CS Professional – Page 12

Quality Review – Secretarial Audit Compliance Management and Due Diligence Important Questions

December 28, 2022

Quality Review – Secretarial Audit Compliance Management and Due Diligence Important Questions

Question 1.
What is peer review and describe Its contents?
Answer:
Peer Review is a process for examining the work performed by one’s equals (peers) and to understand the systems, practices and procedures followed by the Practice Unit and to give suggestions, if any, for further improvement.

The Institute of Company Secretaries of India provides a mechanism of Peer Review of their Members in Practice to enhance the quality of attestation services, to enhance credibility and provide competitive advantage and provide a forum for Guidance and knowledge sharing. The peer review includes the following services by the company secretaries in practice :

Certification/Signing of Annual Return pursuant to section 92 of the Companies Act, 2013.
Issuance of Secretarial Audit Report in terms of section 204 of the Companies Act, 2013.
Issuance of Certificate of Securities Transfers in Compliance with the LODR with Stock Exchanges.
Certificate of reconciliation of capital, updation of Register of Members, etc. as per the Securities & Exchange Board of India.
Conduct of Internal Audit of Operations of the Depository Participants.
Compliance Certification under LODR.
Attestation services of Form AOC-4, MGT-7, DIR-12, SH-7 and PAS-3 filed with the ROC.
Such other services as decided by the Council of ICSI under the scope of peer review from time to time.

Question 2.
What are the benefits which a practice unit will obtain in undergoing a peer review?
Answer:
Significant benefits which a Practice Unit will obtain in undergoing a Peer Review summarised below :
1. A successful Peer Review will provide comfort to the Practice Unit (PU) that it has adhered to various statutory, documentary and other regulatory requirements.

2. If deficiencies are noticed and corrective measures suggested the Practice Unit (PU) will have an opportunity to correct the deficiencies and thereby enhance professional competence.

3. If a Peer Review Certificate is issued in favour of the Practice Unit (PU) it enhances credibility of the Practice Unit in the eyes of the general public.

4. Since a Chinese wall exists between the Peer Review Process and the Disciplinary Proceedings, the Practice Unit (PU) will benefit from Peer Review without any apprehension of any disciplinary proceedings being initiated against for any deficiencies noticed on its part.

5. Clients of the PU will benefit from knowing that their Practice Unit is periodically reviewed by the ICSI.

Question 3.
Write short note on: “Peer Review for Company Secretaries”.
Answer:
1. Peer Review contemplates examination of the systems and approach of a Practice Unit (PU) by another member of the Institute with the objective of identifying the areas, where the practicing member may require guidance in improving the quality of his performance and adherence to the requirements of various technical standards.

2. The focus lies on the promotion of continuing quality improvement in an atmosphere of openness and mutual trust that contributes to enhancing transparency and comparability.

3. A Peer review examines whether a Practice Unit (PU) has adequate policies and procedures in place to comply with the Technical Standards of ICSI and other legal requirements.

4. The Council of ICSI decided to introduce peer review for Practicing Company Secretaries (PCS) to periodically evaluate the quality, sufficiency of systems, procedures and practices so that excellence in their performance is maintained.

Question 4.
In attestation services, what are the guidelines on Peer Review issued in relation to conduct of members?
Answer:
The Guidelines on Peer Review are issued in relation to conduct of members in attestation services:

To promulgate an appropriate mechanism for ensuring the quality of attestation services and guide the members to conduct themselves in a manner that the-Council considers appropriate.
To provide guidance in relation to the statutory powers and obligations with respect to the parties involved in peer review.
To prescribe the scope of peer review and the procedures to be adopted during the conduct of a peer review.
To establish the expected conduct of members during a peer review.

Question 5.
What are the significant benefits which a Practice Unit (PU) will obtain in undergoing the Peer Review?
Answer:
Following are significant benefits which a Practice Unit (PU) will obtain in undergoing a Peer Review:

A successful peer review will provide comfort to the PU that he has adhered to various statutory, documentary and other regulatory requirements.
If deficiencies are noticed and corrective measures suggested then the Practice Unit (PU) will have an opportunity to correct the deficiencies and thereby enhance his professional competence.
If a Peer Review Certificate is issued in favour of Practice Unit (PU) it enhances his credibility in the eyes of the general public.
Clients of the PU will benefit from knowing that their Practice Unit (PU) is periodically reviewed by the ICSI.
Practice Unit (PU) will benefit from peer review without any apprehension of any disciplinary proceedings being initiated against him for any deficiencies noticed on his part.

Question 6.
What qualifications are required for becoming Peer Reviewer?
Answer:
The eligibility for become a Peer Reviewer need to be a Member of the ICSI who should:

possess at least 10 years of post-membership experience.
be currently in whole time practice as a Company Secretary.

Question 7.
List out attestation services under the scope of Peer Review?
Answer:
The following attestation services are covered under the scope of Peer Review:

Signing of Annual Return pursuant to proviso to Section 92(1) of the Companies Act, 2013 in Form MGT -7.
Certification of Annual Return pursuant to Section 92(2) of the Companies Act, 2013 in Form MGT- 8.
Issuance of Secretarial Audit Report in terms of Section 204 of the Companies Act, 2013.
Issuance of Certificate of Securities Transfers in Compliance with Regulation 40(9) of the SEBI (LODR) Regulations.
Certificate of reconciliation of Share Capital Audit, updation of Register of Members, etc.

Question 8.
Write short note on: “Guidelines For mandatory Peer Review for rendering certain professional services”.
Answer:
1. The ceiling on number of Annual Secretarial Compliance Reports to be issued by PCS is 5 (five) reports individually/per partner in each financial year w.e.f. April 1, 2020 and an additional limit of 5 (five) Secretarial Compliance Reports individually/per partner in case the Unit has been Peer Reviewed.

2. The Council has approved the recommendations of the Peer Review Board making Peer Review mandatory for rendering Professional Services viz. Secretarial Audit, Secretarial Compliance Report under SEBI (LODR) Regulations and Diligence Reports for Banks and it has decided to issue the following Guidelines:

Secretarial Audit/Annual Secretarial Compliance Report under SEBI (LODR) of Top 100 companies as per market capitalisation to be undertaken only by Peer Reviewed PCS w.e.f. April 1,2020.
Secretarial Audit/Annual Secretarial Compliance Report under SEBI (LODR) of Top 500 companies as per market capitalisation to be undertaken only by Peer Reviewed PCS w.e.f. April 1,2021.
Secretarial Audit/Annual Secretarial Compliance Report under SEBI (LODR) of all listed companies to be undertaken only by Peer Reviewed PCS w.e.f. April 1, 2022.

3. Secretarial Audit of all companies to be undertaken only by Peer Reviewed PCS w.e.f. April 1, 2023.

4. Issuance of Diligence Report for banks in case of Consortium Lending/Multiple Banking Arrangements to be undertaken only by Peer Reviewed PCS w.e.f. April 1,
2020.

Question 9.
Write note on: “Objectives of Peer Review”.
Answer:
Objectives of Peer Review:
1. Peer review ensure that in carrying out their services,, the PCS has complied with the technical standards laid down by the Institute and has in place proper systems for maintaining the quality of the services/ work they provide.

2. Peer review does not seek to redefine the scope and authority of the technical standards specified by the council but seeks to enforce them within the parameters prescribed by the technical standards.

3. Peer review is directed towards maintenance as well as enhancement of quality of attestation services and to provide guidance to members to improve their performance and adhere to various statutory and other regulatory requirements.

4. Peer review identifies the areas where a practising member may require guidance in improving the quality of his performance and adherence to various requirements as per applicable technical standards and regulatory requirements.

Question 10.
Suppose, PCS Gopal appointed as Peer Reviewer. What qualities must be possessed by PCS Gopal as peer reviewer?
Answer:
The nature and complexities of peer review requires the exercise of professional judgment. PCS Gopal should:

be well acquainted with the technical aspects of the attestation services.
know the provisions of Code of Conduct of ICSI.
have studied various cases decided on Code of Conduct of ICSI.
get himself acquainted with decisions of various courts on ‘cases relating to deficiency in service’.
be aware of relevant provisions of Company Secretaries Act, 1980, Consumer Protection Act, Evidence Act, IPC, etc.
have studied the technical standards like Secretarial Standards, Guidance Notes, Notifications and Guidelines issued by Council of ICSI.
be aware of evolving standards and best practices in the field.
be good at drafting, written and spoken English.
display professional and courteous behaviour while on peer review visit.
understand his limitations.
be clear about what is outside the scope of Peer Review

Question 11.
Write short note on: “Peer Reviewers’ Approach”.
Answer:
1. The reviewer should be courteous, professional and helpful throughout the review process.

2. Peer reviewer should be appreciative of good practices while suggesting areas of improvement and should adopt a collaborative approach with the PU during the review process and should ensure minimum disruption to the PU during the peer review.

3. Peer reviewer should able to provide practical and insightful comments in a discussion mode as a Peer during the review process and should provide value addition to PU and not merely adopt a tick box approach.

The purpose is not to replace the PU’s opinion with the opinion of the Reviewer but to verify the process followed in exercise of judgments by the PU.

Question 12.
Discuss the obligations of the Practice Unit (PU) under Peer Review Process?
Answer:
The obligations of Practice Unit (PU) under Peer Review process are discussed below:
1. Any person who is reasonably believed by a reviewer to have in his possession or under his control any record or other document, which contains or is likely to contain information relevant to the peer review shall:

2. produce to the reviewer or afford him access to any record or document specified by the reviewer or any other record or document which is of a class or description so specified, and which is in his possession or under his control/being in either case a record or other document which the reviewer reasonably believes is or may be relevant to the peer review, within such time as the reviewer may reasonably require.

3. afford and provide to him such explanation or further particulars in respect of anything produced in compliance with a requirement as the reviewer shall specify.

4. provide to the reviewer all assistance in connection with peer review which he is expected to provide.

5. Where any information or matter relevant to a practice unit is record¬ed otherwise than in a legible form, the practice unit shall provide and present to the reviewer a reproduction of any such information or matter, or of the relevant part in a legible form, with a suitable translation in English if the matter is in any other language, and such translation is requested for by the reviewer.

6. The practice unit shall ensure that the reviewer is given access to all documents relevant to his review no matter which office of the practice unit these documents may be available in, in case the practice unit has more than one office.

7. A practice unit shall allow the reviewer to inspect, examine or take any abstract of or extract from a record or document or copy therefrom which may be required by the reviewer.

Question 13.
Write Short Note on:
(a) Cost of Peer Review.
(b) Periodicity of Peer Review.
(c) Framework for Peer Review.
Answer:
(a) Cost of Peer Review:

The cost of Peer Review for the reviewer and his qualified assistants) is decided by the Board from time to time shall be borne by the Practice Unit.
The Cost of Peer Review shall be paid by the practice unit within 30 days from the receipt of invoice from the Peer Reviewer.
In case reviewer has to conduct a second review the same rate would apply to the second review also.
Each of the branch / office under review would be considered as a separate unit for the purpose of payment of cost of Peer Review.
If a company / concern requests the Board for the conduct of peer review of its secretarial auditor (practice unit), the Board shall take due cognizance of such request and in that case the cost of the peer review shall be borne by such company/concern.

(b) Periodicity of Peer Review:

The peer review of every practice unit should be mandatorily carried out at least once in a block of five years.
If the Board so decides or otherwise at the request of the practice unit, the peer review for such a practice unit can be conducted at shorter intervals.

A peer review entails a review of attestation engagement records and related financial/other statements to ascertain whether the practice unit is adhering to technical standards.
Where a practice unit is not following technical standards in certain situations, suggestions and recommendations for improvement may be made and possibly followed by a further review in keeping with the primary thrust of Peer Review.

Question 14.
What methodology to be followed by Peer Reviewer?
Answer:
Methodology to be followed by Peer Reviewer:
Offsite review: This contemplates studying the information given by the Practice Unit (PU) in the Questionnaire and based on the same make his own observations about possible areas where improvement is possible and to note other aspects to be discussed in personal meeting with Practice Unit (PU).

Onsite review:

verification of information given by the Practice Unit (PU).
test checks in respect of attestation assignments handled by the Practice Unit (PU).
interaction with the staff & trainees of Practice Unit (PU) should be a part of the peer review.
calling for the records in respect of the client maintained by the Practice Unit (PU) to verify whether proper systems and procedures have been followed.

Question 15.
Write Short Note on:
(a) Preliminary Report of Reviewer.
(b) Interim Report of Reviewer.
(c) Final Report of Reviewer.
Answer:
(a) Preliminary Report of Reviewer: It has been provided that at the end of an on-site review, the Reviewer shall before making his report to the Board, communicate a Preliminary Report to the practice unit. The reviewer shall report on the areas where systems and procedures had been found to be insufficient or deficient or where any non-compliance has come to his notice with reference to any matter.

The reviewer shall not name any individual in his reports. The Reviewer need not communicate any Preliminary Report if he has not noticed any instance of non-compliance or deficiency during the Peer Review.

(b) Interim Report of Reviewer:
In case the reviewer is not satisfied with the reply of the Practice Unit (PU) the reviewer shall submit his Interim Report to the Board. Then on receiving such a report from a reviewer in terms of these guidelines the Board having regard to the Report and any submissions or representations attached to it may make recommendations to the Practice Unit (PU) concerned regarding the application by it of Technical Standards if it is of the opinion that:

in case the review is related to a firm, any one or more or all of the partners in the firm may have failed to observe, maintain or apply, as the case may be, the Technical Standards.
in case the review is related to a member practicing on his own account, the member may have failed to observe, maintain or apply, as the case may be, the Technical Standards.
specify in the instruction, the matters in respect of which the review is to be carried out.

(c) Final Report of Reviewer:
1. The reviewer will prepare the final reviewer’s report to the board for incorporating the findings as discussed with the practice unit. The model forms of such final reports shall be communicated to the reviewer by the board.

2. The final report will be examined by the board in terms of the degree of compliance with the technical standards by the reviewed practice unit.

3. The board shall consider the reviewer’s final report and the practice unit’s submissions. Thereafter, the board may issue recommendations if considered appropriate to the practice unit and/or instruct the reviewer to perform any follow-up action.

4. The board may if deemed fit issue peer review certificate to the practice unit.

Secretarial Audit Compliance Management and Due Diligence ICSI Study Material

CS Professional Corporate Funding and Listings in Stock Exchanges Notes Study Material Important Questions

December 28, 2022

CS Professional New Syllabus Corporate Funding & Listings in Stock Exchanges Notes Study Material Important Questions

CS Professional Corporate Funding and Listings in Stock Exchanges Notes

CS Professional Corporate Funding and Listings in Stock Exchanges Question Paper

CS Professional Corporate Funding & Listings in Stock Exchanges Chapter Wise Weightage

Chapter Name	2019		2020
Chapter Name	June	December	December
1. Indian Equity – Public Funding	8	20	10
2. Real Estate Investment Trust	–	3	10
3. Infrastructure Investment Trusts	5	5	3
4. Indian Equity – Private funding	18	3	15
5. Indian equity – Non Fund based	10	–	–
6. Debt Funding – Indian Fund Based (Corporate Debt)	10	13	11
7. Debt Funding – Indian Fund Based (Govt. Debt and Banking Finance)	10	15	18
8. Debt Funding – Indian Non fund Based	5	8	3
9. Foreign Funding – Instruments & Institutions	10	–	5
10. Other Borrowings Tools	6	–	5
11. Non-Convertible Redeemable Preference Shares	8	13	–
12. Securitization	–	5	–
13. Listing – Indian Stock Exchanges	15	10	25
14. International Listing	10	25	10
15. Preparing a Company for an IPO and Governance requirements thereafter, Appraising the Board and other functions in the organisations regarding the Post IPO/Listing Governance Change.	15	5	15
16. Documentation	5	10	5

Board Committees – Governance, Risk Management, Compliances and Ethics Important Questions

December 28, 2022

Board Committees – Governance, Risk Management, Compliances and Ethics Important Questions

Question 1.
“To enable better and more focused attention on the affairs of the company, the Board delegates particular matters to committees of the Board set-up for the purpose but the ultimate responsibility lies with the Board.” In the light of the statement, discuss the need and advantages of committee management.
OR
Describe briefly the need and advantages of committee management. Name the committees which are to be constituted for good corporate governance.
OR
“With the globalization and the complex regulator, requirements, the need to delegate oversight of certain areas to a specialist Board Committee has become imperative”. In the light of this statement discuss the need and advantages of such committees.
OR
“The committees are a sub-set of the Board, deriving their authority from the powers delegated to them by the Board.” In the light of above statement, discuss the need and advantage of committee management.
OR .
Discuss the rationale behind composition of Board Committees.
OR
“The committees are formed as means of improving Board’s effectiveness and efficiency in the areas where more focused, specialized and technical discussions are required”. Evaluate the statement by bringing out the needs and significance of committees.
OR
Elucidate the following; Board committee.
Answer:
Committees are formed in an organization as a means of improving board effectiveness and efficiency, in areas where more focused, specialized and technical discussions are required.

Board committees are pillars of corporate governance. Board committees with formally established terms of reference, criteria for appointment, life span, role and function constitute an important element of the governance process and should be established with clearly agreed reporting procedures and a written scope of authority.

A Board can either delegate some of its powers to the committee, enabling it to act directly, or can require the recommendations of the committee to be approved by the Board. Committees thus enable better management of | the board’s time and allow in-depth scrutiny and focused attention.

Significance of Board Committees
Board committee plays a vital role in the following manner:

To improve Board effectiveness and efficiency.
More members become involved.
Specialized skills of members can be used to best advantage as minor details needs to be evaluated/analysed to arrive at a logical conclusion.
Insulate Board from potential undue influence of controlling shareholders and managers.
Committees prepare groundwork for decision making and submit their recommendations to the Board for decision making.
Enables better management of Board’s time and allows in-depth scrutiny of proposals.
Establishing committees is one way of managing the work of the Board and strengthening the Board’s governance role.
Matters may be examined in more detail by a committee.
Inexperienced members gain confidence while serving on the committee.

Following are the mandatory Committees of the Board prescribed under:

Companies Act, 2013:

Audit Committee
Nomination and Remuneration Committee
Stakeholders Relationship Committee
Corporate Social Responsibility Committee

SEBI (LODR) Regulations, 2015:

Audit Committee
Nomination and Remuneration Committee
Stakeholders Relationship Committee
Risk Management Committee

Question 2.
Write short note on the following; Mandatory committees under the SEBI (Listing Obligations & Disclosure Requirements) Regulations, 2015.
OR
Describe briefly of the following; Mandatory committees under the SEBI (Listing Obligations & Disclosure Requirements) Regulations, 2015.
Answer:
Following are the mandatory committees under the SEBI (Listing Obligations & Disclosure Requirements) Regulations, 2015:
1. Audit Committee : As per Regulation 18 of the SEBI (Listing Obligations & Disclosure Requirements) Regulations, 2015, Every listed entity shall constitute a qualified and independent audit committee in accordance with the terms of reference specified therein.

2. Nomination and remuneration committee : As per Regulation 19 of SEBI (LODR) Regulations, 2015 The board of directors shall constitute the nomination and remuneration committee as follows:

The committee shall comprise of at least three directors
All directors of the committee shall be non-executive directors
At least fifty per cent of the directors shall be independent directors and in case of listed entity having outstanding SR equity shares, 2/3rd of the nomination and remuneration committee shall comprise of independent directors.

3. Stakeholders Relationship Committee: As per Regulation 20 of the SEBI (LODR) Regulations, 2015 The listed entity shall constitute a Stakeholders Relationship Committee to specifically look into various aspects of interest of shareholders, debenture holders and other security holders.

4. Risk management committee : Regulation 21 of the SEBI (LODR) Regulations, 2015 deals with the Risk Management Committee and provides that the board of directors shall constitute a Risk Management Committee.

Question 3.
Briefly comment on the following; A company can have as many non mandatory committees as it would require for efficient oversight of the company.
Answer:
A company may have as many non-mandatory committees as it would require for efficient oversight of the company. We will discuss about the committees which are generally constituted by corporate.

In addition to the Committees of the Board mandated by the Companies Act, 2013 viz, Audit Committee, Nomination and Remuneration Committee, Stakeholders Relationship Committee and the CSR Committee, Board of Directors may also constitute other Committees to oversee a specific objective or project. The nomenclature, composition and role of such Committees will vary, depending upon the specific obj ectives of the company.

The non-mandatory committees depending upon the need like:

Strategies Committee
Capital Expenditure Committee
HR Committee
Project Appraisal Committee
Science, Technology & Sustainability Committee
Regulatory, Compliance & Government Affairs Committee.

Question 4.
Infowin Ltd., has been pioneer in corporate governance practices. The board is comprised of appropriate mix of independent and executive directors to separate board functions of governance and management. The board comprised of fifteen members with seven executive directors and ‘ eight independent directors. Responsibilities of the chairman, CEO and COO have been clearly defined and they have to make periodic presentations before the board on the responsibilities, targets and performance. The board is responsible for selection of new directors and it delegates the selection of the new board members to the nomination and remuneration committee. The nomination and remuneration committee recommends to the board the induction of any new board member. The board also regularly works with the chairman, CEO and COO to determine the plans of internal succession of these posts in any emergency.

The board meets to review the quarterly results, discuss the issues related to the company’s financial performance and shareholder’s interests. The independent directors are always kept up to the date with the information regarding the company by the board through separate meetings arranged at regular intervals. The board currently has five committees namely Audit Committee, Nomination and Remuneration Committee, Stakeholders Relationship committee, Corporate Social Responsibility Committee and Investment Committee.

The COO and CEO deal with interactions of the board with the clients, employees, institutional investors, the government and press. The risk man agement is dealt with by the board with the help of the audit committee. In the light of the above you are required to answer the following questions;
(i) How do independent directors on the board help Infowin Ltd. to formulate best business policies?
(ii) What are the different committees formed as part of corporate governance of Infowin Ltd. and what role do these committees play?
Answer:
(i) In the given case, out of fifteen directors in the company, eight are independent directors. The responsibilities of chairman, CEO, COO, CFO are clearly defined and they are required to make presentations to the board on their responsibilities, targets and performances. Independent directors are required because they perform the following important role:

Balance the often conflicting interests of the stakeholders
Facilitate withstanding and countering pressures from owners.
Fulfil a useful role in succession planning.
Act as a coach and mentor for their fulltime colleagues.
Provide independent judgment and wider perspectives.

Thus, the presence of independent director on the board of Infowin Ltd. will lead to greater transparency in company’s dealings and formulation of best policies.

(ii) The Board of Infowin Ltd. has constituted following five committees to play effective role in the defined areas. These committees with their respective role are given below:
1. Audit Committee: The role of the Audit Committee includes oversight of the company’s financial reporting process, disclosure, review of financial statements etc.

