CS Professional – Page 14

Segment-Wise Role of Company Secretaries – Secretarial Audit Compliance Management and Due Diligence Important Questions

December 28, 2022

Segment-Wise Role of Company Secretaries – Secretarial Audit Compliance Management and Due Diligence Important Questions

Question 1.
Write a note on the following: “Statutory duties of Company Secretary under Companies Act, 2013”.
Answer:
Section 205 read with rule 10 of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014 provide the following duties on the Company Secretary:

Guidance to Directors	To provide to the directors of the company, collectively and individually, such guidance as they may require, with regard to their duties, responsibilities and powers.
Facilitation in Convening of Meeting(s)	To facilitate the convening of meetings and attend board, committee and general meetings and maintain the minutes of these meetings.
Approval(s)	To obtain approvals from the board, general meeting, the government and such other authorities as required under the provisions of the Companies Act, 2013.
Representation	To represent before various regulators and other authorities under the Companies Act, 2013 in connection with discharge of various duties under the Companies Act, 2013.
Assisting Board	To assist the Board in the conduct of the affairs of the company.
Advisory to Board To Ensure Good Corporate Governance	To assist and advise the Board in ensuring good corporate governance and in complying with the corporate governance requirements and best practices.
Other Duties	To discharge such other duties as have been specified under the Companies Act, 2013 or rules made there under and such other duties as may be assigned by the Board from time to time.
Ensure Compliance With Secretarial Standards	To ensure that the company complies with the applicable secretarial standards.
Report to Board	To report to the Board about compliance with the provisions of the Companies Act, 2013, the rules made there under and other laws applicable to the company.

Question 2.
Describe the role of a Company Secretary as an Insolvency Professional.
Answer:
Company Secretary as Insolvency Professional:
Company Secretaries having passed necessary examination, possessing prescribed number of years of experience, enrolled with an insolvency professional agency and registered with Insolvency and Bankruptcy Board of India (IBBI) as an insolvency professional can take up matters relating to corporate insolvency resolution process as Interim Resolution/Resolution Professionals, and also take up voluntary liquidation cases. They can also act as authorized representatives for a class of creditors in a meeting of Committee of Creditors in a resolution process.

As per the Insolvency and Bankruptcy Board of India Regulations, a member of the Institute of Company Secretaries of India having ten years’ of experience and have other requisite qualifications is eligible for registration as insolvency professional.

Question 3.
Your client wants to setup Food Processing Unit in the State of Uttarakhand. Describe the details about specific laws applicable to setup Food Processing Unit.
Answer:
For setup Food Processing Unit in the State of Uttarakhand, the specific laws applicable to setup Food Processing Unit:

Essential Commodities Act, 1955 (In Relation To Food).
Export Quality Control and Inspection Act, 1963.
National Food Security Act, 2013.
Food Safety & Standard Act, 2006.
Food Safety and Standards Rules, 2011.
Food Safety and Standards (Packaging and Labelling) Regulations, 2011.
Food Safety and Standards (Licensing and Registration of Food Businesses) Regulations, 2011.
Food Safety and Standards (Prohibition and Restrictions on Sales) Regulations, 2011.
Food Safety and Standards (Food Products Standards and Food Additives) Regulations, 2011.
Food Safety and Standards (Contaminants, Toxins and Residues) Regulations, 2011.
The Meat Food Products Order, 1973.
Meat and Meat Product Order, 1992 (MMPO).
Indian Fisheries Act, 1897 and Amendments.
The Fruit Products Order, 1955.
Fruit Products (1st Amendment) Order, 2006.
Vegetables Product Order, 1967 (VPO).
The Vegetable Oil Products (Control) Order, 1947.
The Edible Oils Packaging (Regulation) Order, 1998.
The Solvent Extracted Oil, De Oiled Meal and Edible Flour (Control) Order, 1967.
The Milk and Milk Products Order, 1992.
Respective State Food Laws.

Question 4.
Ramesh Kumar has received the certificate of membership as well as certificate of practice from the Institute of Company Secretaries of India on 31st March, 2019 and now he wants to become a Registered Valuer. Give your professional advice on the matter and also explain the qualification & disqualification of Registered Valuer to Ramesh Kumar.
Answer:
1. A Company Secretary in practice is recognized to be registered valuer for the asset class “Securities or Financial Assets” under the Companies (Registered Valuer and Valuation) Rules, 2017.

2. To act as a Registered Valuer in the Securities or Financial Assets the person should be the Member of the Institute of Chartered Accountants or The Institute of Cost Accountants of India or the Institute of Company Secretaries of India; or MBA/PGDBM specialization in finance or; Post Graduate Degree in Finance and should have at least three years of experience in the” discipline.

3. Further, the person needs to complete and pass the Valuation Specific Education Course as per syllabus specified under Rule 5 of the Companies (Registered Valuers and Valuation) Rules, 2017.

Further, a person is eligible to be a registered valuer if he/she:
is a valuer member of a registered valuers organisation.
is recommended by the registered valuers organisation of which he is a valuer member for registration as a valuer.
has passed the valuation examination within three years preceding the date of making an application for registration.
possesses the qualifications and experience.
is not a minor.
has not been declared to be of unsound mind.
is not an undischarged bankrupt or has not applied to be adjudicated as a bankrupt;
is a person resident in India.
has not been convicted by any competent court for an offence punishable with imprisonment for a term exceeding’six months or for an offence involving moral turpitude and a period of five years has not elapsed from the date of expiry of the sentence. However, if a person has been convicted of any offence and sentenced in respect thereof to imprisonment for a period of seven years or more, he shall not be eligible to be registered.
has not been levied a penalty under section 271 J of Income Tax Act, 1961 and time limit for filing appeal before commissioner of income-tax (appeals) or income-tax appellate tribunal as the case may be has expired, or such penalty has been confirmed by income-tax appellate tribunal, and five years have not elapsed after levy of such penalty.
is a fit and proper person.
For determining whether an individual is a fit and proper person under these rules, the authority may take account of any relevant consideration, including but not limited to the following criteria-
Integrity, reputation and character.
Absence of convictions and restraint orders.
Competence and financial solvency.

Question 5.
Your client wants to setup a unit in Pharmaceuticals sector in the state of Telangana. Describe in detail about the specific laws applicable for setting up of a unit in the Pharmaceuticals sector.
Answer:
Illustrative list of the Laws applicable to the Pharmaceuticals sector is as under:

The Drugs and Cosmetics Act, 1940 & Amendment 2008
The Drugs and Cosmetics Rules, 1945
The Pharmacy Act, 1948
The Drugs and Magic Remedies (Objectionable Advertisement) Act, 1954
Drugs (Magic Remedies) Objectionable Advertisement Rules, 1955
The Narcotic Drugs and Psychotropic Substances Act, 1985
Special Permits and Licences Rules, 1952
The Medicinal and Toilet Preparations (Excise Duties) Act, 1956
The Drugs (Prices Control) Order, 1995 (under the Essential Commodities Act)
Essential Commodities Act, 1955
The Clinical Establishments (Registration and Regulation) Act, 2010
The Clinical Establishments (Registration and Regulation) Rules, 2010
Biological Diversity Act, 2002
Biological Diversity Rules, 2004
Drug Policy, 2002
Plant Quarantine Order
National Pharmaceutical Policy, 2012
Drugs (Prices Control) Order, 2013
Rules for the Manufacture/Use/Import/Export and Storage of Hazardous microorganisms/genetically engineered organisms or cells.

Question 6.
You are engaged as a retainer in a company for looking after all secretarial compliances. With the advent of introduction of Goods and Services Tax (GST), though the company initially managed to handle this work, subsequently, it finds it very difficult in view of the attrition in the concerned staff managing it and also with reference to the latest amendments and notifications issued frequently. The Company then decided to discuss with you to undertake the work as GST professional. What are the duties and responsibilities that have to be performed as a GST Professional? Briefly explain.
Answer:
The duties and responsibilities that have to be performed as a GST Professional:
1. Advisory services or strategic advisor: A Company Secretary can com-prehensively interpret the law of GST and provide complete guidance and advisory to the business entities. Company Secretaries are more suited for their services because of their knowledge of laws and good communication skills.

2. Tax Planning: Company Secretaries are competent to understand g the impact of laws and its various alternatives and can be helpful in proper tax planning under GST.

3. Procedural Compliances: Procedural Compliance includes registration, filing of returns, payments of taxes, assessment etc. Since a Company Secretary is already playing the role of a Compliance Officer under various other laws, he can assist in the same under GST law also.

4. Book/ Record Keeping: Introduction of GST would also require proper record keeping and maintaining systematic records of credit of input/ input service and its proper utilisation etc.

5. Representation: Company Secretary can provide the service of representation with confidence because of practical exposure due to appearing before various competent authorities.

6. Appellate work: Company Secretary can provide better services in the field of appellate work.

Question 7.
Comment on the given statement: “A listed company is required to appoint a qualified company secretary as the compliance officer.”
Answer:
1. Under Regulation 6 of the SEBI (LODR) Regulations, 2015, a listed company is required to appoint a qualified company secretary as the compliance officer. The compliance officer of the Company is responsible for:

Ensuring conformity with the regulatory provisions applicable to the listed entity in letter and spirit.
Co-ordination with and reporting to the Board, recognised stock exchange(s) and depositories with respect to compliance with rules, regulations and other directives of these authorities in the manner as specified from time to time.
Ensuring that the correct procedures have been followed that would result in the correctness, authenticity and comprehensiveness of the information, statements and reports filed by the listed entity under these regulations.
Monitoring email address of grievance redressal division as designated by the listed entity for the purpose of registering complaints by investors.

2. The company secretary is also liable for ensuring compliance with SEBI (Prohibition of insider Trading) Regulations, 2015 including maintenance of various documents and also to ensure compliance of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011.

3. The requirement for appointment of Compliance officer is not applicable in case of units issued by mutual funds which are listed on recognised stock exchange(s) governed by the provisions of the Securities and Exchange Board of India (Mutual Funds) Regulations, 1996.

Question 8.
Write Short Note on following:
(a) Company Secretary as a part of Senior Management.
(b) Company Secretary as Compliance Manager.
Answer:
(a) Company Secretary as a part of Senior Management:
1. Earlier as per Regulation 16 of the SEBI (LODR) Regulations, 2015 provides that the senior management mean the officers/ personnel of the listed entity who are members of its core management team excluding board of directors and normally comprise all members of management one level below the executive directors, including all functional heads.

2. As per the revised definition w.e.f. 1st April, 2019, the senior management will also include chief executive officer/managing director/whole time director/manager (including chief executive officer/manager, in case they are not part of the board) and specifically include company secretary and chief financial officer.

(b) Company Secretary as Compliance Manager:
1. The Company Secretary in a role of corporate manager have an in-depth knowledge and understanding of the company and its history and also develops relationship with the board and management, the services of company secretary as corporate manger is available at all times to discuss issues in-depth and provide an immediate response to queries.

2. A wide role can be played by a company secretary in small company. He is able to take on other responsibilities likewise Finance Manager, Legal Officer, HR Manager etc.

3. The Company Secretary also assists the chairman in preparing for meetings and truly act as the “conscience of the company” and with no Conflict of Interest and reliable to deal with the confidential documents of the company.

Question 9.
The Company Secretary act as authorised representative of a company and/or its Board. Comment on the given statement.
Answer:
The Company Secretary of a company can appear before the following authorities as a authorized representative of the company and its board:

National Company Law Tribunal.
Competition Commission of India.
Securities and Exchange Board of India.
Securities Appellate Tribunal.
Registrar of Companies.
Consumer Forums.
Telecom Disputes Settlement and Appellate Tribunal.
Tax Authorities.
Other quasi-judicial bodies and Tribunals.

Question 10.
Write short note on: “Company Secretary as Secretarial Auditor”.
Answer:
Company Secretary as Secretarial Auditor:
1. As per section 204 of the Companies Act, 2013: Every listed company and a company belonging to other class of companies as may be prescribed shall annex with its Board’s report made in terms of sub-section (3) of Section 134 of Companies Act, 2013 a secretarial audit report given by a company secretary in practice, in such form as may be prescribed.

2. As per Rule 9 of Companies (Appointment and Remuneration of Managerial Personnel) Amendment Rules, 2020: For the purposes of sub-section (1) of section 204 of Companies Act, 2013, the other class of companies shall be as under:

Every public company having a paid-up share capital of fifty crore rupees or more; or
Every public company having a turnover of two hundred fifty crore rupees or more; or
Every company having outstanding loans or borrowings from banks or public financial institutions of one hundred crore rupees or more.
The format of the Secretarial Audit Report shall be in Form No. MR. 3.

3. As per Regulation 24A of the SEBI (LODR) Regulations., 2015: Every listed entity and its material unlisted subsidiaries incorporated in India shall undertake secretarial audit and shall annex with its annual report, a secretarial audit report, given by a company secretary in practice, in such form as may be specified with effect from the year ended March 31,2019.

Question 11.
Discuss five secretarial functions which can be assigned by the Board of the Company to Company Secretaries?
Answer:
Five secretarial functions which can be assigned by the Board of the Company to Company Secretaries:

To ensure compliance of the provisions of the Corporate Law, Secretarial Standards and other statutes and bye-laws of the company.
To ensure that business of the company is conducted in accordance with its objects as contained in its memorandum of association.
To ensure that affairs of the company are managed in accordance with its articles of association and the provisions of the Companies Law.
To prepare the agenda in consultation with the Chairman and the other documents for all the meetings of the board of directors.
To prepare in consultation with the chairman, the agenda and other documents for the general meetings.

Question 12.
“Company Secretaries having passed necessary examination, possessing prescribed number of years of experience, enrolled with an insolvency professional agency and registered with Insolvency and Bankruptcy Board of India (IBBI) as an insolvency professional, can take up matters relating to corporate insolvency resolution process as interim resolution /Resolution 0 Professionals, as well as also take up voluntary liquidation cases”.
In light of the given statement discuss the eligibility for registration as per Regulation 5 of Insolvency and Bankruptcy Board of India (Insolvency Professionals) (Amendment) Regulations, 2018?
Answer:
As per Regulation 5 of Insolvency and Bankruptcy Board of India (Insolvency Professionals) (Amendment) Regulations, 2018, an individual – shall be eligible for registration, if he:
(a) has passed the Limited Insolvency Examination within twelve months before the date of his application for enrolment with the insolvency professional agency.

(b) has completed a pre-registration educational course, as may be re-quired by the Board, from an insolvency professional agency after his enrolment as a professional member; and

Successfully completed the National Insolvency Programme as may be approved by the Board.
Successfully completed the Graduate Insolvency Programme as may be approved by the Board.
fifteen years’ of experience in management, after receiving a Bachelor’s degree from a university established or recognised by law; or

ten years’ of experience as :

Chartered accountant registered as a member of the Institute of Chartered Accountants of India,
Company secretary registered as a member of the Institute of Company Secretaries of India,
Cost accountant registered as a member of the Institute of Cost Accountants of India, or
Advocate enrolled with the Bar Council.

Question 13.
“The Company Secretaries cannot perform audit in matters related to GST but they can provide various services under GST Law”. In light of above statement, discuss the areas of services under GST Law for Company Secretaries?
Answer:
The Company Secretaries cannot perform Audit in matters related to GST but he can provide the following services:
1. Advisory services or strategic advisor: A Company Secretary can comprehensively interpret the law of GST and provide complete guidance and advisory to the business entities. Company Secretaries are more suited for their services because of their knowledge of laws and good communication skills.

2. Tax Planning: Company Secretaries are competent to understand, the impact of laws and its various alternatives and can be helpful in proper tax planning under GST.

3. Book/Record Keeping: Like any other tax laws, introduction of GST would also require proper record keeping and maintaining systematic records of credit of input/input service and its proper utilisation etc.

4. Representation: A Company Secretary can provide the service of representation with confidence because of practical exposure due to appearing before various competent authorities.

5. Appellate work: A Company Secretary can provide better services in the field of appellate work.

6. Procedural Compliances: Procedural Compliance includes registration, filing of returns, payments of taxes, assessment etc. Since a Company Secretary is already playing the role of a Compliance Officer under various other laws, he can assist in the same under GST law also.

Question 14.
Write Short Note on: “Company Secretary in Representation Services”.
Answer:
Company Secretaries have been authorized to represent before:

Registrar of Companies and Regional Directors.
National Company Law Tribunal and National Company Law Appellate Tribunal.
Competition Commission of India.
Securities and Exchange Board of India.
Securities Appellate Tribunal.
Telecom Disputes Settlement and Appellate Tribunal.
Authorities under Real Estate (Regulation & Development) Act, 2016.
Consumer Forums.
Telecom Disputes Settlement and Appellate Tribunal.
Tax Authorities, and Other Quasi-judicial bodies and Tribunals.

Question 15.
Write Short Note on: “Company Secretary as IPR Expert”.
Answer:
The Company Secretaries can act as registered Trade Marks Agent and also advise their client on matters related to:

IPRs under TRIPs Agreement of WTO.
Anti-dumping, subsidies and countervailing duties.
Foreign Trade Policy and Procedures (also issuing certificates there under).
Intellectual Property licensing and drafting of Agreements.

Question 16.
“Company Secretaries act as an Expert in the field of Banking Services”. In light of the given statement outline any two services provided by them in the field of Banking?
Answer:
Two services provided by them in the field of Banking:

Diligence Report and Certification in respect of Consortium/Multiple banking arrangement made by Scheduled Commercial Banks/Urban Co-operative Banks.
Loan Syndication and Documentation, registration of charges, status and search reports.

Question 17.
“Company Secretaries act as an expert in the field of Arbitration j and Conciliation”. In light of the given statement list three services provided by them in this
Answer:
Three services provided by Company Secretaries as expert in field of Arbitration and Conciliation Services:

Advising in commercial disputes between parties.
Acting as Arbitrator/Conciliator in domestic and international commercial disputes.
Drafting Arbitration/Conciliation Agreement/Clauses.

Question 18.
Discuss the specific laws applicable to Travel & Tourism Industry?
Answer:
Some specific laws are applicable to Travel & Tourism Industry. Which I are classified into following categories:
1. Legal and Regulatory Framework in Travel and Tourism : Relating to consumer protection; health; safety and security of travel and tour- I ism customers. Legal Liability and Risk Management: Legal liability j concepts; owner and director liability; guide and leader liability; risk assessment and controlling; risk mitigation; risk financing and insurance.

2. Transport Legislation : Surface; sea and air transport laws in relation to carriage of passengers.

3. Contract legislation in relation to Travel and Tourism customers : Contract Act & Partnership Act; Sale of Goods Act, Consumer Protection Act & Companies Act.

4. Forex Management: Regulation and Management of foreign exchange : FEMA – realization and repatriation of foreign exchange; Foreign Ex-change Rules in India.

5. Medical Tourism : Certification and Accreditation in Health and Medical Tourism, Ethical, Legal, Economic and Environmental issues in Health and Medical Tourism. Role of the National Accreditation Board for Hospitals & Healthcare (NABH) and Joint Commission International

6. Laws relating to Management of Tourism in Tribal Areas.

7. Laws relating to Setting up Travel Agency & Tour Operation Unit.

Question 19.
List specific laws applicable to the Cement Sector?
Answer:
Specific Laws applicable to the cement sector includes:

Cement Control Order, 1967.
Cement Cess Rule, 1993.
Cement (Quality Control) Order, 1995.
Cement (Quality Control) Order, 2003.
Bureau of Indian Standards Rules, 1987.
Limestone and Dolomite Mines Labour Welfare Fund Act, 1972.
Mines and Minerals (Development and Regulation) Act, 1957.
Mineral Conservation and Development Rules, 1988.
Metalliferous Mine Regulations, 2012.

Question 20.
“India poised to be the third largest automotive market in the world by 2020″.
In light of the given statement discuss the recent developments in auto-mobile sector along with specific applicable laws in automobile sector?
Answer:
Recent Developments:

The Automobile Industry contributes around 7.1 % to India’s GDP by volume.
India poised to be the third largest automotive market in the world by 2020.
Six million-plus hybrid and electric vehicles to be sold annually, by 2020.
FDI received by the sector between April 2000 and December 2017- USD 18.43 Billion.
India is also the fourth largest producer in the world with an annual production of 25 million vehicles in 2016-17 and is the largest manufacturer of two-wheelers, three-wheelers and tractors in the world.
India is home to four large auto manufacturing hubs: Delhi-Gur-gaon-Faridabad in the north, Mumbai-Pune-Nashik-Aurangabad in the west, Chennai-Bangalore-Hosur in the south and Jamshed-pur-Kolkata in the east.

Specific Laws applicable to the automobile sector includes:

Motor Vehicles Act, 1988.
The Central Motor Vehicle Rules, 1989.
Respective State Automobile Laws.

Question 21.
“India’s aviation market is currently the 9th largest in the world and is projected to be the 3rd largest by 2020 and largest by 2030”.
In light of the given statement discuss the recent developments in aviation sector along with specific applicable laws in aviation’sector?
Answer:
Recent Developments in Aviation Sector:

India is the world’s fastest growing domestic aviation market and has posted the fastest full year growth rate for three years in a row now.
India’s Revenue Passenger Kilometer (RPK) growth of 17.5% was higher than the global average growth of 7% in 2017.
More than 80 international airlines connecting to over 40 countries.
At USD 16 billion, India’s aviation market is currently the 9th largest in the world and is projected to be the 3rd largest by 2020 and largest by 2030.

Specific Laws applicable to the Aviation sector includes:

Aircraft Act, 1934.
Aircraft Rules, 1937.
Aircraft Public Health Rules, 1954.
Unlawful Seizure against Safety of Civil Aviation, 1982.
Anti-hijacking (Amendment) Act, 1994.
Air corporations (transfer of undertakings and Repeal) Act, 1994.
The Suppression of unlawful acts against safety of civil aviation Act, 1982.
The Suppression of unlawful acts against safety of civil aviation Rules, 1994.
Aircraft security Rules, 2011.
Tokyo convention Act, 1975.
The Aircraft (Carriage of Dangerous Goods) Rules, 2003.
The Air Corporations Act, 1953.

Question 22.
List specific laws applicable to the Biotechnology sector in India?
Answer:
Specific laws applicable to Biotechnology Sector in India:

Rules for the manufacture, Use/Import/Export and storage of hazardous micro organisms/genetically engineered organisms or cell, 1989.”
Revised recombinant DNA safety guidelines.
Guidelines for research in transgenic plants and guidelines for toxicity and allergen city evaluation of
transgenic seeds, plants and plant parts, 1998.
National Seed policy, 2002.
Seeds Act, 1966.
EXIM Policy Pertaining to Biotechnology.
Environment Protection Act, 1986 pertaining to Biotechnology.
Foreign Exchange Management Act, 1999 pertaining to Biotechnology.
Protection of Plant Varieties and Farmers’ Rights Act, 2001.

Question 23.
Name eight specific laws applicable to the Pharmaceuticals sector In India?
Answer:
Eight specific laws applicable to the Pharmaceuticals sector In India:

The Drugs and Cosmetics Act, 1940 & Amendment 2008.
The drugs and cosmetics rules, 1945.
The Pharmacy Act, 1948.
The Drugs and Magic Remedies (Objectionable Advertisement) Act, 1954.
Drugs (Magic Remedies) Objectionable Advertisement Rules, 1955.
Biological Diversity Act, 2002.
Biological Diversity Rules, 2004.
Drug Policy 2002 and National Pharmaceutical Policy 2012.

Question 24.
“Indian IT & BPM industry is expected to grow to USD 300 billion by 2020.”
In light of the given statement discuss the recent developments in IT & BPM Industry. Also, list few specific applicable laws to the Information Technology sector in India?
Answer:
Recent Developments:

IT-BPM sector accounts for largest share in total Indian services export (45%).
IT-BPM sector accounts for 56% of the total global outsourcing market.
Indian IT & BPM industry is expected to grow to USD 300 billion by 2020.
IT-BPM is the largest private sector employer delivering 3.7 million jobs.
640 offshore development centres in more than 80 countries.

