aspects of CPSE performance
such as low profitability and lack of competitiveness. The extensive regulation of CPSEs by
government had stifled the initiative and growth of public sector. The Economic Administration
Reforms Commission (Chairman: L. K. Jha) had dwelt on issue of autonomy and accountability.
The Commission had recommended a careful re-consideration of extant concepts and
instrumentalities relating to the accountability of public enterprises with a view to ensuring (a)
that they do not erode the autonomy of public enterprises and thus hampers the very objectives
and purposes for which these enterprises have been set up and given corporate shape and for
which they are to be accountable; and (b) accountability has to be secured in the wider sense
of answerability for the performance of tasks and achievements of results. The adoption of MoU
system in India could be seen as an attempt to operationalize this very vital recommendation.
In the backdrop of the dynamic external environment, world- wide competition and
globalization, it is critical that the MoU system is strengthened such that it facilitates the CPSEs in
becoming economically viable through efficient management and control. Hence, the MoU
system aims at offering autonomy to CPSEs and is designed such that it can aid in the
assessment of the extent to which mutually agreed objectives (Mandal, 2012) are achieved. This
section of the report traces the evolution of the MoU system through various committee reports
and highlights the major observations, along with the actions taken thereafter. This would act as
Page 18

an indicator of the developments that have happened in the MoU system in India and, through
the study of extant literature, would also highlight the areas of concern raised after each study.
1.
Arjun Sengupta Committee Report (1984)
2.
National Council of Applied Economic Research (2004)
3.
Report of the Working Group (2008)
4.
S.K. Roongta Committee Report (2011)
5.
Mankad Committee and Task Force (2012)
Page 19

PAPER 13 Corporate Laws & Compliance
SECTION A
1. (a) A government company holds 49% of the subscribed share capital in Smart & Co. Ltd. Mr.
R has been appointed as the auditor at the Annual General Meeting of Smart & Co. Ltd.
through an ordinary resolution. Certain members of the company object to this appointment
on the ground that the appointment of auditors is violative of the provisions of the Companies
Act, 1956. Examine the legal position with reference to the relevant provisions of the
[5]
(b) ABC Company Ltd. in its first general meeting appointed 6 directors whose period of
office is liable to be determined by rotation. Briefly explain the procedure and rules
regarding retirement of these directors. Will it make any difference, if ABC Company Ltd.
does not carry on business for profit?
[5]
(c) Amar Textiles Ltd. is a company engaged in manufacture of fabrics. The Company has
investments in shares of other bodies corporate including shares in Amar Cotton Co. Ltd. and
it has also advanced loans to other bodies corporate. The aggregate of all the investments
made and loans granted by Amar Textiles Ltd. exceeds 60% of its paid up share capital and
free reserves and also exceeds 100% of its free reserves. In course of its business
requirements, Amar textiles Ltd. has obtained a term loan from Industrial Development Bank
of India (a Public Financial Institution within the meaning of section 4A of the companies Act,
1956) and the same is still subsisting. Now the company wants to increase its holding from
70% to 80% of the equity share capital in Amar Cotton Co. Ltd. by purchase of additional 10%
shares from other existing shareholders.
State the legal requirements to be complied with by Amar Textiles Ltd. under the provisions of
the companies Act, 1956 to give effect to the above proposal.
Will your answer be different if Amar Textiles Ltd. would have defaulted in payment of
matured fixed deposits accepted by it from the public?
[5]
Answer 1(a):
The given problem relates to Section 224A of the Companies Act, 1956.
The legal position
1. Requirement of special resolution for appointment or reappointment of auditors
The appointment or reappointment of an auditor shall be made by a special resolution if not less
than 25% of the subscribed share capital, whether singly or in any combination is held, by:
(i)
(ii)
(iii)
(iv)
A Public Financial Institution;

A Government Company;
The Central Government;
Any State Government;
Page 1

(v) Any financial or other institution established by any Provincial or State Act in which a State
Government holds not less than 51% of the subscribed share capital;
(vi) A nationalised bank;
(vii) An insurance company carrying on general insurance business.
2. Consequences of failure to pass the special resolution
Where a company to which this section applies omits or fails to pass a special resolution it shall
be deemed that no auditor or auditors had been appointed by the company and thereupon
the company shall, within 7 days, give notice of that fact to the Central Government and the
Central Government may appoint a person to fill the vacancy.
The given case
A Government Company holds 49% of the subscribed share capital in Smart & Co. Ltd.
Therefore, the provisions of section 224A must be complied with for appointing the auditors.
However, Mr. R has been appointed as the auditor at the Annual General Meeting by passing
an ordinary resolution.
Conclusion
The appointment of Mr. R as an auditor in the annual general meeting is violative of the
provisions of section 224A. This is so because a Government Company holds more than 25% of
the subscribed share capital of Smart & Co. Ltd., and therefore, the appointment of auditors
requires a special resolution. Accordingly, the contention of the shareholders that appointment
of auditors is violative of the certain provisions of the Companies Act, 1956 (viz. Section 224A) is
correct, and so it shall be deemed that no auditors were appointed by Smart & Co. Ltd.
In this case, Smart & Co. Ltd. is required to intimate to the Central Government the fact that no
auditors were appointed in the Annual General Meeting. Such intimation shall be given within 7
days of conclusion of the Annual General Meeting. Thereafter, the Central Government shall fill
the vacancy.
Answer 1(b):
Not less than 2/3rd of total number of directors shall be the directors whose period of office is
liable to determination by retirement by rotation (any fraction contained in that 2/3rd shall be
rounded off as 1). Such directors are referred to as rotational directors. However, the articles of a
company may provide for greater number of rotational directors. Articles may even provide that
all the directors shall be rotational directors (Section 255).
As per section 256, at the first annual general meeting and every subsequent annual general
meeting, 1/3rd [or nearest to 1/3rd) of directors liable to retire by rotation (determined as per
section 255) shall retire from the office. The directors liable to retire by rotation shall be those who
have been longest in the office. In case, two or more directors were appointed on the same
day, the directors liable to retire shall be determined by an agreement between them. In the
absence of any such agreement, their names shall be determined by lots.
Page 2

In the given case, it is given that the first general meeting has appointed 6 directors whose
period of office is liable to be determined by rotation. It means that all the 6 directors appointed
in the first general meeting shall be the rotational directors. Therefore, 2 directors (1/3rd of 6) shall
retire at the ensuing annual general meeting. These directors shall be eligible for reappointment.
A separate resolution shall be moved for reappointment of both the directors (Section 263).
In case ABC Company Limited does not carry on business for profit, section 263A will get
attracted. As per section 263A, nothing contained in sections 177, 255, 256 and 263 shall affect
any provision in the articles of a company for the election by ballot of all its directors at each
annual general meeting if such company does not carry on business for profit or prohibits the
payment of a dividend to its members. Accordingly, ABC Company Limited may elect its
directors by ballot.
Answer 1(c):
As per section 372A (8), any loans, investments etc. made by a holding company in its wholly
owned subsidiary are outside the preview of Section 372A. However, Amar Cotton Co. Ltd. is not
a wholly owned subsidiary of Amar Textiles Ltd. and hence investment in Amar Cotton Co. Ltd. is
not covered by the exemption under section 372 (8).
The aggregate of loans and investments already made by Amar Textiles Ltd. exceeds the two
limits of 60% and 100% specified under section 372A. Therefore, the company can make new
inter-corporate investments only by passing a special resolution.
The proposed investment can be made as follows:
(a) A resolution shall be passed at a Board meeting with the consent of all the directors present.
(b) A special resolution shall be passed in the general meeting. The notice of special resolution
must indicate clearly the specific limits, the particulars of the body corporate in which the
investment is proposed to be made, the purpose of the investment, specific source of
funding and other similar details.
(c) IDBI is a Public Financial Institution within the meaning of section 4A. Since, the aggregate
investments exceed the limit of 60%, prior approval of IDBI shall be obtained.
(d) The company shall enter the prescribed particulars of the investment in the register
maintained for this purpose within 7 days of making the investment.
(e) The company shall ensure that no default in compliance with section 58A (relating to public
deposits) is subsisting.
If the company has defaulted in repayment of public deposits, the company cannot make any
investments even if special resolution and resolution of Board is passed. The investments can be
made only after the default has been made good.
2. (a) Mr. Raj, a director of PQR Ltd., submitted his resignation from the post of director to the
Board of directors on 30th June, 2010 and obtained a receipt therefore on the same day. The
Board of directors of PQR Ltd. neither accepted the resignation nor did it file Form No. 32 with
the registrar of companies. You are required to state whether Mr. Raj ceases to be the director
of PQR Ltd. and if yes, since when?
[5]
Page 3

(b) The Directors of Infotech Consultants Ltd, registered in Calcutta, propose to hold the next
Board Meeting in May 2008. They seek your advice in respect of the following matters
(i) Can the Board Meeting be held in Chennai, when all the Directors of the Company reside
at Calcutta?
(ii) Can the Board meeting be called on a Public Holiday and that too after business hours as
majority of the Directors of the Company have gone to Chennai on vacation?
(iii) Is it necessary that the notice of the Board meeting should specify the nature of business
to be transacted?
[3]
(c) Modern Technologies Limited, an Unlisted Company, proposed to finance its expansion
programme by issuing Equity Shares to public. The company has been making good profits
every year from the commencement of business on 1st April 2003, but it has not declared
dividend so far. The Company was started with initial Equity Share Capital of `3 Crores in Jan
2003. The Paid-up Equity Share Capital and Free Reserves as per the latest Audited Balance
Sheet as at 31st March, 2010 amounted to `5 Crores and `10 Crores respectively.
State the conditions which are required to be fulfilled by an Unlisted Company under the SEBI
(ICDR) Regulations, 2009 in order to be eligible to make an IPO and also examine whether
Modern Technologies Limited is eligible to make the proposed Public issue.
[4]
(d) Tomato Ltd., a vehicles manufacturing company in India has received an order from a
transport company in Italy for supply of 100 Trucks on lease. You are required to state, how
the said Tomato Ltd. can accept such an order.
[3]
Answer 2(a):
The resignation takes effect immediately without any need for its acceptance where the articles
do not contain any provision relating to resignation of directors or where the articles allow the
director to resign at any time. However, a managing director cannot resign by merely sending a
resignation. His resignation becomes effective only when the company accepts the resignation
and relieves him from the office.
The given case is discussed as follows:
It is the duty of the company to file with the registrar a statement of changes made in the
particulars of directors, manager and secretary; a director is not required to submit his
resignation to the registrar.
Further, filing of Form No. 32 is only a consequential act; it is not an act to be complied with in
order to make a resignation valid. Therefore, the resignation of a director shall be valid
notwithstanding the fact that it has not been filed with the registrar by the company and the
director so resigning.
The resignation of Mr. Raj shall take effect immediately (i.e., w.e.f. 30.06.2010), without requiring
any acceptance by the Board in the following cases:
(a) If the articles of PQR Ltd. do not contain any provision relating to resignation of directors.
(b) If the articles of PQR Ltd. give a right to the directors to resign at any time.
Page 4

However, in the following cases, the resignation of Mr. Raj shall take effect only on acceptance
(and then Mr. Raj shall cease to be a director):
(a) If Mr. Raj is managing director or whole time director of the company.
(b) If the articles of the company state that the resignation of a director shall be effective only
when accepted by the Board.
(c) If the letter of resignation submitted by Mr. Raj requires acceptance.
Answer 2(b):
1. Place: Board Meeting need not be held only at the Registered Office. It can be held at
any convenient place, different from the Registered Office also. Also Directors can hold a
Board Meeting in a foreign Country, if circumstances justify it.
2. Time: Sec. 166 requires that AGM shall be held during business hours, and on a day this is not
a Public Holiday. There is no similar provision for Board Meetings, and hence Board Meetings
may also be held on Public Holidays or after business hours. So, Board Meeting can also be
held on a Public holidays unless AOA provides otherwise.
3. Agenda: Law does not require an agenda for a Board Meeting, and any business
whatsoever can be transacted at the Board Meeting. The Board can transact business even
without a formal agenda.
Answer 2(c):
Conditions:
1. Net Tangible Assets of at least `3 Crores in each of the preceding 3 full years (of 12 months
each), of which not more than 50% is held in monetary assets.
2. Track record of Distributable Profits for at least 3 out of immediately preceding 5 years.
3. Net Worth of atleast `1 Crore in each of the preceding 3 full years.
4. Where the Company has changed its name within the last one year, at least 50% of the
revenue for the preceding 1 full year is earned by the Company from the activity suggested
by the new name.
5. Aggregate of the proposed issue and all previous issues made in the same financial year in
terms of size (i.e., offer through offer document + Firm Allotment + Promoters Contribution
through the Offer Document), does not exceed 5 times its Pre-Issue Net Worth as per the
audited Balance Sheet of the last financial year.
Conclusion:
Since all the conditions are satisfied, the Company is eligible to make a public Issue of Shares to
a maximum of 5 times of its pre-issue Net worth as per latest audited balance sheet. i.e., `5 x [`5
Crores Capital + `10 Crores Reserves] = `75 Crores.
Answer 2(d):
Taking any goods out of India to a place outside India amounts to 'export' [Section 2(I)]. As per
Regulation 14 of Foreign Exchange Management (Export of Goods and Services) Regulations,
Page 5