2. Nomination and Remuneration Committee: Identifying persons who are qualified to become Directors and who may be appointed in senior management in accordance with the criteria laid down; recommend to the Board their appointment and removal; carry out evaluation of every Director’s performance; formulate the criteria for determining qualifications, positive attributes and independence of a Director and recommend to the Board a policy, relating to the remuneration for the Directors, KMP and other employees.

3. Stakeholders Relationship Committee: To look into the redressal of grievances of shareholders, debenture holders and other security holders.

4. Corporate Social Responsibility Committee: Formulate and recommend to the Board, a Corporate Social Responsibility Policy which shall indicate the activities to be undertaken by the company and monitor the implementation of the CSR policy from time to time.

5. Investment Committee: For laying down an overall investment policy and operational framework for the investment operations etc.

Question 5.
Elaborate the provisions in respect of the composition of audit com-mittee under the following;
i. SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 as prescribed by SEBI.
ii. Section 177 of the Companies Act, 2013.
OR
Discuss in brief the following; Every listed company shall constitute a committee of the Board to be known as audit committee.
OR
Which categories of companies are required to have Audit Committee of Board (ACB) as per the Companies Act, 2013 and as per the SEBI (LODR) Regulations, 2015.
OR
Your Company is planning to get listed in the stock exchange of India. As a Company Secretary, provide constitution of Audit Committee under the Section 177(2) of the Companies Act, 2013 and the changes as per Regulation 18 of SEBI (Listing Obligations and Disclosure Requirements I (LODR)) Regulations, 2015, for the consideration of Chairman of your company.
Answer:
The constitution of Audit Committee is mandated under the Companies Act, 2013, and the SEBI (Listing Obligations and Disclosure Requirements (LODR)) Regulations, 2015 is as under:-
i. Companies Act, 2013
Section 177(1) of the Companies Act, 2013 read with Rule 6 of the Companies (Meetings of Board and its Powers) Rules, 2014 provides that the Board of directors of following companies are required to constitute a Audit Committee of the Board:

All public listed companies
All public companies with a paid up capital of 10 crore rupees or more
All public companies having turnover of 100 crore rupees or more
All public companies, having in aggregate, outstanding loans or borrowings or debentures or deposits exceeding 50 crore rupees or more.

Section 177(2) of the Companies Act, 2013 provides that:

Audit Committee shall consist of a minimum of three directors
Independent directors should form a majority.
Majority of members of Audit Committee including its Chair¬person shall be persons with ability to read and understand the financial statement.

ii. SEBI (LODR) Regulations, 2015
Regulation 18(1) of the SEBI (LODR) Regulations, 2015 provides that every listed entity shall constitute a qualified and independent audit committee in accordance with the terms of reference, subject to the following:

Audit Committee shall have minimum three directors as members.
Two-thirds of the members of audit committee shall be independent directors and in case of a listed entity having outstanding SR equity shares, the audit committee shall only comprise of independent directors.
All members of audit committee shall be financially literate and at least one member shall have accounting or related financial management expertise.
The chairperson of the audit committee shall be an independent director and he shall be present at AGM to answer shareholder queries.
The Company Secretary shall act as the secretary to the audit committee.
The audit committee at its discretion shall invite the finance director or head of the finance function, head of internal audit and a representative of the statutory auditor and any other such executives to be present at the meetings of the committee.

Question 6.
You are the company secretary of ABC Ltd. the turnover of your company as per last audited financial statement has crossed 100 crore rupees. As per requirement of section 177(1) of the Companies Act, 2013, your company is required to constitute an audit committee. Board of directors of the company has asked you to draft the composition of audit committee. Keeping in view the provisions of Companies Act, 2013 and listing obligations and disclosure requirement (LODR), 2015. Prepare a note for the composition of audit committee.
Answer:
Resolution for the appointment of Audit Committee:
“RESOLVED THAT pursuant to the provisions of Section 177 of the Companies Act, 2013, Regulation 18(1) of the SEBI (LODR) Regulations, 2015 and Article No. of the Articles of Association of the Company, the Board hereby constitute the Audit Committee consisting of the following directors of the company:

Name	Designation	Position in the committee
Mr. X	Director (Independent Director)	Chairman
Mr. Y	Director (Independent Director)	Member
Mr. Z	Managing Director	Member

RESOLVED FURTHER THAT the Audit Committee shall have the terms of reference in accordance with the provisions of Section 177 of the Companies Act, 2013 and Regulation 18(1) of the SEBI (LODR) Regulations, 2015.

RESOLVED FURTHER THAT the quorum of Audit Committee shall either be two members or one third of the members of the audit committee, whichever is greater, with at least two independent directors.”

Question 7.
Discuss the role of qualified and independent audit committee in good governance.
Answer:
As per Regulation 18(3) of the SEBI Listing Regulations, 2015, the role of the Audit Committee shall include the following:
1. Oversight of the company’s financial reporting process and the disclosure of its financial information to ensure that the financial statement is correct, sufficient and credible.

2. Recommendation for appointment, remuneration and terms of appointment of auditors of the company.

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 and auditor’s report thereon before submission to the board for approval, with particular reference to:

Matters required to be included in the Director’s Responsibility Statement to be included in the Board’s report in terms of clause (c) of sub-section (3) of section 134 of the Companies Act, 2013.
Changes, if any, in accounting policies and practices and reasons for the same.
Major accounting entries involving estimates based on the exercise of judgment by management.
Significant adjustments made in the financial statements arising out of audit findings.
Compliance with listing and other legal requirements relating to financial statements.
Disclosure of any related party transactions.
Qualifications in the draft audit report.

5. Reviewing, with the management, the quarterly financial statements before submission to the board for approval.

6. 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.

7. Review and monitor the auditor’s independence and performance, and effectiveness of audit process.

8. Approval or any subsequent modification of transactions of the com-pany with related parties.

9. Scrutiny of inter-corporate loans and investments.

10. Valuation of undertakings or assets of the company, wherever it is necessary.

(Note: This Regulations is of inclusive functions and not exhaustive)

Question 8.
What is mandatory review of information by the audit committee? Discuss the information required by the audit committee.
Answer:
The audit committee shall mandatorily review the following information:

Management discussion and analysis of financial condition and results of operations.
Statement of significant related party transactions (as defined by the audit committee), submitted by management.
Management letters/letters of internal control weaknesses issued by the statutory auditors.
Internal audit reports relating to internal control weaknesses.
The appointment, removal and terms of remuneration of the chief internal auditor shall be subject to review by the audit committee.
Statement of deviations:
Quarterly statement of deviation(s) including report of monitoring agency, if applicable, submitted to stock exchange(s) in terms of Regulation 32(1).
Annual statement of funds utilized for purposes other than those stated in the offer document/prospectus/notice in terms of Regulation 32(7).

Question 9.
With the increasing use of internet, the listed entities have started adopting a functional website for publication of information, In the context of this, analyze the major elements to be considered in Website Disclosure Regulations.
Answer:
Regulation 46 of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 requires a listed entity to maintain a functional website. The listed entity shall ensure that the contents of the website are correct and shall update any change in the content of its website within two working days from the date of such change in content:
1. The listed entity shall maintain a functional website containing the basic information about the listed entity.

2. The listed entity shall disseminate the following information under a separate section on its website:

Details of its business.
Terms and conditions of appointment of independent directors.
Composition of various committees of board of directors.
Code of conduct of board of directors and senior management personnel.
Details of establishment of vigil mechanism/Whistle Blower policy.
Criteria of making payments to non-executive directors, if the same has not been disclosed in annual report.
Policy on dealing with related party transactions.
Policy for determining ‘material’ subsidiaries.
Details of familiarization programmes imparted to independent directors including the following details:
1. Number of programmes attended by independent directors (during the year and on a cumulative basis till date).
2. Number of hours spent by independent directors in such programmes (during the year and on cumulative basis till date).
3. Other relevant details.
The email address for grievance redressal and other relevant details.

(Note: This list is inclusive and not exhaustive)

3. The listed entity shall ensure that the contents of the website are correct.

4. The listed entity shall update any change in the content of its website ‘ within two working days from the date of such change in content.

Question 10.
Write short note on the following; Nomination Committee.
As per Section 178(1) of the Companies Act, 2013, read with Rule 6 of the Companies (Meetings of the Board and its Powers) Rules, 2014 and Rule 4 of the Companies
(Appointment and Qualification of Directors) Rules, 2014, provides that:
Answer:
The board of directors of following classes of companies is required to constitute a Nomination and Remuneration Committee of the Board-

Every listed public companies.
All public companies with a paid up capital of 10 crore rupees or more.
All public companies having turnover of 100 crore rupees or more.
All public companies, having in aggregate, outstanding loans or borrowings or debentures or deposits exceeding 50 crore rupees or more.

Note : Section 178 shall not apply to Section 8 companies and specified IFSC public companies.

Under SEBI (LODR) Regulations, 2015: Regulation 19{1) of the SEBI Listing Regulations, 2015 provides that the Board of all listed entity shall constitute the Nomination
and Remuneration Committee.

Question 11.
Describe composition of the ‘audit committee’ and ‘remuneration committee’ as per Regulation 18(1) of the SEBI (Listing Obligations & Disclosure Requirements) Regulations, 2015. [June 2010, 5 Marks]
Answer:
The constitution of Audit Committee is mandated under the Companies Act, 2013, and the SEBI (Listing Obligations and Disclosure Requirements (LODR)) Regulations, 2015 is as under:-
i. Companies Act, 2013
Section 177(1) of the Companies Act, 2013 read with Rule 6 of the Companies (Meetings of Board and its Powers) Rules, 2014 provides that the Board of directors of following companies are required to constitute a Audit Committee of the Board:

All public listed companies
All public companies with a paid up capital of 10 crore rupees or more
All public companies having turnover of 100 crore rupees or more
All public companies, having in aggregate, outstanding loans or borrowings or debentures or deposits exceeding 50 crore rupees or more.

Section 177(2) of the Companies Act, 2013 provides that:

Audit Committee shall consist of a minimum of three directors
Independent directors should form a majority.
Majority of members of Audit Committee including its Chair¬person shall be persons with ability to read and understand the financial statement.

Composition of the remuneration committee: The board of directors of following classes of companies is required to constitute a Nomination and Remuneration Committee of the Board-

Every listed public companies.
All public companies with a paid up capital of 10 crore rupees or more.
All public companies having turnover of 100 crore rupees or more.
All public companies, having in aggregate, outstanding loans or borrowings or debentures or deposits exceeding 50 crore rupees or more.

Note : Section 178 shall not apply to Section 8 companies and specified IFSC public companies.

Under SEBI (LODR) Regulations, 2015: Regulation 19(1) of the SEBI Listing Regulations, 2015 provides that the Board of all listed entity shall constitute the Nomination and Remuneration Committee.

Question 12.
Discuss the duties of the nomination and remuneration committee.
OR
Discuss the functions of Nomination and Remuneration Copimittee.
OR
Why do companies set up remuneration committee and what is its role in companies?
Answer:
As per Section 178(2), (3) and (4) of the Companies Act, 2013, the Nomination and Remuneration Committee shall perform following – functions:
1. Identify persons who are qualified to become directors in accordance with Identify persons who are qualified to become directors in accordance with the criteria laid down and recommend to the Board their appointment and removal.

2. Performance evaluation of every director.

3. Formulate the criteria for determining qualifications, positive attributes and independence of a director and recommend to the Board a policy, relating to the remuneration for the directors, key managerial personnel and other employees.

4. While formulating the policy, the Committee shall consider the following:

The level and composition of remuneration is reasonable and sufficient to attract, retain and motivate directors of the quality required to run the company successfully.
Relationship of remuneration to performance is clear and meets appropriate performance benchmarks. Remuneration to directors, key managerial personnel and senior management involves a balance between fixed and incentive pay reflecting short and long-term performance objectives appropriate to the working of the company and its goals.

Additional functions under Regulation 19(4) of SEBI (LODR) Regulations, 2015 are:

Formulation of criteria for evaluation of performance of independent directors and the board of directors.
Designing a policy on diversity of board of directors.
Whether to extend or continue the term of appointment of the independent director, on the basis of report of performance evaluation of independent director.

Question 13.
Mr. Allen has recently joined Delta Limited as the secretary and has been asked by the Board of Directors to draft the charter of the Nomination and Remuneration Committee for its approval in the BOD meeting. Provide a sample draft which Mr. Allen would be supplementing to the BOD meeting in the light of provisions of LODR and Companies Act, 2013.
Answer:
The charter of the Nomination and Remuneration Committee of Delta Limited may contain information under the following heads:

Purpose and Objective
Constitution and Organisation
Responsibilities
Compensation policies including performance related pay and stock options plans and other beneficial plans
Nomination of Directors
Performance Evaluation and Leadership Development
Coordinating with Committees of the Board for good corporate governance
Advisors at forums of the organisation
Any other responsibilities
Meetings and Report- Details regarding meetings to be conducted, quorum, reporting at adequate forums and other disclosures
Compensation of Committee Members

Question 14.
What are the applicable legal/regulatory provisions regarding Stakeholders Relationship Committee? You, as practicing Company Secretary, advise the board mentioning the provisions relating to the Composition and Functions of the Committee.
Answer:
(i) Provisions regarding Stakeholders Relationship Committee – Section 178(5) of the Companies Act, 2013 provides that the Board of Directors of following companies shall constitute a Stakeholders Relationship Committee:

Company which consists of more than one thousand shareholders, debenture holders, deposit holders and any other security holders at any time during a financial year.
Regulation 20 of SEBI (LODR) Regulations, 2015 provides that every listed entity shall constitute a Stakeholders Relationship Committee to specifically look into the mechanism of redressal of grievances of shareholders, debenture holders and other security holders.

(ii) Composition of the Committee:
Section 178(5) of the Companies Act, 2013 and Regulation 20 of SEBI (LODR) Regulations, 2015 provides that-

Stakeholders Relationship Committee shall consist of a chairper-son who shall be a non-executive director
Other members of the committee shall be decided by the Board.
The chairperson of the committees or, in his absence, any other member of the committee authorised by him in this behalf is required under the section to attend the general meetings of the company.
Functions of the Committee

Question 15.
Briefly explain the following terms and their relevance to good cor-porate governance practices; Stakeholders relationship committee.
Answer:
Section 178(5) of the Companies Act, 2013 and Regulation 20 of SEBI (LODR) Regulations, 2015 provides that:

Stakeholders Relationship Committee shall consist of a chairperson who shall be a non-executive director
Other members of the committee shall be decided by the Board.
The main function of the committee is to consider and resolve the grievances of security holders of the company.
The role of the Stakeholders Relationship Committee shall be to consider and resolve the grievances of the security holders of the listed entity including-complaints related to transfer of shares, non-receipt of annual report and non-receipt of declared dividends.

Question 16.
Priya Ltd. declared dividend but failed to pay the dividend in time which created grievances among shareholders and debenture holders. Describe the provisions of law available for the beneficiaries.
Answer:
The provisions of law available for the shareholders and debenture holders are as follows:
Section 178(5) of the Companies Act, 2013:
Where a dividend has been declared by a company but has not been paid or the warrant in respect thereof has not been posted within thirty days from the date of declaration to any shareholder entitled to the payment of the dividend, every director of the company shall, if he is knowingly a party to the default, be punishable with imprisonment which may extend to two years and with fine which shall not be less than one thousand rupees for every day during which such default continues and the company shall be liable to pay simple interest at the rate of eighteen per cent per annum during the period for which such default continues:

Provided that no offence under this section shall be deemed to have been committed:-

Where the dividend could not be paid by reason of the operation of any law.
Where a shareholder has given directions to the company regarding the payment of the dividend and those directions cannot be complied with and the same has been communicated to him.
Where there is a dispute regarding the right to receive the dividend.
Where the dividend has been lawfully adjusted by the company against any sum due to it from the shareholder.
Where, for any other reason, the failure to pay the dividend or to post the warrant within the period under this section was not due to any default on the part of the company.

Section 178(5) of the Companies Act, 2013 provides for constitution of the Stakeholders Relationship Committee.

Section 178(6) of the Companies Act, 2013, the Stakeholders Relation¬ship Committee shall consider and resolve the grievances of security holders of the company. Hence, in the given case, after the declaration of the dividend, it becomes the liability on the part of the company to pay the dividend to the eligible shareholders and if it is not paid within the prescribed time limit the directors and company are liable for such failure.

Question 17.
Every company is required to constitute a CSR committee under the Companies Act, 2013. Do you agree? Explain with the relevant provisions of the law.
OR
Answer the following in brief; Discuss the composition of Corporate Social Responsibility Committee with reference to the statutory provisions applicable.
Answer:
According to Section 135(1) of the Companies Act, 2013 read with Rule 3 of the Companies (Corporate Social Responsibility Policy) Rules, 2014 mandates that every company which fulfils any of the following criteria during the immediately preceding financial years ‘shall constitute a CSR Committee :

Companies having net worth of rupees five hundred crore or more.
Companies having turnover of rupees one thousand crore or more.
Companies having a net profit of rupees five crore or more.

Companies (Corporate Social Responsibility Policy) Rules, 2014, provides that:

Unlisted public company or a private company covered under sub-section (1) of section 135 which is not required to appoint an independent director, shall have its CSR Committee without such director.
Private company having only two directors on its Board shall constitute its CSR Committee with two such directors.
Foreign company covered under these rules, the CSR Committee shall comprise of at least two persons of which one person shall be the per-son resident in India authorized to accept on behalf of the company, service of process and any notices or other documents and another person shall be nominated by the foreign company.

It can be stated that a CSR Committee shall consist of three or more directors. Atleast one director shall be an independent director. The composition of the CSR Committee shall be disclosed in the Board’s report.

Question 18.
Write short note on legal provisions on risk management under the SEBI (Listing Obligations & Disclosure Requirements) Regulations 2015.
Answer:
Regulation 21 of the SEBI (LODR) Regulations, 2015 deals with the Risk Management Committee and provides as under:
1. The board of directors shall constitute a Risk Management Committee.

2. The majority of members of Risk Management Committee shall consist of members of the board of directors and in case of a listed entity having outstanding SR equity shares, at least two thirds of the Risk Management Committee shall comprise of independent directors.

3. The Chairperson of the Risk management committee shall be a member of the board of directors and senior executives of the listed entity may be members of the committee.

4. The risk management committee shall meet at least once in a year. [Inserted by the SEBI (LODR) (Amendment) Regulations, 2018, w.e.f. 1-4-2019]

5. The board of directors shall define the role and responsibility of the Risk Management Committee and may delegate monitoring and reviewing of the risk management plan to the committee and such other functions as it may deem fit such function shall specifically cover cyber security.

6. The provisions of this regulation shall be applicable to top 500 listed entities, determined on the basis of market capitalisation, as at the end of the immediate previous financial year.

Question 19.
Write short note on the following; Corporate Governance Committee.
Answer:
A company may constitute Corporate Governance Committee to develop and recommend the board a set of corporate governance guidelines applicable to the company, implement policies and processes relating to corporate governance, to review, periodically, the corporate governance guidelines of the company.

The committee may be responsible for considering matters relating to corporate governance including the composition of board, appointment of new directors, review of strategic human resource decisions, succession planning for the chairman and other key board and executive positions, performance evaluation of the board and its committees and individual directors.

Question 20.
Prepare a detailed note on ICSI Recommendations to strengthen Corporate Governance framework.
Answer:
ICSI Recommendations to strengthen Corporate Governance framework suggests for constitution of Corporate Compliance Committee on mandatory basis in respect of all public limited companies having a , paid-up capital of ₹ 5 crore or more.

The charter of the committee includes the following:

To oversee the Company’s compliance efforts with respect to relevant Company policies, the Company’s Code of Conduct, and other relevant laws and regulations.
To review complaints received from internal and external sources, regarding matters other than the financial matters which are within the purview of the Audit Committee.
To periodically present to the Board for adoption of appropriate changes to the policies, and oversee implementation of and compliance with these policies.
To review regularly the company’s compliance risk assessment plan.
To investigate or cause to be investigated any significant instances of non-compliance, or potential compliance violations that are reported to the committee.
To coordinate with other committees regarding matters brought to the committees attention that relate to issues of compliance with applicable laws and regulations.

Question 21.
Write notes on the following; Compliance officer
Answer:
Compliance officers ensure that compliance risk is adequately managed. In order to enhance effectiveness of board functioning, the compliance officer should report to the chairman on all board governance matters. A compliance officer’s should ensure the presentation of high-quality information to the board and its committees. Regulation 6(1) of SEBI (LODR) Regulations, 2015 provides that every listed entity shall appoint a qualified company secretary as the compliance officer.

Governance Risk Management Compliances and Ethics Notes

Liquidation After IRP – Corporate Restructuring, Insolvency, Liquidation & Winding-Up Important Questions

December 28, 2022

Liquidation After IRP – Corporate Restructuring, Insolvency, Liquidation & Winding-Up Important Questions

Question 1.
The Resolution Professional has reported cases of undervalued transactions during resolution process to the Adjudicating Authority. What orders can be passed by the Adjudicating Authority in this regard.
Answer:
→ If the Liquidator or the Resolution Professional, on verification of transactions of the Corporate Debtor, determine that certain transactions were undervalued, he shall make an application to the Adjudicating Authority to declare such transactions as void and reverse their effect.

→ Section 48 of the Insolvency and Bankruptcy Code, 2016 lists out the orders that may be passed by the Adjudicating Authority setting aside the undervalued transaction.

→ The Adjudicating Authority may provide for the following:
(a) require any property transferred as part of the transaction, to be vested in Corporate Debtor;
(b) release or discharge (in whole or in part) any security interest granted by the corporate debtor;
(c) require any person to pay such sums, in respect of benefits received by such person, to the liquidator, as the Adjudicating Authority may direct; or
(d) require the payment of such consideration for the transaction as may be determined by an independent expert.

Question 2.
“Committing default or failure of Resolution Plan may lead to liqui-dation of a body corporate under Insolvency and Bankruptcy Code, 2016 but could there be other circumstances for which a Tribunal may order for winding-up ?” Examine and explain.
Answer:
→ Part II of the Insolvency and Bankruptcy Code, 2016 lays down the law relating to liquidation process for corporate persons. Firstly, an attempt is made to resolve the insolvency of Corporate Debtor through the Corporate Insolvency Resolution Process. The Liquidation provisions come into effect if the attempts to resolve corporate insolvency fail.