Specific Laws applicable to the Information Technology sector includes:

The Patents Act, 1970 & Patent Rules, 2003.
Trade Marks Act, 1999.
Trade Marks Rules, 2001.
Information Technology Act, 2000; Information Technology (Amendment) Act, 2008 & Rules for the Information Technology Act, 2000.
Designs Act, 2000.
Designs Rules, 2001.

Question 25.
Name eight specific, laws applicable to the food processing sector in India?
Answer:
Eight Specific laws applicable to food processing sector in India:

Essential Commodities Act, 1955 (In Relation To Food).
Export Quality Control and Inspection Act, 1963.
National Food Security Act, 2013.
Food Safety and Standards (Packaging and Labelling) Regulations, 2011.
Food Safety and Standards (Licensing and Registration of Food Businesses) Regulations, 2011.
Food Safety and Standards (Prohibition and Restrictions on Sales) Regulations, 2011.
Food Safety and Standards (Food Products Standards and Food Additives) Regulations, 2011.
Food Safety & Standard Act, 2006 & Food Safety and Standards Rules, 2011.

Secretarial Audit Compliance Management and Due Diligence ICSI Study Material

Ethics and Business – Governance, Risk Management, Compliances and Ethics Important Questions

December 28, 2022

Ethics and Business – Governance, Risk Management, Compliances and Ethics Important Questions

Question 1.
In a branch of ABC Bank, Branch Manager throughout the year has been under acute pressure to achieve the business targets. At the year-end, he finds that despite his best efforts, he has not been able to achieve the targets given by his team leader. Simultaneously, he found that there are various cash credit limits sanctioned which are not being utilized.

On 31st March, he makes debit entries as withdrawals in such unutilized cash credit limits and transfers to current accounts of the borrowers and again reverses these entries on 1st April. In addition, to avoid the mounting pressure of reduction in NPAs, he makes credit transfer entries in cash credit limits not transacted since last six months and reverses these entries on next day after year-end, i.e. 1st April.

In this way, he has been able to manage the achievement of his deposits and advances targets. Also, he has temporarily engaged a boy as attendant. As to employ a casual staff, he was required compliance of laid down policy of the bank, he shown payments made to him as water and cleaning charges under different names. He argues that as no loss has been caused to any one, hence he is right.

In the light of above answer the following questions:
(i) Evaluate his actions in the light of ethical practices and mention which types of ethical issues are there at his branch.
(ii) What do understand by ‘Ethics in Compliance’? Describe by citing an example and a case study involving issues of ethics in compliance.
Answer:
(i) In the given case, the Branch Manager, in order to achieve the targets assigned to him adopted the following unethical practices:

Making debit entries in unutilized cash credit limits and transfer to current account of the borrowers.
Making credit transfer entries in cash credit limits not transacted since last 6 months and reversing the said entries on 1st April i.e. after the year end.
Temporarily engaging an attendant and showing payments made to him as water and cleaning charges.

In light of the above the ethical issues may be summarized as under:

Window dressing of the financials by inflating deposits and to suppress non-performing assets (NPAs), he makes ever-greening of NPAs in violation of RBI directives by manipulating books of account.
This amounts to cooking of the balance sheet of the branch without real business. Hence these are issues of Ethics in Accounts and Finance.
To avoid compliance of laid down procedure to employ a casual worker, he shows the payments as water and cleaning charges in miscellaneous expenses. Hence this is an issue of Ethics in compliance.

(ii) Compliance is about obeying and adhering to rules and authority with letter and spirit. The motivation for being compliant could be to do the right thing out of the fear of being caught rather than a desire to abide by the law. An ethical climate in an organisation ensures that compliance with law is fuelled by a desire to abide by the laws. Organisations that value high ethical values comply with the laws not only in letter but go beyond what is stipulated or expected of them.

Ethical compliance:
Ethical compliance helps companies to develop a work culture that abides by the workplace laws and reduces the costs associated with fines and lawsuits. One of the disadvantages of an ethical compliance program is that it requires the comprehensive support of management in order to ensure its effectiveness.

If members of the management team decide to apply their own version of corporate ethics to the way they manage their departments, then this clash of principles can cause confusion in the workplace. For example, a manager who tends to compromise when his fellow employees are involved in taking bribe, it may set a precedence of undermining the entire corporate culture.

Question 2.
“What is considered ethical behaviour in one society might be considered unethical in another. For example, euthanasia (mercy killing) is permitted in some countries but it is considered strictly unethical in most of the other countries.”
In the light of the above statement discuss the common features of ethics.
Answer:
The common features of ethics may be listed as follows:

Ethics is a conception of right or wrong conduct. Ethics tells us when our behaviour is moral and when it is immoral. It deals with the fundamental human relationship, how we think and behave towards others and how we want them to think and behave towards us.

Ethics relates to the formalised principles derived from social values. It deals with the moral choices that we make in the course of performing our duties with regard to other members of society. Hence, it is relevant in the context of a society only.

Ethical principles are universal in nature. They prescribe obligations and virtues for everybody in a society. They are important not only in business and politics but in every human endeavour.

There exist no sharp boundaries between ethical and non-ethical. Therefore, people.often face ethical dilemmas wherein a clear cut choice becomes very difficult.

The concepts of equity and justice are implicit in ethics. Fair and equitable treatment to all is its primary aim.

Ethics and legality of action do not necessarily coincide. What a society interprets as ethical or unethical ends up expressed in laws. The legality of actions and decisions does not necessarily make them ethical. For example, not helping an injured person in a road accident may be unethical but not illegal.

Thus, the statement ‘What is considered ethical behaviour in one society might be considered unethical in another’ is correct.

Question 3.
Write short notes on the following; Theory of Relativism.
Answer:
Theory of Relativism:
Theory of Relativism promotes the idea that some elements or aspects of experience or culture are relative to i.e. dependent on, other elements or aspects. It holds that there are no absolute truths in ethics and that what is morally right or wrong varies from person to person or from society to society.

The term often refers to truth relativism, which is the doctrine that there is no absolute truth, i.e. that truth is always relative to some particular frame of reference, such as a society or a culture. For example, killing animals for sport (like bull fighting) could be right in one culture and wrong in another.

Question 4.
“Good corporate governance practices cannot guarantee corporate success, but the absence of such governance definitely lead to questionable practices and corporate failures, which surface suddenly and massively”.
Discuss this statement and highlight the need for business ethics.
OR
Briefly comment on the following; Business ethics play a vital role for an organisation.
Answer:
Good corporate governance goes beyond rules and regulations that the Government can put in place. It is about the ethics and the values which drive companies in the conduct of their business.

Ethics is also the first line of defense against corruption, while law enforcement is remedial and reactive. It is, therefore, all about the trust that is established over time between the companies and their different stakeholders through their ethical business conduct.

Need of Business Ethics – The need for business ethics may be highlighted in following points :
1. Ethical conduct is in the long-term interests of businessmen. A business enterprise that is honest and fair to its customers, employees, and other stakeholders earns their trust and goodwill. It ultimately results in customer satisfaction, healthy competition, industrial growth and high earnings.

2. Businesses must balance their desire to maximize profits against the requirements of stakeholders. To address this unique aspect of business, rules are articulated to guide it to earn profits without harming individuals or society as a whole. While referring to business activity profile, Mahatma Gandhi once mentioned that all business entrepreneurs should ask themselves the question whether the activities they are contemplating would be of some use to the common man.

3. Ethical business behaviour is not only about good business but about good citizenship as well. Morally conscious businessmen have created names and built great business empires. They serve customers with good quality products at fair prices, treat their employees with great respect, reward their shareholders with good returns and pay their taxes honestly.

4. A business organisation that adheres to a code of conduct gains a competitive advantage and builds long-term value. On the other hand, unethical practices lead to the ultimate downfall of big organisations too.

5. Business can prosper only when a society is stable and peaceful. Unethical practices at times create distrust, disorder and turmoil in society.

Thus Good corporate governance practices cannot guarantee corporate success, but the absence of such governance definitely lead to questionable practices and corporate failures, which surface suddenly and exert a massive impact.

Question 5.
Green washing is a form of corporate misrepresentation. Explain.
OR
“Green washing is an evil practice amongst the corporates.” Comment.
OR
Discuss the following; Green Washing.
Answer:
Green washing is a form of corporate misrepresentation where a company presents a green public image and publicize green initiatives that are false or misleading. A company might release misleading claims or even true green initiatives while privately engaging in environmentally damaging practices. Companies try to take advantage of the growing public concern and awareness for environmental issues by promoting an environmentally responsible image.

Green washing is used by companies to win over investors (especially those interested in socially responsible investing), create competitive advantage in the marketplace, and convince critics that the company is well-intentioned. There is a profit-driven motive to green washing as well-green products are among the fastest growing segments in the market. Internationally, the increase in green advertising claims has become a cause for concern.

Question 6.
Briefly comment on the following statements; Ethical conduct is in the long-term interest of business.
Answer:
Ethical conduct is in the long-term interests of business. A business enterprise that is honest and fair to its customers, employees, and other stakeholders earns their trust and goodwill. It ultimately results in customer satisfaction, healthy competition, industrial growth and high earnings. Businesses must balance their desire to maximise profits against the, requirements of stakeholders.

Question 7.
Write short note on the following; Characteristics of ethics decision.
Answer:
According to Sueanne, in her book, Ethical Dilemma, characteristics and theory (2008), following characteristics of ethical decision are stated :

Most ethical decisions have mixed outcomes.
Most ethical decisions have personal implications.
Most ethical decisions have multiple alternatives.
Most ethical decisions have extended consequences.
Most ethical decisions have uncertain consequences.

Question 8.
Discuss the importance of organization’s structure in the study of business ethics.
OR
Discuss briefly the following; Organisation structure and ethics.
OR
In a centralized organization decision making authority is concentrated in the hands of top level managers and little authority is delegated to the lower levels in the light of this statement. Discuss the importance of an – organization structure in the study of business ethics.
OR
An organization’s structure is a significant factor to the study of business ethics. Comment
Answer:
In a centralized organization, decision making authority is concentrated in the hands of top-level managers, and very little authority is delegated to the lower levels. Responsibility, both internal and external, rests with top management.

Applicability: This structure is especially suited for organizations that make high-risk decisions, and whose lower-level managers are not highly skilled in decision-making. It is also suitable for organizations in which production processes are routine and efficiency is of primary importance.

Centralized organizations stress on formal rules, policies, and procedures, backed up by elaborate control systems. Their codes of ethics may specify the techniques to be used for decision-making.

An organization’s structure is important to the study of business ethics. Organisational structure touches on many issues related to ethics. Such as:

The alienation experienced by workers doing repetitive work.
The feelings of oppression created by the exercise of authority.
The responsibilities heaped on the shoulders of managers.
The power tactics employed by managers who are anxious to advance their career ambitions.
Health problems created by unsafe working conditions.
The absence of due process for non-unionised employees.

Question 9.
Do you think that an organisation having centralized organisation structure can lead to unethical acts? Why?
Answer:
In a centralized organization, decision making authority is concentrated in the hands of top-level managers, and little authority is delegated to lower levels. Responsibility, both internal and external, rests with top management. These organizations are usually extremely bureaucratic, and the division of labour is typically very well defined. Centralized organizations stress on formal rules, policies, and procedures, backed up with elaborate control systems.

Centralized organizational structures may lead to unethical acts because of the top down approach and the distance between employee and decision maker. If the centralized organization is very bureaucratic, some employees may behave according to “the letter of the law” rather than the spirit.

Question 10.
Writing code of conduct supporting it at top levels and communicating it to employees is just a beginning are should have an ethics committee comprising of independent non-executing directors enumerate the statement and state the functions of ethics committee.
Answer:
Companies should have a committee of independent non-executing directors who are responsible for ensuring that systems are place in the company to assure employ compliance with the code of ethics

The role of Ethics Committee may involve the following:

Review of the standards and procedures.
Facilitate compliance.
Due diligence of prospective employees.
Oversight of communication and training of ethics programme.
Monitor and audit compliance.
Enforcement of disciplinary mechanism.
Analysis and follow-up.

Question 11.
Over the number of years Seasons Ltd., fully owned by Calmitech Corportation Ltd., a listed entity, of which you are now the company secretary, has adopted aggressive growth strategy via targeted acquisition together with organic growth plan. Therefore, the disclosure requirements are based upon the listing rules. Recently Seasons acquired Hijobs Ltd., for geographic exposure, revenues and profits. During the negotiation process there were issues regarding management structure, values and due diligence.

Post completion the process of acquisition the problems started to emerge like lack of data provided in due diligence, reflected the fact that it either didn’t exist or was incomplete. Now it was time for preparation of the year end accounts. There were issues regarding incomplete H accounting records and incorrect exchange rates. In short preparation of the Annual report and the financial statements was a significant challenge. You investigated relatively limited available information on the branch and tentatively concluded that is not material.
i. What would you do knowing that disclosure of such information to the auditors and the Board may delay the parent company’s result, announcement to the market?
ii. What fundamental ethical principles would you take into consideration for making a prudent decision?
Answer:
i. The basic principle of Corporate Governance is to maintain the ethical standards, adequate disclosures, transparency and work in the interest of all the stakeholders.

Being a Company Secretary of the company:

I would act in the best interest of the company and disclose the findings immediately to the Board of directors, Board of the parent company and the auditors.
In addition, I would look for a code of conduct which provides guidance on such matters. Proper qualitative and quantitative assessment on materiality of the new facts can be initiated in the best interest of the company.
A team may be formed to expedite correcting the entries and making correct disclosures.

Although, the process may defer the declaration of results in the market, but it is better than declaring the wrong results and then provide significant additional disclosures at a later date. This delay for the broader interest is inevitable.

ii. The following ethical principles would be considered to form a prudent decision:

Integrity – Accounts and reports should be prepared in accordance with accounting standards and other principles so that they reflect the true and fair position of the company.
Honesty – The aim should be to be honest to the company for the interest of various stakeholders. Truthfulness and correct disclosures cannot be sacrificed at any cost for immediate gains.
Objectivity – Disclosures must be made at adequate places sup-ported by proper annexures and other related evidences. In case there is a delay in making disclosures, it should be justified with proper reasons.
Professional Competence – Professional ethics and standards including due care and diligence should be maintained in all circumstances.
Confidentiality – Confidentiality of the company affairs should be maintained. The situation should be controlled to avoid panic in the organisation in order to ensure that the market standing and the stock prices are not negatively affected.

Question 12.
Write short note on the following; Ethical dilemma.
OR
Briefly comment on the following statements; An ‘ethical dilemma’ involves a situation, when a person is indecisive as to what is right and what is wrong.
Answer:
An ethical dilemma involves a situation that makes a person question what is the ‘right’ or ‘wrong’ thing to do. Dilemma is a situation that requires a choice between options that are or seem equally unfavorable or mutually exclusive. It involves the need to choose from among two or more morally acceptable courses of action, when one choice prevents selecting the other; or, the need to choose between equally unacceptable alternatives.

These dilemmas can be highly complex and difficult to resolve. Easier dilemmas involve a ‘right’ versus ‘wrong’ answer; whereas, complex ethical dilemmas involve a decision between a right and another right choice.

Question 13.
You are a company secretary of the Mentor Products Ltd. you are made responsible for tender filing for the company your company is looking forward to win the tender by a government department a junior worker joins your company after working with your competitor Genius Products Ltd. for 5 years.

The worker informs you that in his previous company he has access to the bids made by the company and that he had know ledge of what standards of cost were set by that company. He offers for assistance in writing the bid by providing information of the competitor.

How would you resolve the ethical dilemma. Explain with reasons.

Would you take input from him for preparation of the tender?
Avoid such input and found on your own statement, or
If you decide to retain him how will you ensure that such things do not happen in future.
Ask him to leave the company for proposing to leak trade secret of competitor as that effect his integrity.

Answer:

No, we would not take inputs from him for preparation of the tender because it is against ethics.
Yes, we will avoid such input and focus on our own standard because if our competitor knows the leakage of information they will ask for retendering.
We will post him in any other division where our confidential matters should not be known to him.
Yes, we will ask him to leave the company for proposing to leak trade secret of competitor as that reflects his integrity because for some gains we can suffer a great loss by the said employee to leak our secrets to our competitor in future.

Question 14.
What are the areas in which a company may face ethical issues? Explain with the help of case study as to how investors can force ethical issues on company’s agenda. Answer:
A company may face ethical issues in different areas. Some of these issues are given below:
a. The ethical issues in finance that companies and employees are con-fronted with include:

In accounting – window dressing, misleading financial analysis.
Related party transactions not at arm length.
Insider trading, securities fraud leading to manipulation of the financial markets.
Fake reimbursements.

b. The ethical issues faced by Human Resource Management include:

Discrimination issues, i.e., discrimination on the bases of age, gender, race, religion, disabilities etc.
Sexual harassment.
Discrimination of whistle-blowers.

c. The ethical issues .confronted in marketing area include:

Pricing: price fixing, price discrimination and price skimming.
Anti-competitive practices, like manipulation of supply, exclusive dealing arrangements and tying arrangements.
Misleading advertisements.

d. The ethical issues confronted in production area include:

Defective, addictive and inherently dangerous products.
Ethical relations between the company and the environment include pollution, environmental ethics and carbon emissions trading.
Ethical problems arising out of new technologies, for example, genetically modified food.

Case Study on how investors can enforce ethical issues on company’s agenda:
Tesco a UK based Supermarket Chain Company faced an unprecedented revolt over the meagre wages it pays to workers in the developing world to supply its supermarkets with everything from cheap clothing to fruit.

Shareholders at the company’s annual meeting in London also voiced their anger at a controversial pay scheme for chief executive Sir Terry Leahy, which could see him pocket over £11 million if Tesco’s expansion into the US market succeeded. 8.75% of shareholders refused to back the company’s remuneration policy while 17.71% refused to back Sir Terry’s special US bonus.

Question 15.
In a branch of ABC Bank, Branch Manager throughout the year has been under acute pressure to achieve the business targets. At the year-end, he finds that despite his best efforts, he has not been able to achieve the targets given by his team leader. Simultaneously, he found that there are various cash credit limits sanctioned which are not being utilized.

In the light of above answer the following questions; Evaluate his actions in the light of ethical practices and mention which types of ethical issues are there at his branch.
Answer:
In the given case, the Branch Manager, in order to achieve the targets assigned to him adopted the following unethical practices:

Making debit entries in unutilised cash credit limits and transfer to current account of the borrowers.
Making credit transfer entries in cash credit limits not transacted since last 6 months and reversing the said entries on 1st April i.e. after the year end.
Temporarily engaging an attendant and showing payments made to him as water and cleaning charges.

In light of the above the ethical issues may be summarised as under:

Window dressing of the financials by inflating deposits and to suppress non-performing assets (NPAs), he makes ever-greening of NPAs in violation of RBI directives by manipulating books of account. This amounts to cooking of the balance sheet of the branch without real business. Hence these are issues of Ethics in Accounts and Finance.
To avoid compliance of laid down procedure to employ a casual worker, he shows the payments as water and cleaning charges in miscellaneous expenses. Hence this is an issue of Ethics in compliance.

Question 16.
Dilemma is a situation that request a choice between options that are seen equally unfavourable or mutually exclusive in the light of this statement. Elaborate the ethical dilemma. State the steps to resolve an ethical dilemma.
OR
You are the company secretary of Universal Development Ltd. the company often faces ethical dilemma. The board wants to circulate a guidance note for its manager to resolve ethical dilemma. Draft guidance note for the consideration and approval of the board.
Answer:
To,
The Board of Directors Universal Development Ltd.
Subject: RESOLVING ETHICAL DILEMMA
Dear Sir,
An ethical dilemma involves a situation that makes a person question what is the ‘right’ or ‘wrong’ thing to do. They make individuals think about their obligations, duties or responsibilities. These dilemmas can be highly complex and difficult to resolve. Easier dilemmas involve a ‘right’ versus ‘wrong’ answer; whereas, complex ethical dilemmas involve a decision between a right and another right choice. However, any dilemma needs to be resolved.

1. What are the options?
List the alternative courses of action available.

2. Consider the consequences
Think carefully about the range of positive and negative consequences associated with each of the different paths of action available.

Who/what will be helped by what is done?
Who/what will be hurt?
What kinds of benefits and harms are involved
What are their relative values?
What are the short-term and long-term implications?

3. Analyse the actions
Actions should be analysed in a different perspective i.e. viewing the action perse disregard the consequences, concentrating instead on the actions and looking for that option which seems problematic. How do the options measure up against moral principles like honesty, fairness, equality, and recognition of social and environmental vulnerability? In the case you are considering, is there a way to see one principle as more important than the others?

4. Make decision and act with commitment
Now, both parts of analysis should be brought together and a conscious and informed decision should be made Once the decision is made, act on the decision assuming responsibility for it.

5. Evaluate the system
Think about the circumstances which led to the dilemma with the intention of identifying and removing the conditions that allowed it to arise.

Sd/-
Mr. X
Company Secretary

Question 17.
Apex Pharmaceuticals Company Ltd. is a well reputed multinational company dealing in manufacturing and marketing of life saving drugs and formulations. Company’s Research and Development (R&D) Department is actively engaged in development and formulations of new drugs in general and life saving drugs in particular.

While experimenting with a chemical molecule, R&D department sees the possibility that a molecule may be developed into a drug that may prove very helpful in the treatment of a rare, painful and life threatening genetic disease, for which no effective drug is available at present in the market, but which afflicts to only one child in one million. However, development of the drug will require investment of huge sum of investors’ money of the company, despite the drug may not have saleability.

The R&D department of the company brings this to the notice of Mr. Ram, who is the CEO of the company. Taking the above facts into consideration, answer;
i. What dilemma Mr. Ram is facing?
ii. As a CEO, in place of Mr. Ram, how you would have acted in such i situation?
Answer:
i. Dilemma is a situation that requires a choice between options that are or seem equally unfavourable or mutually exclusive. Ethical dilemma involves the need to choose from among two or more morally acceptable courses of action, when one choice prevents selecting the other; or, the need to choose between equally unacceptable alternatives. Easier dilemmas involve a ‘right’ versus ‘wrong’ answer; whereas complex ethical dilemmas involve a decision between a right and another right choice.

In the present case Mr. Ram is certainly in dilemma. He is required to choose between carrying out the development of a drug for a rare, painful and life threatening disease which afflict to only one in a million and the action of spending huge sum of shareholder’s money. As one can see, both are positive and ethically right choices. As a socially responsible person, he has to think in terms of eliminating a serious but at the same time he must be careful in dealing with shareholder’s money. Thus, it is a classic case of ethical dilemma.

ii. As CEO in place of Mr. Ram, I would have opted for the following course of action to resolve this ethical dilemma:

Defining the problem clearly.
Getting the collection of the statistical data across the globe, the previous history of such type of genetic disease and probable cause of its spreading in the coming time.
Searching and developing all possible options available.
Evaluating each available option carefully in term of pros and cons of each of them.
Taking the senior management (Board of Directors,- etc.) in confidence and keep them apprising of the situation.
Comparing positive and negative consequences of each option.
Choosing the best available action keeping resources and other prevailing situations of the company in mind.
Properly implementing the decision taken and keeping the follow-up of the same.

Question 18.
What are the causes of ethical dilemma and how will the senior management handle ethical dilemma?
Answer:
An ethical dilemma involves a situation that makes a person question what is the ‘right’ or ‘wrong’ thing to do. They make individuals think about their obligations, duties or responsibilities. These dilemmas can be highly complex and difficult to resolve. Easier dilemmas involve a ‘right’ versus ‘wrong’ answer; whereas, complex ethical dilemmas involve a decision between a right and another right choice. Ethical dilemmas are caused as there exist no sharp boundaries between ethical and non-ethical and, therefore, people often face ethical dilemmas wherein a clear cut choice becomes very difficult.