2000, export of goods on lease or hire or under any arrangement or in any other manner other
than sale or disposal of such goods requires approval of the Reserve Bank of India.
In the given case, Tomato Ltd. proposes to supply on lease 100 trucks to Italy. Lease of trucks to
Italy involves taking goods to Italy (i.e., outside India), and so lease of trucks to Italy is 'export'
within the meaning of section 2(I). Since lease of truck does not amount to sale or disposal of
goods, exporting goods by way of lease requires the permission of Reserve Bank of India.
3. (a) BOD of M/s RP Ltd., in its meeting held on 29th May, 2013 declared an interim dividend
payable on paid up equity share capital of the company. In the Board meeting scheduled
for 10th June, 2013, the Board wants to revoke the said declaration. You are required to state
with reference to the provisions of the Companies Act, 1956 whether the BOD can do so. [3]
(b) The Issued, Subscribed and Paid Up Share Capital of ABC Nidhi Company Ltd is `10 lakhs
consisting of 90,000 Equity Shares of `10 each fully paid up, and 10,000 Preference Shares of
`10 each fully paid up. Out of the Members of the Company, 400 Members holding one
Preference Share each and 50 Members holding 500 Equity Shares applied for relief u/s 397 &
398. As on the date of petition, the Company had 600 Equity Shareholders and 5,000
Preference Shareholders.
Examine whether the above petition is maintainable. Will your answer be different, if
Preference Shareholders have subsequently withdrawn their consent?
[6]
(c) M/s Raman Limited was wound up by the court. The official liquidator invited claims from
the creditors which stood as under:
`11.00 lakhs
Income Tax dues
`05.00 lakhs
Sales Tax dues
`25.00 lakhs
Dues of workers
`25.00 lakhs
Unsecured loans payable to directors
`15.00 lakhs
Trade creditors who supplied raw material
`75.00 lakhs
Secured creditors being the bankers of the company
`156.00 lakhs
Total
Official Liquidator could realize only `80.00 lakhs by sale of the assets and realization made
from companys debtors, which is not sufficient to pay to all the creditors. Please decide the
order of priority for payment to creditors explaining the relevant provisions of the
[6]
Answer 3(a):
Any dividend in between two annual general meetings of the company, or before or after the
closure of annual accounts for any particular year is referred as interim dividend. Dividend, once
declared, becomes a debt payable by the company and after declaration, dividend cannot
be cancelled. The Companies (Amendment) Act, 2000 inserted sub-section (1A), (1B) and (1C)
in section 205. These new provisions specifically authorize the BOD to declare interim dividend
and that the provisions of section 205, 205A, 205C, 206, 206A and 207 shall apply to any interim
dividend also as they apply in case of final dividend. Therefore, interim dividend also cannot be
cancelled.
Page 6

In view of the above discussion, it can be concluded since the Board of RP Ltd. has already
declared interim dividend, it cannot be revoked.
Answer 3(b):
1. Eligibility condition: The following Members shall have the right to apply to Tribunal u/s 397 &
398:
COMPANY
(a) Having Share Capital
(b) Not having Share Capital
ELIGIBLE MEMBERS
Least of the following:
Not less than 100 Members of the Company, or
Not less than 1/10th of the total number of its
Members, or
Any Member(s) holding not less than 1/10th of
the Issued Share Capital.
Note: Members are eligible to apply only if all
moneys / calls due on their Shares have been paid.
Not less than 1/5th of the total number of its
Members.
2. Analysis: Preference Shareholders are also Members. In the above case, the eligible
applicant(s) are least of the following
(a) Minimum Number of Members = 100 Members.
(b) Total Number of Members = 600 + 5,000 = 5,600.
1/10th thereon = 560 Members.
(c) Total Issued Capital = `10,00,000.
Value of shares held by the Applicants = (500 Equity Shares x `10) + (400 Members x 1
Preference Share x `10) = `90,000.
(Minimum required = `1,00,000)
3. Conclusion: Since the application has been made by 450 Members, least of the above (not
less than 100 Members) condition is satisfied. Hence, the application is valid and
maintainable. Subsequent withdrawal of consent does not affect the maintainability of the
petition.
Answer 3(c):
Section 529A(1) provides that in the winding-up of a company, the following dues shall be paid
in priority to all other debts irrespective of anything contained in any other provision of this Act or
any other law for the time being in force:
(a) Workmens dues; and
(b) Debts due to secured creditors to the extent such debts rank under clause (c) of the proviso
to sub-section (1) of section 529 pari passu with such dues, shall be paid in priority to all other
debts.
Page 7

The debts listed under section 529A shall be paid in full unless the assets are insufficient to meet
them, in which case they shall abate in equal proportions.
The order of payment of liabilities adopted by the liquidator shall be as under:
1. Overriding preferential payments under section 529A (i.e., workmen's dues and debts due to
secured creditors).
2. Costs and expenses of winding up.
3. Preferential payments under section 530.
4. Creditors secured by a floating charge.
5. Unsecured creditors.
In the present case, `80 lakhs have been realised by the sale of all the assets of the company.
The amount due to secured creditors is `75 lakhs and the workmen's dues are `25 lakhs.
Overriding preferential payments (workmen's dues and secured creditors) amount to `100 lakhs.
Therefore, the workmen's dues and dues payable to secured creditors shall abate in equal
proportions, i.e., payments to workmen and secured creditors shall be made in the proportion of
amount owed by the company to them (i.e., in the ratio of 75:25). Accordingly, the workers shall
be paid `20 lakhs and the secured creditors shall be paid `50 lakhs. No payment shall be made
to the Government authorities for income tax dues, sales tax dues, unsecured loans payable to
directors or to trade creditors who supplied raw material.
4. (a) Joe Ltd. was incorporated in London with a paid up capital of 20 million pounds. Mr. Y an
Indian Citizen holds 25% of the Paid Up Capital. X Ltd., a Company registered in India holds
30% of the Paid Up Capital of Joe Ltd. Joe Ltd. has recently established a Share Transfer
Office at New Delhi. The Company seeks your advice as to what formalities it should observe
as a Foreign Company. State briefly the requirements relating to filing of accounts with the
ROC by the Foreign Company in respect of its global business as well as Indian business. [7]
(b) The promoters of a Company to be registered under the Companies Act, 1956 having its
main object of carrying on the business as manufacture and stockiest of Iron and Steel,
proposes that the name of the Company is to be Abha Steel Bank Limited. You are required
to state whether the said company with the proposed name can be registered.
[3]
(c) On 24th January 2010, the Board of Directors of M/s. Bold Limited appointed Mr. A as the
company's Sole Selling Agent for a period of 5 years. At the first general meeting of the
company, held after the Board Meeting, on 29th September 2010, the above appointment
was disapproved. Referring to the provisions of the Companies Act, 1956:
(i) State the date from which the above appointment comes to an end.
(ii) What would be your answer in case a clause in the above appointment that "the
appointment must be made by the company in General Meeting" was not inserted as a
condition?
[5]
Page 8

Answer 4(a):
The following issues are relevant in this regard:
1. Indian citizens / Bodies holding 50% Share Capital in Foreign Company:
(a) Where not less than 50% of the Paid-Up Share Capital (Equity or Preference or partly in
both) of a Foreign Company is held by one or more: (a) citizens of India, and/or (b)
Bodies Corporate incorporated in India, whether singly or in the aggregate, such
Company shall comply with such of the provisions of the Act with regard to the business
carried on by it in India, as if it were a Company incorporated in India.
(b) In the above case, Joe Ltd. is a Company where 55% of the Paid-Up Capital is held in the
above manner. Hence, it has to comply with the provisions of the Act with regard to the
business carried on by it in India, as if it were a Company incorporated in India.
2. Obligations of a Foreign Company:
(a) Financial Statements [World or Global Business Accounts]:
(i) Every Foreign Company shall, in every calendar year, make out a Balance Sheet and
Profit and Loss Account. The form, annexures, attachments (including, relating to
every Subsidiary) of such Balance Sheet and P & L A/c shall as if it had been a
Company within the meaning of this Act, have been required to make out and lay
before in General Meeting.
(ii) The Central Govt. is empowered to exempt/modify the above requirements in
respect of any Foreign Company or Class of Foreign Companies, by notification in
the Official Gazette.
(b) Filing with ROC: The following shall be delivered/filed with the ROC. 3 copies of:
(i) Balance Sheet and P & L A/c, along with its annexures and attachments, as
submitted by it to the prescribed authority in the country of its incorporation, [If such
document is not in the English language, a certified translation thereof shall be
annexed to it.]
(ii) List of all places of business established by the Company in India as at the date of
Balance Sheet.
(c) Indian Business Accounts:
(i) In respect of Indian Business, a Foreign Company shall file 3 copies of its Balance
Sheet and P & L A/c, prepared in Indian Rupees, as per Schedule VI requirements.
(ii) Indian Business Accounts shall be audited by a Chartered Accountant practicing in
India.
(d) Time Limits: The accounts shall be filed with the ROC, within 9 months of the close of the
financial year. ROC may extend this period by further 3 months.
Page 9

Answer 4(b):
Section 7 of the Banking Regulation Act, 1949 states that:
1. Use of words Bank, Banker or Banking: No Company other than a banking Company shall
use as part of its name or in connection with its business any of the words Bank, Banker or
Banking and no Company shall carry on the business of banking in India unless it uses as
part of its name at least one of such words.
2. No firm, individual or group of individuals shall, for the purpose of carrying on any business,
use as part of its or his name any of the words bank, banking or banking Company.
3. Not Applicable: Section 7 not applicable under the following circumstances:
(a) A Subsidiary of a banking Company formed for one or more of the purposes mentioned
in u/s 19(1), whose name indicates that it is a subsidiary of that banking Company;
(b) Any association of Banks formed formed for the protection of their mutual interests and
registered u/s 25 of the Companies Act.
Therefore, Company cannot have the name ABC Steel Bank.
Answer 4(c):
The legal position
(a) Where the Board of directors of a company appoints a Sole Selling Agent, such appointment
shall be subject to the condition that the appointment shall cease to be valid if it is not
approved by the shareholders in the first general meeting held after the date of the
appointment.
(b) If the shareholders in the general meeting disapprove the appointment, the appointment
shall cease to be valid with effect from the date of that general meeting.
(c) The provisions regarding incorporation of this condition are mandatory. If there is no such
condition, the agreement will be void ab initio even if the appointment is approved by the
general meeting [Arantee Manufacturing Corporation v Bright Bolts Pvt. Ltd. AIR (1967) 37
Comp Cas 758; Department Circular No. 12(11)-CL- VI/68, dated 6.11.1968].
The given case
(i) Mr. A has been appointed by the Board of Directors on 24 th January, 2010. At the first general
meeting held after the date of appointment of Mr. A, the appointment of Mr. A has been
disapproved. Therefore, the appointment of Mr. A comes to an end with effect from the
date of the first general meeting, viz. 29 th September, 2010.
(ii) In case the appointment of Mr. A had been made without any condition regarding
approval of his appointment in the first general meeting, the appointment of Mr. A would
have been void ab initio. In such a case, the question of cessation of office does not arise at
all, since the appointment is altogether void.
5. (a) A company made a profit of `500 lakh during the financial year 201213. The Board of
directors passed a resolution making a donation of `100 lakh to Gandhi National Memorial
Fund. Discuss the validity of the decision of the directors.
[4]
Page 10

(b) What are the qualifications to be appointed as members of Central Commission as per
The Indian Electricity Act, 2003? Also state the functions of the Central Commission.[3+4=7]
(c) The association of Truck Operators of India by agreement insisted that members of the
association shall not deal with non-members in transportation of goods. The association
claims that this agreement is entered for the welfare of trade and not for any other purpose.
Would this agreement be under the purview of the Act? Will the answer be different if the
association attempts to control the provisioning of services rendered by its members?
[4]
Answer 5(a):
As per section 293B, a company is empowered to contribute such amount as it thinks fit to:
the National Defence Fund; or

any other fund approved by the Central Government for the purpose of National Defence.
Gandhi National Memorial Fund is not an approved fund for the purpose of National Defence.
Therefore, donation to this fund can be made only in accordance with the requirements of
section 293(1)(e).
As per section 293(1)(e), prior consent of the shareholders in general meeting is required for
making a charitable contribution if the amount contributed in a financial year exceeds:
(a) `50,000; or
(b) 5% of average net profits (as determined under sections 349 and 350) during 3 immediately
preceding financial years, whichever is greater.
In the given case, figures of net profit for only one year have been given. Therefore, it has been
assumed that company made a profit of `500 lakhs in each of the 3 financial years immediately
preceding the date of contribution, and so the average profits comes to `500 lakhs. Since, the
contribution to Gandhi National Memorial Fund of `100 lakhs exceeds the limits specified in the
section (i.e. `50,000 or `25 lakhs, being 5% of 500 lakhs, whichever is higher), the contribution
requires the consent of shareholders in the general meeting. Since, the Board has passed a
resolution without the consent of general meeting, such resolution is not valid.
Answer 5(b):
Qualification for appointment of Members of Central Commission [Section 77]:
1. The Chairperson and the Members of the Central Commission shall be persons having
adequate knowledge of, or experience in, or shown capacity in, dealing with, problems
relating to engineering, law, economics, commerce, finance or, management and shall be
appointed in the following manner, namely:
(a) one person having qualifications and experience in the field of engineering with
specialisation in generation, transmission or distribution of electricity;
(b) one person having qualifications and experience in the field of finance;
(c) two persons having qualifications and experience in the field of economics, commerce,
law or management:
Page 11