→ The NCLT shall pass an order for liquidation of Corporate Debtor in following circumstances:

NCLT does not receive a resolution plan (including fast-track process) within the maximum time period permitted for resolving the corporate insolvency; or
NCLT rejects the resolution plan for the non-compliance of the specified requirements; or
During Corporate Insolvency Resolution Process, the Committee of Creditors have decided to liquidate the Corporate Debtor. Such decision is taken by the Committee of Creditors in their meeting, by not less than 66% of the voting share. The Resolution Professional shall communicate such decision of Committee of Creditors to the NCLT; or
Where resolution plan approved by NCLT is contravened by the Corporate Debtor.

→ Further, as per Sec. 271 of the Companies Act, 2013, a company may be wound-up by the National Company Law Tribunal (NCLT) if
(a) the company has passed a special resolution of its being woundup by the Tribunal;
(b) the company has acted against the interests of the sovereignty and integrity of India, the security of the State, friendly relations with foreign States, public order, decency or morality;
(c) application made by ROC or any person authorized by the Central Govt, stating that the affairs of the company have been conducted in a fraudulent manner, unlawful purpose or the promoters and management have been guilty of fraud or misconduct in connection therewith;
(d) the company has defaulted in filing its financial statements or annual returns for immediately preceding 5 consecutive financial years; or
(e) the Tribunal is of the opinion that it is just and equitable that company should be wound-up.

Question 3.
“The Insolvency and Bankruptcy Code makes significant changes in the priority of claims for distribution of liquidation proceeds’. Comment.

Question 4.
You are the liquidator of ABC Ltd. which is currently undergoing liquidation process. As a liquidator, indicate how you will handle the priority of claims for distribution of liquidation proceeds of ABC Ltd. as enumerated in the Insolvency and Bankruptcy Code, 2016.
Answer:

Section 53 of the Insolvency and Bankruptcy Code, 2016 provides the priority of claims for distribution of liquidation proceeds of a corporate debtor.
The priority of claims mentioned in the Insolvency and Bankruptcy Code, 2016 is also known as the ‘Waterfall Mechanism’.
It provides for payment to unsecured financial creditors before payment towards Government dues, unlike priority as specified by the Companies Act, 2013.
A per the provisions of the Code, the proceeds from the sale of the liquidation assets shall be distributed in the following order of priority-
- the insolvency resolution process costs and the liquidation costs paid in full;
- workmen’s dues for 24 months preceding liquidation commencement date and debts owed to secured creditors, on a pari-passu basis;
- wages and any unpaid dues owed to employees for 12 months preceding the liquidation commencement date;
- financial debts owed to unsecured creditors;
- any amount due to the Central and State Govt.;
- any remaining debts and dues;
- preference shareholders, if any; and
- equity shareholders.

Corporate Restructuring, Insolvency, Liquidation & Winding-Up Notes

Secretarial Practice in Drafting Notice, Agenda and Minutes of Company’s Meetings Resolution – Drafting, Pleadings and Appearances Important Questions

December 28, 2022

Secretarial Practice in Drafting Notice, Agenda and Minutes of Company’s Meetings Resolution – Drafting, Pleadings and Appearances Important Questions

Question 1.
“A Company is an artificial judicial person created by Law”. Comment.
Answer:
A company is incorporated under Companies Act, 2013. It is an artificial judicial person created by law having its own entity distinct from its members.

Following are the landmark judgments:-
In the case of Salomon vs. Salomon and Company Limited (1897) A.C. 22, the principle of the separate legal entity of a company was recognized by the House of Lords. It was held that once the company is incorporated, it becomes a separate entity in the eyes of law independent of a company from Mr. Salomon.

In the case of Re. Kondoli Tea Co. Ltd., (1886) ILR 13 Cal. 43, the Calcutta High Court recognised the principle of separate legal entity much earlier than the decision in Salomon case.

Certain persons transferred a Tea Estate to a company and claimed exemptions from ad valorem duty on the ground that they themselves were also the shareholders in the company. It was nothing but a trans¬fer from them in one name to themselves under another name. While rejecting this plea, Calcutta High Court observed:

“The company was a separate person, a separate body altogether from the shareholders and the transfer was as much a conveyance, a transfer of the property as if the shareholders had been totally different persons. ”

Thus a company being an artificial judicial person, it is capable of acting in its own name, entering into contracts, owning and holding property in its own name, sue and to be sued in its name. However, it expresses its will or takes its decisions through natural persons ie. directors or members.

Question 2.
‘Corporate decision-making process has to be collective as per law’. Comment.
Answer:
A company is a separate legal entity. It is an artificial judicial person created by Law. It acts through its directors and members by passing resolutions at validly held meetings. A Meeting has been defined in the case of In Re. Associated Color Laboratories Ltd. (1970) 12 D.L.R. as “Coming together of two or more persons face to face so as to be in each other’s presence or company.”

Decisions of the Board of Directors:
The will of the Board of Directors is expressed through Resolutions at meetings of the Board or those passed by circulation. General Meetings of the members provide a forum for them to express their will with regard to the management of the affairs of the company. The primary purpose of a Meeting is to ensure that a company gives reasonable and fair opportunity to those entitled to participate in the meeting to take decisions as per the prescribed procedures.

The meetings of a company under the Companies Act, 2013 can be classified as under:

Meetings of the Directors and their Committees
Meetings of Members which can further be classified as:-

Annual General Meetings (AGM)
Extraordinary General Meetings (EGM)
Class Meetings.

The following resolutions can be passed at general meetings or through postal ballots:
Ordinary Resolutions: Resolution by majority of >51%
Special Resolutions: Resolution by majority of >75%.

Question 3.
Bank was authorised by its Articles to issue bonds. The directors issued bonds to ‘A’ without the requisite resolution. A filed a suit for recovery of the money against the company. The company resisted the suit on the ground that there was no resolution passed. Will ‘A’ succeed?
Answer:
Meaning: According to the doctrine of indoor management, a person entering into a transaction with the company needed to satisfy that his proposed transaction is not inconsistent with the articles and memorandum of the company. He is not bound to see the internal irregularities of the company and if there are any internal irregularities, the company will be liable to honour its part of the contract.

This doctrine was laid down in the case of:
Royal British Bank v. Turquand(1856) 6 E&B 327 The directors of the company borrowed some money from the plaintiff. The article of the company provides for the borrowing of money on bonds but there was a necessary condition that a resolution should be passed in general meeting.

Now in this case shareholders claims that as there was no such resolution passed in general meeting so the company is not bound to pay the money. It was held that the company is bound to pay back the loan. As directors could borrow but subjected to the resolution, so the plaintiff had the right to infer that the necessary resolution must have been passed. It was held that

“Outsiders are bound to know the external position of the company but are not bound to know its indoor management. ”

Conclusion:
In the present case, ‘A’ will succeed to recover his money as he was totally oblivious of the fact that a resolutions needs to be passed by the company before issuing of any bond. According to the doctrine of indoor management, A is well within its capacity to assume that all the necessary resolutions must have been passed by the directors of the company.

Question 4.
Two shareholders sued the directors of a company, alleging various fraudulent and illegal transactions, whereby the company’s property was j misapplied. The transactions were, however, of such nature as the majority \of shareholders had the power to confirm. Will such suit succeed? Why?
Answer:
A company is a legal entity separate from its shareholders. The Court will not interfere with the internal management of companies acting within ! their powers. Where an ordinary majority of members can ratify the act, the Court will not interfere. This simply means, if the majority can ratify | an act, the minority cannot sue.

Foss v. Harbottle (1843) 2 Hare 461, 67ER 189 In this case two shareholders commenced legal action against the promoters j and directors of the company alleging that they had misapplied the company j assets and had improperly mortgaged the company property.

The Court rejected the two shareholders’ claim and held that a breach of duty by the directors of the company was a wrong done to the company for which it alone could sue. In other words, the proper plaintiff, in that case, was the company and not the two individual shareholders.

Conclusion
Thus the suit filed by two shareholders against the directors of a company for alleged fraudulent act causing losses to the company will not succeed because if the majority of shareholders had the power to confirm the act of the directors, in such case any suit against the directors will not survive.

Question 5.
Distinguish between the following; Ordinary Resolution and Special Resolution.
Answer:
The following are the differences between Ordinary Resolution and Special Resolution:-

Ordinary Resolution	Special Resolution
1. An ordinary resolution is one which is passed in the company’s general meeting by a simple majority of votes.	A Special Resolution is one which is passed in the company’s general meeting by a special majority Le the favourable votes whether in person or by proxy, should not be less than three times the votes cast against the resolution by members so entitled.
2. All matters relating to the company’s business, except those which need to be settled by a special resolution, are settled by an ordinary resolution.	A special resolution is meant to make decisions in important matters and protect the rights of company’s members.
3. No notice is required to be given for moving an ordinary resolution.	A prior notice needs to be given for moving a special resolution in any meeting of the company and the notice should contain the intention to propose the resolution as special resolution should be mentioned specifically.
4. Ordinary Resolution is one wherein simple majority is required to move the resolution at the general meeting.	Special Resolution means a resolution in which supermajority is needed to pass the resolution at the general meeting.
5. Ordinary resolution requires the consent of at least 51% members, in favour of the resolution.	Special resolution requires the consent of at least 75% members, in favour of the resolution.
6. The copy of an ordinary resolution, signed by the officer of the company should be filed with the registrar only in certain cases.	A printed or handwritten copy of a special resolution, containing the signature of the officer of the company must be filed with the Registrar of Companies within 30 days.
7. Ordinary businesses are transacted at annual general meetings.	Special businesses are transacted at Annual general meetings as well as extraordinary general meetings.

Question 6.
The directors of the company were authorised under the Articles of Association of Company to borrow? 20000 without the consent of shareholders in general meeting. The directors themselves let? 50000 to the company without such consent. Is the company held liable for? 50000.
Answer:
Doctrine of indoor management According to the doctrine of indoor management, a person entering into a transaction with the company only needed to satisfy that his proposed transaction is not inconsistent with the articles and memorandum of the company. He is not bound to see the internal irregularities of the company and if there are any internal irregularities, the company will be liable to honour its part of the contract.

Exception to doctrine of indoor management The doctrine of indoor management will not apply if the person dealing with the company has a slight knowledge about the lack of authority of Z the person who is acting on behalf of the company in this situation the doctrine will not apply.

Howard vs. Patent Ivory Company (1888) 38 Ch D 156, the .article of the – company empowered directors to borrow up to 1000 pounds only. However, they could extend the limit of 1000 pound by consent in general meeting. Without such permission, they took 3500 pounds from one of the directors who took debentures. Later on, the company refused to pay back. The court held that the company is only liable to pay back 1000 pounds because the director had noticed about the limit and condition.

Conclusion
This problem refers to the exception to doctrine of indoor management. In this case, the company is liable for only ₹ 20000 which was authorized by Article of Association. The company will not be held liable for ₹ 50000 as this amount was in excess of the borrowing capacity of the company under Articles of Association and the director of a company should be well informed of the internal affairs and capacity of the company.

Question 7.
Describe the applicability of Secretarial Standard-1 under the Companies Act, 2013, issued by The Institute of Company Secretaries of India on Meeting of Board of Directors.
Answer:
Secretarial Standard-1 issued by The Institute of Company Secretaries of India is applicable on meeting of Board of Directors as well as Meetings of Committees of the Board as given below:-
Applicability of Secretarial Standard-1 on meeting of Board of Directors: Secretarial Standard-1 prescribes a set of principles for convening and conducting meetings of the Board of Directors.

According to section 118(10) of the Companies Act, 2013, every company is required to observe Secretarial Standard-1 except:

One Person Companies (OPC) having only one Director on its Board and
Such other class or class of companies which are exempted by Central Government through Notification.

E.g. companies licensed under Section 8 of the Companies Act, 2013.
Exemptions shall be applicable to a Section 8 company provided it has not committed a default in filing its Financial Statements or Annual Return with the Registrar of Companies.

Applicability of Secretarial Standard-1 on Meetings of Committees of the Board: SS-1 is also applicable to the Meetings of Committees of the Board.

At present, Companies Act, 2013 provides for the constitution of following mandatory committees of the Board based on the certain thresholds:

Audit Committee
Nomination and Remuneration Committee
Corporate Social Responsibility (CSR) Committee
Stakeholders Relationship Committee

In case any other committee of the Board is constituted voluntarily or pursuant to any other statute or regulations etc., the company may comply with SS-l with respect to meetings of such committee as a good governance practice.

Question 8.
What are the provisions regarding quorum for the meeting of Board of Directors under Companies Act, 2013. Can article provide for the different quorum than the Companies Act, 2013?
Answer:
According to Section 174 of the Companies Act, 2013, following shall be the Quorum for meetings of Board:-
The quorum for a meeting of the Board of Directors of a company shall be one-third of its total strength or two directors, whichever is higher. Participation of the directors by video conferencing or by other audiovisual means shall also be counted for the purposes of quorum under this sub-section.

The continuing directors may act notwithstanding any vacancy in the Board; but, if and so long as their number is reduced below the quorum fixed by the Act for a meeting of the Board, the continuing directors or director may act for the purpose of increasing the number of directors to that fixed for the quorum, or of summoning a general meeting of the company and for no other purpose.

Whereat any time the number of interested directors exceeds or is equal to two-thirds of the total strength of the Board of Directors, the number of directors who are not interested directors and present at the meeting, being not less than two, shall be the quorum during such time.

Where a meeting of the Board could not be held for want of quorum, then, unless the articles of the company otherwise provide, the meeting shall automatically stand adjourned to the same day at the same time and place in the next week or if that day is a national holiday, till the next succeeding day, which is not a national holiday, at the same time and place.

The Companies Act, 2013 does not provide cap on higher number of quorums. As per Secretarial Standard- 1, Articles of Association may provide for higher number of directors for quorum.

Question 9.
When an urgent resolution by circulation can be initiated?
Answer:
Companies Act, 2013 as well as Secretarial Standard 1 on Meetings of the Board of Directors lists certain items of business which shall not be passed by circulation and shall be placed before the Board at its Meeting. However, other business that requires urgent decisions can be approved by means of resolutions passed by circulation.

Resolutions passed by circulation are deemed to be passed at a duly convened meeting of the board and have equal authority.

Procedure for Resolutions passed by circulation:
The chairman of the board or in his absence, the Managing Director or in their absence, any Director other than an Interested Director, shall decide whether the approval of the board for a particular business shall be obtained by means of a resolution by circulation.

Where not less than one-third of the total number of directors for the time being require the resolution under circulation to be decided at a meeting, the chairman shall put the resolution for consideration at a meeting of the board.

A resolution proposed to be passed by circulation shall be sent in draft, together with the necessary papers, to all the directors. Each business proposed to be passed by way of Resolution by circula¬tion shall be explained by a note setting out the details of the proposal.

Question 10.
XYZ Ltd. wishes to convey Meeting of Board of Directors through Electronic mode. Draft a suitable Notice for the same. Assume other information.
Answer:
XYZ Ltd.
Address:
CIN:

xvzltdffiamail.com
www.xvz.com

Notice Of 2nd Board Meeting

August/03 /2020

To,
Mr. Ram Aggarwal,
Director,
New Delhi.
Dear Sir,

NOTICE is hereby given that the 2nd meeting of the Board of Directors of the company will be held on Tuesday, 11th day of August 2020 at 11 a.m at the registered office of the company.
The Agenda of the business to be transacted at the Meeting is enclosed.
You may attend the Meeting through electronic Mode, the details of which are enclosed. In case you desire to participate through such mode, please send a confirmation via email in this regard to Mr. Raman Singh, Company Secretary of the company at [email protected] within 2 days to enable making necessary arrangements.

Kindly make it convenient to attend the Meeting.

Yours faithfully,
For XYZ Limited
(Signature)
Raman Singh
Company Secretary
[email protected].

Question 11.
Write down the required important practical aspects, while drafting agenda and notes thereon.
Answer:
Following are the important practical aspects while drafting agenda j and notes thereon:
1. Agenda have to be written with special care which not only requires good drafting skills but also an understanding of commercial considerations and the business environment.
For the purpose divide the agenda into two parts: the first part containing usual or routine items and the second part containing other items which can be bifurcated as:

Items for approval.
Items for information/noting.

2. For each item of the agenda an explanatory note should be annexed providing details like introduction, proposal, with recommendations of the management, provisions of Law, decisions to be taken and in¬terest, if any, of any Directors. The explanatory note may be drafted under the following heads:

Background (or Introduction)
Proposal, with recommendations of the management
Provisions of Law
Decisions to be taken.
Interest, if any, of any Directors.

3. As a good governance practice, the agenda item should be initiated by the concerned department (Head of Department or another authorised person) and approved by the competent authority as may be decided by the Board.

4. The Company Secretary should refer to the Agenda of previous Meet¬ings, to see whether any items had been deferred and should consider whether such items are to be included for discussion at the ensuing meeting.

5. The Company Secretary should also refer to the Minutes of the Meet¬ing held during the corresponding period of the previous year to see whether there are any recurring periodic items. The Company Sec¬retary should finalise the Agenda in consultation with the Chairman or in his absence the Managing Director or Whole-time Director.

6. The Company Secretary should maintain and refer folder of notes, documents to ensure that all items which require the decision of the Board are included in the Agenda.

7. A separate Agenda item number should be given for items which are brought forward for discussion from a previous meeting.

Question 12.
Draft a Resolution for appointment of ‘David’ as Company Secretary I pursuant to Section 203 of The Companies Act, 2013.
Answer:
The Chairman advised the Board that it is proposed to appoint Mr. j David who holds the prescribed qualifications as Company Secretary of the | company; Mr. David has given his consent to act as Company Secretary if appointed.

The Board agreed with the same and passed the following Resolution:
“Resolved That pursuant to Section 203 of the Companies Act, 2013 and Rule 8 and Rule 8A of Companies appointment & remuneration of Managerial Personnel Rules, 2014 and other applicable provision if any, of the Companies Act, 2013; Mr. David, holding the prescribed qualification under Section 2(24) of the Companies Act, 2013, be and is hereby appointed 1 as Company Secretary of the company w.e.f April/1/2020, on the terms I specified in the draft agreement placed on the table, a copy of which was initialled by the Chairman for the purpose of identification.”

“Resolved Further That, Mr. David, Company Secretary, shall perform j*s the duties which are required to be performed by a secretary under the 7 Companies Act, 2013 and any other duties assigned to him by the Board j or the Chief Executive Officer.”

“Resolved Further That, Mr. X, Director be and is hereby authorised to sign and file the necessary forms /documents with the Registrar of companies ‘ and make entries, as appropriate, in the registers of the company.”

Question 13.
Draft a specimen affidavit for issue of duplicate Share Certificate, as the original Share Certificate issued by the Company has lost. Assume data.
Answer:

Affidavit
(On stamp paper of ₹10 or above)

I, ABC Sb X, R/o ……… do hereby solemnly affirm and declare oath as under:

1. That I am a Shareholder of xYz Ltd, holding 1000 Equity shares having Folio distinctive Nos. 18 to 1018 issued by the company.
2. That the said share certificates, covering the above-said shares have been lost.
3. That the FIR has been registered in Saket Police Station. vide No. 54/2019 dated 3rd June 2019.
4. That I have not sold and/or transferred the said shares in favour of any other person or persons.
5. That I have not pledged, created any charge or encumbrance on said shares in favour of any person or persons.
6. That I have filed a request to the Company to issue duplicate certificate for the said shares. ‘

(Deponent)

Verification

I, the above-named deponent, verify that the contents of paragraphs 1 to 6 of this affidavit are true to my personal knowledge and belief.

(Deponent)

Solemnly affirmed before me on this ……………………………………. day of ……………………………………. 2013 of ……………………………………. (time) by the deponent.

Sd/-…………………………………….
(Oath Commissioner)

Question 14.
ABC Ltd. called an Annual General Meeting on 28th December 1998. £ As the quorum was not present on that day, the meeting was adjourned Z; to 4th January 1999 on which date the meeting was duly held. No other AGM was held in 1999. Can the company be prosecuted for not holding AGM every year?
Answer:
Section 96 of the Companies Act, 2013 deals with Annual General Meeting. It should be held once in each calendar year.

First annual general meeting of the company should be held within 9 nionths Irom the closing of the first financial year. Hence it shall not be necessary for the company to hold any annual general meeting in the year of its incorporation.

Subsequent annual general meeting of the company should be held within 6 months from the date of closing of the relevant financial year. The gap between two annual general meetings shall not exceed 15 months.

Meenakshi Mill Company Ltd. y. Assistant Registrar of Joint Stock Companies AIR 1938 In this case, the company failed to call an annual general meeling. The Company had called general meeting in December 1934 which was adjourned and held on March 1935. It was pleaded by the company that since the general meeting called on 30th December 1934, was adjourned to 31st March 1935, and was held on that date, it follows that general meeting was held in 1934 and in 1935, and the general meeting held on the 28th January 1936, was within 15 months of 31st March 1935.

It was held by the Court that the annual general meeting held in March 1935 was the adjourned meeting of 1934. There shall be a general meeting held once at least in every year, that is, one meeting per year, and as many meetings as there are years. 1935 is a separate year and distinct meeting should be held. The Company was convicted.

Conclusion
In the present case, ABC Ltd. called an AGM on 28th December 1998 and because of want of quorum, the meeting was adjourned and the meeting was held on 4th January 1999. The meeting held on 4th January 1999 was the adjourned meeting of 1998. Thus, the company must hold meeting for the financial year 1999. If it is not doing so, company can be prosecuted for not holding AGM every year.

Question 15.
Draft a specimen notice by Requisitionists convening an Extraordinary General Meeting as per annexure VII in this regard under the Companies Act, 2013.
Answer:
Following is the notice by Requisitionists convening an Extra-ordinary General Meeting:
NOTICE is hereby given that the persons named below, who are Members of ABC Ltd, having its registered office at ………… , and who have requisitioned the convening of an Extraordinary General Meeting of the Company, hereby, in exercise of the powers and rights conferred by Section 100 of ‘ the Companies Act, 2013, give notice that the said requisitioned meetings shall be held on 3rd day of June 2019, at 2 p.m. at the registered office.

For considering and, if thought fit, passing the following Ordinary/Special Resolution:
Removal Of Mr. Ram (DIN: ………) From The Post Of Director Of The Company
“Resolved That pursuant to Section 115 read with Section 169 of the Companies Act, 2013 and rules made thereunder, Mr. RAM (DIN: ………) be and is hereby removed from the office of Director of the Company with effect from the date of this meeting.”

Names of requisitionists:
1. …………………..
2. …………………..
3. …………………..
4. …………………..
By Order of the Board of Directors
For …………………..
………………….. (Signature)
Place: …………………..
Date: …………………..