Steps to Resolving an Ethical Dilemma

Considering the options available
Considering Consequences
Analysing Actions
Decision making and commitment
Evaluating system

Question 19.
A code of ethics should reflect upon to management’s desire for compliance with the values rules and policies that support an ethical climate, Elucidate.
OR
Write short note on the following; Code of ethics.
Answer:
Code of ethics outlines a set of fundamental principles which could be used as the basis for operational requirements (things one must do), operational prohibitions (things one must not do). It is based on a set of core principles and values and is by no means designed for convenience.

Corporate code of ethics often contains six core values which include :

Trustworthiness
Respect
Responsibility
Fairness
Caring
Citizenship

Question 20.
Most of the companies begin the process of establishing organizational ethics programme by developing codes of conduct. What are the core values or principles contained in these codes of conduct. Briefly discuss the legal provisions in respect of codes of conduct in India and USA .
OR
Your company is listed in the Bombay Stock Exchange there is a proposal set-up its business in USA. You are required to prepare a brief note for the chairman explaining the code of conduct and business ethics in both the countries.
Answer:
The Chairman
XYZ Limited
Sub: Note on code of conduct and Business Ethics Dear Sir,
Code of conduct and Business Ethics India
1. Regulation 17(5)

The board of directors shall lay down a code of conduct for all members of board of directors and senior management of the listed entity.
The code of conduct shall suitably incorporate the duties of independent directors as laid down in the Companies Act, 2013.

2. Regulation 25(5)
An independent director shall be held liable,” only in respect of such acts of omission or commission by the listed entity which had occurred with his knowledge, attributable through processes of board of directors, and with his consent or connivance or where he had not acted diligently with respect to the provisions contained in these regulations.

3. Regulation 26(3)
All members of the board of directors and senior management personnel shall affirm compliance with the code of conduct of board of directors and senior management on an annual basis.

4. Regulation 16(d)
“Senior Management” shall mean officers/personnel of the listed entity who are members of its core management team excluding board of directors and normally this shall comprise all members of management one level below the executive directors, including all functional heads.

Code of conduct and Business Ethics United States of America:

In the United States of America, Section 406 of the Sarbanes Oxley Act, 2002 requires public companies to disclose whether they have codes of ethics, and also to disclose any waivers of those codes for certain members of senior management. Section 406(a) of the Regulation requires companies to disclose:
Whether they have a written code of ethics that applies to their principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions.
Any waivers of the code of ethics for these individuals.
Any changes to the code of ethics.

Question 21.
Write short notes on the following; Ethical Consumerism.
Answer:
Ethical consumerism is the purchasing of products that do not harm or exploit the workers who help in producing a product, and to minimise their impact on the environment. Ethical consumer practices aim at the fulfilment of the objectives of socially responsible trade.

Supporting local industries that hire local artisans as designers, using cruelty-free cosmetics, shopping with reusable bags, drinking with a metal straw, or carrying a tumbler to reduce plastic waste-consumers now think about the ethical supply chain.

Thus, in the global context ethical consumerism deals with the ethical and moral aspects of product value chain from production, i.e. sourcing of materials, down to retailing of the products. The ethical consumer ideal implies that individual consumers can have a significant role, through their daily purchasing decisions, in promoting ethical corporate practices.

Question 22.
Elucidate the following; Code of Conduct.
Answer:
The Code of Conduct or the Code of Business Conduct contains standards of business conduct that must guide actions of the Board of Directors and Senior Management of the company. A code of conduct is a written document that may contain some inspiration statements but | usually specifies acceptable or unacceptable types of behavior. A code I of conduct is more akin to a regulatory set of rules and as such tends to I elicit less debate about specific actions.

SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015:
Regulation 17(5) of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 provides that the board shall lay down a code of conduct for all Board members and senior management of the Listed Entity.

The code of conduct shall be posted on the website of the Listed Entity. All Board members and senior management personnel shall affirm compliance with the code on an annual basis. The Annual Report of the Listed Entity shall contain a declaration to this effect signed by the CEO.

Companies Act, 2013:
The Code of Conduct of a company shall suitably incorporate the duties of j Independent Directors as laid down in the Section 149(8) of the Companies i Act, 2013 which provides that the company and the Independent Directors | shall abide by the provisions specified in Schedule IV.

Question 23.
Elucidate the following; Contents of a code of conduct.
OR
The code of conduct for each company summarises its philosophy of doing business. In the light of the above statement, enotnerate the contents of such code.
Answer:
The code of conduct may include the following:

Company Values
Avoidance of Conflict of Interests
Accurate and timely disclosure in reports and documents that the company files before Government agencies as well as in the company’s other communications
Compliance of applicable laws, rules and regulations including Insider Trading Regulations
Maintaining confidentiality of the company affairs
Standards of business conduct for the company’s customers, communities, suppliers, shareholders, competitors, employees
Prohibition for the Directors and senior management from taking corporate opportunities for themselves or their families
Review of the adequacy of the Code annually by the Board
No authority to waive off the Code should be given to anyone in any circumstances.

Question 24.
The code of conduct of a company summarizes its philosophy of doing business the exact details of this code area matter of discretion enumerate the principles of drafting the code of conduct as following in most of the companies.
OR
The code of conduct of each company summarises its philosophy of doing business the exact details of this code are a matter of discretion but there are some common principles in drafting of the code in most of the companies. What are these principles.
Answer:
Code of conduct, which is popularly known as Code of Business Conduct contains standards of business conduct that must guide actions of the Board and senior management of the company.

The Code of Conduct for each company summarises its philosophy of doing business. Although the exact details of this code are a matter of discretion, the following principles have been found to occur in most of the companies:

Use of company’s assets.
Avoidance of actions involving conflict of interests.
Avoidance of compromising on commercial relationship.
Avoidance of unlawful agreements.
Avoidance of offering or receiving monetary or other inducements.
Maintaining confidentiality.
Collection of information from legitimate sources only.
Safety at workplace.
Maintaining and Managing Records.
Free and Fair competition
Disciplinary actions against the erring person.

Question 25.
Ethics is the study of moral decisions that are made by us in the course of performance of our duties and its advantages.
OR
“Companies showing commitment to ethical conduct consistently outper- I form in comparison to those which do not show.” Comment.
OR
How do good business ethics practices help in attracting and retaining talent in the organization and achieve customer satisfaction.
OR
A commitment by corporate management of follow an ethical code of confers a variety a benefits. What are these benefits?
OR
You are the company secretary of Innovative Products Ltd. The board of directors desires to know the advantages of business ethics draft a note for consideration of the board of directors.
Answer:
To,
The Board of Directors Innovative Products Ltd.
Subject: RESOLVING ETHICAL DILEMMA
Dear Sir,
Business Ethics: Business ethics (also known as corporate ethics) is a form of applied ethics or professional ethics, that examines ethical principles and moral or ethical problems that can arise in a business environment.

More and more companies have begun to recognize the relation between business ethics and financial performance. Companies displaying a “clear commitment to ethical conduct” consistently outperform those companies that do not display an ethical conduct. Adherence of business ethics results in the following benefits –

1. Attracting and retaining talent
The ethical climate matters a lot to the employees. A company that adheres to ethical values and dedicatedly takes care of its employees is rewarded with equally loyal and dedicated employees. Talented people like to offer their services on continuous basis in such organisations which adhere to ethical values.

2. Investor loyalty
Investors are concerned about ethics, social responsibility and reputation of the company in which they invest. Investors are becoming more and more aware that an ethical climate provides a foundation for efficiency, productivity and profits.

3. Customer satisfaction
Customer satisfaction is a vital factor of a successful business strategy. Repeated purchases/orders and an enduring relationship with mutual respect are essential for the success of the company. Ethical conduct towards customers builds a strong competitive position for the company.

4. Regulators
Regulators eye companies functioning ethically as responsible citizens, The regulator need not always monitor the functioning of the ethically sound company.

Further, any organisation that acts within the confines of business ethics not only earns profit but also gains reputation publicly.

Sd/-
Mr.X
Company Secretary
Innovative Products Ltd.

Question 26.
“In the globalised world, ethical assessments are based on relativism.” Comment on this statement in the light of business practices adopted by corporates in different parts of the world.
Answer:
In the globalised world, ethical assessments are based on relativism. Some elements or aspects of experience or culture are relative to, i.e., dependent on, other elements or aspects. There are no absolute truths in ethics and that what is morally right or wrong varies from person to person or from society to society. The term often refers to truth relativism, which is the doctrine that there is no absolute truth. The truth is always relative to some particular frame of reference, such as a society or a language or a culture. For example, killing animals for sport (like bull fighting) could be right in one culture and wrong in another.

Adjustments in the holiday calendar, dress code, formality in business dealings, promotional policies adopted by the companies, all vary across regions. Banks in Middle East do not charge interest on housing loans; they buy property and sell at higher prices to be paid in form of instalments. Similarly, Me Donald changes its ingredients in similar products to match worldwide cultural sensitivity.

Question 27.
Describe the following terms: “Indian Ethos”.
Answer:
Indian Ethos in Management refers to the values and practices that can contribute to service, leadership and management. According to Indian ethos the long-term solution lies in an inner discipline or education which brings a greater light, strength, energy and discrimination to our mind and heart and our higher aspirations and ultimately transforms our consciousness and life.

The mental, moral and psychological discipline described in these Indian spiritual traditions provides a practical system of “value education” which can lead to a deeper and more lasting moral transformation than the mostly intellectual and superficial approach to ethics taught in modern academic and management education. The present ethical debate in the corporate world is focused mostly on values like honesty, integrity, fairness or transparency. But the scope of ethics is not confined to these values only.

Thus the essence of good governance and leadership lies not in the paraphernalia of systems and procedures but on the quality of people who create, govern or operate the systems, which is knows as Sanathana Dharma (the eternal essence), and have been influenced by various strands of Indian philosophy. .

Question 28.
Compliance should be ethical and in spirit of good intention for compliance of laws. In view of this, describe the term ‘Compliance with Spirit of Law’.
Answer:
Meaning of compliance – In the context of corporate governance, compliance means adhering to the law. Ethics is the intent to observe the spirit of law. In other words, it is the expressed intent to do what is right. In the wake of recent corporate scandals, a program that strongly emphasizes both ethics and compliance is good business.

Meaning of ethical compliance – An ethical compliance management programme ensures that the mechanisms are in place to provide early warning of deviations from guidelines and regulations. It is essential to create or expand a culture of trust, enthusiasm, and integrity – critical attributes that can produce measurable results in terms of productivity, employee satisfaction, customer satisfaction, and, ultimately, brand equity.

Conclusion – It is true to say that ‘Compliance should be ethical and in spirit of good intention for compliance of laws’. The enterprise response to compliance mandates seems to be to create and implement whatever compliances are prescribed – to ‘get it done’. The goal is to simply meet the ‘letter of the law’. The effort is directed towards completing Compliance tasks as quickly as possible so all could return to ‘real’ business tasks. But ensuring compliances as per the “spirit of law” is more important.

Governance Risk Management Compliances and Ethics Notes

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

December 28, 2022

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

Question 1(a)
Mango Communications Ltd. is a new company that is willing to take over Telecommunication licenses to operate in 20 telecom circles and get itself listed on the stock exchange but present Government policy does not permit issuing new licenses. There is another telecom company by name Tango Telecom Limited having listed with BSE and NSE holding licenses for 22 telecom circles. Latter Company is looking for some 1 external reconstruction through merger or acquisition due to its operational ineffectiveness. As a Company Secretary, you are asked to find out the way through which a merger deal can happen so that Mango Communications Ltd. could resolve the issues relating to listing and licenses. (5 Marks)
Answer:
→ In 2014, the Department of Telecommunications, Government of India issued ‘Guidelines for Transfer/Merger of various categories of Telecommunication service licenses/authorization under Unified License (UL) on compromise, arrangements and amalgamation of the companies.

→ Further, the Telecom Regulatory Authority of India (TRAI) has released ‘Recommendations on Ease of Doing Telecom Business.’ As a result, the telecom sector permits 100% FDI for better management and funding, as well as permits trading of spectrum and telecom licenses.

→ However, the scheme of compromise, arrangements and amalgamation of telecom companies is governed by the various provisions of the Companies Act, 2013.

→ As per a scheme of merger or acquisition, there shall be transfer of assets/licenses/authorization held by Transferor Company to the Transferee (Acquiring) Company.

→ Consequently, due to such merger or acquisition and transfer of licenses thereon, the total spectrum held by the Transferee entity shall not exceed 25% of the total spectrum assigned for access services and 50% of the spectrum assigned in a given band.

→ Where, due to merger or acquisition, the total spectrum held by the relevant entity is beyond these prescribed limits, the excess spectrum must be surrendered within one year of the permission being granted.

→ Where, due to transfer of telecom licenses in a service area, the Transferee entity becomes a ‘Significant Market Power’ (SMP), then the rules and regulations applicable to SMPs would apply to the Transferee entity.

→ In the given case, Mango Communications Ltd. wishes to acquire telecom licenses to operate in 20 telecom circles. On the other hand, Tango Telecom Ltd. (listed company and holding 22 telecom licenses) is considering corporate restructuring through merger or acquisitions.

→ In the given case, Mango Communications Ltd. should propose a merger with Tango Telecom Ltd. The proposed merger shall be approved by the honourable National Company Law Tribunal (NCLT), as per sections 230-232 of the Companies Act, 2013, along with applicable rules.

→ Post-merger, Mango Communications Ltd. shall be dissolved and the management team of the Transferee company (Tango Telecom Ltd.) shall be revamped with better management practices.

→ Tango Telecom Ltd. shall continue to be a listed company and licenses shall be used by the combined entity. Due to synergy benefits the operational ineffectiveness of Tango Telecom Ltd. can be rectified, and the combined entity shall reap higher benefits.

→ Thus, Mango Communications Ltd. may plan a scheme of merger with Tango Telecom Ltd., subject to the legal compliances, as mentioned above.

Question 1 (b)
It is said that ‘corporate restructuring’ always has motives. Elaborate on the ‘financial motives’ that are prevalent. (5 Marks)
Answer:
→ Corporate Restructuring means re-arranging business of a company for increasing its efficiency and profitability.

→ Restructuring is a method of changing the organizational structure in order to achieve the strategic goals of the organization. It involves dramatic changes in an organization.

→ The strategy adopted shall depend on the motive or organizational goals and hence a different strategy shall apply to different companies.

→ Corporate Restructuring aims at different motives at different times for different companies.

→ Thus, it is said that corporate restructuring always has motives. Following are the financial motives of corporate restructuring
1. Increase Operational Efficiencies: A scheme of amalgamation leads to operational efficiencies. The combination of operations creates integration, which in turn increases earnings potential and reduces cost. It results to focused operational efforts, rationalization, standardization, rise in productivity, and eliminate duplication (for example: HLL and TOMCO, Flipkart.com and Myntra.com).

2. Economies of scale: A combination of two or more companies increases scale of production. The input-output ratio improves with larger scale of operations. Economies of scale are obtained when increase in volume of production leads to a reduction in cost of production per unit. This gives the company a competitive advantage by gaining an ability to reduce the prices to increase market share, or earn higher profits while maintaining the price, (for example: Reliance Industries and Reliance Petroleum).

3. Tax benefits: Companies use mergers and amalgamations for tax management. Especially, where there is merger between profit making and loss-making company. Major income tax benefit arises from set-off and carry forward provision u/s 72A of the Income-tax Act, 1961.

4. Reduced Competition: Horizontal merger results in reduction in competition. Competition is one of the most common and strong reasons for mergers and acquisitions, (for example: Sun Pharmaceutical and Ranbaxy).

5. Reduced Risk: Amalgamation with companies involved into unrelated business areas leads to diversification. It facilitates the smoothening of business cycles effect on the company due to multiplicity of businesses, thereby reducing risk, (for example: Reliance Industries and Network TV18, NetMeds).

6. Maximize Value of Assets: Due to corporate restructuring companies are able to utilize their assets and capacities to better effect. It results in maximizing the value of assets and its efficiencies.

7. Access to Capital Markets – Mergers and amalgamations increase the size of companies and they become a dominant force in the market. Due to their large size their capitalization is higher and hence its bargaining power rises. This facilitates raising funds in the market, either through equity or debt funds.

8. Increase in Market Share: A merger facilitates increase in market share of the merged entity. Rise in market share leads to higher turnover and enhanced profits. Horizontal merger is the key to increasing market share. Mergers can increase the value of shareholders of both companies through utilization of combined resources, (for example: Idea and Vodafone).

9. Financial Management: Financial synergy benefits include liquidity, eliminating financial constraints, deployment of surplus cash, enhancing debt capacity, lowering cost of capital etc. Sometimes, companies with surplus cash may merge to create investments opportunities, thereby enhancing market value.

10. Improving Debt-Equity position: Companies with high debt (leverage) prefer to merge with equity-oriented companies to balance their debt-equity position. This reduces risk and creates stability. This will allow better tax shield and improving share-holders’ wealth.

Question 1(c)
John Ltd. is in the process of taking over Tony Ltd. Turnover of Tony Ltd. as per latest financial statements is ₹ 800 crore and assets value is ₹ 280 Crore. There are no material changes in the value of assets and projected turnover for the current financial year. The Board of Director seek your opinion for obtaining approvals in terms of Competition Act, 2002. (5 Marks)
Answer:
→ As per section 5 of the Competition Act, 2002, ‘combination’ means acquiring control, shares, voting rights or assets by a person over an enterprise, where such person has control over another enterprise engaged in competing business.

→ Thus, the term ‘combination’ includes every scheme of merger, amalgamation, acquisition, takeover, strategic alliance and joint-venture etc.

→ Section 6 of the Competition Act, 2002 regulates combinations. Any combination which causes or likely to cause appreciable adverse effect on competition within the relevant market in India is prohibited and such combination is void.

→ The Competition Act, 2002 has prescribed certain threshold limits to ascertain the nature, scale and economic bearing of a combination.
The threshold limits are based on combined assets and combined turnover of the entities.

→ Any person or enterprise, who or which proposes to enter into a combination, and crosses such threshold limits, shall notify the Competition Commission of India (CCI). No combination shall come into effect until 210 days have passed from the day on which CCI is notified or the CCI has passed orders, whichever is earlier.

→ In the given case, John Ltd. plans to takeover Tony Ltd. which results in a combination. Where, the combined assets or combined turnover crosses the prescribed threshold limits, approval of the Competition Commission of India is mandatory.

→ For seeking approval to the proposed combination, John Ltd. and Tony Ltd. shall give notice to the CCI by filing Form I or Form II, whichever applicable, along with prescribed filing fees.

→ The Competition Commission of India shall approve the combination based on following steps:

Upon receipt of such application, the CCI shall form its prima facie opinion as to whether combination is likely to cause or has caused an appreciable adverse effect on competition within the relevant market in India within 30 working days of the receipt of such notice.
Where CCI observes any adverse effect of competition, it shall issue a (SCN) Show Cause Notice to the parties to the combination, about initiating an investigation in respect of such combination.
The CCI shall, within 7 days, direct the parties to publish the details of the combination, to the public and persons likely to be affected by such combination.
The Commission may invite any persons affected or likely to be affected by the said combination, to file their written objections within 15 working days of the public notice.
The CCI may, within 15 working days of filing of written objections, call for such additional information from parties.
After receipt of all information and within 45 days from expiry of period for filing additional information, the CCI shall proceed to deal with the case.

→ The Commission, after considering all relevant facts and circumstances of the case and assessing the effect of any combination on the relevant market in India, may
(a) Approve the combination, where the CCI comes to a conclusion that the combination does not, or is not likely to, have an appreciable adverse effect on the competition.
(b) Reject the combination, where the CCI is of the opinion that the combination has, or is likely to have an adverse effect on competition.
(c) Modify the scheme of combination, where the CCI is of the opinion that the adverse effect on competition can be eliminated by modifying such combination.

→ As per section 31(11), where the CCI does not, on expiry of a period of 210 days from the date of filing of notice, pass an order or issue any direction in accordance with the provisions of the Act, the combination shall be deemed to have been approved by the Commission

Question 1(d)
The paid-up Equity Share Capital of Zumba Ltd. is 100000 shares of ₹ 10 each as on 1st April, 2019. The promoters hold 37000 shares as on 1st April, 2018, which is 37% of the paid-up capital. The promoters are three shareholders, Ram holding 21000 (21%), Shyam holding 12000 shares (12%) and Mohan holding 4000 shares (4%).

The company makes a preferential allotment to its directors as follows: Ram 7000 shares and Mohan 1000 shares.

Define creeping acquisition and evaluate the requirement of public announcement in above case as per Securities and Exchange Board of India (Substantial Acquisition of Securities and Takeovers) Regulations, 2011. (5 Marks)
Answer:
→ Takeover implies acquisition of control and management of an existing company, through the purchase or exchange of shares. Generally, takeovers take place where shares are acquired from the shareholders of a company at a specified price to gain control of that company

→ In India, takeover of listed companies is regulated by the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (SAST).

→ The SEBI (SAST) Regulations provides certain trigger events where the Acquirer is required to make a public announcement and an open offer to the shareholders of Target Company.

→ As per Regulation 3(3) of SEBI (SAST) Regulations, an acquirer who (along with PACs) already holds 25% or more voting rights in a target company, but less than maximum permissible non-public shareholding, is allowed to acquire additional voting rights in the target company to the extent of upto 5% within a financial year ending on 31st March, without making an open offer.

→ Any acquisition beyond 5% of the voting rights of the target company can be made only after making a public announcement of an open offer for acquiring shares of such a target company. Such event is known as ‘Creeping Trigger.

→ In the given case,

Ram, Shyam and Mohan are promoters of Zumba Ltd. (having 100,000 equity shares)
Ram holds 21000 shares (21%), Shyam holds 12000 shares (12%) and Mohan holds 4000 shares (4%), together amounting to 37% shareholding.
The company makes a preferential allotment of equity shares to Ram 7000 shares and Mohan 1000 shares, total amounting to 8000 shares.
Hence, post issue shareholding of Ram 28000 shares and Mohan 5000 shares. Further, the total paid-up equity shares of Zumba Ltd. shall become 108000 shares.
As a promoter group, their shareholding has become 45000 paid-up equity shares out of total 108,000 paid-up equity shares. The shareholding percent has become 41.67% from the earlier 37%. Hence, the additional acquisition at promoter group level is 41.67% – 37% = 4.46%
Since the acquisition by all the promoters together does not exceed 5% in a financial year there is no creeping trigger.
However, we need to check what would be the post issue holding of individual promoters.
Post issue, Ram holds 28000 paid-up equity shares out of 108,000 paid-up equity shares. Hence, percentage shareholding is 25.93% as compared to 21 % prior to preferential issue. Hence, individually, Ram has crossed the threshold limit of 25% as per Regulation 3(1) of SEBI (SAST) Regulations, 2011. Hence, Ram shall be liable to make public announcement.
Post issue, Mohan holds 5000 paid-up equity shares out of 108,000 paid-up equity shares. Hence, percentage shareholding is 4.63% as compared to 4% prior to preferential issue. Hence, there is no trigger for Mohan as per the SEBI (SAST) Regulations, 2011. Hence, Mohan is not liable to make public announcement.

Attempt all parts of either Q. No. 2 or Q. No. 2A

Question 2(a)
Payment of stamp duty under Indian Stamp Act, 1899 is required even in cases of orders made by National Company Law Tribunal (NCLT) in terms of Sections 230 to 240 of the Companies Act, 2013. Are there any exceptions or exemptions? (5 Marks)
Answer:
→ Article 265 of the Constitution permits levy and collection of tax by an authority of law. In India, stamp duty is levied by the States and hence rate and incidence of stamp in different states varies.

→ As per the Indian Stamp Act, 1899, an instrument includes every document by which any right or liability is or purports to be created, transferred limited extended, extinguished or recorded.

→ In the landmark case of Li-taka Pharma, v. State of Maharashtra, it was held that National Company Law Tribunal (NCLT) order for sanctioning a merger (under sections 230-240) and requiring transfer of assets and liabilities of the Transferor Company to the Transferee Company is a conveyance and hence chargeable to stamp duty.