Provided that not more than one Member shall be appointed under the same category
under clause (c).
2. Notwithstanding anything contained in sub-section (1), the Central Government may
appoint any person as the Chairperson from amongst persons who is, or has been, a Judge
of the Supreme Court or the Chief Justice of a High Court:
Provided that no appointment under this sub-section shall be made except after
consultation with the Chief Justice of India.
3. The Chairperson or any other Member of the Central Commission shall not hold any other
office.
4. The Chairperson shall be the Chief Executive of the Central Commission.
Functions of Central Commission [Section 79]:
1. The Central Commission shall discharge the following functions, namely:
(a) to regulate the tariff of generating companies owned or controlled by the Central
Government;
(b) to regulate the tariff of generating companies other than those owned or controlled by
the Central Government specified in clause (a), if such generating companies enter into
or otherwise have a composite scheme for generation and sale of electricity in more
than one State;
(c) to regulate the inter-State transmission of electricity;
(d) to determine tariff for inter-State transmission of electricity;
(e) to issue licenses to persons to function as transmission licensee and electricity trader with
respect to their inter-State operations;
(f) to adjudicate upon disputes involving generating companies or transmission licensee in
regard to matters connected with clauses (a) to (d) above and to refer any dispute for
arbitration;
(g) to levy fees for the purposes of this Act;
(h) to specify Grid Code having regard to Grid Standards;
(i) to specify and enforce the standards with respect to quality, continuity and reliability of
service by licensees;
(j) to fix the trading margin in the inter-State trading of electricity, if considered, necessary;
(k) to discharge such other functions as may be assigned under this Act.
2. The Central Commission shall advise the Central Government on all or any of the following
matters, namely:
(a) formulation of National electricity Policy and tariff policy;
(b) promotion of competition, efficiency and economy in activities of the electricity industry;
(c) promotion of investment in electricity industry;
(d) any other matter referred to the Central Commission by that Government.
3. The Central Commission shall ensure transparency while exercising its powers and
discharging its functions.
Page 12

4. In discharge of its functions, the Central Commission shall be guided by the National
Electricity Policy, National Electricity Plan and Tariff Policy published under section 3.
Answer 5(c):
Horizontal Anti-Competitive Agreements [Sec. 3(3)]:
Any agreement entered into between Enterprises or Association of Enterprises, or Person or
Association of Persons, or between any Person and Enterprise or practice carried on, or decision
taken by, any Association of Enterprises or Association of Persons, including Cartels, engaged in
identical or similar trade of goods or provision of services which:
(a) directly or indirectly determines purchase or sale prices,
(b) limits or controls production, supply, markets, technical development, investment or provision
of services,
(c) shares the market or source of production or provision of services by way of allocation of
geographical area of market, or type of goods or services, or number of customers in the
market or any other similar way,
(d) directly or indirectly results in bid rigging or collusive bidding,
shall be presumed to have an appreciable adverse effect on competition.
Note:
Exception: An agreement entered into by way of Joint Ventures and which increases the
efficiency in production, supply, distribution, storage, acquisition, or control of goods or
provision of services, shall not be presumed anti-competitive.
Bid Rigging means any agreement, between enterprises or persons engaged in identical
or similar production or trading of goods or provision of services, which has the effect of
eliminating or reducing competition for bids or adversely affecting or manipulating the
process of bidding.
Therefore, in the given case,
Agreement is horizontal anti-competitive, hence void and control or provisioning of services
is also void, sec. 3(3)(b).
6. (a) Gayatri, a resident in India is likely to inherit an immovable property in USA from her
father, who is a resident outside India. Advise Gayatri about the restrictions, if any, in this
regard. Will your answer be different if she is likely to inherit foreign securities?
[4]
(b) XYZ Automobiles Limited intends to make a public issue of 2,00,00,000 equity shares of
`10 each through the 100% book building process indicating a price band.
You are required to answer the following with reference to the SEBI (Disclosure and Investor
Protection) guidelines:
(i) What is the price band that can be indicated in the red herring prospectus, if the floor
price is proposed to be fixed at `300 per equity share?
(ii) What are the restrictions, if the company wants to revise the price band during the
bidding period?
Page 13

(iii) How the shares are to be allocated to different categories of investors like Qualified
Institutional Buyers, Retail Individual Investors, etc.?
[8]
(c) ABC Producer Company Limited was incorporated on 1st April, 2008. At present it has got
200 members and its Board consists of 10 directors. The Board of directors of the company
seeks your advice on the following proposals:
Appointment of one expert director and one additional director by the Board for a period of
four years. Advise the Board of directors explaining the relevant provisions of the Companies
Act, 1956.
[3]
Answer 6(a):
Holding etc. of Currency, Security and Property [Sec. 6(4) & 6(5)]:
(a) A person resident in India may hold, own, transfer or invest in foreign currency, foreign
security or any immovable property situated outside India, if such currency, security or
property was:
Acquired, held or owned by such person when he was resident outside India, or
Inherited from a person who was resident outside India.
(b) A person resident outside India may hold, own, transfer or invest in Indian currency, security
or any immovable property situated in India, if such currency, security or property was:
Acquired, held or owned by such person when he was resident in India, or
Inherited from a person who was resident in India.
Note: However, Current Income on such assets like rent, dividend, interest etc. have to be
repatriated to India within the prescribed time limit as specified in Regulation 5(i) of FEM
(Realisation, Repatriation and Surrender of Foreign Exchange), 2000.
There are no restrictions with regard to inheritance of either immovable property situated outside
India or of foreign security, from a person resident outside India. Further, such inheritance does
not require approval of RBI. Hence, Gayatri can hold the immovable property/foreign security,
after such inheritance.
Answer 6(b):
The provisions relating to book building are contained in Part A of Schedule XI to the Securities
and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2009.
The relevant Clauses of Schedule XI are discussed below:
As per Sub-Clause (b) of Clause (8), where the issuer decides to opt for price band instead of
floor price, the issuer shall also ensure compliance with the following conditions:
(i) The cap of the price band should not be more than 20%, of the floor of the band; i.e. cap of
the price band shall be less than or equal to 120% of the floor of the price band;
(ii) The price band can be revised during the bidding period in which case the maximum
revision on either side shall not exceed 20% i.e. floor of price band can move up or down to
the extent of 20% of floor of the price band disclosed in the red herring prospectus and the
cap of the revised price band will be fixed in accordance with clause (i) above;
Page 14

(iii) Any revision in the price band shall be widely disseminated by informing the stock
exchanges, by issuing press release and also indicating the change on the relevant website
and the terminals of the syndicate members.
(iv) In case the price band is revised, the bidding period shall be extended as per provisions of
sub-regulation (2) of regulation 46.
Applying the provisions of the said Clause to the given case:
(i) The price band that can be indicated in the red herring prospectus, shall be `300 to `360.
(ii) The price band can be revised during the bidding period. However, the maximum revision
on either side shall not exceed 20% of the floor price. Thus, floor of the price band can move
up or down to the extent of 20% of the floor price disclosed in the red herring prospectus,
and the cap of the price band shall not be more than 20% of the revised floor price.
Accordingly, in the given case, the revised price band can be `240 to `288 on the lower
side, or `360 to `432 on the upper side.
Any revision in the price band shall be widely disseminated by informing the stock exchange,
by issuing press release and also indicating the change on the relevant website and
terminals of the syndicate members. Also, the bidding period shall be extended for a further
period of 3 days, subject to the total bidding period not exceeding 13 days.
(iii) As per Regulation 43 of Securities and Exchange Board of India (Issue of Capital and
Disclosure Requirements) Regulations, 2009, in an issue made through the book building
process, the allocation in the net offer to public category shall be made as follows:
(a) not less than 35% to retail individual investors;
(b) not less than 15% to non-institutional investors;
(c) not more than 50% to qualified institutional buyers, 5% of which shall be allocated to
mutual funds.
Answer 6(c):
As per section 581P, the Board may co-opt one or more expert directors or an additional
director not exceeding 1/5th of the total number of directors. Further, every person shall hold the
office of a director for a period not less than 1 year but not exceeding 5 years, as may be
specified in the articles. The total number of directors in the present case is 10. The number of
expert directors and additional directors shall not exceed 2. Therefore, it is permissible for the
Board to appoint one expert director and one additional director for a period of four years.
SECTION B
7. (a) What is Corporate Citizenship? Is this fundamentally different from Corporate Social
Responsibility?
[5]
(b) Discuss the OECD Guidelines for Corporate Governance of State-owned Enterprises.[5]
Page 15

(c) The development of Corporate Governance in the UK was initially the findings of a trilogy
of codes. Explain the same in brief.
[5]
(d) Family ownership of firms is the prevalent form of ownership in many countries around
the globe.
In view of the above statement, explain the concept and need of Ownership structures.[5]
(i) Whole Life Cycle Costing
(ii) Golden Parachute Proposals
(f) What are the pros and cons in adopting Corporate Social Responsibility?
[2.5*2=5]
[5]
Answer 7(a):
A new terminology that has been gaining grounds in the business community today is Corporate
Citizenship. Corporate citizenship is defined by the Boston College Centre for Corporate
Citizenship, as the business strategy that shapes the values underpinning a companys mission
and the choices made each day by its executives, managers and employees as they engage
with society.
citizenship are:
(i)
(ii)
(iii)
(iv)
Minimise harm,
Maximise benefit,
Be accountable and responsive to key stakeholders and
Support strong financial results.
Corporate citizenship, sometimes called corporate responsibility, can be defined as the ways in
which a companys strategies and operating practices affect its stakeholders, the natural
companies explicit and mainly discretionary efforts to improve society in some way, but is also
directly linked to the companys business model in that it requires companies to pay attention to
all their impacts on stakeholders, nature, and society. Corporate citizenship is, in this definition,
integrally linked to the social, ecological, political, and economic impacts that derive from the
companys business model; how the company actually does business in the societies where it
operates; and how it handles its responsibilities to stakeholders and the natural environment.
Page 16

many Indian companies are either beginning to think about or are engaging with in one way or
another.
While some of these initiatives may be labeled as corporate citizenship by some organisations,
there basic message and purpose is the same.
Answer 7(b):
According to OECD, a major challenge is to find a balance between the states responsibility for
actively exercising its ownership functions, such as, the nomination and election of the board,
while at the same time refraining from imposing undue political interference in the
management of the company. Another important challenge is to ensure that there is a level playing
field in markets where private sector companies can compete with the state-owned enterprises,
and that governments do not distort competition in the way they use their regulatory or
supervisory powers.
also suggest the strict separation of the states ownership and regulatory functions.
There should be a clear separation between the state's ownership function and other
SOEs should not be exempt from the application of general laws and regulations.
Stakeholders including competitors, should have access to efficient redress.
SOEs should face competitive conditions regarding access to finance. Their relations with
state-owned banks, state-owned financial institutions, and other state-owned
State acting as an owner
The state should act as an informed and active owner, and establish a clear and consistent
ownership policy, ensuring that governance of state-owned enterprises is carried out in a
transparent and accountable manner with the necessary degree of professionalism and
effectiveness.
The government should develop and issue an ownership policy that defines the overall
objectives of state ownership, the state's role in corporate governance of SOEs, and how
it will implement its ownership policy.
The government should not be involved in the day-to-day management of SOEs and
allow them full operational autonomy to achieve their defined objectives.
The state should let SOE boards exercise their responsibilities and respect their
Page 17

independence.
The state should exercise its ownership rights according to the legal structure of each
company. Keeping this in mind, it should ensure that remuneration schemes for SOE
board members foster the long-term interest of the company, and can attract and
motivate qualified professionals.
Equitable treatment of shareholders
The SOEs should recognize the rights of all shareholders and in accordance with the OECD
principles of corporate governance, ensure their equitable treatment and equal access to
The co-ordinating or ownership entity and SOEs should ensure that all shareholders are
treated equally.
election.
Relations with stakeholders
The state ownership policy should fully recognize the state-owned enterprises' responsibilities
towards stakeholders and report their relations with them.
Listed on large SOEs, as well as SOEs pursuing important public policy objectives, should
report on stakeholder relations.
Transparency and disclosure
State-owned enterprises should observe high standards of transparency in accordance with the
OECD Principles of Corporate Governance.
SOEs should develop efficient internal audit procedures and establish an internal audit
function that is monitored by and reports directly to the board and to the audit
committee or the equivalent company organ.
SOEs, especially large ones, should be subject to an annual independent external audit
based on international standards. The existence of specific state control procedures dots
not substitute for an independent external audit.
Responsibilities of the boards of state-owned enterprises
The boards of state-owned enterprises should have the necessary authority, competencies, and
objectivity to carry out their function of strategic guidance and monitoring of management.
They should act with integrity and be held accountable for their actions.
The boards of SOEs should be assigned a clear mandate and ultimate responsibility for
the company's performance. The board should be fully accountable to the owners, act
in the best interest of the company, and treat all shareholders equally.
SOE boards should carry out their functions of monitoring of management and strategic
Page 18

guidance, subject to the objectives set by the government and the ownership entity.
They should have the power to appoint and remove the CEO.
The boards of SOEs should be so composed that they can exercise objective and
independent judgement. Good practice calls for the chair to be separate from the
CEO.
SOE boards should carry out an annual evaluation to appraise their performance.
Answer 7(c):
As in other countries, the development of Corporate Governance in the UK was initially the
findings of a trilogy of codes: the Cadbury Report (1992), the Greenbury Report (1995), and the
Hampel Report (1998). These are explained as under:
Cadbury Report (1992)
Following various financial scandals and collapses (Coloroll and Polly Peck, to name but two)
and a perceived general lack of confidence in the financial reporting of many UK companies,
the Financial Reporting Council, the London Stock Exchange, and the accountancy profession
established the Committee on the Financial Aspects of Corporate Governance in May 1991.
After the Committee was set up, the scandals at BCCI and Maxwell happened, and as a result,
the committee interpreted its remit more widely and looked beyond the financial aspects to
Corporate Governance as a whole. The Committee was chaired by Sir Adrian Cadbury and,
when the Committee reported in December 1992, the report became widely known as the
Cadbury Report.
The recommendations covered: the operation of the main board; the establishment,
composition, and operation of key board committees; the importance of, and contribution that
can be made by, non-executive directors; the reporting and control mechanisms of a business.
The Cadbury Report recommended a code of Best Practice with which the boards of all listed
companies registered in the UK should comply, and utilized a comply or explain mechanism.
This mechanism means that a company should comply with the code but, if it cannot comply
with any particular aspect of it, then it should explain why it is unable to do so. This disclosure
gives investors detailed information about any instances of non-compliance and enables them
to decide whether the companys non-compliance is justified.
Greenbury Report (1995)
The Greenbury committee was set up in response to concern at both the size of directors
remuneration packages and their inconsistent and incomplete disclosure in companies annual
reports. It made, in 1995, comprehensive recommendations regarding disclosure of directors
remuneration packages. There has been much discussion about how much disclosure there
should be of directors remuneration and how useful detailed disclosures might be. Whilst the
work of the Greenbury Committee focused on the directors of public limited companies, it
hoped that both smaller listed companies and unlisted companies would find its
recommendations useful.
Page 19