………………….. (Name)

Company Secretary
(ACS/FCS No ………………….. )

Notes:
1. A Member entitled to attend and vote at the Meeting is entitled to appoint a Proxy to attend and, on a poll, to vote instead of himself and the Proxy need not be a Member of the Company. Proxies, in order to be effective, should be duly completed, stamped (if applicable) and signed and must be received at the Registered Office of the Company not less than forty-eight hours before the time fixed for the Meeting.

2. The requisition dated ………………….., referred to above, signed by the requisite number of Members in terms of Section 100 of the Companies Act, 2013, and all documents referred to in the Notice are available for inspection by any Member at the Registered. Office of the Company on any working day of the Company between the hours of 11:00 a.m. and 1:00 p.m. up to the date of this Extra-Ordinary General Meeting and at the venue of the Meeting for the duration of the Meeting.

3. Route-map to the venue of the Meeting is enclosed.

Drafting, Pleadings and Appearances Notes

Documentation and Maintenance of Records – Secretarial Audit Compliance Management and Due Diligence Important Questions

December 28, 2022

Documentation and Maintenance of Records – Secretarial Audit Compliance Management and Due Diligence Important Questions

Question 1.
What are the disadvantages of Electronic records?
Answer:
The followings are the disadvantages of Electronic Records:
Software risk : Storing records in an electronic document management system have a risk that since the system being no longer supported by the software company the company will cease to exist.

Format risk : When storing the records as an electronic record, a person run the risk of not being able to read them at some point.

Media compatibility : Maintaining images on media which the person can access at a later date is a big challenge. For example, the documents are also stored in floppy disks. But the floppy disk drive is no longer available.

Reliability : It’s a good idea to have most vital documents imaged but keeping a paper copy assures that the person have access to them anytime.

Portability : The portability is an advantage for digital images. It’s very easy to misplace or accidentally delete large amounts of data or to duplicated and transported outside of any organization.

Conversion expense : It’s very expensive to convert paper documents to digital images. The amount of labour it takes to prepare documents and analyze them so that they can be identified and indexed correctly is very large.

Question 2.
The Chairman of ABC Limited, a listed company seeks your opinion for framing a policy for preservation of documents to avoid stringent penal provisions for non-compliance of the provisions of the Companies Act, 2013 and the Rules made thereunder. Write a note to the Chairman : stating classification of documents under specific period of preservation with specific reference to the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015.
Answer:
To
The Chairman ABC Ltd.
Re: Classification of documents for period of preservation under SEBI (LODR) Regulations, 2015
Dear Sir,
The Legal Requirements of preservation of documents in accordance with the provisions of the Companies Act, 2013 and Regulation 9 of the SEBI (LODR) Regulations, 2015 are as under:
A. Documents whose preservation shall be permanent in nature:

Property records including purchase and sale deeds, licences, copy-rights, patents & trademarks.
Corporate Records including Certificate of Incorporation, Common Seal, Minutes of Board, Committee and Shareholders’ Meetings, Register of Members and other Statutory Records.
Personal files of all live employees.
Any other record as may be decided by the Chief Executive Officer of the Company from time to time.

B. Documents whose preservation period shall not be less than eight years after completion of the relevant transactions:

Books of Account, Bank Statements and vouchers.
Filings with Stock Exchanges, Registrar of Companies and other statutory authorities.
Payroll Records, Employee deduction authorisations, attendance re-cords, employee medical records, leave records, Pension and retrial related Records, etc.
Corporate Social Responsibility Records.
Sponsorship Projects Records.
Correspondence and Internal Memoranda.
Any other record as may be decided by the Chief Executive Officer of the Company from time to time.

C. Documents whose preservation shall be for a minimum period of three years after completion of the event:

Tender Documents
Lease Deeds and Contracts
Legal files
Insurance Records including policies and claims
All e-mail correspondence, internal & external
Any other record as may be decided by the Chief Executive Officer of the Company from time to time.

Documents under Secretarial Standards:

Proof of sending Notice of the meetings of the Board/Committee and General meetings and its delivery.
Proof of sending Agenda and Notes on Agenda and their delivery.
Proof of sending and delivery of the draft of the Resolution.
Proof of sending draft Minutes and its delivery.
Proof of sending signed Minutes and its delivery.

Question 3.
Draft the ‘confidentiality undertaking’ and ‘arbitration’ clauses of a non-disclosure agreement.
Answer:
Confidentiality Undertaking Clause: The Receiving Party agrees:
1. to keep confidential and not disclose to any third party, copy, reproduce reproduce, adapt, divulge, publish or circulate any part of or the whole of any Confidential Information without the prior written consent of the Disclosing Party

2. to restrict access to the Confidential Information disclosed to it under this Agreement to those of its employees and officers who need to know the same strictly for the purpose

3. not to use Confidential Information disclosed to it under this Agreement for any purpose other than the purpose

4. not to combine any part of or the whole of the Confidential Information with any other information

5. not to disclose the whole or any part of the Confidential Information to any third party without
the prior written consent of the Disclosing Party

6. prior to disclosure to such third party procuring that the third party is bound by obligations which are no less onerous than those contained in this Agreement

7. to procure that each employee -and officer to whom Confidential In-formation is disclosed under this Agreement is prior to such disclosure informed of the terms of this Agreement and agrees to be bound by them.

8. to procure that the Confidential Information in its possession is stored securely and that physical access to it is controlled.

Arbitration Clause:
1. This agreement shall be construed in accordance with and governed by the laws of India.

2. Any dispute arising in connection with or out of the performance or the interpretation of this agreement, which the parties cannot settle, shall be finally settled by arbitration. The place of arbitration shall be at …………….. The arbitration shall be governed by the provisions of the Arbitration and Conciliation Act, 1996 and the rules made there-under.

Question 4.
As a Company Secretary, prepare an information chart to be contained in for preparing a scheme of amalgamation.
Answer:
The scheme of amalgamation to be prepared by the company should contain inter alia the following information:
1. Definitions of transferor and transferee as well as the definition of the undertaking of the transferor company.

2. Authorised, issued and subscribed capital of transferor and transferee companies.

3. Basis of scheme should be explained briefly on the recommendation of valuation report, covering transfer of assets/liabilities, specified date, reduction or consolidation of capital, application to financial institutions as lead institution for permission, etc.

4. Change of name, object and accounting year.

5. Protection of employment.

6. Dividend position and prospects.

7. Management structure, indicating the number of directors of the transferee company and the transferor company.

8. Applications under sections 230 and 232 of the Companies Act, 2013 to obtain approval from the Tribunal.

9. Expenses of amalgamation.

10. Conditions of the scheme to become effective and operative and the effective date of amalgamation.
The basis of the scheme should be framed on the reports of valuers for both the merger partner companies.

11. The underlying idea is to ensure that the scheme is just and equitable to the shareholders and employees of each of the amalgamating companies and to the public at large. It should be ensured that common yardstick is adopted for valuation of shares of each of the amalgamating company for fixing rate of exchange of shares on merger.

Question 5.
What is the purpose of Documentation?
Answer:
Following are the purpose of Documentation:
Client Service : Documentation is a tool for professionals to serve better to their clients in a timely and effective manner.

Communication : Documentation is the base for better communication between professionals. Clear, complete, accurate and factual documentation provides a reliable, permanent record of client.

Accountability : Documentation indicates professional accountability and records the work of the professional. It may be used in relation to performance management, internal inquiries, regulatory proceedings and/or legal proceedings.

Professional Responsibility : Documentation is an integral part of professional practice and forms the basis for evidence of professional conduct.

Legal Requirement : Professionals are required to make and keep records of their professional work in accordance with practice standards followed and organisational policy. However, the laws mandate specific information to be recorded and maintained.

Quality : Documentation may be used to evaluate professional practice in terms of Peer reviews, Quality reviews, audits and accreditation processes, Regulatory inspections or critical incident reviews.

Research : Documentation is a valuable source of data for researchers. It provides information to professional, evaluates client outcomes and is a concise record essential for accurate research data and evidence based practice.

Resource Management : Accurate and comprehensive documentation is a priceless source of evidence and provide basis for resource management.

Question 6.
What are the guiding principles for Good Documentation?
Answer:
The guiding principles for good documentation are as under:

Clear
Concise
Complete
Contemporary
Consecutive
Correct
Comprehensive
Collaborative
Client Centric
Confidential

Question 7.
Mr. Welkinson Xu want to know few examples of poor and good documentation practices to improve his skills. List out five examples of each to help him?
Answer:
List of five examples of each as guidance for Mr. Welkinson Xu are discussed below:
Five examples of Poor Documentation:

The delegation of work is not recorded/documented.
Recording of events is not in sequence & tabled.
Document with errors, correction, not signed/dated, and didn’t include a reason for the correction.
Write-over, multiple line-through and use of “White-out” or other masking device.
Standards operating procedures as adopted by the professional is not authorised.

Five examples of Good Documentation:

Records should be completed at time of activity or when any action is taken.
Superseded documents should be retained for a specific period of time.
Concise, legible, accurate and traceable.
Clear examples.
Don’t assume knowledge.

Question 8.
What do you understand by Document Management System (DMS)? List out few advantages of DMS?
Answer:
The term “document management system” can be defined as the software that controls and organizes documents of an organization. It incorporates document and content capture, workflow, document repositories and output systems, and information retrieval systems.

Few advantages of DMS:

Ease in Audit trail.
Document Version Control.
Roll-back options/Retrieve option.
Annotation and Stamps.
Locking and unlocking of Document.
Simultaneous editing.
Tracking on check-in/check-out by various officers.

Question 9.
Discuss advantages of “Electronic Records”?
Answer:
Following are advantage of “Electronic Records”:
Cost Effective : Storing and maintaining records in digital form is much cheaper than in any other format. With the increase in the technology advancement, the Digital media costs drop every day.

Ease of use : It’s very easy to locate and share electronic documents through Computers aid searching now-a-days the process of filing doesn’t exist anymore.

Labour savings : With electronic documents all the steps like filing collating, stapling etc. can be automated and that labour completely disappears.

Search ability : Electronic documents can be made searchable by doing OCR of a document and make the whole text keyword searchable. That is not possible with paper documents.

Portability : It’s very easy to transport electronic documents. No more boxes of records and trucks and semi-trucks to haul records archives.

Version tracking : In case of the version tracking it is very easy with electronic documents, making it easy to see who has made changes to a document, when they made those and what the document looked like before the change.

Question 10.
Discuss disadvantages of “Electronic Records”?
Answer:
Following are disadvantages of “Electronic Records”:
Software risk: Storing records in an electronic document management system have a risk that the system being no longer supported by the software company. The company will cease, to exist and the documents will be locked in an unsupported system resulting in payment of conversion costs to recover them.

Format risk: When storing the records in electronic format the risk – of not being able to read them at some point exists.

Example : Some of the software are become the standard storage format now-a-days like PDF, JPEG, etc., but there is a risk that such software will cease to exist, be purchased or no longer support PDF format, and then it will be difficult in the future to read those PDF documents.

Media compatibility : Maintenance of images in a good, viable format, and have to maintain those images on media that the person can access. Overcoming those problems is always a risk with electronic documents.

Reliability : Paper is an agnostic format. All person needs to have is a light source and some eyes to be able to read paper. It’s a good idea to have most vital documents imaged, but keeping a paper copy assures that the person have access to them anytime. A person should keep a paper copy of vital documents – deeds, corporate documents-stored in a safe off-site location.

Question 11.
Difference between Virtual and Physical Data Room?
Answer:
Following are difference between Virtual and Physical Data Room as discussed below:

Basis of Distinction	Physical Data Room	Virtual Data Room
Form of documents	Papers, files, boxes or other tangible thing.	Electronic/Digital/soft copies of documents including video/audio documents.
Security of documents	Lies with the integrity of person who is in charge of the data room.	More secured through specific login id and password. In addition facilities like internet fire walls are there.
Required Time for creation of data room	Longer time required	Can be created within 48 hours once demands of prospective bidders are identified.
Convenience	Searching the documents is time consuming.	More convenient as it enables multiple bidders to review documents at the same time with search facility also.
Accessibility to data room	Restricted Timings to access data.	Data accessed any time.
Facility to restrict access of specific document	Difficult to implement any restriction	Restricted access.
Ability to Copy	Possible	Not possible always.
Cost	Cost is high because of reasons like	Cost is Low as the documents can be viewed from any location with internet security.

Question 12.
List out ten basic rules that serve as general guidelines in structuring folder and file names.
Answer:
The ten basic rules that could serve as a general guideline m structuring folder and file naming are:

Avoid extra long folder names and complex hierarchical structures but use information-rich filenames instead.
Put sufficient elements in the structure for easy retrieval and identification but do not overdo it.
Use underscore as element delimiter. Do not use spaces or other characters.
Use the hyphen to delimit words within an element or capitalize the first letter of each word within an element.
Elements should be ordered from general to specific detail of importance as much as possible.
The order of importance rule holds true when elements include date and time stamps. Dates should be ordered. Time should be ordered. Example : For Date(s): YYYYMMDD, DDMMYYYY, YYYYMM. For Time – Hour, Minutes, Seconds.
Personal names within an element should have family name first followed by first names or initials.
Abbreviate the content of elements whenever possible.
An element for version control should start with V followed by at least 2 digits and should be placed as the last most elements.
Prefix the names of the pertinent sub-folders to the file name of files that are being shared via email or portable storage devices.

Question 13.
Write Short Note on: “Key Concepts governing the care of records and archives*’.
Answer:
The care of records and archives is governed by three key concepts as follows:
1. Keeping together:

The records must be kept together according to the department/Section responsible for their creation or accumulation, in the original order established at the time of their creation.
This gives them their ‘evidential’ nature and distinguishes them from other kinds of information.
This is true for paper-based records as well as the electronic records.

2. Ensure life cycle: Every records follow a ‘life-cycle’, in that they are created, used for so long as they have continuing value and then disposed of by destruction or by transfer to an archival institution.

Every record pass through three main phases:

Current phase : In the current phase, they are used regularly in the conduct of current business and maintained in their place of origin or in the file store of an associated records office or registry.
Semi-current phase : In the semi-current phase, they are used infrequently in the conduct of current business and are maintained in a records center.
Non-current phase : In the non-current phase, they are destroyed unless they have a continuing value which merits their preservation as archives in an archival institution.

3. Record Preservation:
The care of records and archives is that the care should be managed through a coherent and consistent range of actions from the development of record-keeping systems, through the creation and preservation of records to their use as archives.

The concept suggests that four actions continue or reappear throughout the life of a record: i.e.,

Identification of records
Intellectual control
Provision of access
Physical control.

Question 14.
What are the required factors needed to be considered for preparation of the preservation and archival policy of the Company?
Answer:
The following factors need to be considered in the preparation of the preservation and archival policy of the company:
1. Analysis and Restructuring Existing Systems:

Reviewing and revising legislation and policies
Reviewing and revising organizational policies and structures
Determining resource requirements, such as facilities and staffing
Developing strategic and business plans.

2. Organizing and Controlling Records:

Building sound record-keeping systems
Managing the creation, maintenance, and use of files

3. Providing Physical Protection for Records:

Implementing and maintaining preservation measures
Developing emergency plans to protect records.
Identifying and protecting vital records.

4. Managing Records in Records Centres:

Developing and maintaining records centre facilities.
Transferring, storing, and retrieving records according to disposal schedules.
Disposing of records as indicated by the schedules.

5. Managing Archives:

Acquiring and receiving archives.
Arranging and describing archives according to archival principles.
Providing public access to the archives.

6. Supporting and Sustaining the Program:

Promoting records services to the government and the public.
Promoting education for records and archives personnel.
Developing and expanding the records and archives professions.

Question 15.
Comment on given statement: “To assure the best quality of documents, it is to be assured that sufficient records are maintained to furnish evidence of the activities affecting quality”.
Answer:
To assure the best quality of documents, it is to be assured that sufficient records are maintained to furnish evidence of the activities affecting | quality. The records should incorporate the following:

Operating logs : The names of the individuals who all have worked on the same documents.
Results of reviews : The recording of the changes suggested by each reviewer and basis of the rejection on Non-agreement.
Inspections : List of individuals who have access of the records and have inspection rights of the same.
Monitoring of work performance : Ease in the monitoring of work performed by the person to whom the file is shared.
Information analyses : Provide ease in the Information system of the organization and tracking of files.

Thus, every record must be well managed in order to ensure that they are protected for both administrative purposes and to serve as evidence of the organization’s work. .

Question 16.
List out documents whose preservation shall be permanent in nature.
Answer:
Documents whose preservation shall be permanent in nature:

Property records including purchase and sale deeds, licences, copy-rights, patents & trademarks.
Corporate Records including Certificate of Incorporation, Common Seal, Minutes of Board, Committee and Shareholders’ Meetings, Register of Members and other Statutory Records.
Personal files of all employees.
Any other record as may be decided by the Chief Executive Officer/Managing Director/Whole-time Director of the Company from time to time.

Question 17.
List out documents whose preservation shall not be less than eight years after completion of relevant transaction.
Answer:
Documents whose preservation period shall not be less than eight years after completion of the relevant transactions:

Books of Account, Bank Statements and vouchers.
Filings with Stock Exchanges, Registrar of Companies and other statutory authorities.
Payroll Records, Employee deduction authorisations, attendance re-cords, employee medical records,
leave records, Pension and retrial related records, etc.
Corporate Social Responsibility Records.
Sponsorship Projects Records.

Question 18.
List out documents whose preservation shall not be for a minimum period of three years after completion of Event.
Answer:
Documents whose preservation shall be for a minimum period of three years after completion of the event:

Tender Documents
Lease Deeds and Contracts
Legal files
Insurance Records including policies and claims.
Any other record as may be decided by the Chief Executive Officer
Managing Director/Whole-time Director of the Company from time to time.

Documents under Secretarial Standards:

Proof of sending Notice of the meetings of the Board/Committee and General meetings and its delivery.
Proof of sending Agenda and Notes on Agenda and their delivery.
Proof of sending draft Minutes of the Board/Committee and its delivery.
Proof of sending signed Minutes of the Board/Committee and its delivery.

Question 19.
What are the factors to be considered for Setting up Data Room?
Answer:
The following factors should be considered while setting up Data Room:
Humidity : An excess of humidity creates fungus and produces a proliferation of corrosive insects. The lack of humidity, on the other hand, produces brittle and fragile sheets of paper. A controlled humidity between 3096 and 4096 is the best standard for preservation.

Temperature : The lower is the temperature the better is for preservation of Records. However, suggested to maintain normal temperature in the record room which is required for comfortable standard for human beings in public places.

Light : Light has a considerable impact on document’s preservation. The visible light to the human eye along with the infrared or ultraviolet radiation could cause damages.

Question 20.
Write Short Note on: “Personal Data Protection Bill, 2019”.
Answer:
1. The Personal Data Protection Bill, 2019 was introduced in Lok Sabha by the Minister of Electronics and Information Technology, Mr. Ravi Shankar Prasad, on December 11, 2019. The Bill seeks to provide for protection of personal data of individuals and establishes Data Protection Authority for the same.

2. The Bill governs the processing of personal data by:

Government
Companies incorporated in India.
Foreign companies dealing with personal data of individuals in India.

3. The Bill allows processing of data by fiduciaries only if consent is provided by the individual. However, in certain circumstances, personal data can be processed without consent. These include:

if required by the State for providing benefits to the individual
legal proceedings
to respond to a medical emergency.

Question 21.
List three documents which are primarily considered as confidential and need complete privacy in case of any business house.
Answer:
For any business house the following three documents are primarily considered as confidential and need complete privacy:

Customer’s & Employees’ Information.
Office Plans, Office IDs and Internal Procedure Manuals.
Contracts and Commercial Documents and Trade Secretes.

Question 22.
Enumerate the procedures adopted by company for protection of confidential information.
Answer:
The Company may adopt the following procedures for protecting confidential information:

All confidential documents should be stored in locked file cabinets or rooms and these documents are accessible only to those who are having authorisation to use such documents.
All electronic confidential information should be protected via firewalls, encryption and passwords.
Employees should clear their desks of any confidential information before going home at the end of the day.
Employees should refrain from leaving confidential information visible on their computer monitors when they leave their work stations.
All confidential information, whether contained on written documents or electronically, should be marked as “confidential”.
All confidential information should be disposed off properly.
Employees should refrain from discussing confidential information in public places.
Employees should avoid using e-mail to transmit certain sensitive or controversial information.

Secretarial Audit Compliance Management and Due Diligence ICSI Study Material

CS Professional: Corporate Restructuring, Insolvency, Liquidation & Winding-Up Notes Study Material Important Questions

December 28, 2022

CS Professional: Corporate Restructuring, Insolvency, Liquidation & Winding-Up Notes Study Material Important Questions

CS Professional Corporate Restructuring Insolvency Liquidation & Winding-Up Question Paper

CS Professional Corporate Restructuring, Insolvency, Liquidation & Winding-Up Chapter Wise Weightage

Chapter Name	2019		2020
Chapter Name	June	December	December
Part I
1. Types of Corporate Restructuring	13	5	5
1A. Financial Restructuring	10	10	5
1B. Corporate Demerger	–	–	–
2. Acquisition of Company	5	8	13
3. Planning and Strategy	3	–	3
4. Process of Merger & Acquisition Transactions	5	8	5
5. Documentation	3	3	–
6. Valuation of Business and Assets	15	5	5
7. Accounting Aspects of Corporate Restructuring	–	8	3
8. Taxation & Stamp Duty Aspects	–	3	5
9. Competition Aspects	3	–	13
10. Regulatory Approvals	–	5	5
11. Appearance before NCLT/NCLAT	5	5	–
12. Fast Track Mergers	13	–	–
13. Cross Border Mergers	8	5	11
Part II
14. Insolvency Concepts	13	3	–
15. Petition for Corporate Insolvency Resolution Process	–	8	3
16. Role, Function, Duties of Insolvency Resolution Professional	3	18	5
17. Resolution Strategies	8	3	3
18. Committee of Creditors	5	–	15
19. Resolution Plan	–	–	3
20. Insolvency of Partnership Firm and Individual	3	5	5
21. Fresh Start Process	–	–	–
22. SARFAESI Act and Debt Recovery	5	3	13
23. Cross Border Insolvency	5	5	10
24. Liquidation after Insolvency Resolution Process	5	10	–
25. Voluntary Liquidation	–	5	–
26. Winding-up by the Tribunal	–	5	–

Corporate Governance and other Stakeholders – Governance, Risk Management, Compliances and Ethics Important Questions

December 28, 2022

Corporate Governance and other Stakeholders – Governance, Risk Management, Compliances and Ethics Important Questions

Question 1.
Elaborate the concept of stakeholders.
OR
What do you understand by the ‘stakeholders’ concept? Whether this concept has been recognized in law?
Answer:
In a business context, customers, investors and shareholders, employees, suppliers, government agencies, communities and many others who have a “stake” or claim in some aspect of a company’s products, operations, markets, industry and outcomes are known as “stakeholders.”