→ However, there are certain following exceptions and exemptions from payment of stamp duty:
1. No stamp duty is payable on an instrument sanctioning an amalgamation for rehabilitating business and undertaking of a sick industrial company.

2. Further, the Central Govt, has exempted payment of stamp duty for cases of amalgamation between Holding and Subsidiary company, subject to fulfilment of following conditions

When at least 90% of the issued capital of the transferee company is in the beneficial ownership of the transferor company, or
When the transfer is between a parent and a subsidiary company, one of which is beneficial owner of not less than 90% of the issued share capital of the other, or
When transfer takes place between two subsidiary companies each of which is having not less than 90% of the share capital in the beneficial ownership of the parent company.
However, since stamp duty is a State matter, the exemption for Holding Subsidiary company will be applicable only where the State Govt, follows Central Govt, notification.

Question 2(b)
‘Buy-back strategy’ is now-a-days being adopted by leading corporate bodies. Mention one case that has happened recently specifying the benefits of buy-back. (5 Marks)
Answer:
→ Buy-back means the purchase of its own shares or other specified securities by a company. Section 68 of the Companies Act, 2013 enables a company to re-purchase its own securities.

→ In case of listed companies, along with Companies Act, 2013, there shall be compliance of the SEBI (Buy-Back of Securities) Regulations, 2018.

→ Buy-back results in returning the funds to the shareholders and a reduction of the floating stock of the company’s securities in the market.

→ Following are the benefits of buy-back of equity shares
(a) To increase earnings per share (EPS).
(b) To improve return on capital employed (ROCE), return on equity (ROE) and to enhance long-term shareholder value.
(c) To compensate shareholders in case of low trading volumes, le., to provide exit route.
(d) To increase control by consolidating the Promoters’ stake in the company.
(e) To prevent/protect from any hostile takeover bid. Buy-back acts as a defence mechanism against hostile takeovers by increasing Promoters’ shareholding.
(f) To return surplus cash to shareholders.
(g) To achieve optimum capital structure, le., a mix of borrowing and own funds.
(h) To reduce cost of capital, thereby increasing future profitability.
(i) To ensure optimum allocation of funds generated, by avoiding any unproductive investments.
(j) To support share price during periods of dull market conditions.

→ In the recent past, many companies have adopted buy-back strategy to return funds to the shareholders and reduce its paid-up equity capital.

→ Following are example of buy-back in 2020

WIPROLtd.
Tata Consultancy Services Ltd. (TCS)
Ajanta Pharma Ltd.
NMDC Ltd. (National Mineral Development Corporation)
NTPC Ltd. (National Thermal Power Corporation)

Question 2(c)
“Competition Commission of India takes into consideration various factors while assessing the adverse effect on competition.” – Analyse briefly. (5 Marks)
Answer:
→ As per section 5 of the Competition Act, 2002, ‘combination’ means acquiring control, shares, voting rights or assets by a person over an enterprise, where such person has control over another enterprise engaged in competing business.

→ Thus, the term ‘combination’ includes every scheme of merger, amalgamation, acquisition, takeover, strategic alliance and joint-venture etc.

→ The Competition Act, 2002 has prescribed certain threshold limits to ascertain the nature, scale and economic bearing of a combination. The threshold limits are based on combined assets and combined turnover of the entities.

→ Any person or enterprise, who or which proposes to enter into a combination, and crosses such threshold limits, shall notify the Competition Commission of India (CCI) and get its approval.

→ It is mandatory for the Commission to enquire whether the combination referred to in that notice, has caused or is likely to cause an appreciable adverse effect on competition in India. CCI shall verify whether the benefits of combination are more or less than the adverse effects.

→ Following factors are considered by the Competition Commission of India while evaluating appreciable adverse effect of combinations on competition in the relevant market-
(a) actual and potential level of competition;
(b) extent of barriers to entry into the market;
(c) level of combination in the market;
(d) degree of countervailing power in the market;
(e) chances that the combination would result increases prices or profit margins;
(f) extent of effective competition likely to sustain in a market;
(g) potential market share, in the relevant market;
(h) chances that combination would result in the removal of strong and effective competitor(s);
(i) nature and extent of vertical integration in the market;
(j) nature and extent of innovation; and
(k) relative advantage, through the contribution to the economic development.

Alternative Q. No. 2A

Que. 2A
(i) Ram Ltd. is considering merger with Shyam Ltd. Ram Ltd. shares are currently traded at ₹ 20. It has 1,70,000 shares and its Profit after Taxes (PAT) amounts to ₹ 8,50,000. Shyam Ltd. has 40,000 shares having market price of ₹ 15 and its PAT is ₹ 3,00,000.
(a) If the merger goes through by exchange of equity shares and the exchange ratio is based on the current market price, what would be the new earning per share of Ram Ltd.?
(b) Shyam Ltd. wants to ensure earnings available to its shareholders are not reduced due to proposed merger. What would be the exchange ratio in such a case? (5 Marks)
Answer:

Particulars	Ram Ltd.	Shyam Ltd.
Profits after Tax (PAT)	₹ 8,50,000	₹ 3,00,000
Number of Equity Shares	1,70,000	40,000
Hence, EPS (PAT/No. of Equity shares)	₹ 5.00	₹ 7.50
Market Price per share	₹ 20	₹ 15

(a) The merger goes through by exchange of equity shares and the ex-change ratio is based on the current market price.

Share Exchange (Swap) Ratio = Market Price of Shyam Ltd. (Target company)
Market Price of Ram Ltd. (Acquirer company)

Share Exchange (Swap) Ratio = 0.75 times

Number of shares of Ram Ltd. to be issued to shareholders of Shyam Ltd.	Shares in Shyam Ltd. (x) Swap ratio = 40,000 shares (x) 0.75 = 30,000 shares
Total equity shares of Ram Ltd. after the merger	Existing equity shares of Ram Ltd. (+) New equity shares issued to shareholders of Shyam Ltd. = 170,000 shares (+) 30,000 shares = 200,000 shares
Combined PAT of Ram Ltd. after the merger	PAT of Ram Ltd. (+) PAT of Shyam Ltd. = ₹ 8,50,000 + ₹ 3,00,000 = ₹ 11,50,000
Hence, EPS of Ram Ltd. after the merger	Total PAT post merger/Total shares post merger = ₹ 11,50,000/200,000 shares = ₹ 5.75

(b) Shyam Ltd. wants to ensure earnings available to its shareholders are not reduced due to proposed merger. In such case, the exchange ratio shall be based on the pre-merger EPS of both the companies. Let us verify the same from the following calculations
Share Exchange (Swap) Ratio = Pre-merger EPS of Shyam Ltd. (Target company)
Pre-merger EPS of Ram Ltd. (Acquirer company)

Share Exchange (Swap) Ratio = 1.50 times

Number of shares of Ram Ltd. to be issued to shareholders of Shyam Ltd.	Shares in Shyam Ltd. (x) Swap ratio = 40,000 shares (x) 1.50 = 60,000 shares
Total equity shares of Ram Ltd. after the merger	Existing equity shares of Ram Ltd. (+) New equity shares issued to shareholders of Shyam Ltd. = 170,000 shares (+) 60,000 shares = 230,000 shares
Combined PAT of Ram Ltd. after the merger	PAT of Ram Ltd. (+) PAT of Shyam Ltd. = ₹ 8,50,000 + ₹ 3,00,000 = ₹ 11,50,000
Hence, EPS of Ram Ltd. after the merger	Total PAT post merger/Total shares post merger = ₹ 11,50,000/230,000 shares = ₹ 5.00

Hence, where the share exchange ratio is 1.50 times, the total earnings of Shyam Ltd. is not reduced after the merger.

Question 2A(ii)
A meeting of members of Jwala International Ltd. was held as per the orders of the Tribunal for considering a scheme of compromise and arrangement in which 300 members holding 10,00,000 shares were present. 130 members holding 6,00,000 shares voted in favour, 120 members holding 1,00,000 shares voted against and remaining 50 members with 3,00,000 shares abstained. Examine with reference to provisions of the Companies Act, 2013 as to whether the scheme is approved? (5 Marks)
Answer:
→ Section 230 of the Companies Act, 2013 enables a company to enter into scheme of compromise and arrangement, including merger and amalgamation.

→ As per section 230(1) of the Companies Act, 2013, an application shall be made to National Company Law Tribunal (NCLT) for sanctioning a scheme of compromise and arrangement.

→ As per section 230(6) of the Companies Act, 2013, a scheme of com-promise or arrangement shall require approval by simple majority of members (present and voting) representing three-fourth (3/4th) in value of the members or class thereof, as the case may be.

→ Thus, a simple majority in number, and not less than three-fourth (3/4th) in value of members (present and voting) at the meeting must approve the scheme. Hence, section 230(6) requires dual majority, in number as well as in value.

→ In the given case of Jwala International Ltd., (assuming 1 share = 1 vote)

Particulars	Number of Members	Number of Shares held
Total members present at meeting	300	10,00,000
Total members abstained from voting	50	3,00,000
Total members voted at the meeting	250	7,00,000
Total members voted in favour of the resolution	130	6,00,000
Total members voted against the resolution	120	1,00,000

→ From the above table, we observe that 130 members voted in favour of the resolution, out of the total 250 members (present and voting). 120 members voted against the resolution. Hence, the first condition of simple majority in number of members is satisfied. The members voting in favour are more than the members voted against the resolution.

→ The shareholding of members voting is favour is 6,00,000 shares out of the total 7,00,000 shares of member (present and voting). Hence, there is 6/7 majority (approx. 86%) in terms of value of shares in favour of the resolution. Hence, the second condition under section 230(6) is fulfilled.

→ Since, all conditions as per section 230(6) of the Companies Act, 2013, are fulfilled, the scheme is. said to be approved by the members of Jwala International Ltd.

Question 2A(iii)
Woodland Telecommunication Ltd., listed with National Stock Exchange, is willing to acquire the business of Iron Finance Ltd., a Nonbanking Financial Company listed with BSE through a scheme of arrangement in terms of the Companies Act, 2013. Woodland Telecommunications Ltd. has an outstanding loan of ₹ 2,000 crores from ICICI Bank. Combined assets post-merger would be ₹ 10,000 crores. Suggest the list of approvals required for getting the scheme of merger considered by the Tribunal? (5 Marks)
Answer:
→ Section 230 of the Companies Act, 2013 enables a company to enter into scheme of compromise and arrangement, including amalgamation.

→ Thus, section 230 is an empowering section, which provides an oppor-tunity for companies to enter into corporate restructuring transactions such as mergers and acquisitions.

→ In the given case, Woodland Telecommunication Ltd. is willing to acquire Iron Finance Ltd., (NBFC) through a scheme of arrangement in terms of the Companies Act, 2013.

→ Following approvals are mandatory for getting the scheme of merger considered by the Tribunal:
1. Board of Directors:
The first step in carrying out a scheme of merger is approval by the Board of Directors of both the companies. The scheme shall be sanctioned through a valid Board resolution, passed in a valid Board meeting.

2. Members:
Members’ approval (both companies) to the scheme of merger is important for the Tribunal’s sanction. As per section 230(6), the scheme of arrangement is required to be approved by a simple majority in number of members (present and voting) and three- fourth (3/4th) in value of the members or class thereof.

3. Stock Exchange:
In the given case, Woodland Telecommunication Ltd. is listed on National Stock Exchange, while Iron Finance Ltd. is listed on Bombay Stock Exchange. Since both companies are listed, approval from NSE and BSE is mandatory.

As per SEBI (LODR) Regulations, 2015, both companies are required to file the scheme of merger with the respective stock z exchange. The companies shall obtain ‘Observation Letter’ or ‘No Objection’ from the respective stock exchange.

Woodland Telecommunication Ltd. shall apply for listing of additional shares on NSE (based on agreed share exchange ratio).
On the other hand, Iron Finance Ltd. shall apply for delisting of its shares from BSE and subsequent compliances.

4. Banks and Financial Institutions:
As per given data, Woodland Telecommunication Ltd. has an outstanding loan of ₹ 2,000 crores from ICICI Bank. Hence, approval from ICICI Bank shall be taken. Further, approval shall be also needed where there is any financial assistance sanctioned but not yet disbursed.

5. Competition Commission of India (CCI):
As per given data, the combined assets of both companies’ post-merger would be ₹ 10,000 crores. As per sections 5 and 6 of the Competition Act, 2002, where the combined assets post-merger exceeds ₹ 2000 crores (at enterprise level) and exceed ₹ 8000 crores (at group level), approval from the CCI is mandatory. Woodland Telecommunication Ltd. shall notify the CCI and obtain its approval.

6. Reserve Bank of India (RBI):
As per given data, Iron Finance Ltd. is a Non-Banking Financial Company (NBFC). Generally, approval of the RBI is not needed for merger of an NBFC. However, if an NBFC had license (authorization) to accept deposits from the public, RBI approval shall be needed. The same shall be verified prior to the merger.

7. Telecom Regulatory Authority of India (TRAI):
As per given data, Woodland Telecommunications Ltd. is a telecom sector company. Hence, approval from Telecom Regulatory Authority of India shall be needed. The Govt, of India has issued ‘Guidelines for Transfer/Merger of various categories of Telecommunication service licenses/authorization under Unified License (UL) on compromise, arrangements and amalgamation of the companies.

8. Foreign Exchange Management Act (FEMA):
Where a scheme of merger includes issue of shares/funds to Non-Resident Indians (NRI), the Transferee company is required to obtain prior permission of RBI and FEMA compliance.

9. Income-tax Act, 1961:
The Income Tax Department shall be intimated about the proposed scheme of compromise or arrangement and their objections suggestions are invited. Where income tax benefits are to be obtained, the scheme of merger shall comply with the conditions laid down under the Income-tax Act, 1961.

→ Hence, in the scheme of merger – acquisition between Woodland Telecommunication Ltd. and Iron Finance Ltd., the above approvals shall be mandatory for getting the scheme considered and sanctioned by the Tribunal.

Question 3(a)
Between outbound merger and inbound merger, which one appears more beneficial to Corporate India? (3 Marks)
Answer:
→ Section 234 of the Companies Act, 2013, deals with merger between a Foreign Company and an Indian Company. A Foreign company means any company or body corporate incorporated outside India, whether having a place of business in India or not.

→ In case of cross-border mergers, there shall be compliance of Foreign Exchange Management (Cross Border Merger) Regulations, 2018, along with the Companies Act, 2013.

→ An inbound merger is one where a Foreign company merges with an Indian company resulting in an Indian company being formed. Here, the Foreign company is dissolved and the Indian company continues to exist.

→ An outbound merger is one where an Indian company merges with a Foreign company resulting in a foreign company being formed. Here, the Indian company is dissolved and the Foreign company continues to exist.

→ Inbound mergers are more beneficial to corporate India due to following reasons
a. Geographical Diversification – An inbound merger leads to geographical diversification (entry in new markets).
b. Global Presence – Inbound mergers help Indian companies in making their global presence felt. It increases their goodwill and reputation.
c. Cost Effectiveness – Through inbound mergers, Indian companies can access existing infrastructure and resources in the foreign country, thereby reducing its costs.
d Technological Advancement – Inbound mergers enable Indian companies to use intellectual properties, hence enhancing technical know-how.
e. Efficient Distribution – Inbound mergers help Indian companies to create large distribution network beyond global boundaries.
f. Tax revenue – Since the Indian companies continues to exist, the Indian Govt, shall get higher tax revenues.

Question 3(b)
Is external reconstruction superior to internal reconstruction? (3 Marks)
Answer:
→ Corporate Reconstruction means re-arranging business of a company for increasing its efficiency and profitability. It involves dramatic changes in a company to achieve its objectives.

→ Reconstruction is a process of significantly changing a company’s business model, management team or financial structure to meet the challenges and increase shareholders’ value.

→ Following are types of reconstruction –
1. External Reconstruction

External reconstruction is a process where a company undergoes a change, through mergers, amalgamations acquisitions etc.
It is an arrangement whereby the assets and liabilities of two or more companies come under the control of newly formed company.
External reconstruction is a situation where an existing company is liquidated and taken over by another company and there is transfer of assets and liabilities.
Shareholders of transferor company are issued shares in the newly formed Transferee company, based on agreed share exchange ratio.
External reconstruction facilitates growth of a company, through economies of scale, reducing competition, technological advantage, higher profitability, synergy benefit etc.

2. Internal Reconstruction

Internal reconstruction is a method where an arrangement is made by a company to improve its financial position without going through liquidating.
When a company incurs loss for number of years, the balance sheet does not reflect the true position of the business. Generally, a higher net worth is depicted, than the real one.
Here, the assets are overvalued and it has many intangible assets and fictitious assets. Such a situation does not depict a true picture of financial statements.
In this case of internal reconstruction, the assets are revalued, liabilities are negotiated, and losses suffered are written-off by reducing the paid-up value of shares and/or varying the rights attached to different classes of shares.
However, the existing company is not liquidated.
Internal reconstruction may be done through cost reduction through closure of units, termination programs, or organizational restructuring involving decentralization etc.

→ We observe that external reconstruction is a much wider and complex activity as compared to internal reconstruction. Basically, external reconstruction is growth-oriented process whereas internal reconstruction is survival-oriented process. Both are vital for specific business scenario.

Question 3(c)
Suggest the regulations to be referred to in respect of Combinations under the Competition Act, 2002. (3 Marks)
Answer:
→ Competition Act, 2002 was passed to prevent practices having adverse effect on competition, to promote and sustain competition, and to ensure freedom of trade in Indian markets. A statutory body is formed known as the Competition Commission of India (CCI).

→ As per section 5 of the Competition Act, 2002, ‘a combination’ means acquiring control, shares, voting rights or assets by a person over an enterprise, where such person has control over another enterprise engaged in competing business. Combination includes merger and amalgamation.

→ Section 5 provides certain financial thresholds (combined assets and combined turnover) and all combinations exceeding these financial thresholds are required to be mandatorily approved by the Competition Commission of India (CCI).

→ As per section 6 of the Competition Act, 2002, any combination which causes or likely to cause appreciable adverse effect on competition within the relevant market in India is prohibited and such combination is void.

→ The process of combination analysis undertaken by the CCI is broken down into:
(a) defining the relevant market (product and geographic);
(b) identification of overlap in the relevant market; and
(c) subjecting the combination to competition analysis to ensure that there is no appreciable adverse effect on competition in the relevant market.

→ To facilitate the procedural and substantive provisions, the CCI has provided for informal non-binding pre-merger consultative process and has also provided for guidance notes in order to assist the combining entities in drafting the proposed scheme merger.

→ Basically, sections 5 and 6 of the Competition Act, 2002 stipulate the operative and substantive provisions dealing with the regulation of combinations, along with the CCI (Procedure in regard to the transaction of business relating to combinations) Amendment Regulations, 2011.

→ No combination shall come into effect until 210 days have passed from the day on which notice has been given to the CCI or the CCI has passed orders, whichever is earlier.

→ The CCI has the power to investigate the proposed combination and its effect on the relevant markets in India. Hence, the period of 210 days is extendable based on the number of information requests issued by the CCI.

→ In addition to Combination Regulations, the applicable provisions in relation to confidentiality under Section 57 of the Competition Act and CCI (General) Regulations, 2009 are applicable.

→ Section 43A provides for penalties where any person or enterprise fails to notify the CCI, about a proposed combination.

Question 3(d)
“It would be almost impossible to use the Packman Defence in India” Comment. (3 Marks)
Answer:

A hostile takeover is an offer made directly to a target company’s shareholders, without any previous proposal to the target company’s management. It is a corporate attack on a company.
However, there are various defence tactics against such hostile takeover bid. Packman defence is one such takeover defence strategy.
In a Packman Defence strategy, the target company attempts to purchase the shares of the acquirer (raider) company. This is usually the scenario if the acquirer company is smaller than the target company and the target company has a substantial cash flow or liquid assets.
A Packman Defence strategy can be successful where the target company acquires the shares of the raider company prior to making the public announcement.
Once the acquirer (raider) company makes a public announcement, SEBI imposes certain restrictions on the listed target company.
Regulation 26(2) of the SEBI (SAST) Regulations, 2011, prohibits the target company to enter into any agreement which is not in the ordinary course of business during the offering period (which commences once the public announcement is made).
Hence, after the public announcement is made, it would be almost impossible to use the Packman Defence strategy as a defence mechanism in India.

Question 3(e)
“There are certain practicalities which should be kept in mind while entering into a cross border merger.” Briefly comment. (3 Marks)
Answer:

A cross border merger refers to any merger, amalgamation or arrangement between an Indian Company and Foreign Company.
Cross border mergers shall comply with Section 234 of the Companies Act, 2013, along with the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016 and the Foreign Exchange Management (Cross Border Merger) Regulations, 2018.
Basically, a cross border merger helps in global expansion of companies. It facilitates technology advancements, geographical diversification, cost reduction and higher profitability.
However, cross border mergers are complex transactions subject to many compliances and dynamic variables.
Hence, certain practicalities shall be kept in mind at the time of entering into cross border mergers. Following are the points to be considered
(a) Conduct due diligence on the other firm.
(b) Conduct a risk-benefit analysis before entering into the merger.
(c) Valuation of both the firms is essential to predict the competition law treatment of the merger.
(d) Make sure that when you enter into an outbound merger it is with a company from one of the prescribed jurisdictions.
(e) Have an in-depth analysis of the host country’s regulatory and political background ready before you take the decision of the merger.
(f) Study the tax structure of the other country to understand future tax liabilities.
(g) Study the culture of the other country to avoid future conflicts.

PART II

Question 4(a)
Corporate Insolvency Resolution Process (CIRP) against A Ltd. was initiated on application by its Financial Creditors but the process was not completed within the time limit prescribed in terms of section 12(1) of the Insolvency and Bankruptcy Code, 2016 (IBC). Before completion of the CIRP timeline, the Committee of Creditors in its meeting voted at 70 per cent voting share in favour of a proposal to seek extension for a period of 60 days. Can the Resolution Professional file application, seeking extension of CIRP on the basis of voting results so obtained? (5 Marks)
Answer:

The Insolvency and Bankruptcy Code, 2016 (IBC) offers a uniform, comprehensive insolvency legislation covering corporate debtors. The main purpose of IBC is to ensure a formal and time bound insolvency resolution process.
As per section 12( 1) of IBC, 2016, the Corporate Insolvency Resolution Process (CIRP) shall be completed within a period of 180 days from the date of commencement of the CIRP.
However, Section 12(2) provides that a Resolution Professional can file an application with the NCLT, upon instructions from the Committee of Creditors.
The Committee of Creditors have the power to apply for extension of the basic time limit prescribed under section 12(1). The Committee of Creditors shall pass a valid resolution in a duly convened meeting by a vote of not less than 66% of the voting shares.
Upon passing such resolution, the Committee of Creditors shall instruct Resolution Professional to apply to the NCLT, for extension of CIRP beyond 180 days.
On receipt of application, if the NCLT is satisfied that the subj ect matter of the case is such that Corporate Insolvency Resolution Process cannot be completed within 180 days, it may by order extend the duration of such process by such further period as it thinks fit. However, such period of extension cannot exceed 90 days. [Section 12(3)]
In the given case, the financial creditors initiated a Corporate Insolvency Resolution Process against ‘A’ Ltd. But the process was not completed within 180 days (prescribed time limit). The Committee of Creditors have sought extension of the CIRP. The Committee of Creditors passed a resolution in its meeting with 70% votes in favour of the extension for a period of 60 days.
Based on the provisions of section 12(2) and 12(3) of IBC, 2016, and the valid resolution passed in the meeting of Committee of Creditors, the Resolution Professional can file an application with the NCLT for extension of the time limit of CIRP.