Central to the Greenbury report recommendations were strengthening accountability and
enhancing the performance of directors. These two aims were to be achieved by (i) the
presence of a remuneration committee comprised of independent non-executive directors who
would report fully to the shareholders each year about the companys executive remuneration
policy, including full disclosure of the elements in the remuneration of individual directors; and (ii)
the adoption of performance measures linking rewards to the performance of both the
company and individual directors, so that the interests of directors and shareholders were more
closely aligned.
Since that time (1995), disclosure of directors remuneration has become quite prolific in UK
company accounts.
Hampel Report (1998)
The Hampel Committee was set up in 1995 to review the implementation of the Cadbury and
Greenbury Committee recommendations. The Hampel Committee reported in 1998. The
Hampel Report said: We endorse the overwhelming majority of the findings of the two earlier
committees. There has been much discussion about the extent to which a company should
consider the interests of various stakeholders, such as employees, customers, suppliers, providers
of credit, the local community, etc., as well as the interests of its shareholders. The Hampel report
stated that the directors as a board are responsible for relations with stakeholders; but they are
accountable to the shareholders. However, the report does also state that directors can meet
their legal duties to shareholders, and can pursue the objective of long-term shareholder value
successfully, only by developing and sustaining these stakeholder relationships.
The Hampel Report, like its precursors, also emphasized the important role that institutional
investors have to play in the companies in which they invest (investee companies). It is highly
desirable that companies and institutional investors engage in dialogue and that institutional
investors make considered use of their shares, in other words, institutional investors should
consider carefully the resolutions on which they have a right to vote and reach a decision based
on careful thought, rather than engage in box ticking.
Answer 7(d):
In many countries, family-owned firms are prevalent. Corporate governance is of relevance to
family-owned firms, which can encompass a number of business forms including private and
publicly quoted companies, for a number of reasons. Family-owned firms may face difficulties in
initially finding appropriate independent non-executive directors but the benefits that such
directors can bring is worth the time and financial investment that the family-owned firm will
need to make.
One advantage of a family-owned firm is that there should be less chance of the type of
agency problems. This is because ownership and control rather than being split are still one and
the same, and so the problems of information asymmetry and opportunistic behaviour should (in
theory, at least) be lessened. As a result of this overlap of ownership and control, one would
hope for higher levels of trust and hence less monitoring of management activity should be
necessary. However, problems may still occur and especially in terms of potential for minority
shareholder oppression, which may be more acute in family-owned firms.
Page 20

In family business group firms, the concern is that managers may act for the controlling family,
but not for shareholders in general. These agency issues are: the use of pyramidal groups to
separate ownership from control, the entrenchment of controlling families, and non-arms-length
transactions (aka tunneling) between related companies that are detrimental to public
investors.
Family Assembly
Family Council
Advisory Board
Board Of Directors
(Including Outside
Directors)
Possible stages in a family firms governance

The advantages of a formal governance structure are several. First of all, there is a defined
structure with defined channels for decision-making and clear lines of responsibility. Secondly,
the board can tackle areas that may be sensitive from a family viewpoint but which nonetheless
need to be dealt with - succession planning is a case in point (deciding who would be best to fill
key roles in the business should the existing incumbents move on, retire, or die). Succession
planning is important too in the context of raising external equity because, once a family
business starts to seek external equity investment, then shareholders will usually want to know
that succession planning is in place. The third advantage of a formal governance structure is
also one in which external shareholders would take a keen interest: the appointment of nonexecutive directors. It may be that the family firm, depending on its size, appoints just one, or
maybe two, non-executive directors. The key point about the non-executive director
appointments is that the persons appointed should be indepen-dent; it is this trait that will make
their contribution to the family firm a significant one. Of course, the independent non-executive
directors should be appointed on the basis of the knowledge and experience that they can
bring to the family firm: their business experience, or a particular knowledge or functional
specialism of relevance to the firm, which will enable them to add value and contribute to the
strategic development of the family firm. Another advantage of family-owned firms may be their
ability to be less driven by the short-term demands of the market. Of course, they still ultimately
need to be able to make a profit but they may have more flexibility as to when and how they
do so.
Cadbury (2000) sums up the three requisites for family firms to manage successfully the impacts
of growth: They need to be able to recruit and retain the very best people for the business, they
need to be able to develop a culture of trust and transparency, and they need to define logical
and efficient organisational structures. A good governance system will help family firms to
achieve these requisites.
Page 21

Answer 7(e):
(i) Whole Life Cycle Costing (WLCC):
Towards the late 1990s, the concepts of whole life costing (WLC) and whole life-cycle costing
(WLCC) emerged. The terms whole life costing and whole life-cycle costing are
interchangeable. WLCC is a new term that appears to have been adopted by many building
economists involved in the preparation of forecasts for the long-term cost assessments of capital
projects.
stochastic assessment of the performance of constructed facilities from feasibility to disposal. The
WLCC assessment process takes into account the characteristics of the constructed facility,
reusability, sustainability, maintainability and obsolescence as well as the capital, maintenance,
operational, finance, residual and disposal costs. The result of this stochastic assessment forms
the basis for a series of economic and noneconomic performance indicators relating to the
various stakeholders interests and objectives throughout the life-cycle of a project.
Currently, the application of WLCC in the construction industry is still hindered significantly by
the lack of standard methods and the excuse of lack of sound data upon which to arrive at
accurate decisions. As a result, the output from WLCC models is looked on as unreliable.
Combined with WLCC, risk assessment should form a major element in the strategic decision
making process during project procurement and also in value analysis, especially in todays
highly uncertain business environment. WLCC decisions are complex and usually comprise an
array of significant factors affecting the ultimate cost decisions. WLCC decisions generally have
multiple objectives and alternatives, long-term impacts, multiple constituencies in the
procurement of construction projects, generally involve multiple disciplines and numerous
decision makers, and always involve various degrees of risk and uncertainty. Project cost, design
and operational decision parameters are often established very early in the life of a given
building project. The existing methods do not adequately quantify the true economic impacts of
many quantitative and qualitative parameters.
(ii) Golden Parachute Proposals:
The Securities and Exchange Commissions (the SEC) new disclosure and advisory vote
requirements for compensation based on or relating to merger and similar transactions, often
referred to as golden parachute arrangements, became effective for proxy statements and
other acquisition related filings initially filed on or after April 25, 2011 for Corporate Governance
in USA. The SEC adopted the rules to implement Section 951 of the Dodd-Frank Wall Street
Reform and Consumer Protection Act (the Dodd-Frank Act).
The Dodd-Frank Act requires companies to hold separate shareholder votes on potential
golden parachute payments when they seek approval for mergers, sales and certain other
transactions. In determining the recommendation with respect to a golden parachute proposal,
the 2013 Updates include the consideration of any existing change-in-control arrangements
maintained with named executive officers, rather than focusing only on the new or extended
arrangements. The list of features considered problematic has been refined. Recent
amendments that incorporate problematic features will tend to carry more weight in the overall
Page 22

analysis. However, close scrutiny will also be given if multiple legacy problematic features are
present.
Answer 7(f):
Pros & Cons of adopting Corporate Social Responsibility:
Corporate social responsibility refers to a method of running a company that seeks to address
not only profitability, but also the environmental and social consequences of the business. While
most corporate social responsibility concerns are directed at very large businesses, even small
and medium-sized businesses that employ a large number of local residents or participate in
environmentally problematic industries can face pressure to adopt corporate social
responsibility.
Costs
Cost represents one of the biggest arguments against adopting corporate social responsibility as
a policy. Programs to reduce environmental impact often require expensive changes in
equipment or ongoing costs without any clear way to recoup those losses. The decision to
maintain domestic production facilities or call centers or to buy from domestic producers rather
than outsource or move production overseas can drive up costs for a business. Additionally,
there is no clear evidence that adhering to a policy of corporate social responsibility generates
a significant increase in sales or profit.
Improved Company Reputation
Embracing a policy of corporate social responsibility, paired with genuine action, can serve to
build or improve the reputation of a business. If a companys behavior creates a negative
backlash that leads to lost profitability -- over environmental issues, for example -- corporate
social responsibility becomes a method to repair reputation damage and restore profitability. In
other cases, adopting such a policy works as part of a business essential brand, and consumers
often demonstrate more loyalty to brands that can demonstrate a commitment to
environmental concerns.
Shareholder Resistance
Some investors do look to acquire stock in socially responsible corporations, but, on the whole,
investors purchase stock on the expectations of turning a profit. While some companies, such as
Toyota and GE, have profited from corporate social responsibility, companies that adopt such
policies often prove as likely to lose money. Given the spotty track record of corporate social
responsibility in demonstrating profit increase, investors may resist attempts by executives to
move a company in that direction.
Better Customer Relations
One of the hallmarks of corporate social responsibility is staying involved in the communities
where the business operates. This community involvement goes a long way toward building trust
between customers and the business. If a business builds trust with its customers, they tend to
give the business the benefit of the doubt if something goes wrong, rather than assuming
malicious intent or raw negligence. Customers also tend to stick with businesses they trust, rather
than actively seeking out new companies, which helps keep a business profitable over the long
haul.
Page 23

PAPER 13 Corporate Laws & Compliance
SECTION A
1. (a) Mr. Sanchay was appointed as an Additional Director of Conservative Finance Ltd. w.e.f.
1st October 2011 in a casual vacancy by way of a circular resolution passed by the Board of
Directors. The next AGM of the Company was due on 31 st March 2012 but the same was not
held due to delay in the finalization of the accounts. Some of the Shareholders of the
Company have questioned the validity of the appointment of Mr. Sanchay and his
continuation as Additional Director beyond 31 st March 2012. Advise the Company on the
complaints made by the Shareholders.
[4]
(b) Examine with reference to the provisions of the Companies Act, 1956 the validity of the
following:
(i) A scheme provides for Amalgamation of a 'Foreign Company' with a Company
registered under the Companies Act, 1956.
(ii) The statement forwarded with the notice convening a meeting of its members pursuant to
Court's Direction under Section 391 contains only 'Exchange Ratio' without details of its
calculation.
(iii) At the time of filing of the petition for Amalgamation, the object clause of both the
Transferor and Transferee Companies does not contain power to Amalgamate.
[3]
(c) Mr. Shyam goes abroad for four months from 04.01.2012 and an alternate director has
been appointed in his place. Therefore, advice as to sending of notice as required under
section 286 of the Companies Act, 1956.
[2]
(d) ABC Company Limited, a closely held company comprised two groups of shareholders one foreign and the other Indian. The foreign group held 55% and the Indian 45% of the
shares of the company. The Articles of Association of the company provided all the matters
of the mutual understanding of both the groups. The Articles also contained the provisions
enabling the two groups to enjoy equal amount of managerial power. The relationship
between the two groups could not last for a long time and differences arose between them.
The two groups could not operate, leading to a deadlock. The Indian group, therefore,
complained to the Company Law Board for action against the foreign group for oppression.
Referring the provisions of the Companies Act, 1956, decide:
(i) Whether the contention of the Indian group that the foreign group is acting in a manner
oppressive to the Indian group will sustain?
(ii) What relief can the Company Law Board grant to the petitioners in this case?
[4]
(e) ABC Banking Company Limited has advanced a sum of `25.00 lacs to Mr. Reliable, a
director of the company, to meet his personal liabilities but due to some adverse conditions,
Mr. Reliable is not in a position to repay the loan. The Board of directors of the company is
considering to remit a sum of `10.00 lacs. The Board of Directors seeks your advice.
[2]
Page 1