Stakeholders provide resources that are more or less critical to a firm’s long-term success. These resources may be both tangible and intangible Shareholders, for example, supply capital; suppliers offer material resources or intangible knowledge; employees and managers grant expertise leadership and commitment; customers generate revenue and provide infrastructure and the media transmits positive corporate images.

Recognition of Stakeholder Concept in Law:
The stakeholders concept has been reflected in the laws governing the corporate for a long period. The labour laws seeks to ensure fair and equitable treatment to employees, the environment protection laws seeks to ensure adoption of measures which will minimize the negative impact on environment. Tax laws give incentives in the form of tax holidays for development of backward areas. Tax benefits in the form of exemptions for donations made to recognized funds and organizations etc.

Question 2.
Write notes on the following; Stakeholder orientation.
Answer:
The degree to which a firm understands and addresses stakeholders demands can be referred to as a “stakeholder orientation”.

The orientation comprises three sets of activities:

The organization wide generation of data about stakeholder groups and assessment of the firm’s effects on these groups.
The distribution of this information throughout the firm.
The organization’s responsiveness as a whole to this intelligence.

A stakeholder orientation is not complete unless it includes activities that actually address stakeholder issues. The responsiveness of the organization as a whole to stakeholder information consists of the initiatives the firm adopts to ensure that it abides by or exceeds stakeholder expectations and has a positive impact on stakeholder issues.

Question 3.
Discuss the stakeholders’ concept stating the principles enunciated by Evans and Freeman.
Answer:
Freeman defined stakeholders as any group or individual who can affect or is affected by the achievement of the organization’s objectives. This concept was elaborated by Evan & Freeman as the following two principles:

Principles of corporate legitimacy:
The corporation should be managed for the benefit of its stakeholders: its customers, suppliers owners, employees and local communities. The rights of these groups must participate, in some sense in decisions that substantially, affect their welfare.

The stakeholder fiduciary principle:
Management bears a fiduciary relationship to-stakeholders and to the corporation as an abstract entity. It must act in the interest of the stakeholders as their agent and it must act in the interests of the – corporation to ensure the survival of the firm, safe guarding the long term stakes of each group.

Subsequently Freeman redefined stakeholder as “These groups who are vital to the survival and success of the corporation” and the principles were altered renamed:

The stakeholder enabling principle: Corporation shall be managed in the interest of stakeholders.

The principle of Director Responsibility: Directors of corporation shall have a duty of care to use reasonable judgment to define and direct the affairs of the corporation in accordance with the stakeholder enabling principle.

Question 4.
Discuss briefly the following; Stakeholder engagement.
OR
”Stakeholders engagement is an alliance building tool”. Comment
OR
How does better stakeholder engagement enables good governance. Discuss.
Answer:
Following are the key points on Stakeholder engagement :

Stakeholder engagement is an alliance-building tool.
Corporations practice stakeholder engagement in an effort to under-stand the needs of their stakeholders, create partnerships and promote dialogue.
Stakeholder engagement identifies stakeholders, assesses stakeholder needs, develops stakeholder relations plans and forms alliances with stakeholders.
Stakeholder engagement provides opportunities to further align business practices with societal needs and expeditions, helping to drive long-term sustainability and shareholder value.
Stakeholder engagement helps the organization, to compete in an increasingly complex and ever-changing business environment, while at the same time bringing about systemic change towards sustainable development.
Stakeholder engagement leads to increased transparency, responsiveness, compliance, organizational learning, quality management, accountability and sustainability.
Stakeholder engagement is a central feature of sustainability performance. In nutshell, the stakeholder’s engagement ensures good governance.

Question 5.
“Stakeholder engagement provides opportunities to further align business practices with societal needs and expectations, helping to drive long-term sustainability and shareholder value”.
In the context of this, discuss key principles of stakeholder engagement.
OR
Explain the key principles of stakeholder engagement.
Answer:
Stakeholder engagement is the process by which an organisation involves people who may be affected by the decisions it makes or can influence the implementation of its decisions.

The key principles of Stakeholders’ engagement are:

Communicate : Interactions from the various stakeholders should be promoted. The communication may be made through the print media elaborating about the progress of the company, which is also a part of the transparency and disclosure. Ensure intended message is understood and the desired response achieved.
Consult, early and often : Always ask the right questions to get the useful information and ideas. To engage their support ask them for advice and listen how they feel.
Remember, they are human : Operate with an awareness of human feelings.
Plan it : Time investment and careful planning against it, has a significant payoff.
Relationship : Try to develop trust with stakeholders.
Simple but not easy : Be empathetic. Listen to the stakeholders.
Managing risk : Stakeholders can be treated as risk and opportunities that have probabilities and impact.
Compromise : Across a set of stakeholder’s diverse priorities.
Understanding what is success : Explore the value of project to the stakeholder.
Take responsibilities : Project governance is the key of project success. It’s always the responsibilities of everyone to maintain an ongoing dialogue with stakeholders.

Question 6.
Answer the following in brief; How a better stakeholder engagement ensures good governance?
Answer:
Stakeholder engagement provides opportunities to further align business practices with societal needs and expectations, helping to drive long-term sustainability and shareholder value. Stakeholders engagement helps the organization, to compete in an increasingly complex and ever-changing business environment, while at the same time bringing about systemic change towards sustainable development.

Stakeholder engagement leads to increased transparency, responsiveness, compliance, organizational learning, quality management, accountability and sustainability. Stakeholder engagement is a central feature of sustain ability performance. In nutshell, the stakeholder’s engagement ensures good governance.

Question 7.
“Stakeholder analysis is the identification of a project’s/activity’s key stakeholders, an assessment of their interests and the ways in which these interests affect project’s riskiness and viability”. Elaborate this statement.
OR
What do you understand by stakeholder analysis?
Answer:
Stakeholder analysis is the identification of a project or activity’s key stakeholders, an assessment of their interests, and the ways in which these interests affect project’s riskiness and viability. It is linked to both institutional appraisal and social analysis: drawing on the information deriving from these approaches, but also contributing to the combining of such data in a single framework. Stakeholder analysis contributes to project design/ activity design through the logical framework, and by helping to identify appropriate forms of stakeholder participation.

Doing a stakeholder analysis can:

Draw out the interests of stakeholders in relation to the problems which the project is seeking to address (at the identification stage) or the purpose of the project (once it has started)
Identify conflicts of interests between stakeholders.
Help to identify relations between stakeholders which can be built upon, and may enable establish synergies.
Help to assess the appropriate type of participation by different stake-holders. The underlining factor in the stakeholder concept is that every activity of an organization should be based taking into account the interests of all the stakeholders. A holistic approach ensuring fairness to all the stakeholders is completely necessary for the sustainability of an enterprise.

Question 8.
“Better Stakeholder engagement ensures Good Governance”. In light of this sentence, elaborate the role of stakeholders in governance.
Answer:
Stakeholders are characterized by their relationship to the company and their needs, interests and concerns, which will be foremost in their minds at the start of an engagement process. However, as the process unfolds they soon take a particular role with related tasks and responsibilities.

The following are just some of the different roles that stakeholders can play:

Experts, such as academicians, who have been invited to contribute knowledge and strategic advice to the company’s board.
Technical advisors with expertise on the social and environmental risks associated with particular technological and scientific developments invited to sit on scientific and ethical panels in science-based industries.
Representatives of special interests, such as employees, local communities or the environment commonly invited to participate in stakeholder panels to review company performance and/or reporting practices.
Co – implementers, such as NGOs, who have partnered with the company to implement a joint solution or program to address a shared challenge.

Stakeholders can only be well informed and knowledgeable if companies are transparent and report on issues that impact stakeholders. Both parties have an obligation to communicate sincerely and attempt to understand, not just be understood.

Question 9.
Answer the following; “Stakeholder is any group of individuals which – can effect or is affected by the organization.” What are the types of stake-holders?
OR
What is understood by the term stakeholder-Enumerate the different stakeholder of any corporate entity.
Answer:
In a business context, customers, investors and shareholders, employees, suppliers, government agencies, communities and many others who have a ‘stake’ or claim in some aspect of company’s product operations, markets, industry and outcomes are known as stakeholder. These group are influenced by business, but they also have the ability to affect businesses. The stakeholders may be classified into:

Primary stakeholders – Primary stakeholders are those whose continued association is absolutely necessary for a firm’s survival; these include employees, customers, investors, and shareholders, as well as the governments and communities that provide necessary infrastructure.

Secondary stakeholders – Secondary stakeholders do not typically engage in transactions with a company and thus are not essential for its survival; these include the media, trade associations, and special interest groups.

Question 10.
Explain briefly the following: Thesis of stakeholder theory.
Answer:
Thesis in stakeholder theory is as follows:
1. Descriptive : The theory is used to describe specific corporate characteristics such as nature of the firm, the way managers think about managing, how corporations are managed or how the board members think about the interests of constituencies.

2. Instrumental : Instrumental stakeholders are defined by the need to the management to take them into account when trying to achieve their goals.

3. Normative : This approach is categorical in effect it says – ‘Do (don’t do) this because it is the right (wrong) thing to do’.

4. Broadly managerial : It recommends attitudes, structures and practices that taken together constitute stakeholder management.

Question 11.
Write a brief note on Caux Round Table (CRT).
OR
Write a note on the following; The Caux Round Table.
Answer:
The Caux Round Table (CRT) is an international network of business leaders working to promote a morally and sustainable way of doing business. The Caux Round Table was founded in 1986 by Frits Philips Sr. former President of Philips Electronics, and Olivier Giscard d’Estaing, former Vice-Chairman of
INSEAD, as a means of reducing escalating international trade tensions between Europe, Japan and the USA.

In 1994 Caux Round Table Principles for Business around three ethical foundations were formed namely:

Responsible stewardship.
The Japanese concept of Kyosei – living and working for mutual advantage.
Respecting and protecting human dignity.

These principles recognize that while laws and market forces are necessary, they are insufficient guides for responsible business conduct. The Caux Round Table believes that the world business community should play an important role in improving economic and social conditions.

Through an extensive and collaborative process in 1994, business leaders developed the CRT Principles for Business to embody the aspiration of principled business leadership. The CRT believes that its Principles for Responsible Business provide necessary foundations for a fair, free and transparent global society.

Question 12.
What are CRT Principles of responsible business? Discuss
OR
Discuss briefly the Caux Round Table (CRT) and its principles of business.
OR
“The Caux Round Table (CRT) is based on the belief that the world business community should pay an important role in improving economic and social conditions”.
In the light of this statement, enumerate the CRT general principles for business.
Answer:
The CRT Principles for Business are a worldwide vision for ethical and responsible corporate behaviour and serve as a foundation for action for business leaders worldwide.

Aim of CRT Principles:
As a statement of aspirations, the CRT Principles aim to express a world standard against which business behaviour can be measured. The Caux Round Table has sought to begin a process that identifies shared values, reconciles differing values, and thereby develops a shared perspective on business behaviour acceptable to and honoured by all.

CRT Principles for Responsible Business set forth ethical norms for acceptable businesses behaviour. The principles also have a risk management foundation because good ethics is good risk management. They balance the interests of business with the aspir ations of society to ensure sustainable and mutual prosperity for all.

Following are these principles:

Principle 1 – Respect stakeholders beyond shareholders
Principle 2 – Contribute to economic, social and environmental development
Principle 3 – Build trust by going beyond the letter of the law
Principle 4 – Respect rules and conventions
Principle 5 – Support responsible globalisation
Principle 6 – Respect the environment
Principle 7 – Avoid illicit activities

Question 13.
Explain the following statement; KYOSEI philosophy reflects a confluence of social environmental technological and political solution.
OR
The Japanese concept of KYOSEI reflects spirit of co-operation. Formulate a note on how to implement KYOSEI in an organization.
OR
What are different stages of KYOSEI?
Answer:
KYOSEI is a Japanese technique meaning “a spirit of co-operation”. In simple words, it means ‘the living and working together for the common good’. However, in broad sense it may be defined as “All people, regardless of race, religion or culture, harmoniously living and working together into the future.”

Stages of KYOSEI (Five stages)
First stage : In the first stage of KYOSEI, a company must work to secure a predictable stream of profits and to establish strong market positions. At this stage a corporate is at the stage of evolution and it is concerned with profit making and its economic survival. Stakeholder’s benefits are not a major concern area.

Second stage : From this foundation, it moves on to the second stage, in which managers and workers resolve to cooperate with one another, recognizing that both groups are vital to the company’s success. Managers and workers unite in working for the prosperity of the corporation and both have a share in the profits.

Third stage : In the third stage, this sense of cooperation is extended beyond the company to encompass customers, suppliers, community groups, and even competitors. At this stage company assumes local social responsibilities. Companies respect the interests of their own stakeholders, customers, staff, shareholders, suppliers, competitors and the local community.

Fourth stage : At the fourth stage, a company takes the cooperative spirit beyond national boundaries and addresses some of the global imbalances. At this stage company assumes global social responsibilities. It begins to take care of all its direct stakeholders, including its local community and beyond. Thus it strives to fulfil its corporate obligations on a global scale.

Fifth stage : In the fifth stage, which companies rarely achieve, a company urges its national government to work towards rectifying global imbalances. At the global level KYOSEI will address Trade imbalances, Income imbalances and Environmental imbalances by advocating political, economic and educational reform.

Question 14.
Discuss Clarkson principles of stakeholder management.
Answer:
The Clarkson Principles, which emerged from a project undertaken by the Centre for Corporate Social Performance and Ethics, are as follows:
Principle 1 : Managers should acknowledge and actively monitor the concerns of all legitimate stakeholders, and should take their interests appropriately into account in decision-making and operations.

Principle 2 : Managers should listen to and openly communicate with stakeholders about their respective concerns and contributions, and about the risks that they assume because of their involvement with the corporation.

Principle 3 : Managers should adopt processes and modes of behaviour that are sensitive to the concerns and capabilities of each stakeholder constituency.

Principle 4 : Managers should recognize the interdependence of efforts and rewards among stakeholders, and should attempt to achieve a fair distribution of the benefits and burdens of corporate activity among them, taking into account their respective risks and vulnerabilities.

Principle 5 : Manages should work cooperatively with other entities, both public and private, to insure that risks and harms arising from corporate activities are minimized and, where they cannot be avoided, appropriately compensated.

Principle 6 : Managers should avoid altogether activities that might jeopardize inalienable human rights (example the right to life) or give rise to risks which, if clearly understood, would be patently unacceptable to relevant stakeholders.

Principle 7 : Managers should acknowledge the potential conflicts between their own role as corporate stakeholders and their legal and moral responsibilities for the interests of stakeholders, and should address such conflicts through open communication, appropriate reporting and incentive systems, and, where necessary, third party review.

Question 15.
“Better stakeholders’ engagement ensures good governance.” Analyse this statement in the context of employees as stakeholders.
Answer:
“Better stakeholders’ engagement ensures good governance”. Employees are one of the important and primary stakeholders of the companies. Employees have a stake in the long-term success of the corporation. Employees possess skills and knowledge which are specific to their particular corporation. Moreover, employees care about a wide range of decisions within corporations. Stakeholder engagement leads to increased transparency, responsiveness, compliance, organizational learning, quality management, accountability and sustainability. Stakeholder engagement is a central feature of sustainability performance.

Question 16.
“Employees participation in corporate governance system can be found in many countries and corporations throughout the world”. In the light of this statement, discuss some of the important examples for ensuring good governance by employee.
Answer:
Employee participation in corporate governance systems can be found in many countries and corporations throughout the world.

Following are the some important example for ensuring good governance by employees:

Right to consultation – where employees must be consulted on certain management decisions. This right increases transparency of management decisions and allows employee opinion to ameliorate the asymmetry of information between management and the market.

Right to nominate/vote for supervisory board members – In many cases employee participation on the board is mandated. This right creates a check and balance system between management and the supervisory board, which in turn creates the perception of greater fairness.

Compensation/privatization programs that make employees holders of shares, thereby empowering employees to elect the board members, which, in turn holds management responsible.

Participation in the capital: Employees may be partner in the capital contribution. They may be given the shares under the ESOP scheme. This will create the belongingness of the ownership concept among the employees meaning there by owner as well as employee. This will lead to the Improved employee commitment and buy-in to management’s goals side by side the alignment of interest between employees and shareholders. It may support the emergence of more transparent and effective corporate governance.

Question 17.
“Organization that builds mutually strong relationship with its vendors improves its overall performance in the market price”. Discuss.
Answer:
Vendors play a key role in the success of an organisation. The organisation which builds a mutually strong relationship with its vendors improves its overall performance in the marketplace. The time, money and energy used to nurture a positive vendor relationship cannot be measured directly against the company’s bottom line. However, a well managed vendor relationship will result in increased customer satisfaction, reduced costs’ better quality, and better service from the vendor. It ultimately contributes toward the good governance of an organisation. A proper systematic approach of vendor management will benefits all the employees, organisation, customer and vendors.

Question 18.
Name any five principles laid down under German Corporate Governance Code, 2019.
Answer:
Following are the first five principles under the German Corporate Governance Code, 2019
Principle 1 : The Management Board is responsible for managing the enterprise in its own best interests. Its members are jointly accountable for managing the enterprise. The Chair or Spokesperson of the Management Board coordinates the work of the Management Board members.

Principle 2 : The Management Board develops the enterprise strategy, co-ordinates it with the Supervisory Board and ensures its implementation.

Principle 3 : The Management Board stipulates target values for the share of women in the two management levels below the Board.

Principle 4 : A responsible management of risks arising from business activities requires an appropriate and effective internal control and risk management system.

Principle 5 : The Management Board ensures that all provisions of law and internal policies are complied with, and endeavours to achieve their compliance by the enterprise.

Governance Risk Management Compliances and Ethics Notes

Corporate Governance and Shareholders Rights – Governance, Risk Management, Compliances and Ethics Important Questions

December 28, 2022

Corporate Governance and Shareholders Rights – Governance, Risk Management, Compliances and Ethics Important Questions

Question 1.
Briefly comment on the following :
i. Protection of shareholder’s rights is sacrosanct for good corporate governance.
ii. Investors relations can be referred to as ‘financial public relations’ or ‘financial communication’
Answer:
i. Protection of shareholder rights is sacrosanct for good corporate H governance. It is one of the pillars of corporate governance. For the p efficient functioning of the capital market, the fundamental requirement is that the investor rights are well protected.

The Preamble to Securities and Exchange Board of India Act, 1992 reads as under:
“An Act to provide for the establishment of a Board to, protect the interests of investors in securities and to promote the development of, and to regulate the securities market and for matters connected there with or incidental thereto.”

The central element in corporate governance is the challenges arising out of separation of ownership and control. The shareholders are the true owners of a corporate and the governance function controls the operations of the corporate. There is a strong likelihood that there is a mismatch between the expectations of the shareholders and the actions of the management. Therefore there is a need to lay down clearly the rights of the shareholders and that of the management.

In the Indian context, the SEBI Act, 1992, the various SEBI Regulations and Guidelines and the Companies Act, 2013 enables the empowerment of shareholder rights.

ii. Investor Relations (IR) is a strategic management responsibility that integrates finance, communication, marketing and securities law compliance to enable the most effective two-way communication be-tween a company, the financial community and other constituencies, which ultimately contributes to a company’s securities achieving fair valuation.

Typically, investor relation is a department or person reporting to the Chief Financial Officer. In some companies, investor relation is managed by the public relations to as “financial public relations” or “financial communications”.

Question 2.
What is meant by investor protection? Discuss the investor protection measures taken by Securities and Exchange Board of India (SEBI)
OR
Investors must be safeguarded not only against frauds and cheating but also against the losses arising out of unfair practices. What are the SEBI’s B regulations for investors’ protection in India?
Answer:
Securities and Exchange Board of India (SEBI) is the capital market S regulator and nodal agency in India who regulates the security market. One of the objectives of the SEBI is to provide a degree of protection to the investors and to safeguard their rights, steady flow of savings into market and to promote the development of and regulate the securities market. Investors should be safeguarded not only against frauds and cheating but also against the losses arising out of unfair practices. Such practices may include:

Deliberate misstatement in offer statements to investors
Price manipulations
Insider trading

SEBI has issued many guidelines and regulations to regulate the capital market and to protect the investors. Some of these guidelines are:

SEBI (Ombudsman) Regulations, 2003 – designed to redress the investor’s grievance against listed companies or intermediaries or both for amicable settlement.	SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003 – to prohibit any fraudulent and unfair Trade Practices relating to securities market.
SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009.	SEBI (Investor Protection and Education Fund) Regulations, 2009 to establish an Investor Protection and Education Fund which will be used inter-alia, for “aiding investors”
SEBI (Prohibition of Insider Trading) Regulations, 2015 – The basic objective is to prohibit persons who have more access to company’s information which can be used to benefit the individual or group of individual or agency.	SEBI has also set up a separate cell to address the grievances of investors.

Question 3.
Write short note on the following; Institutional investors.
Answer:
Institutional investors are organizations which pool large sums of money and invest those sums in companies. Their role in the economy is to act as highly specialized investors on behalf of others. In India, there are broadly the following typed of institutional investors:

Development oriented financial institutions such as IFCI, IDBI and state financial corporations.
Insurance Companies – LIC, GIC and other subsidiaries.
Banks.
All mutual funds and including UTI.
Pension Funds.

Question 4.
Highlight the role of institutional investors in promoting good corporate governance.
OR
Write short note on the following; Role of institutional investors in corporate governance.
OR
Briefly comment on the following statement; institutional investors have a crucial role to play in ensuring good corporate governance.
Answer:
Most of the reports on corporate governance have emphasized on the role of institutional investors in promoting good corporate governance. The Kumar Mangalam Birla committee on corporate governance emphasizes that the institutional shareholders can play effective role in the corporate governance system of a company because of following reasons –

Institutional shareholders have acquired a large stake in equity share capital of listed companies.
They have a special responsibility given the weightage of their votes and have a bigger role to play in corporate governance as retail investors look upon them for positive use of their voting rights.

Question 5.
“Institutional Investors play an important role in promoting good governance, however, this notion has its own pros and cons”. What are these pros and cons? Explain.
Answer:
Institutional investors are financial institutions that accept funds from third parties for investment in their own name but on such parties’ behalf. They include pension funds, mutual funds and insurance companies.

Institutional investors are organizations which pool large sums of money and invest those sums in companies. Their role in the economy is to act as highly specialized investors on behalf of others.