Question 4(b)
Laxmi Bank Ltd. acquired 10 per cent convertible debentures in Bhaskar Ltd. In terms of the issue, in the year 2012 these debentures were converted into the equity shares in Bhaskar Ltd. Consequent to conversion, Laxmi Bank Ltd. became the owner of 5 per cent equity holding in Bhaskar Ltd. Further, Laxmi Bank Ltd. provided a loan of ? 10 crores to Bhaskar Ltd. that became due in the year 2018. Bhaskar Ltd. became defaulter in repayment of loans not only to Laxmi Bank Ltd. but also some other Banks. On the application by ICID Bank, the Adjudicating Authority initiated Corporate Insolvency Resolution Process (CIRP) and appointed Interim Resolution Professional (IRP). The Committee of Creditors, constituted by the IRP include Laxmi Bank Ltd. ICID Bank objected on the ground that Laxmi Bank Ltd. is a related party that should not have any right of representation, participation or voting. Examine the issue and offer your views. (5 Marks)
Answer:
→ As per Section 21 of Insolvency and Bankruptcy Code (IBC), 2016, an Interim Resolution Professional is responsible for the constitution of the Committee of Creditors. He shall collate all claims received against a Corporate Debtor, determine the financial position of the Corporate Debtor and then constitute a Committee of Creditors.

→ Basically, the Committee of Creditors shall comprise of all financial creditors of the Corporate Debtor. A Financial Creditor may appoint its agent/trustee/representative to act on its behalf and participate and vote in the meetings of Committee of Creditors.

→ Where a Financial Creditor is related party of the Corporate Debtor, he shall not have any right of representation, participation or voting in a meeting of the Committee of Creditors.

→ Related party includes the following –
(a) director or partner of the corporate debtor or a relative of such director or partner;
(b) key managerial personnel (KMP) of the corporate debtor or a relative of such KMP;
(c) any person on whose advice, directions or instructions, a director, partner or manager of the corporate debtor is accustomed to act;
(d) a body corporate which is a holding, subsidiary or an associate company of the corporate debtor, or a subsidiary of a holding company to which the corporate debtor is a subsidiary;
(e) any person who controls more than 20% of voting rights in the corporate debtor on account of ownership or a voting agreement etc.

→ However, where a Financial Creditor is regulated by a financial sector regulator (such as RBI, SEBI, IRDA) and is a related party of the Corporate Debtor solely due to conversion of debt into equity shares, shall be allowed to participate and vote in the meetings of Committee of Creditors.

→ In the given case, Laxmi Bank Ltd. (regulated by RBI) holds 596 equity shares in Bhaskar Ltd. due to conversion of 1096 Debentures into equity shares. Further, Laxmi Bank Ltd. is a financial creditor of Bhaskar Ltd. due to loan granted ₹ 10 crores.

→ Bhaskar Ltd. defaulted in repayment of loans. On application of ICID Bank, the NCLT initiated the corporate insolvency resolution process, and appointed an Interim Resolution Professional.

→ The Interim Resolution Professional included Laxmi Bank Ltd. in the Committee of Creditors. However, ICID Bank contented that Laxmi Bank Ltd. is a shareholder of Bhaskar Ltd. and hence it is a related party. Laxmi Bank Ltd. shall not have any right of representation, participation or voting in the Committee of Creditors.

→ However, since Laxmi Bank Ltd. (a Financial Creditor) is regulated by financial sector regulator (Reserve Bank of India) and is a related party of Bhaskar Ltd. solely due to conversion of debt into equity shares, it shall be allowed to participate and vote in the meetings of Committee of Creditors.

→ Hence, the objection of ICID Bank is not tenable and Laxmi Bank Ltd. shall be included in the Committee of Creditors and shall have the right of representation, participation and voting.

Question 4(c)
Deepak was appointed as Interim Resolution Professional (IRP) by Adjudicating Authority on 1st July 2019 in respect of Corporate Debtor Bingo Ltd. Bingo Ltd. failed to file returns regarding Tax Deducted at source for Quarter 1 for the financial year 2019-20. Suspended Directors argued that they are not managing the affairs of the company and hence the responsibility of compliance lies with IRP. Offer your view referring to provisions of section 17(2) of Insolvency and Bankruptcy Code, 2016 and clarify whether the contention of the suspended directors is justified? (5 Marks)
Answer:

A Corporate Insolvency Resolution Process may be initiated either by financial creditors or operational creditors or the corporate debtor itself.
Where National Company Law Tribunal (Adjudicating Authority), admits the application, there is commencement of the formal Corporate Insolvency Resolution Process (CIRP).
As per section 16, the Adjudicating Authority shall appoint an Interim Resolution Professional on the insolvency commencement date.
The primary role of Interim Resolution Professional is constitution of Committee of Creditors, monitor assets and manage the business operations of the corporate debtor.
As per section 17(2) of the IBC, 2016, the management of the affairs of the Corporate Debtor shall vest with Interim Resolution Professional. The powers of the Board of Directors of the corporate debtor shall be suspended and be exercised by the Interim Resolution Professional.
The Interim Resolution Professional shall execute all deeds, receipts, and other documents, on behalf of the corporate debtor. He has access to books of account, records and other documents of corporate debtor available with Govt, authorities, statutory auditors, accountants etc.
Further, the Interim Resolution Professional shall be responsible for complying with the statutory requirements under any applicable laws on behalf of the Corporate Debtor.
As per section 19, every personnel and promoters of the corporate debtor shall extend all assistance and cooperation required by the Interim Resolution Professional in the management of the affairs of the corporate debtor. Personnel includes the directors, managers, key managerial personnel, designated partners and employees of the corporate debtor.
In the given case, Mr. Deepak was appointed as Interim Resolution Professional for Bingo Ltd. on 1st July 2019. Bingo Ltd. failed to file the returns regarding Tax Deducted at Source (TDS) for quarter one of financial year 2019-20. The suspended directors argued that this default in the statutory compliance is the responsibility of IRP.
As per section 17(2) of IBC, 2016, along with the Insolvency and Bankruptcy Code (Second Amendment) Act, 2018, the contention of the suspended directors is justified. The IBC, 2016, has assigned the responsibilities of statutory compliance to the Interim Resolution Professional.
However, the suspended directors shall provide all necessary support and assistance to the Interim Resolution Professional for ensuring all such statutory compliances.

Question 4(d) Omega Ltd. is a securitization and reconstruction company in terms of Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI). The certificate thus issued was cancelled by the competent authority. However, Omega Ltd. is holding certain investments of Qualified Institutional Buyers (QIB) at the time of cancellation. Offer your views regarding the authority that cancels the registration and the rights of Omega Ltd. against such cancellation. (5 Marks)
Answer:
→ Asset Reconstruction Company (ARC), means a company registered with Reserve Bank of India under section 3 of Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI) for the purposes of carrying on business of asset reconstruction or securitisation, or both.

→ Basically, an Asset Reconstruction Company is incorporated under provisions of the Companies Act, 2013, along with registration with the RBI.

→ As per section 4 of the SARFAESI Act, 2002, the Reserve Bank of India (RBI) has the power to cancel the ‘Certificate of Registration’ issued to an Asset Reconstruction Company.

→ The RBI is empowered to cancel the registration of an ARC for the following reasons –
(a) ceases to carry on the business of asset reconstruction or securitization,
(b) ceases to receive or hold any investment from a qualified buyer,
(c) fails to comply with conditions of registration,
(d) fails to comply with RBI directions/guidelines,
(e) fails to maintain accounts in the prescribed manner,
(f) fails to submit necessary documents to RBI,
(g) fails to inform RBI about any substantial change in management.

→ However, prior to cancelling the registration, the RBI shall give an opportunity to such ARC of being heard. Where the RBI cancels registration, the ARC may appeal to the Central Govt., within 30 days from date of communication of cancellation order.

→ An ARC, which is holding investments of qualified buyers and whose certificate of registration has been cancelled shall be deemed to be an ARC until it repays the entire investments held by it (together with interest, if any) within such period as the Reserve Bank may direct.

→ In the given case, Omega Ltd. is a securitization and reconstruction company, in terms of the SARFAESI Act, 2002. Its certificate of registration was cancelled by the Reserve Bank of India.

→ However, since Omega Ltd. is holding certain investments of Qualified Institutional Buyers at the time of cancellation, it shall continue to be treated as a deemed asset reconstruction company.

→ Hence, until all funds are repaid, along with interest by Omega Ltd., it shall be deemed to be a securitization and reconstruction company. Further, Omega Ltd. may appeal to the Central Govt, against the cancellation order.

Question 5(a)
A bank took over the management of a company in term of Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI) and appointed 5 directors consequently removing Suresh, an executive director. Suresh demanded compensation for loss of office as well as his unpaid salary for the last 2 months. Will he be entitled for compensation for loss of office and unpaid salary? (3 Marks)
Answer:

The main purpose of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI) is to enable and empower secured creditors to take possession of their secured assets and to deal with them, without the intervention of Court.
Section 9 of SARFAESI Act, 2002, provides various measures that can be taken by a secured creditor for the purposes of recovery of non-performing assets, including change in management, takeover of business, taking over possession of secured assets etc.
Section 15 of SARFAESI Act, 2002, empowers a secured creditor to take-over the management of business of a borrower. Where the management of business of a borrower is taken over by a secured creditor, it can appoint as many persons as it thinks fit to be the directors.
The secured creditor shall publish a notice in a newspaper in English language as well as in the vernacular language of the place where the principal office of the borrower is situated.
On publication of such notice, all persons who were directors of the borrower company are deemed to have vacated their office.
As per section 16, no director or manager or any person in charge of management of the borrower shall be entitled to any compensation for the loss of office or for the premature termination under this Act. However, they are entitled to any outstanding dues receivable from such company.
In the given case, a bank took over the management of a company in terms of SARFAESI Act, 2002 and appointed 5 directors. Mr. Suresh, an executive director, was removed in the process. Suresh demanded compensation for loss of office as well as his unpaid salary for the last 2 months.
Based on the provisions of section 16 of the SARFAESI Act, 2002, Mr. Suresh shall not be entitled for any compensation for loss of office. However, he can claim his unpaid salary for the last 2 months.

Question 5(b)
How could the rights of dissenting shareholders to a scheme of merger be resolved? (3 Marks)
Answer:
→ The basic principle of shareholders’ democracy says that the rule of majority shall prevail. However, it is also vital to ensure that the power of the majority does not result in oppression of the minority and/or mismanagement of the company.

→ Every shareholder has the freedom to voice his opinion in the meeting or through an affidavit submitted to the Tribunal. Dissenting shareholders represent those members who do not agree with the resolution, and hence they vote against the resolution. Such dissenting members are given opportunity to express their opinions during the decision-making process.

→ As per section 230(4) of the Companies Act, 2013 it is provided that in a scheme of arrangement any person or persons holding at least 10% of the shareholding or 5% of the total outstanding debt can put objection to the proposed scheme.

→ There are various modes of resolving the rights of dissenting shareholders. Following are ways of protecting the rights of dissenting shareholders
1. Dual majority: As per section 230(6) of the Companies Act, 2013, a scheme of merger must be passed via dual majority, ie., simple majority in number of members, representing three-fourths (3/4th) in value of shares held. Due to dual majority, the minority shareholders are protected from oppression.

2. Appeal to the Tribunal: The dissenting shareholders have a right to appeal to the National Company Law Tribunal for setting aside the scheme of merger. Where the dissenting shareholders can prove mala fide intention of the majority, the NCLT shall reject the scheme.

3. Power to modify the scheme: As per section 231(2), the Tribunal has the power to modify the scheme of merger to protect the dissenting shareholders.

4. Exit route: The Tribunal has the power to award an exit route to the dissenting shareholders. The promoters of the merging company shall be directed to purchase the shares of such dissenting shareholders at a fair price (as computed by registered valuers).

5. Tribunal Hearing: After the scheme is approved in the members’ meeting, the NCLT shall order a separate hearing on the petition, prior to sanctioning the scheme. The dissenting shareholders have the right to voice their concerns at such NCLT hearing.

6. Published in newspapers: The notice of the members’ meeting is published in newspapers and websites for maximum coverage. All members shall have due knowledge of the scheme of merger and they shall participate in the voting and exercise their rights.

7. Independent Chairman conducts and supervises the meeting, to ensure impartial treatment.

Question 5(c)
What are the powers and obligations of a Liquidator regarding ‘uncalled capital’ or ‘unpaid capital contribution’? (3 Marks)
Answer:
→ The Insolvency and Bankruptcy Code, 2016 (IBC) offers a uniform, comprehensive insolvency legislation for corporate persons as well as partnerships and individuals. The main purpose of IBC is to ensure a formal and time bound insolvency resolution process.

→ In case of insolvency of corporate persons, IBC consists of two independent stages:

Insolvency Resolution Process: the creditors assess the viability of corporate debtor’s business and the options for its rescue and revival, and
Liquidation Process: where the insolvency resolution process fails or financial creditors decide to wind-up and distribute the assets of the debtor.

→ The Liquidation process involves sale of all assets and properties of the corporate debtor and payment of all liabilities, as per the waterfall mechanism.

→ Where the assets of the corporate debtors are insufficient to pay all liabilities, the liquidator may collect funds by making calls to the shareholders. The Liquidator has the power to realize any amount due from any contributory to the corporate debtor.

→ The liquidator is empowered to call and realize the uncalled capital of the corporate debtor and to collect the arrears, if any, due on calls made prior to the liquidation.

→ The liquidator shall send a notice to the contributory to make the payments within 15 days from the receipt of the notice.

→ No distribution shall be made to a contributory, unless he makes his contribution to the uncalled or unpaid capital as required.

Question 5(d)
Are there any grounds to appeal against the approval of Resolution Plan by the Adjudicating Authority in terms of Insolvency and Bankruptcy Code, 2016? (3 Marks)
Answer:
→ A resolution plan means a plan proposed by a resolution applicant for insolvency resolution of the corporate debtor as a going concern.

→ A Resolution Professional shall submit each resolution plan to the Committee of Creditors who shall approve the resolution plan by not less than 66% majority.

→ Once the resolution plan is approved by the Committee of Creditors, it is presented to the Adjudicating Authority (NCLT) for its approval. As per section 31, the Adjudicating Authority (NCLT) shall review the resolution plan sanctioned by the Committee of Creditors.

→ Section 32 of the IBC, 2016 deals with appeals against an order approving a resolution plan.

→ An appeal may be filed on the following grounds:
(a) the approved resolution plan is in contravention of the provisions of any applicable law,
(b) there has been material irregularity in exercise of the powers by the resolution professional during the corporate insolvency resolution period,
(c) the debts owed to operational creditors of the corporate debtor have not been provided for in the resolution plan in the manner specified by the Board,
(d) the insolvency resolution process costs have not been provided for repayment in priority to all other debts, or
(e) the resolution plan does not comply with any other criteria specified by the Board.

Question 5(e)
“The procedure for application to initiate Insolvency Resolution Process against a Corporate Debtor by operational creditor differs with application by financial creditors.” Explain briefly. (3 Marks)
Answer:
→ As per section 6 of Insolvency and Bankruptcy Code, 2016, where any corporate debtor commits a default, the following person are entitled to initiate a corporate insolvency resolution process:
(a) a financial creditor (section 7),
(b) an operational creditor (section 8) or
(c) the corporate debtor itself (section 10).

→ A Financial Creditor means any person to whom, a financial debt is owed. Financial Debt means a debt (with interest), related to money borrowed, bonds, notes, deposit, debentures, hire-purchase, lease, indemnity, guarantee, letter of credit etc.

→ An Operational Creditor means a person to whom an operational debt is owed. Operational Debt means a claim in respect of the provision of goods or services and salary or wages, including payable to the Central Government, any State Government or any local authority.

→ Basically, the procedure for application to initiate Corporate Insolvency Resolution Process against a corporate debtor by operational creditor differs with application by financial creditors.

→ Following are the reasons for the difference in the procedure

the amount involved in operational debts are much less as compared to the financial debts.
in case of operational creditors, the possibility of disputed debts is higher in comparison to financial creditors such as banks and financial institutions.

→ Hence, the procedure for insolvency resolution by operational creditor differs from the procedure applicable to financial creditors.

Attempt all parts of either Q. No. 6 or Q. No. 6A

Question 6(a)
United Nations Commission on International Trade (UNCITRAL) demonstrated as Guiding Role in respect of Insolvency Laws in Member Nations – Comment. (5 Marks)
Answer:

‘Cross-Border Insolvency’ or ‘International Insolvency’ is a term used when the lender and borrower belong to different countries, and the borrower becomes insolvent.
Cross-border insolvency is a situation where assets, properties and liabilities, of an insolvent debtor are located in two or more countries.
Expansion in global trade has resulted in rising cases of cross-border insolvencies.
However, the national insolvency laws of many countries are not effective to deal with cases of cross-border insolvencies. Generally, local laws do not provide tangible solutions in such cases.
Hence, the United Nations Commission on International Trade Law (UNCITRAL) Model law on Cross-Border Insolvency was approved in May 1997.
The Model Law is designed to assist countries to update their local insolvency laws with modem, harmonized and fair framework.
The synchronization of local laws with the UNCITRAL Model law will lead to better handling of cross-border insolvency cases.
The UNCITRAL Model law is intended to inform and assist insolvency law reform among member nations, providing a reference tool for national authorities and legislative bodies while preparing new laws and regulations or reviewing the adequacy of existing laws and regulations.
The Model Law is designed to assist member nations to prepare their insolvency laws with a modern legal framework to more effectively focus on cross-border insolvency proceedings. It focuses on authorizing and encouraging cooperation and coordination between member nations.
In 2004, UNCITRAL released the Legislative Guide on Insolvency Law. The purpose of the Legislative Guide is to assist the establishment of an effective and efficient legal framework to address the financial difficulty of debtors.
The Guide is supposed to be used as a reference by national legislative bodies, while preparing new laws and regulations.
The Legislative Guide discusses the importance of other tools for addressing cross-border insolvency, such as voluntarily negotiations between a debtor and its key creditors etc.
Thus, the United Nations Commission on International Trade (UNCITRAL) demonstrates a ‘Guiding Role’ in respect of Insolvency Laws in Member Nations.

Question 6(b)
Ganga Infrastructure Ltd. is an Indian Company with its Registered office at New Delhi. Michle Inc is an incorporated company in New York. Ganga Infrastructure Ltd. proposes to merge the business of Michle Inc with its business in India – Brief your opinion with reference to merger and amalgamation with a foreign entity under the Companies Act, 2013? (5 Marks)
Answer:

A cross border merger refers to any merger, amalgamation or arrangement between an Indian Company and Foreign Company in accordance with Companies (Compromises, Arrangements and Amalgamations) Rules, 2016 notified under the Companies Act, 2013.
A Foreign company means any company or body corporate incorporated outside India, whether having a place of business in India or not.
An Inbound merger is one where a foreign company merges with an Indian company resulting in an Indian company being formed. An outbound merger is one where an Indian company merges with a foreign company resulting in a Foreign Company being formed.
In the given case, Ganga Infrastructure Ltd. is an Indian company and Michle Inc. is a foreign company. Ganga Infrastructure Ltd. plans to merge the business of Michle Inc. with its business in India. Hence, this is a scenario of Inbound merger.
Section 234 of the Companies Act, 2013, deals with merger between a Foreign Company and an Indian Company. Following are the provisions under the Companies Act, 2013
- The terms and conditions of the cross-border merger may include payment of consideration to the shareholders of the merging company in cash, or in Depository Receipts, or partly in cash and partly in Depository Receipts, as the case may be.
- A Foreign Company may merge with an Indian Company after obtaining approval of RBI and after complying with the provisions of Sections 230 to 232 of the Companies Act, 2013.
- Mergers which comply with FEMA (Cross Border Merger) Regulations, 2018 are deemed to be automatically approved by the RBI and do not require a separate approval.
- Transferee Company shall ensure that valuation is conducted by registered valuers who are members of a recognized professional body in the jurisdiction of the Transferee Company.
- Valuation shall be as per internationally accepted principles on accounting and valuation. A declaration to this effect shall be submitted to RBI for obtaining its approval.
- Cross Border Merger is permitted with companies belong to certain countries:
whose securities market regulator is a signatory to the International Organization of Securities Commission’s (IOSCO) Multilateral Memorandum of Understanding,
whose central bank is a member of Bank for International Settlements (BIS), and
a country which is identified by Financial Action Task Force (FATF), with respect to Anti-Money Laundering or Financing Terrorism activities.

Question 6(c)
“Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI) is a legislation for fast recovery of debt by the secured creditors but there are certain exceptions” – briefly elucidate with at least 5 circumstances, where the legislation cannot be applied. (5 Marks)
Answer:

The main purpose of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI) is to enable and empower secured creditors to take possession of their secured assets and to deal with them, without the intervention of Court.
Section 9 of SARFAESI Act, 2002, provides various measures that can be taken by a secured creditor for the purposes of fast recovery of non-performing assets, including change in management, takeover of business, taking over possession of secured assets etc.
However, as per section 31 of the SARFAESI Act, 2002, following are the cases where the Act does not apply
- a hen on goods, money or security given under Indian Contract Act, 1872 or Sale of Goods Act, 1930;
- a pledge of movables as per the Indian Contract Act, 1872;
- any conditional sale, hire-purchase or lease where no security interest has been created;
- any rights of unpaid seller under the Sale of Goods Act, 1930;
- any security interest for securing repayment of any financial asset not exceeding X 1,00,000;
- any security interest created in agricultural land;
- creation of any security in any aircraft as per the Aircraft Act, 1934;
- creation of any security interest in any vessel as per the Merchant Shipping Act, 1958;
- any case in which the amount due is less than 20% of the principal amount and interest thereon.

Alternative Q. No. 6A

Question 6A(i)
Elucidate briefly the process of Notification to Foreign Creditors as per United Nations Commission on International Trade (UNCITRAL) Model Law. (5 Marks)
Answer:

‘Cross-Border Insolvency’ or ‘International Insolvency’ is a term used when the lender and borrower belong to different countries, and the borrower becomes insolvent.
Cross-border insolvency is a situation where assets, properties and liabilities, of an insolvent debtor are located in two or more countries.
The United Nations Commission on International Trade Law (UNCITRAL) Model law on cross-border insolvency is designed to assist member nations to update their local insolvency laws with modern, harmonized and fair framework.
The Model Law is designed to assist member nations to prepare their insolvency laws with a modern legal framework to more effectively focus on cross-border insolvency proceedings.
As per Article 14 of the Model Law, under laws of the enacting country relating to insolvency, a notification is to be given to creditors, such notification shall also be given to the known creditors that do not have addresses in the country.
The Court may order that appropriate steps be taken with a view to notifying any creditor whose address is not yet known.
The main purpose of notifying foreign creditors is to inform them of the commencement of the insolvency proceeding and of the time-limit to file their claims.
Such notification shall be made to the foreign creditors individually, unless the court considers that some other form of notification would be more appropriate.
When a notification of commencement of a proceeding is to be given to foreign creditors, the notification shall:
(a) Indicate a reasonable time period for filing claims and specify the place for their filing;
(b) Indicate whether secured creditors need to file their secured claims; and
(c) Contain any other information required to be included in such a notification to creditors pursuant to the law of this country and the orders of the court.

Question 6A(ii) As an Interim Resolution Professional (IRP) how could you constitute the Committee of Creditors of a Corporate Debtor (CD) having only operational creditors or all financial creditors, who submitted their claims, are found to be related parties of the CD? (5 Marks)
Answer:

As per Section 21 of Insolvency and Bankruptcy Code (IBC), 2016, an Interim Resolution Professional is responsible for the constitution of the Committee of Creditors. He shall collate all claims received against a Corporate Debtor, determine the financial position of the Corporate Debtor and then constitute a Committee of Creditors.
Basically, the Committee of Creditors shall comprise of all financial creditors of the Corporate Debtor. Where a Financial Creditor is related party of the Corporate Debtor, he shall not have any right of representation, participation or voting in a meeting of the Committee of Creditors.
As per Regulation 16 of IBC, 2016, there is a possibility that a Corporate Debtor has no financial creditors or where all financial creditors are related parties of the Corporate Debtor.
In such cases, the Committee of Creditors shall consist of only operational creditors.
Committee of Creditors, consisting of only operational creditors shall have following members:
(a) eighteen (18) largest operational creditors by value, however, if total number of operational creditors is less than eighteen, then all such creditors are included;
(b) one representative elected by all workmen; and
(c) one representative elected by all employees.
A member of the Committee of Creditors shall have voting rights in proportion of the debt due to such creditor, as compared to the total debt.
‘Total Debts’ includes
- the amount of debt due to the operational creditors;
- the amount of the aggregate debt due to workmen; and
- the amount of the aggregate debt due to employees.
A Committee of Creditors formed by Operational Creditors shall have the same rights, powers, duties and obligations as a committee comprising Financial Creditors.