Answer 1(a):
The given problem relates to sections 260 and 262 of the Companies Act, 1956.
The Legal Position
Additional Directors (Section 260)
The Board may appoint the additional directors in pursuance of the provisions of section 260.
The Board may, in its discretion, appoint the additional directors whenever it deems fit.
The appointment of additional directors can be made by the Board either by passing a
resolution at a Board meeting or by passing a resolution by circulation.
An additional director holds office upto the date of next annual general meeting. A director
appointed as an additional director vacates his office, at the latest, on the last day on which
the annual general meeting could have been called as required by section 166, and cannot
continue in office thereafter on the ground that the meeting was not or could not be called
within the time prescribed under section 166 [Krishna Prasad Pilani v Colaba Land and Mills
Co. (1959) 29 Comp Cas 273; Departmental Circular No. 8/3(260)/63-PR, dated 05.02.1963].
Director filling a casual vacancy (Section 262)
The Board is authorised to fill a casual vacancy arising in the office of a director appointed in
general meeting.
The director filling a casual vacancy shall hold office only up to the date up to which the
director in whose place he is appointed would have held office if it had not been vacated.
A casual vacancy cannot be filled by passing a resolution by circulation under section 289.
The given case
The Board has appointed Mr. Sanchay as an additional director in a casual vacancy.
The appointment of additional director has been made by passing a circular resolution.
The last date for holding the annual general meeting was 31 st March, 2012. The annual
general meeting has not been held till 31st March, 2012.
The issue raised in the given problem is:

(a) Whether appointment of Mr. Sanchay is valid or not; and
(b) Whether Mr. Sanchay can continue after 31st March, 2012.
Analysis of the case

1. Neither section 260 nor section 262 authorises the Board to appoint an additional director to
fill the casual vacancy.
Page 2
If appointment of Mr. Sanchay is made as an additional director, then, the provisions of

section 260 apply, and so such appointment cannot amount to filling a casual vacancy.
If Mr. Sanchay is appointed to fill a casual vacancy, then, the provisions of section 262
apply to him, and so Mr. Sanchay shall not be an additional director.
Thus, a combined reading of sections 260 and 262 makes it clear that the appointment
of Mr. Sanchay as an additional director to fill the casual vacancy is not possible at all.
2. Mr. Sanchay has been appointed to fill the casual vacancy by passing a circular resolution.
Since, the appointment of a director filling a casual vacancy requires passing of a resolution
in a board meeting only, therefore, the appointment of Mr. Sanchay is in contravention of
section 262, and is therefore, invalid.
Conclusion
The complaint made by the shareholders is valid.

The appointment of Mr. Sanchay is not valid since it is in contravention of sections 260 and
262.
Mr. Sanchay cannot continue as a director after the date of annual general meeting, since
his very appointment is void ab initio.
Answer 1(b):
(i) A transferor company in a scheme of amalgamation under Sec. 394 may be anybody
corporate. This includes a foreign company. But a transferee company shall be a company
registered under the Companies Act, 1956. Therefore, a scheme providing for amalgamation
of a foreign company with a company registered under the Companies Act, 1956 is valid.
(ii) The statement forwarded with the notice under Sec. 391 shall provide all material facts
including details as to calculation of "Exchange Ratio".
(iii) The power to amalgamate shall be present. If this is not so the petition is invalid.
Answer 1(c):
Notice of every Board meeting shall be given in writing to every director for the time being in
India and to every other director at his usual address in India (Section 286).
As can be seen, section 286 does not specifically state that notice to an alternate director shall
be served. However, an alternate director is a director in his own right. He is not a proxy or
representative of the original director. The grounds of vacation of office also apply to him as
these apply to the original director, e.g., an alternate director shall vacate office if he does not
attend the Board meetings as contemplated by section 283(1)(g). As such, it is implied that
notice to an alternate director is to be given. Thus, notice should be served to both, the
alternate director as well as the original director. Notice to Mr. Shyam, who is outside of India,
shall be served at his usual address in India.
Page 3

Answer 1(d):
Reference may be made to the provisions of Sec. 397. Thus, the CLB (now Tribunal) has
substantial powers to provide relief to the company. But it should be seen whether there is
oppression in this case. The two groups enjoy equal amount of managerial power under the
Articles. Due to misunderstanding there is a dead lock. In a situation like this where the rival
groups are equal in strength there may be no oppression at all. This view is supported by the
decision in Gnanasambandam (CP) Vs. Tamilnadu Transports (Coimbatore) Pvt. Ltd. (1971).
Further, cases of deadlock may not be a case for winding up. At best, the CLB may direct either
group to buy out the shares of the other and failing which the company may be wound up on
the grounds that it is Just and Equitable so to do.
Conclusion:
(i) As the two groups are equal in strength and there is a deadlock, there is no oppression.
(ii) If at all the CLB decides to grant relief it may order the foreign group, which holds 55% of the
share capital to buy out the minority Indian group. (Yasovardhan Saboo Vs. Groz Beckert
Saboo Ltd. (1993).
Answer 1(e):
Section 20A of the Banking Regulation Act, 1949 provides that except with the prior approval of
RBI, a banking company shall not remit in whole or in part any debt due to it by:
(a) Any of its Directors, or
(b) Any firm or company in which any of its Directors is interested as Director, Partner, Managing
Agent or Guarantor, or
(c) Any individual, if any of its Directors, is his Partner or Guarantor.
Sub-section (2) further provides that any remission of debt in contravention of the aforesaid shall
be void and of no effect.
2. (a) Mr. Vivaan, a chartered accountant is a director in PQR Limited. The company proposes to
appoint or engage the firm Vivaan and Co. in which Mr. Vivaan is a partner in one or more of
the following capacities:
(i) Consultants on regular retainer basis.
(ii) Authorised representative to appear before tribunals.
Discuss whether the provisions of section 314 of the Companies Act are attracted in the above
situations.
[4]
(b) M/s XYZ Ltd. was incorporated on 1 st January, 2010. On 1st November, 2012 a political
party approaches the company for a contribution of `10 lakhs for political purpose. Advise in
respect of the following:
(i) Is the company legally authorised to give this political contribution?
(ii) Will it make any difference, if the company was in existence on 1st October, 2009?
(iii) Can the company be penalised for defiance of rules in this regard?
[6]
Page 4

(c) Printed Computer is a Singapore based company having several business units all over
the world. It has a unit for manufacturing computer printers with its headquarters in Pune. It
has a branch in Dubai which is controlled by the headquarters in Pune. What would be the
residential status under FEMA, 1999 of printer units in Pune and that of Dubai branch?
[5]
Answer 2(a):
The restrictions on holding of an office or place of profit under section 314 do not extend to
rendering of professional services, such as services rendered by doctor, engineer, architect,
chartered accountant, advocate or solicitor [Re, Harper Ticket Issuing and Recording Machines
Ltd. (1912) WN 263]. It is considered that an advocate or solicitor appears in a Court of law as an
officer of the Court. Such appearance and receiving fees on that account cannot lead to an
inference of an office or place of profit, However, if the advocate or solicitor is appointed on a
regular retainership basis, section 314 shall apply [Department Circular No. 14/75
98/12/314(1B)/75-CL-V), dated 05.06.1975].
(i) In the given case, the appointment of Vivaan and Co. is made on regular retainership basis
and so it amounts to holding of an office or place of profit. Section 314(1) would apply to
such appointment if Vivaan and Co., draws remuneration of `50,000 or more. If Vivaan and
Co. draws remuneration exceeding `2,50,000 per month, section 314(1B) will apply.
(ii) Where a chartered accountant undertakes a particular case and professional fees is paid to
him, he renders the services in a professional capacity. Consequently, it does not amount to
an office or place of profit and therefore section 314 is not attracted. Engaging a person in a
particular case or for undertaking a particular assignment of consultancy, or rendering
advice on a specific matter, shall not by itself constitute appointment to an office or place
of profit.
However, if the terms of engagement are that he should attend to all the cases or act as adviser
in the connected matters, whether generally or in a particular city or town, then, even though
he may be paid on a case to case basis, it shall amount to appointment to an 'office or place of
profit' under the company.
Answer 2(b):
As per section 293A, the following companies shall not make a political contribution:
(a) A Government company.
(b) A company which has been in existence for less than 3 financial years.
In the given case:
(i) M/s XYZ Ltd. cannot make any political contribution because the company is not in
existence for a period of 3 financial years.
(ii) If XYZ were incorporated on 01.10.2009, it may make a political contribution as on 01.11.2012
because in such a case, it would have been in existence for 3 financial years. However, it
shall comply with the following conditions:
(a) The amount of contribution shall not exceed 5% of average net profits (as determined
under sections 349 and 350) during 3 immediately preceding financial years.
Page 5

(b) The Board shall make a political contribution only by passing a resolution at a Board
meeting.
(c) The company shall disclose in its profit and loss account the amount of political
contribution and the name of the political party or the person to whom such amount has
been contributed.
(iii) If a company makes a political contribution in contravention of section 293A, following
consequences shall follow:
(a) The company shall be punishable with fine which may extend to 3 times the amount so
contributed.
(b) Every officer of the company who is in default shall be punishable with imprisonment up
to 3 years and shall also be liable to fine.
Answer 2(c):
Section 2(u) defines a 'person'. As per this definition, the following shall be covered in the
definition of a 'person':
(a)A company.
(b)Any agency, office or branch owned by a 'person'.
Section 2(v) defines a 'person resident in India'. As per this definition, the following shall be
covered in the definition of a 'person resident in India':
(a)An office, branch or agency in India owned or controlled by a person resident outside India.
(b)An office, branch or agency outside India owned or controlled by a person resident in India.
In the given case, Printed Computers (Singapore), its headquarters in Pune as well as Dubai
Branch is a 'person'. Therefore, residential status under FEMA shall be determined for each of
them separately.
Printed Computers (Singapore) does not fall under any of the clauses of the definition of a
'person resident in India'. Therefore, Printed Computers (Singapore) is a person resident
outside India.
The Pune Headquarters of Printed Computers is a 'person resident in India' since it falls under
the clause 'an office, branch or agency in India owned or controlled by a person resident
outside India'.
The Dubai branch of Printed Computers (Singapore), though not owned, is controlled by the
Pune headquarters. The Dubai branch is a 'person resident in India' since it falls under the
clause 'an office, branch or agency outside India owned or controlled by a person resident
in India'.
3. (a) Mr. Naman holding 3% Shares in OPQ Ltd., became a Director of this Company on
01.05.2011. The Company prior to his appointment as Director, had commenced transactions
with A Ltd. in the next Board Meeting to be held on 10.05.2011, the Board proposes to discuss
about price revisions sought for by A Ltd. Briefly explain
(i) Whether Mr. Naman should make a disclosure of his interest in A Ltd, assuming that the
Company is going to have transactions with A Ltd. on a continuous basis, if yes, when
and how? When should it be renewed?
(ii) Can he vote in the price revision resolution in the Board Meeting?
Page 6

(iii) You are informed that Mr. Naman holds 1.5% of the Share Capital of A Ltd and that his
wife holds another 3% of the Share Capital of A Ltd.
[3]
(b) Mr. Zen was appointed as a Member of the Competition Commission of India by Central
government. He has a professional experience in international business for a period of 12
years, which is not a proper qualification for appointment of a person as member. Pointing
out this defect in the Constitution of Commission, Mr. Yen, against whom the commission
gave a decision, wants to invalidate the proceedings of the commission. Examine with
reference to the provisions of the Competition Act, 2002 whether Mr. Yen will succeed.
[6]
(c) The Official Liquidator of Arya Ltd (in liquidation) instituted misfeasance proceedings u/s
543 against A, a Director of the Company in liquidation. During the pendency of
misfeasance proceedings, A died. What is meant by Misfeasance? Is it possible for the
Official Liquidator to implead the legal representatives of A and continue the proceeding
against them?
[2+4=6]
Answer 3(a):
1. Disclosure of Interest: Mr. Naman should disclose his interest as required u/s 299.
The words becomes concerned or interested occurring in the provision denotes a

present state of thing.
In case of a person who was actually concerned or interested in the contract or
arrangement, the liability for disclosure arises the moment he accepts office as Director.
If a Director acquired interest in a running transaction of the Company, he should
disclose this fact at the next Board Meeting held after he becomes so interested.
2. Voting at Board Meeting:

(a) U/s 300, an Interested Director shall not vote on the resolution in respect of the contract
in which he is interested.
(b) However, provisions of Sec. 300 are not applicable if the interest of the Director consists
solely of his holding only Qualification Shares, or less than 2% of the Paid-Up Capital in the
other Company.
(c) In the given case, Mr. Naman holds 1.5% of the Share Capital of A Ltd, and his wife holds
another 3% in the Share Capital of A Ltd, and therefore it cannot be said that he is
interested only to the extent of less than 2% of the Paid-Up Share Capital of A Ltd.
(d) Hence, Mr. Naman should not participate and vote in the Board Meeting to be held on
10.05.2011, in the matter pertaining to A Ltd.
Answer 3(b):
The given problem relates to section 15 of the Competition Act, 2002. As per section 15, no act
or proceeding of the Commission shall be invalid merely by reason of:
(a) any vacancy in the Commission; or
(b) any defect in the constitution of the Commission; or
(c) any defect in the appointment of a person acting as a Chairperson or as a Member; or
Page 7