The Pros and Cons on the role of the institutional investors in promoting the good corporate governance may be listed as under:

Pros	Cons
The institutional investors have significant stakes in the companies and so of the voting power.	Mutual Fund Investors have the short-term vision hence their performance measurement may not be a significant evaluation in assessing the corporate governance while making the investment decision.
They are in better position to have the access of the information about the company.	The investment objectives are also a deciding factor while making the investment decision.
The stock market performance can vis-ualised with the adoption of the better corporate governance.	Institutional investors may off load the holding if there is mis-matching in their asset liability/liquidity position.
They may influence in attracting the Foreign Direct Investment in India.	A common man’s investment portfolio is affected with the decision of the in-vestment by the institutional investors.

Based on the experience of countries where shareholders activism is vibrant, such as for example Australia, France, the UK, or the United States, it is reasonable to expect that Indian institutional investor should use their ownership rights more actively.

Question 6.
How the institutional investors assess the health of a company before making the investment decision?
OR
“The institutional investors use different tools to assess the health of a company before investing resources in it”. Elaborate
OR
Describe the tools used by the institutional invertors to assess the health of a company before investing resources in it.
OR
“The institutional investors use different tools to assess the health of a company before investing of funds. Discuss some of the important tools used by the institutional investors for this purpose.
Answer:
Institutional investors use different tools to assess the health of Company before investing resources in it. Some of the important tools are discussed as under:
1. One-to-one meeting – The meetings between institutional investors and companies are extremely important as a means of communication between the two parties, and a tool to assess the health of companies. Company usually arrange such meeting with its largest institutional investors and not with other investors.

2. Voting – The right to vote can be seen as fundamental tool for some element of control by shareholders. The institutional investors can register their views by postal voting, or, vote electronically where this facility is available. By voting, institutional investors can build pressure on management of the corporation. Most of the large institutional investors now have a policy of trying to vote on all issues which may be raised at their investee company’s AGM.

3. Focus lists – A number of institutional investors have established ‘focus lists’ whereby they target under performing companies and include them on a list of companies which have under performed a main index. After being put on the focus list, the companies often receive unwanted, attention of the institutional investors who may seek to change various directors on the board.

4. Corporate governance rating systems – With the increasing emphasis on corporate governance across the globe, it is perhaps not surprising that a number of corporate governance rating systems have been developed. Some institutional investors have developed corporate governance rating systems. A corporate governance rating could be a powerful indicator of the extent to which a company currently is adding, or has the potential to add in the future, shareholders value.

Question 7.
Elucidate the following; Corporate governance rating systems.
Answer:
With the increasing emphasis on Corporate Governance across the globe, it is perhaps not surprising that a number of Corporate Governance Rating Systems have been developed such as Deminor, Standard and Poor’s, and Governance Metrics International (GMI).

Advantages of Corporate Governance ratings

It is a powerful indicator of the extent to which a company currently is adding, or has the potential to add in the future, shareholder value. This is because a company with good Corporate Governance is generally perceived as more attractive to investors than one without.
Provides a useful indication of the CG environment in specific countries, and in individual companies within those countries.
These rating systems will provide a useful “benchmarks” for the majority of investors who identify good CG with a well-run and well-managed , company.
The ratings will also be useful to Governments in identifying perceived levels of Corporate Governance in their country compared to other countries in their region, or outside it, whose companies may be competing for limited foreign investment.

Question 8.
Discuss the activities for which financial sanctions can be provided under Investor’s Education and Protection Fund.
Answer:
Schedule II to the Investor Education and Protection Fund Authority (Appointment of Chairperson and Members, holding of Meetings and provisions for Offices and Officers) Rules, 2016 stipulate the broad functional divisions of the Authority including sanctioning grants to the registered entities for seminars, programmes, projects or activities in the field of Corporate Governance, Investors’ Education and Protection fund including research activities.

Question 8(A).
The Board of directors of your company intends to formulate corporate communication policy. As a Company Secretary, you are required to prepare a qualitative note highlighting the areas on which communication policy may specifically focus.
Answer:
To
The Board of Directors ABCD Limited
Subject: Corporate Communication Policy
Dear Sir,
Corporate Communication Policy defines the role and responsibilities of the employees in the communication structure of the company.

Corporate Communication Policy may specifically focus on:
(a) Information to Employees – Internal Communications:
All the relevant information should be communicated to the employees through internal channels.

(b) Media Relations: This involves building and maintaining a positive relationship with the media.

(c) External Event: Could involve vendor/supplier/distributor meets, channel partner meetings, event related to product launches, important initiatives etc.

(d) Investor Communication: Investor relation cell can held responsible for coordinating communications with investors.

(e) Brand Management: Maj or responsibility of corporate communication is image or brand building.

(f) Legal Communication: Regulators are the external players having considered role in communication by the company. At various points communication are to be made to the stock exchange, government and judicial authorities. Secretarial and legal department may be held responsible for timely and accurate communication.

Question 9.
Answer the following; Discuss Steward Theory of Corporate Governance.
Answer:
The word ‘steward’ means a person who manages another’s property or estate. Here, the word is used in the sense of guardian in relation to a corporation. The Steward Theory of Corporate Governance is value based.

Managers and employees are to safeguard the resources of corporation and its property and interest when the owner is absent. They are like a caretaker. They have to take utmost care of the corporation. They should not use the property for their selfish ends. This theory makes use of the social approach to human nature.

The managers should manage the corporation as if it is their own corporation. They are not agents as such but occupy a position of stewards. The managers are motivated by the principal’s objective and the behaviour pattern is collective, pro-organizational and trustworthy. Thus, under this theory:

First of all values as standards are identified and formulated.
Second step is to develop training programmes that helps to achieve excellence.
Thirdly, moral support is important to fill any gaps in values.

Question 10.
Discuss briefly the following; shareholder activism.
OR
Briefly explain the following terms and their relevance to good corporate governance practices; shareholder activism.
OR
Elucidate the following; Shareholder activism.
OR
“Shareholders can ensure that the company follows good corporate governance practices and implements beneficial policies.” Discuss shareholder’s activism.
Answer:
Shareholder activism means :

Establishing dialogue with the management on issues that concern.
Influencing the corporate culture.
Using the corporate democracy provided by law.
Increasing general awareness on social and human rights issues concerning the organization.

Shareholder activism refers to the active involvement of stockholders in their organization. Active participation in company meetings is a healthy practice. They can resolve issues laid down in the annual and other general meetings and can raise concerns over financial matters or even social causes such as protection of the environment.

Shareholder activists include public pension funds, mutual funds, unions, religious institutions, universities, foundations, environmental activists and human rights groups. A share in a company is not only a share in profits but also a share in ownership. Shareholders must realize that their active participation in the company’s operations ensures:

Better Management
Less Frauds
Better Governance

Question 11.
Explain briefly the following; UN Principle Responsible Investment.
Answer:
Principles for Responsible Investment encourages investors to use responsible investment to enhance returns and better manage risks, but does not operate for its own profit; it engages with global policy makers but is not associated with any government; it is supported by, but not part of, the United Nations.

The six Principles for Responsible Investment are a voluntary and aspirational set of investment principles that offer a menu of possible actions for incorporating ESG issues into investment practice.

The Principles were developed by investors, for investors which are as follows:

Principle 1: We will incorporate ESG issues into investment analysis and decision-making processes.
Principle 2: We will be active owners and incorporate ESG issues into ownership policies and practices.
Principle 3: We will seek appropriate disclosure on ESG issues by the entities in which they invest.
Principle 4: We will promote acceptance and implementation of the Principles within the investment industry. We will promote acceptance and implementation of the Principles within the investment industry.
Principle 5: We will work together to enhance effectiveness in implementing the Principles.
Principle 6: We will each report on their activities and progress towards implementing the Principles.

Question 12.
Discuss the salient features of CalPERS. What are the main drivers of their corporate engagement programme?
Answer:
California Public Employees’ Retirement System (CalPERS) manages retirement benefits for more than 1.6 million California public employees, retirees, and their families. The corporate governance team at CalPERS challenges companies and the status quo; vote proxies; work closely with regulatory agencies to strengthen financial markets; and invest with partners that use corporate governance strategies to add value to the fund by turning around ailing companies.

As a strategy CalPERS invest in sick and ailing companies where it employs good governance practices to improvise company’s overall performance. CalPERS corporate engagement process has the overarching objective of improving alignment or interest between providers of capital and company management. It is CalPERS view that improved alignment of interest will enable the fund to fulfil its fiduciary duty to achieve sustainable risk adjusted returns.

The main drivers in the corporate engagement program are –

Financial Performance – company engagement to address persistent, relative value destruction, through the Focus List Program.
Value Related Risk – material environmental, social and governance factors, such as reputational risk, climate change, board diversity and key accountability measures such as majority voting.
Compliance – in response to State or Federal legislation.

Question 13.
“The central element in corporate governance is the challenges arising out of separation of ownership and control. The shareholders are the true owners of a corporate and the governance function controls the operations of the corporate. There is a strong likelihood that there is mismatch between the expectations of the shareholders and the actions of management”.
In the light of above statement, enumerate the core principles of accountable corporate governance.
Answer:
Following are the core principles of accountable corporate governance are-

PRINCIPLES	MEANING
Sustainability	Companies and external managers are expected to optimize operating performance, profitability and investment returns in a risk-aware manner and with a responsible conduct.
Director Accountability	Directors should be accountable to shareowners, and management accountable to directors.
Transparency	Operating, financial, and governance information about the companies must be readily transparent to permit accurate market comparisons.
One-share/One-vote	All investors must be treated equitably and upon the principle of one-share/one vote.
Proxy Materials	Proxy materials should be written in a manner designed to provide shareowners with the information necessary to make informed voting decisions.
Code of Best Practices	Code of Best Practices should be followed to promote transparency of information, prevention of harmful labor- practices, investor protection, and corporate social responsibility.
Long-term Vision	Corporate directors and management should have a long-term strategic vision that, at its core, emphasizes sustained shareowner value and effective management of both risk and opportunities in the oversight of financial, physical, and human capital.
Access to Director Nominations	Shareowners should have effective access to the director nomination process.
Political Stability	Progress toward the development of basic democratic institutions and principles, including such things as: a strong and impartial legal system; and, respect and enforcement of property and shareowner rights.

Question 14.
The big investors, FIIs etc. engages the Proxy Advisory Firms to get the important information and recommendations which lead the protection of their interest and safeguard of their fund. Prepare a brief note on reasons for engaging the Proxy Advisory Firms.
Answer:
Proxy advisory firms are independent research outfits that evaluate the pros and cons of corporate matters such as mergers, acquisitions, top appointments and CEO pay, which shareholders are expected to vote on in AGMs, EGMs or court-convened meetings.

Following are few reasons why institutional investors engage proxy advisors:
i. Proxy advisors generally offer variety of services consisting of both, analyzing the proposals at general meetings and recommending voting decisions.

ii. The recommendations of proxy advisors help the investors to obtain a more considered understanding of different agenda items and to arrive at an informed voting decision, allowing them to optimise their own limited resources and cast their votes in a timely and informed manner.

iii. Considering that institutional investors invest in multiple companies in different industry range and across the globe, it may not be feasible for those investors to have informed knowledge of the corporate governance specifications of that country and hence there may be an inability to understand the need and impact of a particular agenda item. Proxy advisors help to combat this issue as well through their informed consultancy.

iv. Apart from the above, general meetings across the globe may be concentrated during a certain period of the year and therefore the investors may not be in a position to gather information and knowledge about all the companies and hence, may not be in a position to take informed decision while voting. Proxy services firms play an important role in the proxy voting system.

v. Proxy advisers also influence boards’ decision making. They do a good job of policing the boards and governance records of the firms they track, and nudging institutional investors to take a stand on governance issues.

Question 15.
Write a brief note on the following; Promoter.
Answer:
According to Sec. 2(69) of Companies Act, 2013 a “promoter” means a person:

Who has been named as such in a prospectus or is identified by the company in the annual return referred to in section 92.
Who has control over the affairs of the company, directly or indirectly whether as a shareholder, director or otherwise.
In accordance with whose advice, directions or instructions the Board of Directors of the company is accustomed to act:

Provided that nothing in sub-clause (c) shall apply to a person who is acting merely in a professional capacity. “Control” has been defined by section 2(27) in the Companies Act, 2013 which reads as under:

“control” shall include the right to appoint majority of the directors or to control the management or policy decisions exercisable by a per¬son or persons acting individually or in concert, directly or indirectly, including by virtue of their shareholding or management rights or shareholders agreements or voting agreements or in any other manner.

Question 16.
Write a note on the following; promoter group.
Answer:
As per Regulation 2(l)(pp) of the SEBI Regulations, 2018, ‘promoter group’ includes:
1. The promoter

2. An immediate relative of the promoter (i.e. any spouse of that person, or any parent, brother, sister or child of the person or of the spouse).

3. in case promoter is a body corporate:
A. A subsidiary or holding company of such body corporate.

B. Anybody corporate in which the promoter holds twenty per cent or more of the equity share capital; and/or anybody corporate which holds twenty per cent or more of the equity share capital of the promoter.

C. Anybody corporate in which a group of individuals or companies or combinations thereof acting in concert, which hold twenty per cent or more of the equity share capital in that body corporate and such group of individuals or companies or combinations thereof also holds twenty per cent or more of the equity share capital of the issuer and are also acting in concert.

4. In case the promoter is an individual:

A. Anybody corporate in which twenty per cent or more of the equity share capital is held by the promoter or an immediate relative of the promoter or a firm or Hindu Undivided Family in which the promoter or any one or more of their relative is a member.

B. Anybody corporate in which a body corporate as provided in (A) above holds twenty per cent or more, of the equity share capital.

C. Any Hindu Undivided Family or firm in which the aggregate share of the promoter and their relatives is equal to or more than twenty per cent of the total capital.

5. All persons whose shareholding is aggregated under the heading “shareholding of the promoter group”.

Question 17.
“The IEPF Authority is entrusted with the responsibility of administration of the Investor Education Protection Fund (IEPF), make refunds of shares, unclaimed dividends, matured deposits/debentures etc. to g investors and to promote awareness among investors.” In the light of the aforesaid statement answer the following:
(i) What are the amounts credited to the fund? Name any five.
(ii) For what purposes such funds may be utilized?
Answer:
(i) As per Section 125(2) of the Companies Act, 2013, following shall be credited to the Fund :
(a) The amount given by the Central Government by way of grants after due appropriation made by Parliament by law in this behalf for being utilised for the purposes of the Fund.

(b) Donations given to the Fund by the Central Government, State Governments, companies or any other institution for the purposes of the Fund.

(d) The amount in the general revenue account of the Central Government which had been transferred to that account under sub-section (5) of section 205A of the Companies Act, 1956, as it stood immediately before the commencement of the Companies (Amendment) Act, 1999, and remaining unpaid or unclaimed on the commencement of this Act.

(e) The amount lying in the Investor Education and Protection Fund under section 205C of the Companies Act, 1956.

(f) The interest or other income received out of investments made from the Fund.

(g) The amount received under sub-section (4) of section 38.

(Note: This list is inclusive and not exhaustive)

(ii) Section 125(3) of Companies Act, 2013, provides that the Fund shall be utilised for –
a. The refund in respect of unclaimed dividends, matured deposits, matured debentures, the application money due for refund and interest thereon.

b. Promotion of investors education, awareness and protection.

c. Distribution of any disgorged amount among eligible and identifiable applicants for shares or debentures, shareholders, debenture-holders or depositors who have suffered losses due to wrong actions by any person, in accordance with the orders made by the Court which had ordered disgorgement.

d. Reimbursement of legal expenses incurred in pursuing class action suits under sections 37 and 245 by members, debenture-holders or depositors as may be sanctioned by the Tribunal.

e. Any other purpose incidental thereto, in accordance with such rules as may be prescribed.

Governance Risk Management Compliances and Ethics Notes

Accounting and Audit Related Issues, Related Party Transactions and Vigil Mechanism – Governance, Risk Management, Compliances and Ethics Important Questions

December 28, 2022

Accounting and Audit Related Issues, Related Party Transactions and Vigil Mechanism – Governance, Risk Management, Compliances and Ethics Important Questions

Question 1.
P Pvt. Ltd. was incorporated under the Companies Act, 1956 on 3rd October, 2011. The Authorised Share Capital of the Company is ₹ 75 crores. The present Paid-up Share Capital of the Company is ₹ 60 crore. The turnover of the company for financial year 2017-18 was ₹ 150 crores and because of good overseas marketability of the company’s product, the turnover of the company for the year ended 31st March, 2019 increased to ₹ 210 crores.

The Secretarial Auditor of the company advised that the company should have internal audit in place, but the Managing Director of the company argued that since it is a private company, so it is not required.

Based on the facts in the above case, answer the following questions:
i. Whether internal audit is compulsory for the Private Limited?

ii. In the above case if the company had been an Unlisted Public Limited and Turnover for year ended 31 st March, 2019 would be ₹ 190 crore, , what would have been your answer?

iii. Can Company Secretary be appointed as Internal Auditor in an Unlisted Public Company where he is already appointed as Key Managerial Personnel
Answer:
i. As per section 138 of the Companies Act, 2013 read with Rule 13(1)(c) of The Companies (Accounts) Rules, 2014 every private company having the following shall be required to appoint an internal auditor:

Turnover of two hundred crore rupees or more during the preceding financial year.
Outstanding loans or borrowings from banks or public financial institutions exceeding one hundred crore rupees or more at any point of time during the preceding financial year.

In the present case; the turnover of the P Pvt. Ltd. is higher than ₹ 200 crore, for the year ended 31st March, 2019, it is mandatory for P Pvt. Ltd. to appoint an internal auditor.

ii. As per section 138 of the Companies Act, 2013 read with Rule 13(1)

(b) of The Companies (Accounts) Rules, 2014 every unlisted public company having:
a. Paid up share capital of fifty crore rupees or more during the preceding financial year.
or
b. Turnover of two hundred crore rupees or more during the pre-ceding financial year.
or
c. Outstanding loans or borrowings from banks or public financial institutions exceeding one hundred crore rupees or more at any point of time during the preceding financial year.
or
d. Outstanding deposits of twenty five crore rupees or more at any point of time during the preceding financial year shall be required to appoint an internal auditor.

In the present case; the paid up capital of P Pvt. Ltd is higher than ₹ fifty crores, hence the company needs to appoint the internal auditor.

iii As per Section 138 of the Companies Act, 2013 an internal auditor, shall either be a chartered accountant or a cost accountant, or such other professional as may be decided by the Board.

Explanation to Rule 13 of The Companies (Accounts) Rules, 2014 states that the internal auditor may or may not be an employee of the company.

In view of the above the Company Secretary who is appointed as Key Managerial Personnel in the company can be appointed as an internal auditor of the company.

Question 2.
Apart from Statutory Audit, for some class of companies, Internal Audit is also mandatory. Which companies are required to have Internal Audit as per the provisions of the Companies Act, 2013?
Answer:
Section 138 of the Companies Act, 2013 read with Rule 13 of the Companies (Accounts) Rules, 2014 provides for the mandatory appointment of an internal auditor who shall either be a chartered accountant or a cost accountant, or such other professional as may be decided by the Board to conduct internal audit of the functions and activities for classes of company given below –

Every listed company : Every unlisted public company having –

Paid up share capital of 50 crore rupees or more during the preceding financial year; or
Turnover of 200 crore rupees or more during the preceding financial year; or
Outstanding loans or borrowings from banks or public financial institutions exceeding 100 crore rupees or more at any point of time during the preceding financial year; or
Outstanding deposits of 25 crore rupees or more at any point of time during the preceding financial year.

Every private company having –

Turnover of 200 crore rupees or more during the preceding financial year; or
Outstanding loans or borrowings from banks or public financial institutions exceeding 100 crore rupees or more at any point of time during the preceding financial year.

Question 3.
M Pvt. Ltd. was registered in the year 2001 as a Private Limited Company and continuing with the same status. It is having a paid-up share capital of ₹ 65 crore as on 31st March, 2019. The present company’s auditor, X, Chartered Accountant, (a Proprietor Firm) who was appointed as auditor of the company in the year 2014. The term of the said auditor is going to expire and company wants to re-appoint the same person, since he is having well acquaintance with the company’s officials and its working.

Based on the above facts, answer the following questions :
i. Whether X can be reappointed as Statutory Auditor of the Company?

ii. In the above case if, instead of the Individual Person as an auditor, the company would have appointed any Firm of Chartered Accountants, and now the tenure of the said firm is expiring, whether this firm is eligible for reappointment?

iii. In the given case, if the paid-up capital of the company is ₹ 5 crore and having cash credit limit and term loan facility from a bank to the tune of ₹ 55 crore, what would have been your answer?
Answer:
i. As per Section 139(2) of the Companies Act, 2013 read with Rule 5(b) of the Companies (Audit and Auditors) Rules, 2014:

All private limited companies having paid up share capital of rupees fifty crore or more shall not appoint or re-appoint:

An individual as auditor for more than one term of five consecutive years’.
An audit firm as auditor for more than two terms of five consecutive years.

Cooling off period – An individual auditor who has completed his term of five consecutive years shall not be eligible for re-appointment as auditor in the same company for five years from the completion of his term.

Conclusion – In the present case as the paid up share capital of the company is more than ₹ 50 Crore, Mr. X cannot be appointed as Statutory Auditor for the second term.

ii. As per Section 139(2) of the Companies Act, 2013 read with Rule 5 of the Companies (Audit and Auditors) Rules, 2014:
All private limited companies having paid up share capital of rupees fifty crore or more shall not appoint or re-appoint:

An individual as auditor for more than one term of five consecutive years.
An audit firm as auditor for more than two terms of five consecutive years.

Cooling off period:

An audit firm which has completed its term shall not be eligible for re-appointment as auditor in the same company for five years from the completion of such term:
Provided further that as on the date of appointment no audit firm having a common partner or partners to the other audit firm, whose tenure has expired in a company immediately preceding the financial year, shall be appointed as auditor of the same company for a period of five years.

Conclusion:
In the present case, the firm of Chartered Accountants will not be eligible for the reappointment for five years on the completion of the term.

iii. In the present case the company is having paid up share capital of ₹ 5 crore i.e. within the threshold limit of ₹ 50 crore, however, since the company has borrowing facility from a bank of ₹ 55 crores (i.e. exceeding the threshold limits of ₹ 50 crores), the company cannot re-appoint X as its auditor.