Question 6A(iii)
Briefly comment on the rights of secured creditors in a Repayment Plan under section 105 of the Insolvency and Bankruptcy Code, 2016? (5 Marks)
Answer:

As per section 105 of the Insolvency and Bankruptcy Code, 2016, a repayment plan means a plan prepared by a debtor in consultation with the Resolution Professional.
The repayment plan contains the terms and details, as per which the debtor will repay his debts to his creditors.
The Repayment Plan may authorize the Resolution Professional to perform the following
(a) carry on the debtor’s business or trade on his behalf or in his name; or
(b) realise the assets of the debtor; or
(c) administer or dispose of any funds of the debtor.
The Resolution Professional shall prepare a report on the proposed repayment plan. Such report shall be submitted to the Adjudicating Authority (within 21 days) along with the repayment plan.
Section 110 of the Insolvency and Bankruptcy Code, 2016, provides the rights of secured creditors in a repayment plan.
A secured creditor may or may not give up on his right to enforce security during the period of implementation of the repayment plan.
A secured creditor who participates in the meetings of creditors and votes in relation to the repayment plan will be required to give up his right to enforce his security.
However, where the secured creditor does not want to give up his right to enforce his security, he may vote on the repayment plan in respect of his unsecured debt. Such an affidavit shall be given by the secured creditor, containing the estimated value of unsecured debt.
In case a secured creditor participates in the voting on the repayment plan by submitting an affidavit, the secured and unsecured parts shall be treated as separate debts.
Confirmation of the secured creditor shall be obtained if he does not participate in the voting on repayment plan, but the repayment plan affects his right to enforce security.

Corporate Restructuring Insolvency Liquidation & Winding-Up Notes

Reporting – Governance, Risk Management, Compliances and Ethics Important Questions

December 28, 2022

Reporting – Governance, Risk Management, Compliances and Ethics Important Questions

Question 1.
Role of Government in Sustainability Reporting?
OR
Attempt the following: Write note on sustainability reporting in emerging economies.
Answer:
‘Sustainability reporting’ is a process for publicly disclosing an organization’s economic, environmental, and social performance. Global Reporting Initiative (GRI) has developed a generally accepted framework to simplify report preparation and assessment, helping both reporters and report users gain greater value from sustainability reporting.

Sustainability Reporting Framework in India:
In India, the Ministry of Corporate Affairs (MCA) recommends sustainability reporting. Considering the importance of sustainability in businesses, MCA had launched Corporate Social Responsibility Volun tary Guidelines in 2009. To take this further, in 2011 MCA issued ‘National Voluntary Guidelines on Social, Environmental and Economical Responsibilities of Business’ which encouraged reporting on environment, social and governance issues.

SEBI in its (Listing Obligations and Disclosure Requirements) Regulations, 2015 has mandated the requirement of submission of BRR for top 1000 listed entities describing initiative taken by them from an environmental, social and governance perspective in the prescribed format

Regulation 34(2)(f) of SEBI (LODR) Regulations, 2015 – “The annual report shall contain the following :
(f) For the top one thousand listed entities based on market capitalization (calculated as on March 31 of every financial year), business responsibility report 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.

Provided that listed entities other than top one thousand listed companies based on market capitalization and listed entities which have listed I their specified securities on SME Exchange, may include these business responsibility reports on a voluntary basis in the format as specified.”

Question 2.
Attempt the following; As the company secretary of sound India ltd. you are required by the chairman to prepare a note for the board of directors highlighting the following:
(i) Importance of sustainability reporting.
(ii) Available framework for sustainability reporting.
(iii) Challenges involved in main streaming sustainability reporting.
Answer:
(i) Importance of sustainability reporting – Internal benefits of sustainability reporting for companies and organizations can include :

Increased understanding of risks and opportunities
Emphasizing the link between financial and non-financial performance.
Influencing long-term management strategy and policy, and business plans.

External benefits of sustainability reporting can include:

Mitigating – or reversing – negative environmental, social and governance impacts.
Improving reputation and brand loyalty.
Enabling external stakeholders to understand the organization’s true value, and tangible and intangible assets.

(ii) Sustainability report – A sustainability report is a report published by a company or organization about the economic, environmental and social impacts caused by its everyday activities. A sustainability report presents the organization’s values and governance model, and demonstrates the link between its strategy and its commitment to a sustainable global economy. A sustainability report is the key platform for communicating sustainability performance and impacts – whether positive or negative.

Sustainability Reporting Framework in India – In India, considering the importance of sustainability in businesses, MCA had launched Corporate Social Responsibility Voluntary Guidelines in 2009.

To take this further, in 2011 MCA issued ‘National Voluntary Guidelines on Social, Environmental and Economical Responsibilities of Business’ which encouraged reporting on environment, social and governance issues.

SEBI in its (Listing Obligations and Disclosure Requirements) Regulations, 2015 vide Regulation 34 has mandated the requirement of submission of BRR for top 1000 listed entities describing initiative taken by them from an environmental, social and governance perspective in the prescribed format.

(iii) Following are the challenges in mainstreaming sustainability reporting:
1. Government Encouragement: In many jurisdictions, there are no guidelines on sustainability reporting to encourage the corporate sector. While on the other hand, there are voluntary as well as mandatory guidelines from regulators for reporting on Sustainability aspects like in India we have SEBI framework of Business Responsibility Report.

2. Awareness: Lack of awareness about the emerging concept of sustainability reporting is also a major challenge which the government and corporate governance bodies need to address by arranging the sustainability awareness programme for the Pro-fessionals, Board of Directors and Management in the corporate sector.

3. Expertise Knowledge: Sustainability Reporting is relatively a new concept in many jurisdictions and organization found it very difficult to prepare a sustainability report in the absence of expert guidance on the subject. The professional bodies in various jurisdictions should impart the expert knowledge of sustainability reporting to their members to develop a good cadre of experts in this emerging area of sustainability reporting.

4. Investor Behaviour: It is a recognized principle that investors should consider the Environmental, Social and Governance (ESG) issues while making investment decisions. There are specific regulators guidelines for the institutional investor to be vigilant on voting aspects and be concerned about the governance practices of the companies in which they invest.

Question 3.
Answer the following; What are the key drivers of sustainability re-porting?
Answer:
Sustainability reporting is a process of publicly disclosing an organization’s economic, environmental, and social performance. Some of the key drivers of sustainability reporting are
1. Regulations: Governments, at most levels have stepped up the pressure on corporations to measure the impact of their operations on the environment. The most notable shift has been from voluntary to mandatory sustainability, monitoring and reporting.

2. Customers: Public opinion and consumer preferences are a more abstract but powerful factor that exerts considerable influence on companies, particularly those that are consumer oriented.

3. Loyalty: This factor has led the firms to provide much more information about the products they produce, the suppliers who produce them, and the product’s environmental impact starting from creation to consumption.

4. NGO’s and the Media: Public reaction comes not just from customers but from advocates and the media, who shape public opinion.

5. Employees: Those who work for a company bring particular pressure to bear on how their employers behave; they, too, are concerned citizens beyond their corporate roles.

6. Peer pressure from other companies: Each company .is part of an – industry, with the peer pressures and alliances that go along with it. Matching industry standards for sustainability reporting can be a factor; particularly for those who operate in the same supply chain and have environmental or social standards they expect of their partners.

7. Companies themselves: Corporations, as public citizens, feel their own pressure to create a credible sustainability policy, with performance measures to back it up, but with an eye on the bottom line as well. Increasingly, stakeholders are demanding explicit sustainability reporting strategies and a proof of the results.

8. Investors: Investors like Institutional investors and stock exchange CEOs have moved to request increased sustainability reporting from listed companies, and environmental, social and corporate governance indices have been established such as the Dow Jones Sustainability Index.

Question 4.
Explain briefly the following; Global reporting initiative (GRI).
OR
Attempt the following; What is the main function of global reporting initiatives?
Answer:
The GRI Standards represent global best practice for reporting | publicly on a range of economic, environmental and social impacts, j Sustainability reporting based on the Standards provides information about an organization’s positive or negative contributions to sustainable development.

The modular, interrelated GRI Standards are designed primarily to be used as a set, to prepare a sustainability report focused on material topics. Preparing a report in accordance with the GRI Standards provides an inclusive picture of an organization’s material topics, their related impacts, and how they are managed. An organization can also use all or part of selected GRI Standards to report specific information.

GRI Sustainability Reporting Standards (GRI Standards) help businesses, governments and other organizations understand cCtid communicate the impact of business on critical sustainability issues.

Question 5.
“Report content should be balanced and reasonable presentation of the organisation’s performance.” In the light of above statement, discuss the steps to use the GRI Reporting Framework.
Answer:
The Global Reporting Initiative (GRI) had launched the fourth generation of its sustainability reporting guidelines: the GRI G4 Sustainability Guidelines (the Guidelines) in 2013. The aim of G4, is to help reporters prepare sustainability reports that contain valuable information about the organization’s most critical sustainability related issues, and make such sustainability reporting standard practice.

Applicability:
G4 is applicable to all organizations, large and small, across the world. The Guidelines are now presented in two parts to facilitate the identification of reporting requirements and related guidance. It consist of following two parts.

Part 1- Reporting Principles and Standard Disclosures: It contains the reporting principles and standard disclosures and also sets out the criteria to be applied by an organization to prepare its sustainability report in accordance with the Guidelines.

Part 2 – Implementation Manual: It contains reporting and interpretative guidance that an organization should consult when preparing its sustainability report.

Standard Disclosures:
Following are two different types of Standard Disclosures

General Standard Disclosures

Specific Standard Disclosures

Strategy and Analysis

Organizational Profile

Identified Material Aspects and Boundaries

Stakeholder Engagement

Report Profile

Governance

Ethics and Integrity

Disclosures on Management Approach

Indicators

Question 6.
What is stakeholder inclusiveness?
OR
Explain the concept of stakeholder inclusiveness.
OR
The reporting organization should identify its stakeholders and explain in its sustainability reporting how it has responded to their reasonable expectations and interests. Elucidate statement by considering stakeholders inclusiveness.
Answer:
‘Stakeholder Inclusiveness’ is one of the four core principles in the GRI G4 Guidelines that help to define report content that is material to the reporting organization and its stakeholders.

Stakeholders are defined as entities or individuals:

Who can reasonably be expected to be significantly affected by the organization’s activities, products, and/or services.
Whose actions can reasonably be expected to affect the ability of the organization to successfully implement its strategies and achieve its objectives.

Need for stakeholders inclusiveness:
Stakeholders are individuals or groups that have interests, rights, or ownership in an organization and its activities. Since the stakeholders for an organization are scattered and there may be variation in their expectation and interest, stakeholder engagement processes can serve as tools for understanding the reasonable expectations and interests of stakeholders.

The reasonable expectations and interests of stakeholders are a key reference point for many decisions in the preparation of the sustainability report. The organization should identify its stakeholders, and explain how it has responded to their reasonable expectations and interests.

Question 7.
What are the different sections of Business Responsibility Reporting Framework as per LODR Regulations?
OR
What are the major sections of Business Responsibility Report (BRR)?
Answer:
As per Regulation 34 of SEBI (LODR) 2015, SEBI has mandated the requirement of submission of BRR for top 1000 listed entities describing initiative taken by them from an environmental, social and governance perspective in the prescribed format.”

Section A : General Information about the Organisation – Industry Sector, Products & Services, Markets, other general information.
Section B : Financial Details of the Organisation – Paid up capital, Turnover, Profits, CSR (Corporate Social Responsibility) spend.
Section C : Other Details – BR initiatives at Subsidiaries and Supply- chain Partners.
Section D : BR Information – Structure, Governance & Policies for Business Responsibility.
Section E : Principle-wise Performance – Indicators to assess performance on the 9 Business Responsibility principles as envisaged by the National Voluntary Guidelines (NVGs).

Question 8.
What do you understand by integrated reporting?
Answer:
An Integrated Report is:
“A concise communication about how an organisation’s strategy, governance, performance and prospects, in the context of its external environment, lead to the creation of value over the short, medium and long-term”.

The primary purpose of an integrated report is to explain to providers of financial capital how an organisation creates value over time. Integrated reporting is founded on integrated thinking, which helps demonstrate inter connectivity of strategy, strategic objectives, performance, risk and incentives and helps to identify sources of value creation. Integrated Reporting is one step ahead of sustainability reporting and is set to become the way companies report their annual financial and sustainability information together in one report.

Aim of integrated report – The aim of an integrated report is to clearly and concisely tell the organization’s stakeholders about the company and its strategy and risks, linking its financial and sustainability performance in a way that gives stakeholders a holistic view of the organization and its future prospects.

Question 9.
In addition to the Financial Capital, the Integrated Reporting examines ‘ i five additional capitals that should guide an organisation’s decision-making and long-term success. Which are these five additional capitals?
Answer:
Following are the five additional capitals which are in addition to financial capital that should guide an organisation’s decision-making and long-term success – its value creation in the broadest sense:
1. Manufactured capital: Manufactured capital is seen as human-created, production-oriented equipment and tools.

2. Intellectual capital: It is a key element in an organization’s future earning potential, investment in R&D, innovation, human resources and external relationships, which can determine the organization’s competitive advantage.

3. Human capital: It is generally understood to consist of individual’s capabilities and the knowledge, skills and experience of the company’s employees and managers as they are relevant to the task at hand as well as the capacity to add to the reservoir of knowledge, skills and experience.

4. Social and relationship capital: Social and relationship capital may include relationships within an organization, as well as those between an organization and its external stakeholders, depending on where social boundaries are drawn.

5. Natural capital: It may be defined as any stock of natural resources or environmental assets such as soil, water, and atmosphere, ecosystems which provide a flow of useful goods or services now and in the future.

Question 10.
“Integrated reporting would build on the existing financial reporting model to present additional information about a company’s strategy, governance, and performance.”
In light of above sentence, prepare a note on purpose of Integrated reporting and guiding principles for preparation of such report.
Answer:
Purpose of Integrated Reporting:
1. The primary purpose of an integrated report is to explain to pro-viders of financial capital how an organisation creates value over time. An integrated report benefits all stakeholders interested in an organisation’s ability to create value over time, including employees, customers, suppliers, business partners, local communities, legislators, regulators and policy-makers.

2. An integrated report aims to provide insight about the resources and relationships used and affected by an organisation – these are collectively referred to as “the capitals” in this Framework.

3. It also seeks to explain how the organisation interacts with the external environment and the capitals to create value over the short, medium and long term. The capitals are stocks of value that are increased, decreased or transformed through the activities and outputs of the organisation.

They are categorized in this Framework as financial, manufactured, intellectual, human, social and relationship, and natural capital, although organisations preparing an integrated report are not required to adopt this categorization or to structure their report along the lines of the capitals.

Guiding Principles:
The following Guiding Principles underpin the preparation and presentation of an integrated report, informing the content of the report and how information is presented. These Guiding Principles are applied individually and collectively for the purpose of preparing and presenting an integrated report; accordingly, judgment is needed in applying them, particularly when there is an apparent tension between them (e.g., between conciseness and completeness).

A. Strategic focus and future orientation: An integrated report should provide insight into the organisation’s strategy, and how it relates to the organisation’s ability to create value in the short, medium and long term and to its use of and effects on the capitals.

B. Connectivity of information: An integrated report should show a holistic picture of the combination, inter relatedness and dependencies between the factors that affect the organisation’s ability to create value over time.

C. Stakeholder relationships: An integrated report should provide insight into the nature and quality of the organisation’s relation-ships with its key stakeholders, including how and to what extent the organisation understands, takes into account and responds to their legitimate needs and interests.

D. Materiality: An integrated report should disclose information about matters that substantively affect the organisation’s ability to create value over the short, medium and long term.

E. An integrated report should be concise: An integrated report includes sufficient context to understand the organisation’s strategic governance, performance and prospects without being burdened with less relevant information.

F. Reliability and completeness: An integrated report should include all material matters, both positive and negative, in a balanced way and without material error.

G. Consistency and comparability: The information in an integrated report should be presented:

On a basis that is consistent over time.
In a way that enables comparison with other organisations to the extent it is material to the organisation’s own ability to create value over time.

Question 11.
Sustainability reporting is an intrinsic element of integrate report. Elaborate.
Answer:
‘Sustainability reporting’ considers the relevance of sustainability to an organization and also addresses sustainability priorities and key topics, focusing on the impact of sustainability trends, risks and opportunities on the long-term prospects and financial performance of the organization.

On the other hand Integrated reporting is an integrated representation of the key factors that are material to its present and future value creation. Integrated reporters build on sustainability reporting foundations and disclosures in preparing their integrated report.

‘Sustainability reporting’ vs. ‘Integrated reporting’ :
Although the objectives of sustainability reporting and integrated reporting may be different, sustainability reporting is an intrinsic element of integrated reporting. Sustainability reporting is fundamental to an organization’s integrated thinking and reporting process in providing input into the organization’s identification of its material issues, its strategic objectives, and the assessment of its ability to achieve those objectives and create value over time.

Question 12.
The Ministry of Corporate Affairs issued the Corporate Governance Social Responsibility Voluntary Guidelines 2009, which emphasize that every business should design and formulate a CSR policy to guide the ‘ strategic planning and a road map for its CSR initiatives. Outline the core ; elements of CSR policy.
Answer:
Core elements of a CSR Policy are as follows:
1. Care for all stakeholders: The companies should respect the interests of, and be responsive towards all stakeholders, including shareholders, employees, customers, suppliers, project affected people, society at large etc. and create value for all of them.

2. Ethical functioning: Their governance systems should be under pinned by Ethics, Transparency and Accountability. They should not engage in business practices that are abusive, unfair, corrupt or anti-competitive.

3. Respect for workers’ rights and welfare: Companies should provide a workplace environment that is safe, hygienic and humane and which upholds the dignity of employees. They should provide all employees with access to training and development of necessary skills for career advancement.

4. Respect for Human Rights: Companies should respect human rights for all and avoid complicity with human rights abuses by them or by third party.

5. Respect for Environment: Companies should take measures to check and prevent pollution; recycle, manage and reduce waste, should manage natural resources in a sustainable manner and ensure optimal use of resources like land and water etc.

6. Activities for Social and Inclusive Development: Depending upon their core competency and business interest, companies should undertake activities for economic and social development of communities and geographical areas, particularly in the vicinity of their operations.

Question 13.
You have been recently appointed as a Company Secretary of a large company which has incurred expenditures on various CSR activities during the year. Advise the Board about the particulars to be ensured in Annual Report for disclosures on Corporate Social Responsibility (CSR) under Companies Act, 2013 by the Board.
Answer:
As per Section 134 of the Companies Act, 2013, the Board of the Company is mandated to prepare a CSR Report.
The Companies (CSR Policy) Rules, 2014 provide for the format for reporting CSR activities annually. The format for the annual report on CSR activities is as follows:

A brief outline of the company’s CSR policy, including overview of projects or programs proposed to be undertaken and a reference to , the web-link to the CSR policy and projects or programs.
The composition of the CSR Committee.
Average net profit of the company for last three financial years.
Prescribed CSR Expenditure.
In case the company has failed to spend the two per cent of the average net profit of the last three financial years or any part thereof, the company shall provide the reasons for not spending the amount in its Board report.
A responsibility statement of the CSR Committee that the implementation and monitoring of CSR Policy, is in compliance with CSR objectives and Policy of the company.
Details of expenditure incurred on CSR activities during the financial year.
Total amount to be spent for the financial year.
Amount unspent, if any.

Governance Risk Management Compliances and Ethics Notes

Internal Control – Governance, Risk Management, Compliances and Ethics Important Questions

December 28, 2022

Internal Control – Governance, Risk Management, Compliances and Ethics Important Questions

Question 1.
Write short note on the following; Internal control.
OR
Elucidate the following; Internal control.
Answer:
According to Merriam – Webster Internal Control means:
“a system or plan of accounting and financial organization within a business comprising all the methods and measures necessary for safeguarding its assets, checking the accuracy of its accounting data or otherwise substantiating its financial statements, and policing previously adopted rules, procedures, and policies as to compliance and effectiveness”.

According to The Standard on Auditing 315 (SA 315) the nature of the internal control depicts the following :

Internal control is a process designed, implemented and maintained by those charged with the governance, management and other personnel.
It provides reasonable assurance about the achievement of an entity’s objectives in the categories of financial reporting, effectiveness and efficiency of operations, safeguarding of assets and compliance with applicable laws and regulations.

Internal control at the organizational level – Internal control objectives at the organizational level relate to the following :

Reliability of financial reporting
Timely feedback on the achievement of operational or strategic goals
Compliance with laws and regulations

Internal control at the specific transaction level – Internal control at the specific transaction level refers to the following:

The actions taken to achieve a specific objective
Example: How to ensure the organization’s payments to third parties are for valid services rendered.
Reduction in process variation, leading to more predictable outcomes.

Question 2.
Internal control is a way for management to run a business and is integrated within the management process. Comment.
Answer:
According to Investopedia, Internal controls are:
“The mechanisms, rules, and procedures implemented by a company to ensure the integrity of financial and accounting information, promote accountability and prevent fraud. Besides complying with laws and regulations, and preventing employees from stealing assets or committing fraud, internal controls can help improve operational efficiency by improving the accuracy and timeliness of financial re-porting”.

Objectives of Internal Control – Objective behind the establishment of the internal control are as under:

Internal Control is a policy matter, designed and implemented by the company concerned.
It describes the rules and procedures to ensure the integrity of the financial statements.
It provides the mechanism of work flow in such a manner that no single person may carry out the process from the beginning to end.
It ensures that work is segregated in small parts and is checked and processed by an independent person.
It improves operational efficiency by improving the accuracy and timeliness of financial reporting.
It gives a reasonable assurance about the achievement of an entity’s objectives with regard to reliability of financial reporting, effectiveness and efficiency of operations, and compliance with applicable laws and regulations.
It aids in detecting and preventing fraud and protecting the organization’s resources.
It reduces the process variations and arbitrary intervention in the work flow process.

Therefore, it can be stated that internal control is a way for management to run a business and is integrated within the management process.

Question 3.
Explain the scope of “Administrative Control”.
Answer:
Administrative controls include all managerial controls concerned with decision making process. Administrative controls have an indirect relationship with financial records.

For example: Quality control, works standards, periodic reporting, policy appraisal etc.

Administrative controls are very wide in their scope. They include all managerial controls concerned with decision-making process. They are concerned with the authorisation of transactions and include:

Anything from plan of organisation to procedures
Record keeping
Distribution of authority and the process of decision making.
Controls such as quality control through inspection
Performance budgeting
Responsibility accounting
Performance evaluation, etc.

Thus, administrative controls are those which help in improving the efficiency, productivity and not necessarily recorded under the accounting systems. Works standards, quality control, methods study and motion study are examples of administrative control.

Question 4.
Why the Information System is the most essential component of Internal Control?
Answer:
An information system consists of infrastructure (physical and hardware components), software, people, procedures, and data. Many information systems make extensive use of information technology (IT).

The information system relevant to financial reporting objectives, which includes the financial reporting system, encompasses methods and does the following:

Identify and record all valid transactions.
Describe on a timely basis the transactions in sufficient detail to permit proper classification of transactions for financial reporting.
Measure the value of transactions in a manner that permits recording their proper monetary value in the financial statements.
Determine the time period in which transactions occurred to permit recording of transactions in the proper accounting period.
Present properly the transactions and related disclosures in the financial statements.