(d) any irregularity in the procedure of the Commission not affecting the merits of the case.
Applying the provisions of section 15, the mere fact that one of the members of the Commission
was not qualified for appointment, does not affects the merits of the case. It is a mere defect in
the constitution of the Commission. Therefore, the contention of Mr. Yen that the proceedings of
the Commission are not valid, is incorrect.
Answer 3(c):
The term Misconduct covers any breach of duty resulting in misapplication of assets or property
of the Company. Misfeasance covers those cases where:
(a) there is dishonesty or fraud or culpable negligence, or
(b) there is an improper exercise of lawful authority.
Situations of Misfeasance: Sec. 543 is applicable, if in the course of winding-up of a Company, it
appears that Person liable
(a) any person who has taken part in the
promotion or formation of the Company,
or
(b) any past or present Director, Manager,
Liquidator or Officer of the Company.
Act/omission covered u/s 543

Has misapplied, or retained, or become
liable or accountable for, any money or
property of the Company, or
Has been guilty of any misfeasance or
breach of trust in relation to the
Company.
For creation of liability u/s 543, it must be shown that there has been dishonesty or fraud, or
atleast gross and culpable negligence. An honest mistake not amounting to culpable
negligence or breach of duty, should not be considered as misfeasance. Ayyangar vs
Official Assignee
The proceedings commenced against the Delinquent Director of a Company in liquidation

u/s 542 and 543 can be continued after his death against his legal representatives.
The amount declared to be due in such misfeasance proceedings can be realized from the
estate of the deceased in the hand of his legal representatives.
However, the legal representative would not be liable for any sum beyond the value of the
estate of the deceased in their hands. [Official Liquidator vs Parthasarathy Sinha 53 CC 163
(SC) Official Liquidator, Supreme Bank Ltd vs PA Tendolkar 43 CC 382 (SC)]
The cause of action in a misfeasance proceeding against the Director or other Delinquent
Officer initiated u/s 543, survives and can be continued against the legal representatives.
4. (a) Mr. BPK was appointed as the sole selling agent of M/s KMP Ltd. w.e.f 1 st January 2010 for
a period of 5 years. Mr. BPK earned his remuneration as following during the years 2010 to
2012:
Year
2010
2011
Amount of remuneration
`4,41,000
`6,32,000
Page 8

2012
`7,45,000
On and from 1st January 2013, the sole selling agency agreement was terminated by M/s
KMP Ltd. You are required to calculate the amount of compensation payable by the said
company to Mr. BPK under the provisions of the Companies Act, 1956.
What would be your answer in a case where the said M/s KMP Ltd. was amalgamated with
another company with effect from 1 st January 2013 and Mr. BPK refused to act as the sole
selling agent of the amalgamated company after amalgamation.
[3+2=5]
(b) The Central Govt. acquired a Banking Company. The scheme of acquisition, apart from
other matters, provided for the quantum of compensation payable to the shareholders of the
acquired Bank. Some Shareholders are not satisfied with the amount of compensation fixed
under the scheme of acquisition.
Is there any remedy available to the shareholders under the provisions of the Banking
Regulation Act, 1949?
[3]
(c) Mr. Lalit, a member of a Producer Company, wants to transfer his shares. State as to how
he can transfer his shares under the provisions of the Companies Act, 1956.
[5]
(d) Distinguish between Insolvency and Winding-up.
[2]
Answer 4(a):
(i) According to section 294A, where the office of a sole selling agent is vacated for any reason
other than those specified under that section then the company shall be liable to pay
compensation and the amount of compensation shall not exceed the remuneration which
he would have earned if he would have been in office for the unexpired residue of his term,
or for three years, whichever is shorter, calculated on the basis of the average remuneration
actually earned by him during a period of three years immediately preceding the date on
which his office ceased or was terminated, or where he held his office for a period lesser
than three years, then average remuneration actually earned by him during such lesser
period.
In the given case, based on the above provision of the Companies Act, 1956 Mr. BPK is
entitled to compensation for the remaining term of his office i.e., 2 years. The amount if
compensation is to be calculated on the basis of average of preceding three years
remuneration i.e., (`4,41,000 + `6,32,000 + `7,45,000)/3 = `6,06,000. Thus, the amount of
compensation shall not exceed `12,12,000 i.e. `6,06,000 x 2.
(ii) According to section 294A, the company shall not be liable to pay compensation to the sole
selling agent for loss of office where the sole selling agent vacates office for facilitating any
scheme of compromise or arrangement and he is reappointed in the new company. Since
the question Mr. BPK refuses to act as sole selling agent in the amalgamated company, he is
not entitled for any compensation. He would have been entitled for compensation had he
not been offered to be appointed in the amalgamated company.
Page 9

Answer 4(b):
Compensation to Shareholders of the Acquired Bank [Sec. 36AG]:
1. Recipient: The Central Govt. / Transferee Bank shall give the compensation determined in
the prescribed manner, to:
(a) Registered Shareholder of the acquired Bank, or
(b) Where the acquired Bank is a Banking Company incorporated outside India, the
acquired Bank
2. Reference to Tribunal:
(a) Request: If the amount of compensation offered is not acceptable to any person to
whom the compensation is payable, the aggrieved person may request the Central
Govt. in writing to have the matter referred to the Tribunal. Such a request shall be made
before the date notified by the Central Govt.
(b) Eligible Persons: The Central Govt. shall have the matter referred to the Tribunal for
decision, if it receives requests from:
Not less than 1/4th in number of the Shareholders holding not less than 1/4th in value of
the Paid up Share Capital of the acquired Bank, or
Where the acquired Bank is a Banking Company incorporated outside India, from the
acquired Bank.
3. Finality of compensation: If before the notified date, the Central Govt. does not receive
requests as required, the amount of compensation offered, and where a reference has
been made to the Tribunal, the amount determined by it, shall be the compensation
payable and shall be final and binding on all parties concerned.
Answer 4(c):
Shares of a Member of a Producer Company shall be transferable only as per the following
principles:
1. Transfer to Active Member only: A Member of a Producer Company may after obtaining the
previous approval of the Board, transfer the whole or part of his shares along with any
special rights, to an Active Member, at par value.
2. Transmission on Death of Member:
(a) Every Member shall, within 3 months of his becoming a Member in the Producer
Company, nominate a person to whom his shares in the Producer Company shall vest in
the event of his death. The nomination shall be made in the manner specified in the
Articles.
(b) On the death of the Member, the Nominee shall become entitled to all the rights in the
Shares of the Producer Company. The BOD shall transfer the shares of the deceased
Member to his Nominee.
(c) If the Nominee is not a Producer, the Board shall direct the surrender of shares, together
with Special Rights, if any, to the Producer Company, at par value or such other value as
may be determined by the Board.
3. Surrender of Shares:
(a) Situation: Where the BOD of a Producer Company is satisfied that:
Any member has ceased to be a Primary Producer, or
Page 10

Any member has failed to retain his qualifications to be a Member as
specified in the Articles.
(b) BODs Power: BOD shall direct the surrender of shares together with special rights, if any,
to the Producer Company, at par value or such other value as the BOD may determine.
(c) Procedure: The Member must be served with a prior written notice and given an
opportunity of being heard, before the direction for surrender of shares is given by BOD.
Note: Surrender is also applicable if the Nominee of a deceased Member is not a Producer.
However, no prior notice/hearing opportunity need be given in such case.
Answer 4(d):
Particulars
Individual
Insolvency
Only an individual can be adjudged as
an insolvent. An individual cannot be
wound-up or dissolved.
Winding-up
A Company can only be woundup. It cannot be adjudged
insolvent, even if it is unable to pay
its debts.*
A Company can be wound-up
even when it is financially sound,
e.g., voluntary winding-up.
The property remains vested in the
Company, but its administration is
taken over by the Liquidator.
After completion of winding-up, the
Company will be dissolved. Its legal
status comes to an end.
A person can be adjudged insolvent,

only when he is unable to pay his
Debts
debts/liabilities.
In
insolvency
proceedings,
the
Vesting of
assets/property of the person is vested in
Assets
the Official Assignee/Receiver.
After
completion
of
insolvency
proceedings, the insolvent is discharged
Status at
end
from all his debts, and becomes a legal
person.
Note: It is common to use the term Insolvent Company, where a Company is unable to pay its
debts.
5. (a) Following is the latest audited Balance Sheet of ABC Ltd.
Capital and liabilities
Equity Share Capital (10000
shares of 100 each)
Less: Calls unpaid
Preference Share Capital
Securities Premium A/c
Capital Redemption Reserve
General Reserve
Profit & Loss A/c
Sinking Fund Reserve
Dividend
Equalisation
Reserve
Loan from TIIC
Deposits from S Ltd.
Current Liabilities
`
10,00,000
10,000
9,90,000
1,50,000
1,50,000
2,25,000
5,00,000
2,20,000
1,10,000
60,000
Assets
Goodwill
Land and Buildings
Plant and machinery
Equity shares in A Ltd.
Preference shares in B Ltd.
Debentures in C Ltd.
Shares in P Ltd.
Capital in Z & Co.
Current Assets
`
1,00,000
10,50,000
20,25,000
1,25,000
50,000
1,00,000
2,25,000
1,00,000
55,000
10,00,000
2,00,000
1,25,000
Page 11

Provision for Taxation
1,00,000
38,30,000
38,30,000
The following is the additional relevant information:

1. Of the equity shares capital, 3,000 shares have been issued as rights shares and 2,000
shares as bonus shares.
2. B Ltd. is subsidiary of ABC Ltd. with 90% shareholding, whereas A Ltd. is wholly owned
subsidiary of ABC Ltd.
3. Z & Co. is a partnership firm. The directors seek advice as to whether the following
additional investments can be made by a decision taken in a Board Meeting:
(i) Loan to A Ltd.
(ii) Debentures in B Ltd
(iii) Purchase of shares of Shree Ltd. in the open market
State reasons.
`10,00,000
`2,25,000
`95,000
[8]
(b) MAR Ltd wants to issue certain shares on preferential basis and has sought your advice in
respect of pricing the shares for such issue. State the guidelines issued by SEBI in respect of
pricing of the issue of shares on a preferential basis.
[7]
Answer 5(a):
Step 1: Calculation of paid up capital and free reserves:
Paid Up Capital: Equity Share Capital
Less: Calls Unpaid
10,00,000
10,000
9,90,000
Preference Share Capital
1,50,000
Total
11,40,000
NOTE: Preference Share Capital is to be included for calculating paid up capital.
Free Reserves: Securities Premium
1,50,000
General Reserve
5,00,000
Profit & Loss Account
2,20,000
Dividend Equalisation Reserve
60,000
Total
9,30,000
NOTE: Capital Redemption Reserve and Sinking Profit Reserve are not available for
distribution as dividend and therefore shall not be considered for computing free reserves.
Step 2: Calculation of the limits:
(A) 60% of Paid up Capital and free reserves

= 60% of (11,40,000 + 9,30,000)
= 60% of (20,70,000)
= 12,42,000
(B) 100% of Free Reserves as computed above `9,30,000
Page 12
(A) or (B) whichever is higher `12,42,000
Step 3: Computation of Value of transactions as per Balance Sheet:

Preference Shares in B Ltd
Debentures In C Ltd
Shares in P Ltd
50,000
1,00,000
2,25,000
3,75,000
NOTE:
1. Equity Shares in A Ltd is not considered as acquisition of shares by a holding
company in its wholly owned subsidiary is exempted from the provisions of 372 A. The
shares are not to be considered while computing Limits.
2. As Z & Co., is a partnership firm the capital therein is not considered.
Step 4: Computation of Proposed Investments:
Debentures in B Ltd
Purchase of shares in Shree Ltd
2,25,000
95,000
3,20,000
The aggregate of the investments already made ` (3,75,000) together with the proposed
investments of `(3,20,000) amounts to `6,95,000.
This is well within the ceiling limit of `12,42,000 computed in step 2 above.
Therefore there is no requirement as to previous approval by way of special resolution.
The Board of directors should approve the proposed transactions at a meeting of the
board by passing a resolution agreed to by all the directors present at the meeting.
Previous approval of M/s. TIIC a PFI is not required as:
(a) There is no default towards TIIC and
(b) The aggregate of the value of the transactions (`6,95,000) does not exceed 60% paid
up capital and free reserves i.e. `12,42,000.
Answer 5(b):
1. Pricing of Shares: The minimum issue price for the Preferential Issue is determined as under
Where Equity Shares of a
Minimum Issue Price = Higher of the following
Company have been listed on
a Stock Exchange
A. For a period of 6 months or Average of the weekly high and low of the closing prices
more as on the relevant of the related Shares quoted on the Stock Exchange:
date
(a) During the 26 weeks preceding the relevant date, or
(b) During the 2 weeks preceding the relevant date.
B. For a period of less than 26 (a) Price at which Shares were issued by the Company in
weeks as on the relevant
its IPO, or
date
(b) Value per share arrived at in a scheme of
arrangement u/s 391 to 394 of the Companies Act,
Page 13

pursuant to which the Shares of the Company were
listed,
(c) Average of the weekly high and low of the closing
prices of the related Shares quoted on the Stock
Exchange:
During the period Shares have been listed
preceding the relevant date, or
During the 2 weeks preceding the relevant date.
Note: On completing a period of 26 weeks of listing, the
Company shall re-compute the price as per (A) above,
and the difference shall be paid by the Allottees to the
Company, if such re-computed price is less than the
earlier Issue Price.
Note:
Relevant Date means the date 30 days prior to the date on which the meeting of
General Body of Shareholders is held, u/s 81(1A) of the Companies Act, to consider the
proposed issue.
Where Shares are issued on preferential basis, pursuant to a scheme approved under the
Corporate Debt Restructuring framework of RBI, the date of approval of the Corporate
Debt Restructuring package shall be the relevant date. [R 71]
In case of preferential issue of convertible securities, either the relevant date referred to in
clause (a) of this regulation or a date 30 days prior to the date on which the holders of the
convertible securities become entitled to apply for the Equity Shares.
Any preferential issue of specified securities, to QIBs not exceeding 5 in number, shall be
made at a price not less than the average of the weekly high and low of the closing
prices of the related equity shares quoted on a recognized stock exchange during the 2
weeks preceding the relevant date.
Stock Exchange means any of the Recognised Stock Exchanges in which the equity
shares are listed and in which the highest trading volume in respect of the equity shares of
the issuer has been recorded during the preceding 26 weeks prior to the relevant date.
2. Payment of Consideration:
(a) Full consideration of specified securities other than warrants issued under this Chapter shall
be paid by the allotted at the time of allotment of such specified securities. However, that
in case of a preferential issue of specified securities pursuant to a scheme of corporate
debt restructuring as per the corporate debt restructuring framework specified by the
Reserve Bank of India, the allottee may pay the consideration in terms of such scheme.
(b) An amount equivalent to at least 25% of the consideration as determined above shall be
paid against each warrant on the date of allotment of warrants.
(c) The balance 75% of the consideration shall be paid at the time of allotment of equity
shares pursuant to exercise of option against each such warrant by the warrant holder.
(d) In case the warrant holder does not exercise the option to take equity shares against any
of the warrants held by him, the consideration paid in respect of such warrant shall be
forfeited by the Issuer.
Page 14