Question 4.
Answer the following in brief; Briefly explain the role of due diligence report in helping to curb occurrence of related party transactions.
Answer:
Section 188(1) of Companies Act, 2013 provides that except with the consent of the Board of Directors given by a resolution at a meeting of the Board and subject to such conditions as may be prescribed, no company shall enter into any contract or arrangement with a related party with respect to

Sale, purchase or supply of any goods or materials
Selling or otherwise disposing of, or buying, property of any kind
Leasing of property of any kind .
Availing or rendering of any services
Appointment of any agent for purchase or sale of goods, materials, services or property
Related party’s appointment to any office or place of profit in the company, its subsidiary company or associate company
Underwriting the subscription of any securities or derivatives thereof, of the company

Hence Due Diligence Report of such transactions has its own importance. Due diligence report is system of curbing related party transactions from occurring. Audit committee should seek a due diligence report with regard to all proposed material transactions which should highlight potential conflict of interest.

Therefore, the companies should have well articulated policies specifying that transactions beyond a certain threshold limits and transactions of certain nature would require a pre-clearance from the audit committee.

Question 5.
Under the Energy Department, Govt, of Tamil Nadu, three Companies as Government Company were incorporated as below:

A Ltd. for Generation of Electricity
B Ltd. for Transmission of Electricity
C Ltd. for Distribution of Electricity

Further, three subsidiaries namely X Ltd., Y Ltd. and Z Ltd. were incorporated as wholly owned subsidiary companies of C Ltd. C Ltd. purchases the Power (Electricity) from A Ltd. and sell all Power to subsidiary Companies, Subsidiary Company through B Ltd. distributes the Power in the State. Apart from that, C Ltd. also purchases cables from manufacturer and sells it to Subsidiary Companies with margin of 5% on sale price. In the power supply, C Ltd. also charge 0.05 paisa per unit as service charge from Subsidiary Companies.

During the Audit, Auditors raised the question that there are lot of related party transactions and directors and members are same in all the Companies. Further, Chairman is also common. Neither the Board nor the Members of the Company approved any transaction which comes under the definition of Related Party Transaction. The Company Secretary replied that the transactions are preapproved by Energy Department, Govt, of Tamil Nadu but Auditor is dissatisfied with this reply.

In such situation, check the validity of the transactions between related parties.
Answer:
Following are the legal provisions of Related party transactions :
1. All related party transactions require the approval of the Audit Committee as per section 177 of the Companies Act, 2013 except to a transaction, referred to in section 188 of the Companies Act, 2013, between a holding company and its wholly owned subsidiary company, as stated under fourth proviso to section 177(4) of the Companies Act, 2013. Up to certain limits, the approval of the Board is required and above the limits, approval of the members must be taken.

2. As per proviso two of section 188(1) of the Companies Act, 2013 member of the company shall not vote where he is related party. However as per proviso three of section 188(1) of the Companies Act, 2013, if 9096 or more members are related party, members can vote. As per proviso four of section 188(1) of the Companies Act, 2013, the approval of the Board is not required where the transactions are on arms length basis in ordinary course of business.

3. Further, as per proviso five of section 188(1) of the Companies Act, 2013, the approval of members is not required in case of transaction between holding and wholly owned subsidiary.

As per the exemption notification dated 5th June, 2015 issued by Ministry of Corporate Affairs, the first and second proviso to sub-section( 1) to section 188 of the Companies Act, 2013 shall not apply to:

A Government Company where the contracts/arrangements to be entered into by it with any other Government Company.
A Government company (other than a listed company), in respect of contracts/arrangements other than those mentioned in (a) above, if it has obtained approval of the administrative ministry of the concerned Central/State Government.

Conclusion In this case, C Ltd., being a Government company has entered into the following transactions:

Purchase of power from A Ltd. (Government Company)
Sale of power to subsidiary companies ( all Government companies, as they are subsidiaries of a Government company)
X Ltd, Y Ltd. and Z Ltd. (wholly owned subsidiaries, being Government companies) distribute power through B Ltd. (Government company)
Purchase of cables from a manufacturer and sale to its Subsidiary – companies (Government companies)
Levy of service charges at 0.05 paise per unit on its Subsidiary companies (Government companies)

Therefore, in the present case, assuming that the transactions are at arm’s length and in the ordinary course of business, neither the approval of the Board nor the members of the company is required and the related party transactions would be valid.

Question 6.
Write short note on the following; related party transactions.
OR
“Related party transactions have always been viewed with the concern”.
In this context, briefly narrate the changes made under the Companies Act, 2013.
OR
What do you mean by ‘related party transaction’? What are the provisions of listing agreement related to monitoring of related party transactions?
Answer:
Regulation 2(1)(zc) of SEBI (LODR) Regulations, 2015, defines related party transaction a transfer of resources, services or obligations between a listed entity and a related party, regardless of whether a price is charged and a “transaction” with a related party shall be construed to include a single transaction or a group of transactions.

Regulation 23 of SEBI (LODR) Regulations, 2015 provides for monitoring of related party transactions:
1. The listed entity shall formulate a policy on materiality of related party transactions and on dealing with related party transactions.

2. Approval of Audit Committee: All related party transactions shall require prior approval of the audit committee.

3. Omnibus approval: Audit committee may grant omnibus approval for related party transactions proposed to be entered into by the listed entity subject to the following conditions-

a. The audit committee shall lay down the criteria for granting the omnibus approval in line with the policy on related party trans-actions of the listed entity and such approval shall be applicable in respect of transactions which are repetitive in nature.

b. The audit committee shall satisfy itself regarding the need for such omnibus approval and that such approval is in the interest of the listed entity.

c. The omnibus approval shall specify:

The name(s) of the related party, nature of transaction, period of transaction, maximum amount of transactions that shall be entered into.
The indicative base price/current contracted price and the formula for variation in the price if any.
Such other conditions as the audit committee may deem fit provided where the need for related party transaction cannot be foreseen and aforesaid details are not available, audit committee may grant omnibus approval for such transactions subject to their value not exceeding rupees one crore per transaction.

d. The audit committee shall review, at least on a quarterly basis, the details of related party transactions entered into by the listed entity pursuant to each of the omnibus approvals given.

e. Such omnibus approvals shall be valid for a period not exceeding one year and shall require fresh approvals after the expiry of one year.

4. Approval of the shareholders: All material related party transactions shall require approval of the shareholders through resolution and the related parties shall abstain from voting on such resolutions whether the entity is a related party to the particular transaction or not.

5. Exemptions: The provisions of sub-regulations (2), (3) and (4) shall not be applicable in the following cases:

Transactions entered into between two government companies.
Transactions – entered into between a holding company and its wholly owned subsidiary whose accounts are consolidated with such holding company and placed before the shareholders at the general meeting for approval.

Question 7.
Secretarial audit is a process to check compliance with provisions of all applicable laws and rules regulations procedures. Elaborate and discuss provisions of the Companies Act, 2013 with regard to Secretarial Audit.
Answer:
As per section 204(1) of Companies Act, 2013 read with Rule 9 of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014, the following companies are required to obtain

Secretarial Audit Report:

Every listed company
Every public company having a paid-up share capital of fifty crore rupees or more
Every public company having a turnover of two hundred fifty crore rupees or more.
Every company having outstanding loans or borrowings from banks or public financial institutions of one hundred crore rupees or more.

Circular dated February 8, 2019 specifies that while the annual secretarial audit shall cover a broad check on compliance with all laws applicable to the entity, listed entities shall additionally, on an annual basis, require a check by the PCS on compliance of all applicable SEBI Regulations and circulars/guidelines issued thereunder, consequent to which, the PCS shall submit a report to the listed entity in the manner specified in this circular.

Question 8.
“The NFRA is an independent regulator established under Section 132 of the Companies Act, 2013 to oversee the auditing profession”. Discuss.
Answer:
The NFRA is an independent regulator established under Section 132 of the Companies Act, 2013 to oversee the auditing profession. The NFRA has been established as an independent regulators for enforcement of auditing standards and ensuring the quality of audits to strengthen the independence of audit firms and therefore enhance investor and public confidence in financial disclosures of companies. The powers and functions of NFRA are majorly pertaining to oversee the auditing profession that may be studied under the following points –
1. To investigate either suo-motu or on a reference made by the Central Government in matters of professional misconduct committed by any member or Chartered Accountants firm.

2. To make recommendations to the Central Government on formulation and laying down of accounting standards and auditing policies for adoption by companies or their auditors.

3. To monitor and implement compliance relating to accounting standards and auditing policies as prescribed.

4. To oversee the quality of service of professions associated with compliance of accounting standards and auditing policies and suggest measures for improvement.

5. NFRA shall have equivalent powers as a civil court under the Code of Civil Procedure, 1908. It can exercise the powers related to:

dis-covery and production of books or other documents as specified by NFRA
summoning and enforcing the attendance of persons and examining them on oath
inspection of books, registers and other documents of any person
issuing commissions for examination of witness or other documents.

6. NFRA may impose penalties:

Not less than one lakh rupees which may extend up to five times of the fees received in case of individuals
Not less than ten lakh rupees which may extend up to ten times of the fees received in case of firms.

7. NFRA may consider an investigation based on monitoring and com-pliance review of auditor or audit firm upon recommendations by Member- Accounting and Member- Auditing.

(Note: This list is inclusive and not exhaustive)

Question 9.
Write short notes on the following; Whistle blower mechanism.
Answer:
Every listed company and the companies belonging to the following class or classes shall establish a vigil mechanism for their directors and employees to report their genuine concerns or grievances :

The Companies which accept deposits from the public.
The Companies which have borrowed money from banks and public I financial institutions in excess of fifty crore rupees.

Question 10.
You are a company secretary of a listed company. The company has i borrowings from the Banks/FIs worth Rs. 75 crores, which is in the form of Term Loan and Working Capital Finance. You noticed that the company is not having Vigil Mechanism in place. Suggest the suitable strategy to the Board for establishment of Vigil Mechanism in the company quoting the relevant provisions of the Companies Act, 2013 and SEBI (LODR) Regulations, 2015.
Answer:
Vigil Mechanism under Companies Act, 2013 –
Section 177(9) of the Companies Act, 2013 provides that every listed company or such class or classes of companies, as may be prescribed, shall establish a vigil mechanism for directors and employees to report genuine concerns in such manner as may be prescribed.

Rule 7 of the Companies (Meetings of Board and its Powers) Rules, 2014 provides that every listed company and the companies belonging to the following class or classes shall establish a vigil mechanism for their directors and employees to report their genuine concerns or grievances:

The Companies which accept deposits from the public.
The Companies which have borrowed money from banks and public financial institutions in excess of fifty crore rupees.

Vigil mechanism under SEBI (Listing Obligations and Disclosure Regulations), 2015
Regulation 22 of SEBI (LODR) Regulations, 2015 provides that every listed entity shall establish a vigil mechanism for directors and employees to report concerns about unethical behaviour, actual or suspected fraud or violation of the listed entity code of conduct or ethics policy

Conclusion:
Since the company is a listed company, it should establish vigil mechanism as per both Section 177(9) of the Companies Act, 2013 and SEBI (LODR) Regulations, 2015 with following provisions :

The audit committee shall oversee the vigil mechanism through the committee and if any of the members of the committee have a con-flict of interest in a given case, they should recuse themselves and the others on the committee would deal with the matter on hand.

The vigil mechanism shall provide for adequate safeguards against victimisation of employees and directors who avail of the vigil mechanism and also provide for direct access to the Chairperson of the Audit Committee or the director nominated to play the role of Audit Committee, as the case may be, in exceptional cases.

In case of repeated frivolous complaints being filed by a director or an employee, the audit committee or the director nominated to play the role of audit committee may take suitable action against the con-cerned director or employee including reprimand.

The details of establishment of such mechanism shall be disclosed by the listed entity on its website and in the Board’s report.

Question 11.
Write a note on the following; Functions and duties of NFRA.
Answer:
Following are the function & duties of NFRA as per section 132(2) of Companies Act 2013.

Maintain details of particulars of auditors appointed in the companies and bodies corporate specified in rule 3 of NFRA Rules.
Recommend accounting standards and auditing standards for approval by the Central Government.
Monitor and enforce compliance with accounting standards and auditing standards.
Oversee the quality of service of the professions associated with ensuring compliance with such standards and suggest measures for improvement in the quality of service.
Promote awareness in relation to the compliance of accounting standards and auditing standards.
Co-operate with national and international organisations of independent audit regulators in establishing and overseeing adherence to accounting standards and auditing standards.
Perform such other functions and duties as may be necessary or incidental to the aforesaid functions and duties.

Question 12.
Briefly explain the following; Powers of NFRA under section 132 of Companies Act, 2013.
Answer:
Section 132(4) of Companies Act, 2013 states that notwithstanding anything contained in any other law for the time being in force, the National Financial Reporting Authority shall –

a. Have the power to investigate, either suo motoor on a reference made to it by the Central Government, for such class of bodies corporate or persons, in such manner as may be prescribed into the matters of professional or other misconduct committed by any member or firm of chartered accountants, registered under the Chartered Accountants Act, 1949:

Provided that no other institute or body shall initiate or continue any proceedings in such matters of misconduct where the National Financial Reporting Authority has initiated an investigation under this section.

b. Have the same powers as are vested in a civil court under the Code of Civil Procedure, 1908, while trying a suit, in respect of the following matters, namely:

Discovery and production of books of account and other documents, at such place and at such time as may be specified by the National Financial Reporting Authority.
Summoning and enforcing the attendance of persons and examining them on oath.
Inspection of any books, registers and other documents of any person referred to in clause (b) at any place.
Issuing commissions for examination of witnesses or documents.

c. Where professional or other misconduct is proved, have the power to make order for –

Imposing penalty
Debarring the member or the firm being appointed as an auditor or internal auditor or undertaking any audit in respect of financial statements or internal audit of the functions and activities of any company or body corporate or performing any valuation as provided under section 247.

For a minimum period of six months or such higher period not exceeding ten years as may be determined by the National Financial Reporting Authority.

Question 13.
Write a note on the following; Types of Whistle blowers.
Answer:
Following are the types of whistle blowers:
1. Internal : When the whistle blower reports the wrong doings to the officials at higher position in the organization. The usual subjects of internal whistle blowing are disloyalty, improper conduct, indiscipline, insubordination, disobedience etc.

2. External : Where the wrongdoings are reported to the people outside the organization like media, public interest groups or enforcement agencies it is called external whistle blowing.

3. Alumini : When the whistle blowing is done by the former employee of the organization it is called alumini whistle blowing.

4. Open : When the identity of the whistle blower is revealed, it is called Open Whistle Blowing.

5. Personal : Where the organizational wrongdoings are to harm one person only, disclosing such wrong doings it is called personal whistle blowing.

6. Impersonal : When the wrong doing is to harm others, it is called impersonal whistle blowing.

7. Government : When a disclosure is made about wrong doings or unethical practices adopted by the officials of the Government.

8. Corporate: When a disclosure is made about the wrongdoings in a business corporation, it is called corporate whistle blowing.

Question 14.
Write a note on the following: Whistle Blowing under Sarbanes-Oxley Act, 2002 (SOX).
Answer:
Section 302 of Sarbanes Oxley Act of 2002, an Act enacted by U.S. congress to protect investors by improving the accuracy and reliability of corporate disclosures made pursuant to the securities laws, and for other purposes contains following provisions for whistle blowers:

Make it illegal to “discharge, demote, suspend, threaten, harass or in any manner discriminate against” whistle blowers.
Establish criminal penalties of up to 10 years for executives who re-taliate against whistle blowers.
Require board audit committees to establish procedures for hearing whistle blower complaints.
Allow the secretary of labour to order a company to rehire a terminated employee with no court hearing.
Give a whistleblower the right to a jury trial, bypassing months or years of administrative hearings.

Question 5.
Briefly explain, Vigil mechanism under SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015.
Answer:
Following are the provisions of Vigil mechanism under SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015:
1. The listed entity shall formulate a vigil mechanism for directors and employees to report genuine concerns. [Regulation 22(1)]

2. The vigil mechanism shall provide for adequate safeguards against victimization of director(s) or employee(x) or any other person who avail the mechanism and also provide for direct access to the chair-person of the audit committee in appropriate or exceptional cases. [Regulation 22(2)]

3. The listed entity shall disseminate the details of establishment of vigil mechanism/Whistle Blower policy.

4. The disclosure regarding the details of establishment of vigil mechanism, whistle blower policy, and affirmation that no personnel has been denied access to the audit committee shall be made in the section on the corporate governance of the annual report.

Governance Risk Management Compliances and Ethics Notes

Corporate Policies and Disclosures – Governance, Risk Management, Compliances and Ethics Important Questions

December 28, 2022

Corporate Policies and Disclosures – Governance, Risk Management, Compliances and Ethics Important Questions

Question 1.
Write short note on the following; Continual disclosure.
Answer:
According to Regulation 30 of the SEBI (SAST) Regulation, 2011:
1. Every person, who together with persons acting in concert with him, holds shares or voting rights entitling him to exercise twenty-five per cent or more of the voting rights in a target company, shall disclose their aggregate shareholding and voting rights as of the thirty-first day of March, in such target company in the prescribed format.

2. The promoter of every target company shall together with persons acting in concert with him, disclose their aggregate shareholding and voting rights as of the thirty-first day of March, m such target company in such form as may be specified.

3. The disclosures required under sub-regulations (1) and (2) shall be made within seven working days from the end of each financial year to:

Every stock exchange where the shares of the target company are listed.
The target company at its registered office.

Question 2.
What are the guidelines provided in the Listing Obligation and Dis-closure Requirements (LODR) Rules, 2015 related to annual report of companies?
Answer:
Regulation 34 of the SEBI (LODR) Regulations, 2015 provides that the listed entity shall submit the annual report to the stock exchange within twenty one working days of it being approved and adopted in the annual general meeting as per the provisions of the Companies Act, 2013.

The annual report shall contain the following:
a. Audited financial statements i e. balance sheets, profit and loss accounts etc., and Statement on Impact of Audit Qualifications as stipulated in regulation 33(3)(d), if applicable.

b. Consolidated financial statements audited by its statutory auditors.

c. Cash flow statement presented only under the indirect method as prescribed in Accounting Standard-3 or Indian Accounting Standard 7, as applicable, specified in Section 133 of the Companies Act, 2013 read with relevant rules framed thereunder or as specified by the Institute of Chartered Accountants of India, whichever is applicable.

d. Directors report

e. Management discussion and analysis report – either as a part of directors report or addition thereto.

f. Business Responsibility Reports describing the initiatives taken by them from an environmental, social and governance perspective, in the format as specified by the Board from time to time by the top one thousand listed entities based on market capitalization (calculated as on March 31 of every financial year).

Provided that listed entities other than top one thousand listed companies based on market capitalization and listed entities which have – listed their specified securities on SME Exchange, may include these business responsibility reports on a voluntary basis in the format as specified. [SEBI (LODR) (Fifth Amendment) Regulations, 2019]

Additional Disclosures in Annual Report:
The annual report shall contain any other disclosures specified in the Companies Act, 2013 along with the following additional disclosures as specified in Schedule V:-

Related Party Disclosure
Management Discussion and Analysis
Corporate Governance Report
Declaration signed by the chief executive officer stating that the members of board of directors and senior management personnel have affirmed compliance with the code of conduct of board of directors and senior management.
Compliance certificate from either auditors or practicing company secretaries regarding compliance of conditions of corporate governance be annexed with the directors’ report.
Disclosures with respect to demat suspense account/unclaimed suspense account.

Question 3.
You are Company Secretary of a listed company. You have been asked to prepare report on corporate governance to be included in the annual report of the company. Briefly explain the major contents of such report.
Answer:
The following disclosures shall be made in the section on the corporate governance of the annual report:
1. A brief statement on listed entity’s philosophy on code of governance.

2. Board of directors : Composition and category of directors, attendance, number of other board of directors, Disclosure of relationships between directors etc.

3. Audit committee: Brief description of terms of reference, composition, name of members and chairperson, Meetings and attendance during the year.

4. Nomination and Remuneration Committee: Brief description of terms of reference, composition, name of members and chairperson, meeting and attendance during
the year, performance evaluation criteria for independent directors.

5. Remuneration of Directors: Criteria of making payments to non-executive directors, alternatively, this may be disseminated on the listed entity’s website and reference drawn thereto in the annual report.

6. Stakeholders’ grievance committee: Name of non-executive director heading the committee, Name and designation of compliance officer, No. of shareholders’ complaints received so far, No. of pending complaints.

7. General body meetings: Location and time, where last three annual general meetings held, whether any special resolutions passed in the previous three annual general meetings or through postal ballot, details of voting pattern, person who conducted the postal ballot exercise etc.

8. Means of communication: Quarterly results, newspapers wherein results normally published, Any website, where displayed, Whether it also displays official news releases, presentations made to institutional investors or to the analysts etc.

9. General shareholder information: Annual general meeting – date, time and venue, financial year, dividend payment date, stock code, market price data- high, low during each month in last financial year.

10. Other Disclosures: Web link where policy for determining ‘material’ subsidiaries is disclosed.

Question 4.
Discuss provisions relating to prior intimation of Board meeting to Stock Exchange as per SEBI (LODR) Regulations, 2015.
Answer:
As per Regulation 29 of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, a listed entity shall give prior intimation to stock exchange about the meeting of the board of directors in the following manner:
A. At least two working days in advance, excluding the date of the intimation and date of the meeting in which any of the following proposals is due to be considered:

Proposal for buyback of securities.
Proposal for voluntary delisting by the listed entity from the stock exchange.
Fund raising by way of further public offer, rights issue, American Depository Receipts/Global Depository Receipts/Foreign Currency Convertible Bonds, or any other method and for determination of issue price.
Declaration/recommendation of dividend, issue of convertible securities including convertible debentures or of debentures carrying a right to subscribe to equity shares or the passing over of dividend.
The proposal for declaration of bonus securities where such proposal is communicated to the board of directors of the listed entity as part of the agenda papers.

B. At least five days in advance excluding the date of the intimation and date of the meeting in which following proposal is due to be considered:

Financial results viz. quarterly, half yearly, or annual, as the case may be; (the intimation shall include the date of such meeting of board of directors also)

C. At least eleven working days before any of the following proposal is placed before the board of directors:

Any alteration in the form or nature of any of its securities that are listed on the stock exchange or in the rights or privileges of the holders thereof.
Any alteration in the date on which, the interest on debentures or bonds, or the redemption amount of redeemable shares or of debentures or bonds, shall be payable.