The quality of system-generated information affects management’s ability to make appropriate decisions in managing and controlling the entity’s activities and to prepare reliable financial reports.

Communication, which involves providing an understanding of individual roles and responsibilities pertaining to internal control over financial reporting, may take such forms as policy manuals, accounting and financial reporting manuals, and memoranda. Communication also can be made electronically, orally, and through the actions of management.

Thus Information System is the most essential component of Internal Control.

Question 5.
Prepare a Board note on internal control highlighting the elements of sound internal control system for a company.
Answer:
Following is a Note to the Board of directors on Internal Control:
To,
The Board of Directors
XYZ Ltd.
Subject: Note on Internal Control
Dear Sir,
Internal Control is a process for assuring achievement of an organization’s objectives in operational effectiveness and efficiency, reliable financial reporting, and compliance with laws, regulations and policies.

It is a means by which an organization’s resources are directed, monitored, and measured. It plays an important role in detecting and preventing fraud and protecting the organization’s resources, both physical and intangible.

Following are the elements of sound internal control system for a company:
Segregation of duties – Segregation of duties among different people allows internal checks to take place. It reduces the risk of intentional manipulation and error and increases the element of checking, however it does not eliminate the risk.

Organisational structure – The structure or pattern of an organisation includes defining and allocating responsibilities and identifying lines of reporting for all aspects of the enterprise’s operations, including the controls. The delegation of authority and responsibility should be clearly specified.

Objectives and Policy Statements – Objectives are the aims, goals, purposes or accomplishments laid down by the top management to be achieved by the middle and lower management. Policies and procedures provides the manner of achieving the objectives.

Authorisation and approval – All transactions should require authorisation or approval by an appropriate responsible person. The limits of these authorisations should be specified.

Personnel – Proper procedures should be made to ensure that personnel have capabilities commensurate with their responsibilities.

(Note: The list is inclusive and not exhaustive)

Sd.
Mr. A
Company Secretary
XYZ Ltd.

Question 6.
Internal check and internal control are two frequently used terms in risk management and compliance. Explain the meaning of Internal Check and Internal Control and also mention how these two are different from each other.
Answer:
Internal check – “Internal check” is a system of instituting checks on the day-to-day transactions which operate continuously as a part of routine system whereby the work of one person is complementary to the work of another, the object being the prevention or early detection of errors or fraud. The objective of such allocation of duties is that no single individual has an exclusive control over any one transaction or group of transactions.

Internal control – “Internal control”, as defined in accounting and auditing, as a process for assuring achievement of an organization’s objectives in operational effectiveness and efficiency, reliable financial reporting, and compliance with laws, regulations and policies.

It is a means by which an organization’s resources are directed, monitored, and measured. It plays an important role in detecting and preventing fraud and protecting
the organization’s resources, both physical and intangible.

For example:

Physical Resources : Machinery and property.
Intangible Resources : Reputation or intellectual property such as trademarks.

Following are the differences between internal check and internal control:

Basis	Internal Check	Internal Control
Meaning	Internal check refers to the way of allocating responsibility, segregation of work, where work of the subordinates is checked by the immediate supervisors to verify that the work is carried out according to the company policies and guidelines.	Internal control is the system implemented by a company to ensure the integrity of financial and accounting information and that the company is progressing towards fulfilling its profitability and operational objectives in a successful manner.
Verification	One person’s work is independently checked by another person(s).	It is a self-balancing mechanism implemented by the management, so as to ensure that the entire work process is divisible in parts, so that not a single person may have the access to complete the entire process.
Implementation	Internal checks are implemented at all organizational levels such as tactical and operational level.	Internal controls are designed and documented at the corporate management level.
When it is done	As soon as one part or process is completed, it is checked by another.	Internal Control is a policy decision by the management and is a continuous process.
Purpose	Safeguarding or minimizing errors and frauds in actions transactions and records, so as to ensure the efficient running of business.	Formulation and circulation of management principles and policies and effective and speedy execution thereof with the help of internal checking and internal audit activities.
Scope	Scope of internal check is narrower compared to internal control.	Wider in scope than internal check.

Question 7.
What do you understand by internal control? What are its components?
Answer:
“Internal control” is defined as a process, affected by an organization’s people and information technology systems, designed to help the organization accomplish specific goals or objectives.

It is a means by which an organization’s resources are directed, monitored, and measured. It plays an important role in preventing and detecting fraud and protecting the organization’s resources, both physical and intangible.

The Appendix 1 of SA 315 provides the following Internal Control Components :

Component	Meaning
Control Environment	The control environment is the set of standards, processes, and structures that provide the basis for carrying out internal control across the organization. Control Environment comprises of the following elements : 1. Communication and enforcement of integrity and ethical values. 2. Commitment to competence. 3. Participation by those charged with governance. 4. Management’s philosophy and operating style. 5. Organizational structure. 6. Assignment of authority and responsibility. 7. Human resource policies and practices.
Entity’s Risk Assessment Process	Every entity faces a variety of risks from external and internal sources. Risk assessment involves a dynamic and iterative process for identifying and assessing risks to the achievement of objectives
Information and Communication	Information is necessary for the entity to carry out internal control responsibilities to support the achievement of its objectives. Communication is the continual, iterative process of providing, sharing, and obtaining necessary information. Internal communication is the means by which information is disseminated throughout the organization, flowing up, down, and across the entity.
Control Activities	Control activities are the actions established through policies and procedures that help ensure that management’s directives to mitigate risks to the achievement of objectives are carried out. Control activities can be carried out by the following means: 1. Performance reviews 2. Information processing 3. Physical controls
Monitoring	Ongoing evaluations, separate evaluations, or some combination of the two are used to ascertain whether each of the five components of internal control, including controls to affect the principles within each component, is present and functioning.

Question 8.
Write short note on the following; COSO’s internal control framework.
Answer:
Committee of Sponsoring Organizations of the Treadway Commission (COSO) defines internal control as a process, effected by an entity’s board of directors, management, and other personnel, designed to provide reasonable assurance regarding the achievement of objectives relating to operations, reporting, and compliance.

Following are the components of Internal Control as defined by COSO:

Control environment
Risk Assessment
Control Activities
Information
Monitoring Activities

The concepts from the definition of Internal Control by COSO can be elaborated as under:

Achieving Objectives: Geared to the achievement of objectives in one or more separate but overlapping Categories.
A process consisting of ongoing tasks and activities: It is a means to an end, not an end in itself.
Effected by people: It is not merely about policy and procedure manuals, systems, and forms, but about people and the actions they take at every level of an organization to effect internal control.
Assurance to senior management: Able to provide reasonable assurance, not absolute assurance, to an entity’s senior management and board of directors
Adaptable to the entity structure: Flexible in application for the entire entity or for a particular subsidiary, division, operating unit, or business process.

Question 9.
Answer the following in brief; What are the three categories of objectives provided in COSO International Control Integrated Framework?
Answer:
The COSO International Control Integrated Framework sets forth the following three categories of objectives, which allow organizations to focus on separate aspects of internal control:

Objective	Meaning
Operations Objectives	These pertain to effectiveness and efficiency of the entity’s operations, including operational and financial performance goals, and safeguarding assets against loss.
Reporting Objectives	These pertain to internal and external financial and non-financial reporting and may encompass reliability, timeliness, transparency, or other terms as set forth by regulators, standard setters, or the entity’s policies.
Compliance Objectives	These pertain to adherence to laws and regulations to which the entity is subject.

Question 10.
Elucidate principles on Internal Control enunciated by Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Answer:
The Committee of Sponsoring Organizations of the Treadway Commission (COSO) had originally identified five components of internal control, which became widely adopted for use in assessing the effectiveness of internal controls.

Its more recently updated framework identifies 17 principles mapped to the original components. These Principles are as under:

Component 1 : Control Environment

Principle 1 : Demonstrates commitment to integrity and ethical values
Principle 2 : Exercises oversight responsibility
Principle 3 : Establishes structure, authority, and responsibility
Principle 4 : Demonstrates commitment to competence
Principle 5 : Enforces accountability

Component 2 : Risk Assessment

Principle 6 : Specifies suitable objectives
Principle 7 : Identifies and analyzes risk
Principle 8 : Assesses fraud risk
Principle 9 : Identifies and analyzes significant change

Component 3 : Control Activities

Principle 10 : Selects and develops control activities
Principle 11 : Selects and develops general controls over technology
Principle 12 : Deploys control activities through policies and procedures

Component 4 : Information & Communication

Principle 13 : Uses relevant information
Principle 14 : Communicates internally
Principle 15 : Communicates externally

Component 5 : Monitoring Activities

Principle 16 : Conducts ongoing and/or separate evaluations
Principle 17 : Evaluates and communicates deficiencies

Question 11.
Write short note on the following; CEO/CFO certification.
Answer:
As per Regulation 17(8) of SEBI (LODR) Regulations, 2015, the Chief Executive Officers and the Chief Financial Officers shall provide the compliance certificate to the Board of Directors as specified in Part B of Schedule II.

The following compliance certificate shall be furnished by Chief Executive officer and Chief Financial Officer:
A. They have reviewed financial statements and the cash flow statement for the year and that to the best of their knowledge and belief:

These statements do not contain any materially untrue statement or omit any material fact or contain statements that might be misleading.
These statements together present a true and fair view of the listed entity’s affairs and are in compliance with existing accounting standards, applicable laws and regulations.

B. There are, to the best of their knowledge and belief, no transactions entered into by the listed entity’s during the year which are fraudulent, illegal or violative of the company’s code of conduct.

C. They accept responsibility for establishing and maintaining internal controls for financial reporting and that they have evaluated the effectiveness of internal control systems of the listed entity’s pertaining to financial reporting and they have disclosed to the.auditors and the Audit Committee, deficiencies in the design or operation of such internal controls, if any, of which they are aware and the steps they have taken or propose to take to rectify these deficiencies.

D. They have indicated to the auditors and the Audit committee:-

Significant changes in internal control over financial reporting during the year.
Significant changes in accounting policies during the year and that the same have been disclosed in the notes to the financial statements.
Instances of significant fraud of which they have become aware and the involvement therein, if any, of the management or an employee having a significant role in the listed entity’s internal control system over financial reporting.

Question 12.
Write a short note on the following; classification of internal control.
Answer:
Internal control can broadly be classified into two categories:
1. Accounting controls/financial controls – Accounting controls comprise the plan of organisation and all methods and procedures that are concerned mainly with and relate to, the safeguarding of assets and the reliability of the financial information.
For example : Maintaining inventory.

2. Administrative controls – Administrative controls are very wide in their scope. They include all other managerial controls concerned with decision making process. Administrative controls have an indirect relationship with financial records.
For example : Quality control, works standards, periodic reporting, policy appraisal etc.

Question 13.
“A variety of internal control techniques can help prevent improprieties.” Comment.
Answer:
Variety of internal control techniques can help prevent improprieties covering following points as mentioned below:

There should be clear division of the work.
Segregation of the work should be in such a manner that the work done by one person is the beginning of the work for another person.
There should be the clarity of the responsibility.
The work flow process be documented or standardized so that the staff may perform the work as suggested in the work flow chart.
No single persons should be allowed to have access or control over any important business operation.
There should be job rotation of the staff duties periodically.
Staff should be asked to go on mandatory leave periodically so that other person may come to know if someone is playing foul with the system.
Persons having the charge of the important assets should not be al¬lowed to have access to the books of account.
Periodical inspection of the physical assets is carried out to ensure its physical existence as well in good working conditions.

Question 14.
What are the methods adopted for Internal Control in modern organization?
Answer:
The following methods are adopted for Internal Control in modern organization :

Internal Check – Internal check is done by allocation of authority and work in such a manner so as to keep a check on the day-to-day transactions which operate continuously as part of routine system whereby the work of one person is automatically proved independently or is complementary to the work of another, the object being prevention or early detection of error and frauds.

Internal Audit – Internal Audit is an :

Independent appraisal function
Established within the organization
To examine and evaluate the activities as a service to the management
To assist the members for effective discharge of their responsibilities
To furnish with analyses, appraisals, suggestions etc.

Flow Charts – The work flow process be documented or standardized so that the staff may perform the work as suggested in the work flow chart.

Internal Control Questionnaire – An internal control questionnaire is a document which an auditor provides to employees of a company before performing an audit. The questionnaire is useful to determine which areas the audit should focus on. When employees answer the questions, the auditor knows whether the company is keeping accurate records overall, and has evidence that shows who is responsible for which documents. The company receives the benefits of having a cheaper, faster and more effective audit because of the internal control questionnaire.

Inter firm and Intra firm Comparisons – Inter firm comparison means a comparison of two or more similar business units with the objective of finding the competitive position to improve the profitability and productivity of those business units. Thus, inter firm comparison is a tool used by the management of a company to compare its operating performance and financial results with those of similar companies engaged in the same industry.

Question 15.
You are Company Secretary of XYZ Limited. You are required by the Chairman of your company to prepare a note for the Board of directors highlighting the main aspects of internal auditing.
Answer:
Following is a Note to the Board of directors on Internal Audit :
To,
The Board of Directors XYZ Ltd.
Subject : Note on Internal Audit
Dear Sir,
Institute of Internal Auditors has defined internal audit as under:
“Internal auditing is an independent, objective assurance and consulting activity designed to add value and improve an organization’s operations. It helps an organization accomplish its .objectives by – bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control, and governance processes.”

The following are the main aspects of internal auditing :

Review, appraisal and evaluation of the soundness, adequacy and application of financial, accounting and other operating controls.
Ascertaining the adequacy and reliability of management information and control systems.
Ascertaining the achievement of management objectives and compliance with established plans, policies and procedures.
Ensuring proper safeguards for assets – their utilization and accounting thereof.
Detection and prevention of fraud and error.
Ascertaining the integrity of management data in an organisation.
Identifying the areas of cost reduction, coupled with increased production, improved productivity and improved systems.
Ascertaining the quality of performance and undertaking ‘value for money’ exercises.
Compliance with statutory laws and rules including adherence to the Companies (Auditors’ Report) Order, 2003 to avoid adverse comments from the statutory auditors.
Undertaking special reviews and assignments directed by management to ensure economical and efficient use of resources.
To provide for a channel of communicating new ideas to the top management.

Sd.
Mr. A
Company Secretary
XYZ Ltd.

Question 16.
What are the steps involved in an internal control mechanism?
Answer:
In order to establish the internal control mechanism the following steps should be followed :

Identify the key areas where the internal control mechanism is to be established.
Every work flow should be so documented that it is not complete if another person has not checked it out.
The other person’s role should start when the first person’s role comes to an end.
Establish the surprise check mechanism where the money matters are involved.
Reporting of the non-adherence of key compliance areas.
Review mechanism of the control units.
Establishment of Vigil Mechanism: The organization should establish a vigil mechanism as per the provisions of Rule 7 of the Companies (Meetings of Board and its Powers) Rules, 2014.

Question 17.
Are there any limitations of internal control? Explain.
Answer:
Following are the limitations of internal control:

Internal control cannot change an inherently poor manager into a good one.
Internal control cannot ensure success, or even survival in case of shifts in government policy or programs, competitors’ actions or economic conditions, since these are beyond the management’s control.
An internal control system, no matter how well conceived and operated, can provide only reasonable and not absolute assurance to management and the board regarding achievement of an entity’s objectives.
The likelihood of achievement is affected by limitations inherent in all internal control systems.
Controls can be circumvented by the collusion of two or more people, and management has the ability to override the system.
Another limiting factor is that the design of an internal control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs.

Thus, while internal control can help an entity achieve its objectives, it is not a panacea.

Question 18.
According to Regulation 1$ of SEBI (LODR) Regulations, 2015 what is the role of the audit committee and the information to be reviewed by the audit committee?
Answer:
The role of the audit committee shall include the following:

Oversight of the listed entity’s financial reporting process and the disclosure of its financial information to ensure that the financial statement is correct, sufficient and credible.
Recommendation for appointment, remuneration and terms of appointment of auditors of the listed entity.
Approval of payment to statutory auditors for any other services rendered by the statutory auditors.
Reviewing, with the management, the quarterly financial statements before submission to the board for approval.
Reviewing and monitoring the auditor’s independence and performance, and effectiveness of audit process.
Approval or any subsequent modification of transactions of the listed entity with related parties.
Scrutiny of inter-corporate loans and investments.

(Note: The list above is inclusive and not exhaustive)

Review of information by Audit Committee – 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).

Governance Risk Management Compliances and Ethics Notes

Debt Funding – Indian Fund Based (Corporate Debt) – Corporate Funding and Listings in Stock Exchanges Important Questions

December 28, 2022

Debt Funding – Indian Fund Based (Corporate Debt) – Corporate Funding and Listings in Stock Exchanges Important Questions

Question 1.
Write note on the following: “Fixed Income Products”.
Answer:
“Fixed Income Products”:

These are investment vehicles which provide for fixed income returns on investments.
Fixed income securities can be issued by any legal entity like Central and State Governments, public bodies, statutory corporations, banks and institutions and corporate bodies.
Fixed Income Products includes Bank Fixed Deposits, Corporate Fixed deposits, Public Provident Fund, Kisan Vikas Patra, National Savings Certificate’ etc.
A bank basically has three types of deposits, ie. time deposit, savings deposit and current account. NBFCs also accept various types of deposits.

Question 2.
Write notes on the following: “Debt Securities”.
Answer:
“Debt securities” means non-convertible debt securities which create or acknowledge indebtedness and includes debentures, bonds and such other securities of a body corporate or a Trust registered with SEBI as a Real Estate Investment Trust or an Infrastructure Investment Trust, or any statutory body constituted by virtue of a legislation, whether constituting a charge on the assets of the body corporate or not, but excludes bonds issued by Government or such other bodies as may be specified by SEBI, security receipts and securitized debt instruments.

Question 3.
Write notes on the following: “Investor in debt market.”
Answer:
Investors in debt markets are the entities who invest in fixed income instruments. Following are investors in debt market
Banks: They invest in all instruments ranging from T- bills, CPs and CDs to GOISECs, private sector debentures etc. Banks lend to corpo-rate sector directly by way of loans and advances and also invest in debentures issued by the private corporate sector and in PSU bonds.

Insurance Companies: The second largest category of investors in the debt market are the insurance companies.

Provident funds: Provident funds are estimated to be the third largest investors in the debt market. Investment guidelines for provident funds are being progressively liberalized and investment in private sector debentures is one step in this direction.

Mutual Funds: Mutual funds represent an extremely important category of investors in debt market. World over, they have almost surpassed banks as the largest direct collector of primary savings from retail investors and therefore as investors in the wholesale debt market. The investors in debt markets are generally Banks, Financial Institutions, Mutual Funds, Insurance Companies, Provident Funds etc.

Question 4.
Briefly explain the following terms related to debt market:

Inflation linked bond.
Floating interest rate

Answer:
Inflation linked bond: A bond is considered indexed for inflation if the payment on the instrument is indexed by reference to the change in the value of a general price index over the term of the instrument.

Floating interest rate: Floating interest rate simply means that the rate of interest is variable. The interest rate payable for the next period is set with reference to a benchmark market rate agreed upon by both the lender and the borrower.

Question 5.
What constitutes debt market in India? Describe the various investors in debt market.
Answer:
Components of Debt Market: The debt market in India comprises mainly of two segments viz,, the Government securities market consisting of Central and State Government securities, Zero Coupon Bonds (ZCBs), Floating Rate Bonds (FRBs), T – Bills and the corporate securities market consisting of FI bonds, PSU bonds, and Debentures/Corporate bonds. Government securities form the major part of the market in terms of outstanding issues, market capitalization and trading value.

Following are Investors in Debt Market:
Banks: They invest in all instruments ranging from T-Bills, CPs and CDs to GOISECs, private sector debentures etc. Banks lend to corporate sector directly by way of loans and advances and also invest in debentures issued by the private corporate sector and in PSU bonds.

Insurance Companies: The second largest category of investors in the debt market are the insurance companies.

Provident Funds: Provident funds are estimated to be the third largest investors in the debt market. Investment guidelines for provident funds are being progressively liberalized and investment in private sector debentures is one step in this direction.

Mutual Funds: Mutual funds represent an extremely important category of investors. World over, they have almost surpassed banks as the largest direct collectors of primary saving from retail investors and therefore as investors in the wholesale debt market.

Trusts: Trusts include religious and charitable trusts as well as statutory trusts formed by the government and quasi government bodies. Most of the trusts invest in CDs banks and bonds of financial institutions and units of Unit Trust of India.

Note: The investors in such instruments are generally Banks, Financial Institutions, Mutual Funds, Insurance Companies Provident Funds etc.

Question 6.
Briefly explain the following statement: “Debt market in India com-prises of two segments.”
Answer:
The debt market in India comprises mainly two segments:
1. Government securities markets consisting of Central Government and State Government securities, Zero Coupon Bonds (ZCBs), Floating Rate Bonds (FRBs) and the corporate securities market consisting of FI Bonds, PSU Bonds and Debentures/Corporate bonds. Government securities form the major part of the market in terms of outstanding issues, market capitalization and trading value.

2. Corporate debentures & bonds issued by Private Sector Companies.

Question 7.
What is ‘debt security’? Describe the different debt market participants.
Answer:
A tradable form of a loan/debt is termed as Debt instrument/securities. It pertains to obligations of issuer with regards to certain future cash flows representing payment of interest and principal by the issuer to the holder (legal owner) of the instrument. There are various types of fixed income’ instruments, which cater to the needs of both investors and issues. Classification of these instruments done on the basis of Interest, time duration etc.

Debt Market Participants:

Primary Dealer: Primary dealers are important intermediaries in the government securities market. They act as underwriters in the primary market and market makers in the secondary market.
Brokers: Brokers plays an important role in secondary debt market by bringing together counter parties and negotiating terms of the trade.

Question 8.
Discuss how the debt market and its instruments help the companies in raising funds.
Answer:
→ Debt markets are markets for the issuance, trading and settlement of various types and features of fixed income securities. Fixed income securities can be issued by any legal entity like Central and State Governments, public bodies, statutory corporations, banks and institutions and corporate bodies.

→ The debt market in India comprises mainly of two segments viz., the Government securities market consisting of Central and State Governments securities, Zero Coupon Bonds (ZCBs), Floating Rate Bonds (FRBs), T-Bills and the corporate securities market consisting of FI bonds, PSU bonds, and Debentures/Corporate bonds. Government securities form the major part of the market in terms of outstanding issues, market capitalization and trading value.

→ The trading of government securities on the Stock exchanges is currently through Negotiated Dealing System using members of Bombay Stock Exchange (BSE)/National Stock Exchange (NSE) and these trades are required to be reported to the exchange. Two Depositories National Securities Depository Limited (NSDL) and Central Depository Services (India) Limited (CDSL) maintain records of holding of securities in a dematerialized form. Records in case of holding of government securities for wholesale dealers like banks/Primary Dealers (PDs) and other financial institutions are maintained by the RBI.

Thus, debt markets helps the companies to raise funds like Corporate Debentures and Fixed Income Products etc.

Question 9.
Discuss briefly the rules and regulations relating to redemption and roll-over of debt securities.
Answer:
The redemption and roll-over of the debt securities whether issued to the public or privately placed are required to be made in accordance with the provisions of SEBI (Issue and Listing of Debt Securities) Regulations, 2008.

Redemption and roll-over of debt securities that are convertible either partially or fully or optionally into listed or unlisted equity shall be guided by the disclosure norms applicable to equity or other instruments offered on conversion in terms of SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018.

The redemption and roll-over of the debt securities are required to fulfil certain conditions which are as follows:

The issuer shall redeem the debt securities whether non-convertible or convertible in terms of the offer document.
Roll-over of non-convertible debt securities requires passing of a special resolution of holders of such securities and give twenty one days notice of the proposed roll-over.
Disclosure has been made in respect of the credit rating obtained for the debt securities.