3. Pricing of Shares on conversion: Where PCDs / FCDs / other convertible instruments are issued
on a preferential basis, providing for the Issuer to allot Shares at a future date, the Issuer shall
determine the price at which the Shares could be allotted, in the same manner as specified
for pricing of Shares allotted in lieu of warrants as indicated above.
4. Exclusions: the provisions relating to Pricing of Preferential Allotment and Lock in period
requirements shall not apply to Shares allotted to any financial institution within the meaning
Sec. 2(h)(ia) and 2(h)(ii) of the Recovery of Debts due to Banks and Financial Institutions Act,
1993.
6. (a) What are the powers of the Central Govt. under IRDA Act, 1999? Can Central Govt.
supersede the IRDA?
[6]
(b) The promoters of ABC Ltd., an Unlisted Company, decide to go for a public issue. They
seek your advice in respect of the following matters:
(i) Can equity shares be reserved in Firm Allotment Category for Promoters, at a price
different from the price at which shares are offered to Public?
(ii) Circumstances in which equity shares can be issued in denomination of `2 per share.
(iii) Need for past track record of distributable profits.
(iv) Requirement of Net Tangible Assets in previous years.
[4]
(c) A Ltd. and B Ltd. both dealing in Chemicals and Fertilizers have entered into an
agreement to jointly promote the sale of their products. A complaint has been received by
the CCI stating that the agreement between the two is Anti-Competitive and against the
interest of other in the trade. Examine what are the factors the CCI will take into account to
determine whether the agreement in question will have any appreciable adverse effect on
competition in the market.
[5]
Answer 6(a):
1. Power of Central Government to issue directions [Section 18]
(1) Without prejudice to the foregoing provisions of this Act, the Authority shall, in exercise of
its powers or the performance of its functions under this Act, be bound by such directions
on questions of policy, other than those relating to technical and administrative matters,
as the Central Government may give in writing to it from time to time:
Provided that the Authority shall, as far as practicable, be given an opportunity to
express its views before any direction is given under this sub-section.
(2) The decision of the Central Government, whether a question is one of policy or not, shall
be final.
2. Power of Central Government to supersede Authority [Section 19]
(1) if, at any time, the Central Government is of the opinion:
(a) that, on account of circumstances beyond the control of the Authority, it is unable to
discharge the functions or perform the duties imposed on it by or under the provisions
of this Act; or
Page 15

(b) that the Authority has persistently defaulted in complying with any direction given by
the Central Government under this Act or in the discharge of the functions or
performance of the duties imposed on it by or under the provisions of this Act and as
a result of such default the financial position of the Authority or the administration of
the Authority has suffered; or
(c) that circumstances exist which render it necessary in the public interest so to do, the
Central Government may, by notification and for reasons to be specified therein,
supersede the Authority for such period, not exceeding six months, as may be
specified in the notification and appoint a person to be the Controller of Insurance
under section 2-B of the Insurance Act, 1938 (4 of 1938), if not already done:
Provided that before issuing any such notification, the Central Government shall give
a reasonable opportunity to the Authority to make representations against the
proposed supersession and shall consider the representations, if any, of the Authority.
(2) Upon the publication of a notification under sub-section (1) superseding the Authority:
(a) the Chairperson and other members shall, as from the date of supersession, vacate
their offices as such;
(b) all the powers, functions and duties which may, by or under the provisions of this Act,
be exercised or discharged by or on behalf of the Authority shall, until the Authority is
reconstituted under sub-section (3), be exercised and discharged by the Controller of
Insurance; and
(c) all properties owned or controlled by the Authority shall, until the Authority is
reconstituted under sub-section (3), vest in the Central Government.
(3) On or before the expiration of the period of supersession specified in the notification
issued under sub-section (1), the Central Government shall reconstitute the Authority by a
fresh appointment of its Chairperson and other members and in such case any person
who had vacated his office under clause (a) of sub-section (2) shall not be deemed
disqualified for re-appointment.
(4) The Central Government cause a copy of the notification issued under sub-section (1)
and a full report of any action taken under this section and the circumstances leading to
such action to be laid before each House of Parliament at the earliest.
3. Power to make rules [Section 24]
(1) The Central Government may, by notification, make rules for carrying out the provisions
of this Act.
(2) In particular, and without prejudice to the generality of the foregoing power, such rules
may provide for all or any of the following matters, namely:
(a) the salary and allowances payable to, and other terms and conditions of service of,
the members other than part-time members under sub-section (1) of section 7;
(b) the allowances to be paid to the part-time members under sub-section (2) of section
7;
(c) such other powers that may be exercised by the Authority under clause (q) of subsection (2) of section 14;
(d) the form of annual statement of accounts to be maintained by the Authority under
sub-section (1) of section 17;
Page 16

(e) the form and the manner in which and the time within which returns and statements
and particulars are to be furnished to the Central Government under sub-section (I)
of section 20;
(f) the matters under sub-section (5) of section 25 on which the Insurance Advisory
Committee shall advise the Authority;
(g) any other matter which is required to be, or may be, prescribed, or in respect of
which provision is to be or may be made by rules.
4. Power to remove difficulties [Section 29]
(1) If any difficulty arises in giving effect to the provisions of this Act, the Central Government
may, by order published in the Official Gazette, make such provisions not inconsistent
with the provisions of this Act as may appear to be necessary for removing the difficulty:
Provided that no order shall be made under this section after the expiry of two years from
the appointed day.
(2) Every order made under this section shall be laid, as soon as may be after it is made,
before each House of Parliament.
Note:
(a) Rules and regulations to be laid before Parliament [Section 27]
Every rule and every regulation made under this Act shall be laid, as soon as may be after it is
made, before each House of Parliament, while it is in session, for a total period of 30 days which
may be comprised in one session or in 2 or more successive sessions, and if, before the expiry of
the session immediately following the session or the successive sessions aforesaid, both Houses
agree in making any modification in the rule or regulation or both Houses agree that the rule or
regulation should not be made, the rule or regulation shall thereafter have effect only in such
modified form or be of no effect, as the case may be; so, however, that any such modification
or annulment shall be without prejudice to the validity of anything previously done under that
rule or regulation.
(b) Application of other laws not barred [Section 28]
The provisions of this Act shall be in addition to, and not in derogation of, the provisions of any
other law for the time being in force.
Answer 6(b):
(i) Differential Pricing is a process by which the Shares of the Company are issued at two
different prices depending on the type of the allottees.
Such differential pricing shall be allowed in respect of (a) Higher Price for Firm Allotment
Category Applicants, (b) Issue to Retail Individual Investors, (c) Composite Public and rights
Issue and (d) Employees in case the issuer opts for the alternate method of book-building in
terms of Part D of Schedule XI.
(ii) An issuer making IPO shall determine the face value of shares as follows:
Issue Price
Less than `500
`500 or more
Face Value
`10 per share.
Can be below `10 per share, but shall not be less than `1 per
Page 17

share.
(iii) Earlier it was required to maintain a track record of distributable profits in terms of section 205
of the Companies Act, 1956, on both standalone as well as consolidated basis for at least 3
out of the immediately preceding 5 years, but now it has been substituted by SEBI (Issue of
Capital and Disclosure Requirements) (Second Amendment) Regulations, 2012, w.e.f.
12.10.2012 as:
It has a minimum average pre-tax operating profit of rupees fifteen crore, calculated on a
restated and consolidated basis, during the three most profitable years out of the
immediately preceding five years.
(iv) Requirement of Net Tangible Assets:
It should have net tangible assets of at least three crore rupees in each of the preceding
three full years (of twelve months each), of which not more than fifty per cent are held in
monetary assets:
Provided that if more than fifty per cent of the net tangible assets are held in monetary
assets, the issuer has made firm commitments to utilize such excess monetary assets in its
business or project:
Provided further that the limit of fifty per cent on monetary assets shall not be applicable in
case the public offer is made entirely through an offer for sale.
Answer 6(c):
For determining whether a Combination would have the effect of or is likely to have an
appreciable adverse effect on competition in the relevant market, the CCI shall have due
regard to all or any of the following factors:
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
Actual and potential level of competition through imports in the market,

Extent of barriers to entry into the market,
Level of combination in the market,
Degree of countervailing power in the market,
Likelihood that the combination would result in the parties to the combination being able to
significantly and sustainably increase prices or profit margins,
Extent of effective competition likely to sustain in a market,
Extent to which substitutes are available or are likely to be available in the market,
Market share, in the relevant market, of the persons or enterprise in a combination
individually and as a combination,
Likelihood that the combination would result in the removal of a vigorous and effective
competitor(s) in the market,
Nature and extent of vertical integration in the market,
Possibility of a failing business,
Nature and extent of innovation,
Relative advantage, by way of the contribution to the economic development, by any
combination having or likely to have appreciable adverse effect on competition,
Whether the benefits of the combination outweigh the adverse impact of the combination,
if any.
Page 18
SECTION B
7. (a) The German Corporate Governance system is based around a dual board system.
Elucidate the statement.
[5]
(b) Discuss the various reasons for Corporate Social Responsibility (CSR).
[5]
(c) Briefly discuss the various issues regarding the MoU System in Indian CPSEs.
[5]
(d) The typical organizational structure of PSUs makes it difficult for the implementation of
corporate governance practices as applicable to other publicly-listed private enterprises.
In view of the above, list the difficulties encountered in governance.
[5]
(i) Corporate Governance in Germany
(ii) Risk and uncertainty in Whole Life Cycle Costing
[2.5*2=5]
(f) According to Altered Images: The 2001 State of Corporate Responsibility in India Poll a
followed a chronological evolution of 4 thinking approaches. Explain the same.
[5]
Answer 7(a):
complying with international best practice on Corporate Governance. The Cromme Code was
published in 2002 and was amended in 2005.
The German Corporate Governance system is based around a dual board system, and
essentially, the dual board system comprises a management board (Vorstand) and a supervisory
board (Aufsichtsrat).
accountable for the management of the enterprise and the chairman of the management
board co-ordinates the work of the management board. On the other hand, the supervisory
board appoints, supervises, and advises the members of the management board and is directly
involved in decisions of fundamental importance to the enterprise. The chairman of the
supervisory board co-ordinates the work of the supervisory board. The members of the
supervisory board are elected by the shareholders in general meetings. The co-determination
principle provides for compulsory employees representation. So, for firms or companies which
have more than five hundred or two thousand employees in Germany, employees are also
represented in the supervisory board which then comprises one-third employee representative
or one-half employee representative respectively. The representatives elected by the
Page 19

shareholders and representatives of the employees are equally obliged to act in the enterprises
best interests.
The idea of employee representation on boards is not always seen as a good thing because
the employee representatives on the supervisory board may hold back decisions being made
that are in the best interests of the company as a whole but not necessarily in the best interests
of the employees as a group. An example, would be where a company wishes to rationalize its
operations and close a factory but the practicalities of trying to get such a decision approved
by employee representatives on the supervisory board, and the repercussions of such a decision
on labour relations, prove too great for the strategy to be made a reality.
Answer 7(b):
The rationale for CSR has been articulated in a number of ways. In essence, it is about building
sustainable businesses, which need healthy economies, markets and communities. The major
reasons for CSR can be outlined as:
1. Globalisation
As a consequence of cross-border trade, multinational enterprises and global supply chains,
there is an increased awareness on CSR concerns related to human resource management
practices, environmental protection, and health and safety, among other things. Reporting on
the CSR activities by corporates is therefore increasingly becoming mandatory.
In an increasingly fast-paced global economy, CSR initiatives enable corporates to engage in
more meaningful and regular stakeholder dialogue and thus be in a better position to anticipate
and respond to regulatory, economic, social and environmental changes that may occur.
There is a drive to create a sustainable global economy where markets, labour and communities
are able to function well together and companies have better access to capital and new
markets.
Financial investors are increasingly incorporating social and environmental criteria when making
decisions about where to place their money, and are looking to maximise the social impact of
the investment at local or regional levels.
2. International Legal Instruments and Guidelines
In the recent past, certain indicators and guidelines such as the SA 8000, a social performance
standard based on International Labour Organization Conventions have been developed.
International agencies such as United Nations and the Organization for Economic Co-operation
and Development have developed compacts, declarations, guidelines, principles and other
instruments that set the tone for social norms for organisations, though these are advisory for
organisations and not mandatory.
One of the United Nations Millennium Development Goals calls for increased contribution of
assistance from country states to help alleviate poverty and hunger, and states in turn are
advising corporates to be more aware of their impact on society. In order to catalyze actions in
Page 20

support of the MDGs, initiatives such as Global Compact are being put in place to
instrumentalise CSR across all countries.
As the worlds largest, global corporate citizenship initiative by the UN, the Global Compact, a
voluntary initiative is concerned with building the social legitimacy of business.
The Global Compact is a framework for businesses that are committed to aligning their business
operations and strategies with ten universally accepted principles that postulate that companies
should embrace, support and enact, a set of core values in the areas of human rights, labour
standards, the environment, and anti-corruption.
3. Changing Public Expectations of Business
Globally companies are expected to do more than merely provide jobs and contribute to the
economy through taxes and employment. Consumers and society in general expect more from
the companies whose products they buy. This is coherent with believing the idea that whatever
profit is generated is because of society, and hence mandates contributing a part of business to
the less privileged.
Further, separately in the light of recent corporate scandals, which reduced public trust of
corporations, and reduced public confidence in the ability of regulatory bodies and
organisations to control corporate excess. This has led to an increasing expectation that
companies will be more open, more accountable and be prepared to report publicly on their
performance in social and environmental arenas.
4. Corporate Brand
that resonates with key external stakeholders, customers, general public and the government.
Corporates in India are also realising that their reputation is intrinsically connected with how well
acceptance.
Page 21