Question 5.
What are the Financial Information which are required to be disclosed on website of the company as per Regulation 46 of SEBI (LODR) Regulations, 2015?
Answer:
The listed entity shall maintain a functional website containing the basic information about the listed entity. The listed entity shall disseminate the following financial information under a separate section on its website:
i. Financial information including:

Notice of meeting of the board of directors where financial results shall be discussed.
Financial results, on conclusion of the meeting of the board of directors where the financial results were approved.
Complete copy of the annual report including balance sheet, profit and loss account, directors report, corporate governance g report etc.

ii Shareholding pattern.

iii. Details of agreements entered into with the media companies and/or their associates, etc.

iv. Schedule of analyst or institutional investor meet and presentations made by the listed entity to analysts or institutional investors simultaneously with submission to stock exchange.

v. New name and the old name of the listed entity for a continuous period of one year, from the date of the last name change.

vi. With effect from October 1, 2018, all credit ratings obtained by the entity for all its outstanding instruments, updated immediately as and when there is any revision in any of the ratings.

vii. Separate audited financial statements of each subsidiary of the listed entity in respect of a relevant financial year, uploaded at least 21 days prior to the date of the annual general meeting which has been called to inter alia consider accounts of that financial year.

The listed entity shall ensure that the contents of the website are correct. The listed entity shall update any change in the content of its website within two working days
from the date of such change in content.

Question 6.
To protect the interest of the Stakeholders, SEBI has taken various initiatives and Code of Fair Disclosure is one of the important steps under Regulation 8 of SEBI (Prohibition of Insider Trading) Regulations, 2015. Prepare a note on Code of Fair Disclosure. [December 2019, 5 Marks]
Answer:
As per Code of Fair Disclosure under Regulation 8 of Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 2015:

1. The board of directors of every company, whose securities are listed on a stock exchange, shall formulate and publish on its official website, a code of practices and procedures for fair disclosure of unpublished price sensitive information that it would follow in order to adhere to each of the principles set out in Schedule A to these regulations, without diluting the provisions of these regulations in any manner.

2. Every such code of practices and procedures for fair disclosure of unpublished price sensitive information and every amendment thereto shall be promptly intimated to the stock exchanges where the securities are listed. The board of directors of a listed company shall make a policy for determination of “legitimate purposes” as a part of “Codes of Fair Disclosure and Conduct” formulated under Regulation 8.

Principles of Fair Disclosure for purposes of Code of Practices and Procedures for Fair Disclosure of Unpublished Price Sensitive Information, Regulation 8(1) are as under:

1. Prompt public disclosure of unpublished price sensitive information that would impact price discovery no sooner than credible and concrete information comes into being in order to make such information generally available.

2. Uniform and universal dissemination of unpublished price sensitive information to avoid selective disclosure.

3. Designation of a senior officer as a chief investor relations officer to deal with dissemination of information and disclosure of unpublished price sensitive information.

4. Prompt dissemination of unpublished price sensitive information that gets disclosed selectively, inadvertently or otherwise to make such information generally available.

5. Appropriate and fair response to queries on news reports and requests for verification of market rumours by regulatory authorities.

6. Ensuring that information shared with analysts and research personnel is not unpublished price sensitive information.

7. Developing best practices to make transcripts or records of proceedings of meetings with analysts and other investor relations conferences on the official website to ensure official confirmation and documentation of disclosures made.

8. Handling of all unpublished price sensitive information on a need-to-know basis.

Question 7.
ABC Ltd. is a public limited company listed on NSE and BSE. The company is enjoying cash credit limit of ₹ 10 crores with Trust Bank against the book debts. The said cash credit limit is renewed from time to time and for this purpose the Trust Bank requires the financial papers from the company which include the Balance Sheet and Profit and Loss Account, list of sundry debtors (with age-wise outstanding) and projected financial data viz: Turnover, Profit, Non-performing debtors etc.

The company was in the process of the finalisation of its annual accounts as of 31st March, 2018 and the same was to be put before the Audit Com-mittee of Board (ACB), meeting of which was schedule to be held on 5th July, 2018, for recommendation to the Board of Directors. The CC limit with the Trust Bank which was due for renewal from 31st March, 2018, renewed on ad-hoc basis for three months only on the basis of provisional data, subject to the submission of final papers, else the CC limit account of the company will turned in to non-performing account.

Since the Trust Bank also wants the CC Limit account in performing status, it insisted the company to submit the final data even before the approval of the ACB/ Board in order to renew the limit and prevent the account from turning into NPA.

Based on the above facts the Company approaches you, being a Corporate Law Consultant.
Answer the following queries raised by the ABC Ltd :
(i) Whether HP Ltd. can provide the financial information (which is price sensitive information) to its banker without getting it perused and approved by the ACB and Board? Quote your answer with relevant provisions of law.

(ii) If the Manager of the Trust Bank Branch, where the CC Limit account is maintained, is provided the unapproved financial papers and on the basis of these financial papers, he comes to know that company has shown profit with a rise of 20% from the previous year, so he pur-chased the shares of the company from the market with lesser price (in expectation of high jump in price after declaration of the result).

When the results were officially declared by the company, the shares jumped to 30% and the branch manager off loaded the purchases so made. Whether the Manager will be treated as Insider as per the SEBI (Prohibition of Insider Trading) Regulations, 2015?

(iii) What are the provisions relating to the trading when a person is in possession of unpublished price sensitive information as per the SEBI (Prohibition of Insider Trading) Regulations, 2015?

(xv) What are the penal provisions for insider trading as prescribed in the Companies Act, 2013 and SEBI Act, 1992.
Answer:
(i) In terms of Sub-Regulation (1) of Regulation 3 of SEBI (Prohibition of Insider Trading) Regulations, 2015, no insider shall communicate, provide, or allow access to any unpublished price sensitive information, relating to a company or securities listed or proposed to be listed, to any person including other insiders except where such communication is in furtherance of legitimate purposes, performance of duties or discharge of legal obligations.

Sub-Regulation (2) of Regulation 3 states that no person shall pro-cure from or cause the communication by any insider of unpublished price sensitive information relating to a company or securities listed or proposed to be listed, except in furtherance of legitimate purposes, performance of duties or discharge of legal obligations.

Sub-Regulation (2A) of Regulation 3 provides that the board of directors of a listed company shall make a policy for determination – of “legitimate purposes” as a part of “Codes of Fair Disclosure and Conduct” formulated under Regulation 8.

Thus, as a prudent rule the price sensitive information should not be passed on until it is for legitimate purposes. However, as per Explanation to Sub-Regulation (2A), unpublished price sensitive information can be shared with banker/lender for legitimate purposes like renewal of Credit limits provided that such sharing has not been carried out to evade or circumvent the prohibitions of these regulations.

(ii) Sub-Regulation (2B) of Regulation 3 of SEBI (Prohibition of Insider Trading) Regulations, 2015 provides that any person in receipt of unpublished price sensitive information pursuant to a “legitimate purpose” shall be considered an “insider” for purposes of these regulations and due notice shall be given to such persons to maintain confidentiality of such unpublished price sensitive information in compliance with these regulations.

According to the above para, the branch manager who is in receipt of unpublished price sensitive information for the legitimate purpose is an insider under the regulations.

(iii) Regulation 4 of SEBI (Prohibition of Insider Trading) Regulations, 2015 deals with the provisions relating to trading when in possession of unpublished price sensitive information.

Regulation 4(1) : No insider shall trade in securities that are listed or proposed to be listed on a stock exchange when in possession of unpublished price sensitive information.

Explanation – When a person who has traded in securities has been in possession of unpublished price sensitive information, his trades would be presumed to have been motivated by the knowledge and awareness of such information in his possession:

Provided that the insider may prove his innocence by demonstrating the circumstances including the following:
i. The transaction is an off-market inter transfer between insiders who were in possession of the same unpublished price sensitive information without being in breach of regulation 3 and both parties had made a conscious and informed trade decision.

ii. The transaction was carried out through the block deal window mechanism between persons who were in possession of the unpublished price sensitive information without being in breach of regulation 3 and both parties had made a conscious and in-formed trade decision.

iii. The transaction in question was carried out pursuant to a statutory or regulatory obligation to carry out a bona fide transaction.

iv. The transaction in question was undertaken pursuant to the exercise of stock options in respect of which the exercise price was pre-determined in compliance with applicable regulations.

v. In the case of non-individual insiders:

The individuals who were in possession of such unpublished price sensitive information were different from the individuals taking trading decisions and such decision-making individuals were not in possession of such unpublished price sensitive information when they took the decision to trade.
Appropriate and adequate arrangements were in place to ensure that these regulations are not violated and no unpublished price sensitive information was communicated by the individuals
Possessing the information to the individuals taking trading decisions and there is no evidence of such arrangements having been breached.

vi The trades were pursuant to a trading plan set up in accordance with Regulation 5.

Regulation 4(2): In the case of connected persons the onus of establishing, that they were not in possession of unpublished price sensitive information, shall be on such connected persons and in other cases, the onus would be on the Board.
Regulation 4(3): The Board may specify such standards and requirements, from time to time, as it may deem necessary for the purpose of these regulations.

(iv) Section 195 of the Companies Act, 2013, dealing with the matter relating to insider trading has been omitted by the Companies Amendment Act, 2017 w.e.f. 09/02/2018.

However, penalty for insider trading is provided under Section 15G of the SEBI Act, 1992. It provides that if any insider who,:

Either on his own behalf or on behalf of any other person, deals in securities of a body corporate listed on any stock exchange on the basis of any unpublished price-sensitive information.
Communicates any unpublished price sensitive information to any person, with or without his request for such information except as required in the ordinary course of business or under any law.
Counsels, or procures for any other person to deal in any securities of anybody corporate on the basis of unpublished price-sensitive information, shall be liable to a penalty which shall not be less than ten lakh rupees but which may extend to twenty-five crore rupees or three times the amount of profits made out of insider trading, whichever is higher.

Question 8.
What are the material disclosures of which information should be disclosed to Stock Exchange within 24 hours of conclusion of the Board Meeting as per SEBI (LODR) Regulations, 2015?
Answer:
As per Regulation 30 of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, the listed entity shall first disclose to stock exchange(s) of all events, as specified in Part A of Schedule III, or information as soon as reasonably possible and not later than twenty four hours from the occurrence of event or information. Following events shall be disclosed:

1. Commencement or any postponement in the date of commencement of commercial production or commercial operations of any unit/ division.

2. Change in the general character or nature of business brought about by arrangements for strategic, technical, manufacturing, or marketing tie-up, adoption of new lines of business or closure of operations of any unit/division (entirety or piecemeal).

3. Capacity addition or product launch.

4. Awarding, bagging/receiving, amendment or termination of awarded/ bagged orders/contracts not in the normal course of business.

5. Agreements (viz. loan agreement(s) (as a borrower) or any other agreement(s) which are binding and not in normal course of business) and revision(s) or amendment(s) or termination(s) thereof.

6. Disruption of operations of any one or more units or division of the listed entity due to natural calamity (earthquake, flood, fire etc.), force majeure or events such as strikes, lockouts etc.

7. Effect(s) arising out of change in the regulatory framework applicable to the listed entity.

8. Litigation(s)/dispute(,s)/regulatory action(s) with impact.

9. Fraud/defaults etc. by directors (other than key managerial personnel) or employees of listed entity.

10. Options to purchase securities including any ESOP/ESPS Scheme.

11. Giving of guarantees or indemnity or becoming a surety for any third party.

12. Granting, withdrawal, surrender, cancellation or suspension of key licenses or regulatory approvals.

Question 9.
Ms. Nidhi is the Company Secretary of ZYCO Bank, the merchant banker for Synergy Ltd., which had recently carried out an issue and allotment of Equity Shares. Draft a post issue advertisement to be circulated in daily newspapers.
Answer:
The post-issue merchant banker shall ensure that advertisement giving details relating to oversubscription, basis of allotment, number, value and percentage of all applications including ASBA (Application Supported by Blocked Amount) number, value and percentage of successful allottees for all applications, date of completion of despatch of refund orders or instructions to Self Certified Syndicate Banks by the Registrar, date of despatch of certificates and date of filing of listing application, etc. is released.

Format of an advertisement is as under:
Post Issue Advertisement of Synergy Ltd. (Equity Shares) – Carried out by Zyco Bank was a huge success

Shares issued : 100,000
Shares subscribed : 328,000
Over subscription : 3.28 times
Basis of Allotment : Pro rata allotment made to 150,000 share (Green Shoe Option)
Applied through ASBA : 80%
Process complete : 30/09/2016
Date of completion of despatch of refund orders : 08/10/16
Date of despatch of Certificates : 15/10/16
Date of filing of listing application : 10/10/16

Merchant Banker to the Issue
Place: _________
Date: _________

Question 10.
“Without proper policies, it is extremely tough for the business to continue and policies work as guide and help the manager to direct all the actions towards the same goal.” In light of the aforesaid statement; highlight the importance of corporate policies.
Answer:
Corporate Policy is a formal declaration of the guiding principles by which an organization will function. Policies are developed by the board of directors or a senior management policy committee.

Policies are an essential component of every organisation and address important issues. Therefore, must be effectively communicated amongst stakeholders.

Following are the points highlighting the importance of corporate policies:

Policies are necessary to perform the business activities in a smooth way.
Policies promote delegation of the power of making decisions.
Policies help in analysis of performance by serving as a standard.
It helps in dealing with the issues for optimal utilization of limited resources.
Sound policies aid in developing good public image of an organization.

Question 11.
Briefly explain the following; Corporate Social Responsibility Policy.
Answer:
Section 135(4) of the Companies Act, 2013, contains that the Board of every company which is required to constitute a CSR Committee shall after taking into account the recommendations made by the Corporate Social Responsibility Committee, approve the Corporate Social Responsibility Policy for the company.

The contents of such Policy shall be disclosed in board’s report and also place it on the company’s website.

The CSR Policy of the company includes the following:

A list of CSR projects or programs which a company plans to under-take within the areas or subjects specified in Schedule VII of the Act, specifying modalities of execution of such project or programs and implementation schedules for the same.
Monitoring process of such projects or programs
A clause specifying that the surplus arising out of the CSR projects or programs or activities shall not form part of the business profit of the company.

Question 12.
Briefly explain the following; Risk Management Policy.
Answer:
Section 134(3)(n) of the Companies Act, 2013, provides that a statement indicating development and implementation of a risk management policy for the company including identification therein of elements of risk, if any, which in the opinion of the Board may threaten the existence of the company should be included in the report by its Board of Directors. This indicates that framing a risk management policy is also envisaged under the provisions of the Companies Act, 2013.

Question 13.
Briefly explain the following; Vigil Mechanism Policy.
Answer:
Section 177(10) of the Companies Act, 2013 provides that the vigil mechanism under sub-section (9) of the said section shall provide for adequate safeguards against victimisation of persons who use such mechanism and make provision for direct access to the chairperson of the Audit Committee in appropriate or exceptional cases and the details of establishment of such mechanism shall be disclosed by the company on its website, if any, and in the Board’s report. This mechanism is herein referred as a policy.

Question 14.
Briefly explain the following; Nomination and Remuneration policy.
Answer:
Section 178(3) and (4) of the Companies Act, 2013 provides that the Nomination and Remuneration Committee shall formulate the criteria for determining qualifications, positive attributes and independence of a director and recommend to the Board a policy, relating to the remuneration for the directors, key managerial personnel and other employees. The Nomination and Remuneration Committee shall, while formulating the policy shall ensure that –

The level and composition of remuneration is reasonable and sufficient to attract, retain and motivate directors of the quality required to run the company successfully.
Relationship of remuneration to performance is clear and meets appropriate performance benchmarks.
Remuneration to directors, key managerial personnel and senior management involves a balance between fixed and incentive pay reflecting short and long-term performance objectives appropriate to the working of the company and its goals.

The policy shall be placed on the website of the company, if any, and the salient features of the policy and changes therein, if any, along with the web address of the policy, if any, shall be disclosed in the Board’s report.

Question 15.
Explain any five policies which a company is required to formulate under SEBI (LODR) Regulations, 2015.
Answer:
The key policies required for companies under the SEBI (LODR) Regulations, 2015 are:
1. Risk policy – As per Regulation 4(2)(/)(ii)(l), a listed entity is required to have a risk policy which shall be reviewed and guided by the board of directors.

2. Policy for preservation of documents As per Regulation 9, a listed entity is required to have a policy for preservation of documents, approved by its board of directors, classifying them in at least two categories as follows:

a. Documents whose preservation shall be permanent in nature.

b. Documents with preservation period of not less than eight years after completion of the relevant transactions. The documents may be preserved in electronic mode.

3. Policy for Determining ‘Material’ Subsidiary As per Regulation 16(2)(c), a listed entity is required to formulate a policy for determining ‘material’ subsidiary. “Material subsidiary” means a subsidiary, whose income or net worth exceeds 10% of the consolidated income or net worth respectively, of the listed entity and its subsidiaries in the immediately preceding accounting year.

4. Whistle Blower Policy – As per Regulation 22 and Regulation 46(2)(e), a listed entity is required to formulate a vigil mechanism for directors and employees to report genuine concerns under which they can have direct access to the chairperson of the audit committee in appropriate or exceptional cases. This mechanism/policy should be disclosed on the website of the listed entity.

5. Policy relating to the remuneration of the directors, key managerial personnel and other employees A listed entity is required to formulate a policy on the remuneration of the directors, key managerial personnel and other employees. [Part D, Schedule II (1)].

Question 16.
What are the contents to be incorporated in a director’s responsibility statement?
Answer:
As per Section 134(5), the Directors’ Responsibility Statement shall state that –
a. In the preparation of the annual accounts, the applicable accounting standards had been followed along with proper explanation relating to material departures.

b. The directors had selected such accounting policies and applied them consistently and made judgments and estimates that are reasonable and prudent so as to give a true and fair view of the state of affairs of the company at the end of the financial year and of the profit and loss of the company for that period

c. The directors had taken proper and sufficient care for the maintenance of adequate accounting records in accordance with the provisions of this Act for safeguarding the assets of the company and for preventing and detecting fraud and other irregularities.

d. The directors had prepared the annual accounts on a going concern basis.

e. The directors, in the case of a listed company, had laid down internal financial controls to be followed by the company and that such internal financial controls are adequate and were operating effectively.

f. The directors had devised proper systems to ensure compliance with the provisions of all applicable laws and that such systems were adequate and operating effectively.

Question 17.
What are the disclosures required to be made by a company under SEBI rules and regulations?
Answer:
Following disclosures are made by a company under various regulations of SEBI :

SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018:

Disclosures in the draft off er document and offer document (Regulation 24)
Filing of the draft offer document and offer document (Regulation 25)
Draft offer document and offer document to be available to the public (Regulation 26)
Issue-related advertisements (Regulation 43)
Post-issue advertisements (Regulation 51)
Post-issue reports (Regulation 55)

SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011:

Disclosure of acquisition and disposal (Regulation 29)
Continual disclosures (Regulation 30)
Disclosure of encumbered shares (Regulation 31)

SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015

Prior Intimations (Regulation 29)
Disclosures of Financial Results [Regulation 33]
Annual Report Disclosures [Regulation 34]
Website Disclosures [Regulation 46]
Disclosure of Events or Information [Regulation 30]
Disclosure of Material Events
Disclosures of events upon application of the Materiality Guidelines
Disclosure of Other Events

SEBI (Prohibition Of Insider Trading) Regulations, 2015

1. Disclosures of Trading By Insiders [Regulation 6]
2. Disclosures by Certain Persons – Initial Disclosure [Regulation 7(1)]
3. Continual Disclosures: [Regulation 7(2)]
4. Code of Fair Disclosure [Regulation 5]
5. Code of Conduct [Regulation 9]
6. Institutional Mechanism for Prevention of Insider trading [Regulation 9A]

Question 18.
What are the disclosures required to be made by a company for encumbered shares?
Answer:
According to Regulation 31 of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011, the following disclosures are necessary if the company’s shares are encumbered:
1. The promoter of every target company shall disclose details of shares in such target company encumbered by him or by persons acting in concert with him in the prescribed format.

2. The promoter of every target company shall disclose details of any invocation of such encumbrance or release of such encumbrance of shares in prescribed format.

3. The disclosures required under sub-regulation (1) and sub-regulation (2) shall be made within seven working days from the creation or invocation or release of encumbrance, as the case may be to,- (a) every stock exchange where the shares of the target company are listed; and (b) the target company at its registered office.

4. The promoter of every target company shall declare on a yearly basis that he, along with persons acting in concert, has not made any encumbrance, directly or indirectly, other than those already disclosed during the financial year.

5. The declaration required under sub-regulation (4) shall be made within seven working days from the end of each financial year to:

Every stock exchange where the shares of the target company are listed.
The audit committee of the target company.

Question 19.
Distinguish between Initial Disclosures and Continual Disclosures under SEBI (Prohibition of Insider Trading) Regulations, 2015
Answer:
Regulation 7(1): Initial Disclosure – Initial Disclosures are required to be made by :
a. Every promoter or member of the promoter group, key managerial personnel and director of every company whose securities are listed on any recognised stock exchange shall disclose his holding of securities of the company as on the date of these regulations taking effect, to’ the company within thirty days of these regulations taking effect.

b. Every person on appointment as a key managerial personnel or a director of the company or upon becoming a promoter or member of the promoter group shall disclose his holding of securities of the company as on the date of appointment or becoming a promoter, to the company within seven days of such appointment or becoming a promoter.

Regulation 7(2): Continual Disclosures – Continual Disclosures are required to be made by :
a. Every promoter or member of the promoter group, designated person and director of every company shall disclose to the company the number of such securities acquired or disposed of within two trading days of such transaction if the value of the securities traded, whether in one transaction or a series of transactions over any calendar quarter, aggregates to a traded value in excess of ten lakh rupees or such other value as may be specified.

b. Every company shall notify the particulars of such trading to the stock exchange on which the securities are listed within two trading days of receipt of the disclosure or from becoming aware of such information.

c. The above disclosures shall be made in such form and such manner as may be specified by the Board from time to time.

Category: CS Professional

Quality Review – Secretarial Audit Compliance Management and Due Diligence Important Questions

CS Professional New Syllabus Corporate Funding & Listings in Stock Exchanges Notes Study Material Important Questions

Board Committees – Governance, Risk Management, Compliances and Ethics Important Questions

Liquidation After IRP – Corporate Restructuring, Insolvency, Liquidation & Winding-Up Important Questions

Secretarial Practice in Drafting Notice, Agenda and Minutes of Company’s Meetings Resolution – Drafting, Pleadings and Appearances Important Questions

Documentation and Maintenance of Records – Secretarial Audit Compliance Management and Due Diligence Important Questions

CS Professional: Corporate Restructuring, Insolvency, Liquidation & Winding-Up Notes Study Material Important Questions

Corporate Governance and other Stakeholders – Governance, Risk Management, Compliances and Ethics Important Questions

Corporate Governance and Shareholders Rights – Governance, Risk Management, Compliances and Ethics Important Questions

Accounting and Audit Related Issues, Related Party Transactions and Vigil Mechanism – Governance, Risk Management, Compliances and Ethics Important Questions

Corporate Policies and Disclosures – Governance, Risk Management, Compliances and Ethics Important Questions