Answer 7(c):
The Memorandum of Understanding (MoU) is a negotiated document between the
Government, acting as the owner of Centre Public Sector Enterprise (CPSE) and the Corporate
Management of the CPSE. It contains the intentions, obligations and mutual responsibilities of the
Government and the CPSE and is directed towards strengthening CPSE management by results
and objectives rather than management by controls and procedures.
The beginnings of the introduction of the MoU system in India can be traced to the
recommendation of the Arjun Sengupta Committee on Public Enterprises in 1984. The first set of
Memorandum of Undertaking (MoU) was signed by four Central Public Sector Enterprises for the
year 1987-88. Over a period of time, an increasing number of CPSEs was brought within the MoU
system. Further impetus to extend the MoU system was provided by the Industrial Policy
Resolution of 1991 which observed that CPSEs will be provided a much greater degree of
management autonomy through the system of Memorandum of Undertaking.
Broadly speaking, the obligations undertaken by CPSEs under the MoU are reflected by three
types of parameters i.e., (a) financial (b) physical and (c) dynamic.
The Figure below clearly brings out the several challenges which the MoU system in India,
currently faces.
Issues regarding the MoU System in Indian CPSEs
Impact of
External
Environment
Making the
inclusion of
Offsetting
Parameters
Objective
Scientific
Setting of the
Base Target
Pressured functioning
amongst CPSEs due to
repetitions in the
financial parameters
Lacks the ability to

foster Good Governance
Lack of MoU as
a Business
Review Tool
Concept of
Benchmarking
needs more
emphasis
MoU instrument lacks

the ability to propel
New Product/ Service
Development
PSUs lacking in
Existing Balance ScoreCard
appropriate CSR
approach might not be
Directorate of Studies, The Institute of Cost Accountants of Indiainitiatives
(Statutory Body under an Act of Parliament)
suitable in a dynamic
environment
Page 22
Dark Lines Connect Broad Themes (Issues)
Dotted lines connect Sub-Themes (Issues)
Despite the overwhelming success of the MOU system, there is a need to strengthen the exercise
further to make it more value added. Some of the suggestions in this regard are as follows:
CPSEs may detract themselves from soft targeting. This could be seen from the fact that your
MOU goals set by most of the CPSEs are achieved in the third quarter of a financial year
itself.
The internal systems need to be revamped to contribute to MOU effectiveness. This may
mean making the internal budgeting, pricing, materials control, MIS, performance appraisal,
recruitment systems to be brought in line with the goals set in MOU.
There is a need to percolate MOU system down the line.
The wage negotiations should go beyond the managerial cadre in the same split and form
as in the case of the process followed relating to executives.
Balance scorecard concept should be stressed further to yield a composite MOU index.
The basic targets need to be fixed very carefully and questioning the very logic of taking the
previous years accomplishments as good.
Answer 7(d):
While routine governance regulations become applicable for public sector companies formed
under the Companies Act, 1956 and come under the purview of SEBI regulations the moment
they mobilize funds from the public, the typical organizational structure of PSUs makes it difficult
for the implementation of corporate governance practices as applicable to other publicly-listed
The board of directors will comprise essentially of bureaucrats drawn from various ministries
which are interested in the PSU. In addition, there may be nominee directors from banks or
make.
Page 23

Answer 7(e):
(i) Corporate Governance in Germany:
The German corporate governance system could be termed an insider system. The German
Corporate Governance system is based around a dual board system, and essentially, the dual
board system comprises a management board (Vorstand) and a supervisory board (Aufsichtsrat).
accountable for the management of the enterprise and the chairman of the management board
co-ordinates the work of the management board. On the other hand, the supervisory board
appoints, supervises, and advises the members of the management board and is directly involved
in decisions of fundamental importance to the enterprise. The chairman of the supervisory board
co-ordinates the work of the supervisory board. The members of the Supervisory board are elected
by the shareholders in general meetings. The co-determination principle provides for compulsory
employees representation. So, for firms or companies which have more than five hundred or two
thousand employees in Germany, employees are also represented in the supervisory board which
then comprises one-third employee representative or one-half employee representative
respectively. The representatives elected by the shareholders and representatives of the
employees are equally obliged to act in the enterprises best interests.
complying with international best practice on Corporate Governance.
The Cromme Code was published in 2002 and is split into a number of sections, starting with a
section on shareholders and the general meeting. The Cromme Code also reflects some of the
latest developments in technology. The Cromme Code was amended in 2005.
Table: Key characteristics influencing German corporate governance
Feature
Key characteristic
Main business form
Public or private companies limited by shares
Financial and non-financial companies
Legal system
Civil law
Board structure
Dual
Important aspect
Compulsory employee representation on supervisory

board.
Page 24

(ii) Risk and uncertainty in Whole Life Cycle Costing:
stochastic assessment of the performance of constructed facilities from feasibility to disposal.
WLCC decisions are complex and usually comprise an array of significant factors affecting the
ultimate cost decisions. WLCC decisions generally have multiple objectives and alternatives,
long-term impacts, multiple constituencies in the procurement of construction projects, generally
involve multiple disciplines and numerous decision makers, and always involve various degrees
of risk and uncertainty. Project cost, design and operational decision parameters are often
established very early in the life of a given building project. Often, these parameters are chosen
based on owners and project teams personal experiences or on an ad hoc static economic
analysis of the anticipated project costs. While these approaches are common, they do not
provide a robust framework for dealing with the risks and decisions that are taken in the
evaluation process. Nor do they allow for a systematic evaluation of all the parameters that are
considered important in the examination of the WLCC aspects of a project. The existing
methods also do not adequately quantify the true economic impacts of many quantitative and
qualitative parameters.
Decisions about building-related investments typically involve a great deal of uncertainty about
their costs and potential savings. Performing a WLCCA greatly increases the likelihood of
choosing a project that saves money in the long run. Yet, there may still be some uncertainty
associated with the WLCC results. WLCCAs are usually performed early in the design process
when only estimates of costs and savings are available, rather than certain dollar amounts.
Uncertainty in input values means that actual outcomes may differ from estimated outcomes.
There are techniques for estimating the cost of choosing the "wrong" project alternative.
Deterministic techniques, such as sensitivity analysis or breakeven analysis, are easily done
without requiring additional resources or information. They produce a single-point estimate of
how uncertain input data affect the analysis outcome. Probabilistic techniques, on the other
hand, quantify risk exposure by deriving probabilities of achieving different values of economic
worth from probability distributions for input values that are uncertain. However, they have
greater informational and technical requirements than do deterministic techniques. Whether
one or the other technique is chosen depends on factors such as the size of the project, its
importance, and the resources available. Since sensitivity analysis and break-even analysis are
two approaches that are simple to perform, they should be part of every WLCCA.
Answer 7(f):
According to Altered Images: the 2001 State of Corporate Responsibility in India Poll, a survey
conducted by Tata Energy Research Institute (TERI), the evolution of CSR in India has followed a
chronological evolution of 4 thinking approaches:
Ethical Model (1930 1950): One significant aspect of this model is the promotion of trusteeship
that was revived and reinterpreted by Gandhiji. Under this notion the businesses were motivated
to manage their business entity as a trust held in the interest of the community. The idea
prompted many family run businesses to contribute towards socioeconomic development. The
Page 25

efforts of Tata group directed towards the well being of the society are also worth mentioning in
this model.
Statist Model (1950 1970s): Under the aegis of Jawahar Lal Nehru, this model came into being in
the post independence era. The era was driven by a mixed and socialist kind of economy. The
important feature of this model was that the state ownership and legal requirements decided
the corporate responsibilities.
Liberal Model (1970s 1990s): The model was encapsulated by Milton Friedman. As per this
model, corporate responsibility is confined to its economic bottom line. This implies that it is
sufficient for business to obey the law and generate wealth, which through taxation and private
charitable choices can be directed to social ends.
Stakeholder Model (1990s Present): The model came into existence during 1990s as a
consequence of realisation that with growing economic profits, businesses also have certain
societal roles to fulfill. The model expects companies to perform according to triple bottom line
approach. The businesses are also focusing on accountability and transparency through several
mechanisms.
Page 26

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Answer to PTP_Final_Syllabus 2012_Dec 2015_Set 1

Paper-13: CORPORATE LAWS AND COMPLIANCE

Answer to PTP_Final_Syllabus 2012_Dec 2015_Set 1

Communicate the key features of

Translate into intelligible or familiar terms

Counsel, inform or notify

Appraise or asses the value of

Propose a course of action

How you are expected to

Answer to PTP_Final_Syllabus 2012_Dec 2015_Set 1

Time Allowed: 3 Hours

Can CSR be integrated with decision making?

Answer to PTP_Final_Syllabus 2012_Dec 2015_Set 1

(f) Integration of CSR in decision making:

Answer to PTP_Final_Syllabus 2012_Dec2015_Set 3

7th November, 2014.

Day of despatch of notice

16th October, 2014.

Number of days notice given

Day of holding the AGM (i.e., 7th November,

Number of days notice required u/s 101 = 21 days.

- since 21 days' notice of the AGM has not been

(b) The notice is short

(c) The shortfall may be condoned

- if consent is given for such shorter notice by at

Answer to PTP_Final_Syllabus 2012_Dec2015_Set 3

Answer to PTP_Final_Syllabus 2012_Dec2015_Set 3

The company can refuse to register 'C as a member.

Answer to PTP_Final_Syllabus 2012_Dec2015_Set 3

Answer to PTP_Final_Syllabus 2012_Dec2015_Set 3

Answer to PTP_Final_Syllabus 2012_Dec2015_Set 3

As at 31.03.2013 As at 31.03.2014 As at 31.03.2015

Answer to PTP_Final_Syllabus 2012_Dec2015_Set 3

Answer to PTP_Final_Syllabus 2012_Dec2015_Set 3

Answer to PTP_Final_Syllabus 2012_Dec2015_Set 3

Answer to PTP_Final_Syllabus 2012_Dec2015_Set 3

Answer to PTP_Final_Syllabus 2012_Dec2015_Set 3

Answer to PTP_Final_Syllabus 2012_Dec2015_Set 3

Answer to PTP_Final_Syllabus 2012_Dec2015_Set 3

Answer to PTP_Final_Syllabus 2012_Dec2015_Set 3

Answer to PTP_Final_Syllabus 2012_Dec 2015_Set 2

Paper-13: CORPORATE LAWS AND COMPLIANCE

Answer to PTP_Final_Syllabus 2012_Dec 2015_Set 2

How you are expected to

Communicate the key features of

Translate into intelligible or familiar terms

Counsel, inform or notify

Appraise or asses the value of

Propose a course of action

Answer to PTP_Final_Syllabus 2012_Dec 2015_Set 2

Time Allowed: 3 Hours

Do you consider business ethics to be a professional code?

Answer to PTP_Final_Syllabus 2012_Dec 2015_Set 2

Answer to PTP_Final_Syllabus 2012_Dec 2015_Set 2

Answer to PTP_Final_Syllabus 2012_Dec 2015_Set 2

Answer to PTP_Final_Syllabus 2012_Dec 2015_Set 2

Answer to PTP_Final_Syllabus 2012_Dec 2015_Set 2

Conditions for issue or circulation of prospectus

Manner of certification of prospectus

Answer to PTP_Final_Syllabus 2012_Dec 2015_Set 2

Answer to PTP_Final_Syllabus 2012_Dec 2015_Set 2

Answer to PTP_Final_Syllabus 2012_Dec 2015_Set 2

Answer to PTP_Final_Syllabus 2012_Dec 2015_Set 2