Question 10.
The debt market in India comprises mainly of two segments, i.e., the government securities market and corporate securities market. Discuss in brief.
Answer:
The debt market in India comprises mainly of two segments viz, the Government securities market consisting of Central and State Governments securities ie. Zero Coupon Bonds (ZCBs), Floating Rate Bonds (FRBs), T-Bills etc. and the corporate securities market consisting of fixed interest (FI) bonds, PSU bonds, and Debentures/Corporate bonds. Government securities form the major part of the market in terms of outstanding issues, market capitalization and trading value.

The trading of government securities on the Stock exchanges is currently through Negotiated Dealing System using members of BSE Ltd. /NSE Ltd. and these trades are required to be reported to the exchange. The bulk of the corporate bonds privately placed were not listed on the stock exchanges. Two Depositories, National Securities Depository Limited (NSDL) and Central Depository Services (India) Limited (CDSL) maintain records of holding of securities in a dematerialized form. Records of holding of government securities for wholesale dealers like banks/Primary Dealers (PDs) and other financial institutions are maintained by the RBI.

Question 11.
Comment on the followings: XYZ Limited a listed company has issued partly convertible debentures in the past. Now it is planning for roll-over of non-convertible portion of these debentures. As a Company Secretary advise the conditions to be fulfilled in this regard.
Answer:
Regulation 21 of SEBI (ICDR) Regulations, 2009 stipulates that the non-convertible portion of partly convertible debt instruments issued by a listed issuer, the value of which exceeds fifty lakh rupees can be rolled over without change in the interest rate, subject to compliance with the provisions of Companies Act, 2013, and the following conditions:

Through postal ballot approved the roll-over.
The issuer has undertaken to redeem the non-convertible portion of the partly convertible debt instruments of all the holders of the convertible debt instruments who have not agreed to the resolution.
75% of the holders of the convertible debt instruments of the issuer have through a resolution issuer has along with the notice for passing the resolution, sent to all holders of the convertible debt instruments, an auditors’ certificate on the cash flow of the issuer and with comments on the liquidity position of the issuer.
credit rating has been obtained from at least one credit rating agency registered with the SEBI within a period of six months prior to the due date of redemption and has been communicated to the holders of the convertible debt instruments, before the roll-over.

Nevertheless the creation of fresh security and execution of fresh trust deed is not mandatory if the existing trust deed or the security documents provide for continuance of the security till redemption of secured convertible debt instruments Further, the decision whether the issuer is required to create fresh security and to execute fresh trust deed or not is to be taken by the debenture trustee.

Question 12.
Explain roll-over of non-convertible portion of partly convertible debentures under SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018. [(June 2013) (5 Marks)]
Answer:
The non-convertible portion of partly convertible debt instruments issued by a listed issuer exceeding INR 10 crores can be rolled over without change in the interest rate subject to the compliance with the following conditions with respect to SEBI (ICDR) Regulation, 2018:

75% of the holders of the convertible debt instruments of the issuer have, through a resolution, approved the roll-over through postal ballot.
The issuer has:
- along with the notice for passing the resolution sent to all holders of the convertible debt instruments an auditor’s certificate on the cash flow of the issuer and with comments on the liquidity position of the issuer.
- undertaken to redeem the non-convertible portion of the partly convertible debt instruments of all holders of the convertible debt instrument who have not agreed to the resolution.
Credit rating has been obtained from at least one credit rating agency registered with the Board within a period of one month prior to the due date of redemption and has communicated to the holders of the convertible debt instruments before the roll-over.

Question 13.
An issuer may list its debt securities issued on private placement basis on a recognized stock exchange subject to specified conditions as per SEBI (Issue and Listing of Debt Securities) Regulations, 2008. Explain those conditions.
Answer:
As per Regulation 20 of the SEBI (Issue and Listing of Debt Securities) Regulations, 2008 provides the conditions for listing of debt securities on a recognized stock exchange, issued on private placement basis which are as below:

An issuer is required to fulfil the following conditions:
The issue is in compliance with the provisions of the Companies Act, 2013, rules prescribed thereunder and other applicable laws.
- Credit rating has been obtained from at least one credit rating agency registered with SEBI.
- The securities should be in dematerialized form.
- The disclosures as provided for this purpose have been made.
Where application is made to more than one recognised stock exchange, the issuer shall choose one of them as the designated stock exchange.
Issuer shall comply with conditions of listing of such debt securities as specified in the Listing Regulations with the stock exchange where such debt securities are sought to be listed.
The designated stock exchange shall collect a regulatory fee from the issuer at the time of listing of debt securities issued on private placement basis.
The issuer shall make disclosures in a disclosure document as specified in Schedule I of these regulations accompanied by the latest Annual Report of the issuer and the same shall be made on the website of the stock exchange where such securities are proposed to be listed.

Question 14.
Explain with a suitable example, day count convention for Debt Securities issued under the SEBI (Issued and Listing of Debt Securities) Regulations, 2008.
Answer:
SEBI has provided certain clarifications on aspects related to day count convention for debt securities issued under the SEBI (Issue and Listing of Debt Securities) Regulations, 2008.

If the interest payment date falls on a holiday, the payment may be made on the following working day however the dates of the future coupon payments would be as per the schedule originally stipulated at the time of issuing the security.

Example:

Date of Issue of Corporate bonds	01 January, 2016
Date of Maturity	31st December, 2018
Date of coupon payments	1st July and 1st January
Coupon payable	Semi – annually

In this case, January 01, 2017 is a Sunday, thus the coupon would be payable on January 02, 2017 Le. the next working day. However the calculation for payment of interest will be only till December 31, 2016, which would have been the case if January 01, 2017 were not a holiday. Also, the remaining dates of payment would remain July 01, 2017; January 01, 2018 and 1st January, 2019 although one of the interest payment was made on January 02, 2017.

In order to ensure consistency for interest calculation, a uniform methodology shall be followed for calculation of interest payments in the case of leap year, which shall be as follows:

In case of a leap year, if February 29 falls during the tenor of a security, then the number of days shall be reckoned as 366 days (Actual/ Actual day count convention) for a whole one year period, irrespective of whether the interest is payable annually, half yearly, quarterly or monthly etc.

Example:

Date of Issue of Corporate bonds	1st January, 2016
Date of coupon payments	1st July and 1st January
Coupon payable	Semiannually

In this case, the leap year (i.e. 2016) containing 366 days would be reckoned as the denominator (Actual/Actual) for payment of interest in both the half year periods Le. Jan 01, 2016 to Jul 01, 2016 and Jul 01, 2016 to Jan 01, 2017.

Question 15.
A company is planning to place privately 10 years 11.5% debentures. Most of such debentures would be issued to a venture capitalist who is looking for an exit route. Writing a brief note advising the company as to how it can proceed for listing of such debentures on recognized stock exchange.
Answer:
To
Board of Directors XYZ Limited
Note: Listing of Debt Securities

The issuer company should consider following points:

Debt securities issued by a company on private placement basis on a recognized stock exchange subject to the following conditions:
- In compliance with the provisions of the Companies Act, Rules prescribed thereunder and other applicable laws.
- Credit rating has been obtained from one or more registered credit rating agencies.
- Securities in dematerialized form
- Disclosures provided in SEBI (Issue and Listing of Debt Securities) Regulations, 2008 have been complied with.
The company shall comply with conditions of listing specified in the SEBI (LODR) Regulations, 2015 with the stock exchange where its debt securities are to be listed.
The issuer shall make disclosures as, specified in Schedule I of these regulations accompanied by the latest Annual Report of the issuer.

Furthermore, Chapter V of SEBI (LODR) Regulations provides for following obligations of issuer – company which has issued debt securities (Non- convertible):

Regulation 50	Intimation of interest on and redemption of debt- instruments to Stock-Exchange at least 11 working days before the due-date.
Regulation 51	Disclosure of information having bearing on performance of the listed entity.
Regulation 52	Preparation and submission of un-audited or audited financial result.
Regulation 53	Disclosure in Annual – Report
Regulation 54	Asset Cover
Regulation 55	Credit Rating
Regulation 56	Documents and intimation to debenture trustees

Mr. XY
Company Secretary
ABC Ltd.

Question 16.
Explain the following: “Securitized Debt Instrument”.
Answer:

“Securitized Debt Instruments” are regulated by the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, SEBI (Issue and Listing of Securitised Debt Instruments and Security Receipts) Regulations, 2008 for listing on stock exchanges and Securitisation Companies and Reconstruction Companies (Reserve Bank) Guidelines and Directions, 2003.
“Securitized Debt Instrument” means any certificate or instrument, by whatever name called issued to an investor by any issuer who is a special purpose distinct entity possessing any debt or receivable including mortgage debt assigned to such entity and acknowledging the beneficial interest of the investor in such debt or receivable including mortgage debt, as the case may be.

Question 17.
Discuss the measures taken by Government and Regulators to develop a vibrant Corporate Bond Market in India.
Answer:
A vibrant capital market, both equity and bond, has to play an increasingly pivotal role to facilitate fund mobilization for sustaining India’s projected economic growth momentum. The role of corporate bond market becomes even more important now given the stress on Ki the banking sector. Several policy measures have been taken by the x Government and the Regulators to develop a vibrant corporate bond market.

Some important measures taken includes following:

Framework for allowing banks to provide Partial Credit Enhancement for enhancing creditworthiness of corporate bonds.
Information Repositories developed by Exchanges and Depositories to provide consolidated information on primary issuance and secondary market trades in corporate bonds.
Electronic Book Building mechanism for providing enhanced transparency in issuance of debt securities on private placement basis.
Enhanced standards for Credit Rating Agencies for timely monitoring of credit quality of bonds.
Specifications related to International Securities Identification Number (ISINs) for debt securities to encourage liquidity and reduce fragmentation of issues.
Tri-Party Repo trading on Exchanges to enhance liquidity and price discovery in corporate bonds.
Time taken for listing of public issue of bonds reduced from 12 days to 6 days.
Doing away with the requirement of 1 % security deposit for public issue of debt securities.

Question 18.
The partly convertible debt instruments of ABC Ltd. are listed on BSE and NSE. ABC Ltd. is contemplating the roll-over of the non-convertible portion of the partly convertible debt instruments. As a company secretary of ABC Ltd. prepare a board note highlighting the conditions to be complied with by ABC Ltd. in terms of SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018.
Answer:
To
The Board of Directors
XYZ Ltd.

Note: Conditions for roll-over of the non-convertible portion of partly convertible debt instruments issued by XYZ Ltd.
XYZ Ltd. can roll-over the non-convertible portion of partly convertible debt instruments, the value of which exceeds 50 lakh rupees, without change in the interest rate, subject to the following conditions:

75% of the holders of the convertible debt instruments of the issuer have, through a resolution through postal ballot, approved the roll-over.
Fresh trust deed shall be executed at the time of such roll-over or the existing trust deed can be continued if the trust deed provides for such continuation.
Adequate security shall be created or maintained in respect of such debt securities to be rolled-over.

The issuer shall redeem the debt securities of all the debt securities holders, who have not given their positive consent to the roll-over.

Credit rating has been obtained from at least one credit rating agency registered with the SEBI within a period of six months prior to the due date of redemption and has been communicated to the holders of the convertible debt instruments before the roll-over.

Mr. AB
Company Secretary
XYZ Ltd.

Question 19.
Attempt the following and support your answer with necessary reasons: XYZ Ltd. issued 12.5% debentures amounting to ₹ 150 crores on private placement basis during the financial year 2013. Later on, it was found that these debentures were issued to 73 persons. A Sessions Court or Tribunal in Mumbai took cognizance of the same and suo motu initiated the proceedings against XYZ Ltd. The company pleaded that the Court/ Tribunal has no locus standi in this regard and therefore, it cannot initiate any proceedings against it.

As per the Securities and Exchange Board of India Act, 1992 and other relevant laws, discuss whether the company’s pleading is tenable and whether the court or tribunal should drop the proceedings against the Company.
Answer:

In the given case, XYZ Ltd. issued 12.5% debentures amounting to ₹ 150 crores on private placement basis during the financial year 2013. Later on, it was found that these debentures were issued to 73 persons.
XYZ Ltd. has violated the requirement of “Private Placement”. The company has issued debentures to 73 persons which is clear violation of Regulations of SEBI (ICDR) Regulations, 2018 because in this case securities are offered to a selected group of persons not exceeding 49.
The action of Mumbai Session Court of taking suo motu cognizance is not valid due to reasons given in Section 26 of Securities and Exchange Board of India Act, 1992.
As per Section 26 of SEBI Act, 1992: “No Court/Tribunal shall take cognizance of any offence punishable under this Act or any rules or regulations made thereunder, except on compliant made by SEBI.”

Thus, the issuer company’s pleading that the Court/Tribunal shall not initiate any proceeding against it, is valid. The Court/Tribunal shall drop the proceeding against the company.

QUestion 20.
What do you mean by “Green Debt Securities”?
Answer:
A Debt Security shall be considered as “Green or Green Debt Securities”, if the funds raised through issuance of the debt securities are to be utilised for project(s) and/or asset(s) falling under any of the following:

Renewable and sustainable energy including wind, solar, bio energy, other sources of energy which use clean technology etc.
Clean transportation including mass/public transportation etc.
Sustainable water management including clean and/or drinking water, water recycling etc.
Climate change adaptation.
Energy efficiency including efficient and green buildings etc.
Sustainable waste management including recycling, waste to energy, efficient disposal of wastage etc.
Sustainable Land use including sustainable forestry and agriculture, afforestation etc.
Biodiversity conservation.
Any other category as may be specified by SEBI from time to time.

Question 21.
Write detailed Note on: “Electronic Book Provider”.
Answer:
“Electronic Book Provider”:
“Electronic Book Provider” or “EBP” means a recognized stock exchange(s), which pursuant to obtaining approval from SEBI, provides an electronic platform for private placement of securities.
Explanation: “Eligible participant” means following:

Qualified Institutional Buyers (QIBs), as defined under SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018.
Any non-QIB investor including arranger(s), who/which has been authorized by the issuer, to participate in a particular issue on EBP Platform.

Electronic Book Provider (EBP) and its Obligations:
The recognized stock exchange and depository are identified to act as an EBP. An EBP:

shall provide an online platform for placing bids;
shall have necessary infrastructure like adequate office space, equipments, risk management capabilities, manpower and other information technology infrastructure to effectively discharge the activities of an EBP;
shall ensure that the private placement memorandum/in-formation memorandum, term sheet and other issue related information is available to the eligible participants on its platform immediately on receipt of the same from issuer;
has adequate backup, disaster management and recovery plans are maintained for the EBP;
shall ensure safety, secrecy, integrity and retrievability of data.

The EBP platform so provided by the EBP shall be subject to periodic audit by Certified Information Systems Auditor (CISA).

EBP shall make information related to the issue available on its website.

Question 22.
Write short note on: “Fund raised by Issuance of Debt Securities by large entities”.
Answer:
“Fund raised by Issuance of Debt Securities by large entities”:
Applicability:

For the entities following April-March as their financial year, the framework shall come into effect from April 01,2019 and for the entities which follow calendar year as their financial year, the framework shall become applicable from January 01, 2020.
The framework shall be applicable for all listed entities (except for Scheduled Commercial Banks) which are Large Corporate.

SEBI has been working on operationalizing the 2018-19 Budget announcement which mandates large corporate to raise 2596 of their financing needs from the corporate bond market. Naturally, given the nascent stage of development of corporate bond market, such framework has to be relatively soft touch.

SEBI came out with a discussion paper on July 20, 2018. Based on feedback received on the discussion paper and wider consultation with market participants including entities, the detailed guidelines for operationalising the above budget announcement.

Corporate Funding and Listings in Stock Exchanges Notes

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

December 28, 2022

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

Question 1.
The board of directors play a pivotal role in ensuring good governance. In the light of this statement discuss the role of directors in a company.
Answer:
The contribution of directors on the Board is critical to the way a corporate conducts itself. A board’s responsibilities derive from law, custom, tradition and prevailing practices.

The Boards have to respond to the explosive demands of the marketplace. The role of the Board of Directors is the cornerstone in evolving a sound, efficient, vibrant and dynamic corporate sector for attaining of high standards in integrity, transparency, conduct, accountability as well as social responsibility.

The role of Board in particular includes:

Providing direction for management.
Demonstrate ethical leadership, displaying – and promoting throughout the company-behaviour consistent with the culture and values it has defined for the organization.
Create a performance culture that drives value creation without exposing the company to excessive risk of value destruction.
Make well-informed and high-quality decisions based on a clear line of sight into the business.
Create the right framework for helping directors meet their statutory duties under the Companies Act, 2013, and/or other relevant statutory and regulatory regimes.
Being accountable, particularly to those that provide the company’s capital.
Think carefully about its governance arrangements and embraces evaluation of their effectiveness.

Question 2.
“Board and executive leaders need to work together based on mutual respect, trust and commitment”.
In the light of this statement discuss in brief the relationship between the Board and Executive Management.
OR
Write short note on the following; Relationship between directors and managers.
Answer:
The Board and Executive leadership need to work together based on mutual respect, trust and commitment. The Board provides counsel to management and should not get involved in the day-to-day affairs of the organization. Clear expectations for the board and the director need to be established and maintained, because a board that is overly active in management can inhibit the organization’s effectiveness.

The Executive Management can help the board govern more and manage less by adopting the following three methods:

Use a comprehensive strategic plan : that has been developed in conjunction with the board, and supplement it with regular progress reports. This will keep the board’s sights focused on the long term goals and mission of the organization. Regular reports will keep board members apprised of progress toward organizational goals, and provide part of the basis for evaluation of the executive management.

Provide the board with relevant materials : before board meetings, and explain why the materials are coming to the attention of the board. ‘ Let board members know how specific agenda items relate to the organization’s larger mission, and what kind of action or discussion is desired of the board on each item.

Facilitate board and board committee discussions so : that the board stays focused on the larger issues. Refer to set policies that define the limits of the board’s decision-making power, and strive to engage the board in a dialogue among themselves that leads to consensus-building.

Question 3.
Write short notes on the following; Key Managerial Personnel (KMP).
Answer:
According to section 2(51) of the Companies Act, 2013, key managerial personnel in relation to a company means:

The Chief Executive Officer or the managing director or the manager
The company secretary
The whole-time director
The Chief Financial Officer
Such other officer, not more than one level below the directors who is in whole time employment, designated as key managerial personnel by the Board Such other officer as may be prescribed

Question 4.
What are different types of directors on a Corporate Board?
Answer:
As per Section 2(34) of the Companies Act, 2013, Director means a director appointed to the Board of a Company.
Various types of directors on a Corporate Board are as under:
i. Executive Director/Managing Director: The term executive director is usually used to describe a person who is both a member of the board and who also has day-to-day responsibilities in respect of the affairs of the company.

According to Section 2(54) of the Companies Act, 2013 “managing director” means:
“A director who, by virtue of articles of a company or an agreement with the company or of a resolution passed by the company in general meeting or by its Board of directors, is entrusted with substantial powers of management of the affairs of the company and includes a director occupying the position of a managing director, by whatever name called.”

ii. Non Executive Director : They are not in the employment of the company. They are the members of the Board, who normally do not take part in the day-to-day implementation of the company policy.

iii. Shadow Director. Shadow Director is a person who is not formally appointed as a director, but in accordance with whose directions or instructions the directors of a company are accustomed to act.

iv. Woman Director : Second Proviso to section 149 of the Companies Act, 2013 read with Rule 3 of Companies (Appointment and Qualification of Directors) Rules, 2014, prescribes that every listed company and every other public company having paid-up share capital of one hundred crore rupees or more; or turnover of three hundred crore rupees or more shall appoint at least one Woman director.

v. Resident Director : Section 149(3) of the Act has provided for residence of a director in India as a compulsory i.e., every company shall have at least one director who has stayed in India for a total period of not less than 182 days in the previous calendar year.

vi. Independent Directors: Section 149(4) of the Companies Act, 2013 read with Rule 4 of the Companies (Appointment and Qualification of Directors) Rules, 2014 provides that every listed company shall have at least one-third of the total number of directors and the following class or classes of Companies shall have at least two directors as Independent Directors:

The Public Companies having paid up share capital of ten crore rupees or more.
The Public Companies turnover of one hundred crore rupees or more.
The Public Companies which have, in aggregate, outstanding loans, debentures and deposits, exceeding fifty crore rupees.

vii. Nominee Director. A nominee director belongs to the category of non-executive director and is appointed on behalf of an interested party.

viii. Lead Independent Director. A director who coordinates the activities of other non-employee directors and advises the chairman on issues ranging from the schedule of board meetings to recommending retention of advisors and consultants to the management.

ix. Small Shareholders Director. A listed Company may have one director elected by small shareholders. Such director may be appointed upon notice of not less than 1000 shareholders or 1/10th of the total, shareholders, whichever is lower.

x. Additional Director. Section 161(1) of the Companies Act, 2013 provides that any person, other than a person who fails to get appointed as a director in a general meeting may be appointed as an additional director at any time who shall hold office up to the date of the next annual general meeting or the last date on which the annual general meeting should have been held, whichever is earlier.

Question 5.
Briefly explain the legal provisions regarding appointment of woman director in a public company.
OR
Answer the following in brief; Which type of a company should have at least one woman director?
Answer:
Proviso to Section 149(1) of the Companies Act, 2013 provides that certain classes of companies must have at least one woman director. Rule 3 of the Companies (Appointment and Qualification of Directors) Rules, 2014 prescribes that the following class of companies shall have at least one Woman Director from 1st April 2015:-

Every Listed Company
Every other Public Company having
Paid-up capital of 100 crore rupees or more
Turnover of 300 crore rupees or more

Question 6.
“Corporate Boards are also involved in women empowerment.” Comment.
OR
“Women can play a significant role in the board of directors” Comment on the rationale for having a woman director on a company’s board.
OR
Write short note on the following; Woman director.
Answer:
Women directors can play a significant role in decision making Companies Act, 2013 has taken a positive step in this direction by providing for mandatory appointment of women director on corporate boards.
1. Proviso to Section 149(1) of the Companies Act, 2013 provides that certain classes of companies must have at least one woman director.

2. Rule 3 of the Companies (Appointment and Qualification of Directors) Rules, 2014 prescribes that the following class of companies shall have at least one Woman Director from 1st April 2015:
(i) Every Listed Company

(ii) Every other Public Company having:

Paid-up capital of 100 crore rupees or more
Turnover of 300 crore rupees or more

Regulation 17(i) of the SEBI (LODR) Regulations requires that at least one woman director shall be appointed on the board of all listed entities.

Sebi (Lodr) (Amendment) Regulations, 2018:
The top 500 listed companies shall have atleast one independent woman director by 1st April 2019 and for the top 1000 listed entities by 1 April 2020. A company shall comply with above provisions within a period of six months from the date of its incorporation.

Question 7.
Is shadow director equally liable with the other directors for obligations of the firm?
OR
Write short note on the following; Shadow Director.
Answer:
Shadow Director is a person who is not formally appointed as a Director, but in accordance with whose directions or instructions the directors of a company are accustomed to act. However, a person is not a Shadow Director merely because the Directors act on advice given by him in a professional capacity.

Shadow Director is a holder of controlling or majority share of a private firm who is not technically a director and does not openly participate in the firm’s governance, but whose directions or instructions are routinely complied with by the employees or other Directors.

In the eyes of law, he or she is a De-facto Director and is held equally liable for the obligations of the firm with the other De-facto and De-jure Directors.

Question 8.
How is the board size of companies determined?
Answer:
Board size is an important determinant of board effectiveness. The composition and structure of the Board as prescribed under the law is given hereunder:

Companies Act, 2013:
Section 149( 1) of Companies Act, 2013, provides that every company shall have a Board of Directors consisting of individuals as directors and shall have –

A minimum number of three directors in the case of a public company.
At least two directors in the case of a private company.
At least one director in the case of a One Person Company.
A maximum of fifteen directors provided that a company may appoint more than fifteen directors after passing a special resolution.

Section 149(4) of Companies Act, 2013, provides that every public listed company shall have atleast one third of total number of directors as independent directors and Central Government may prescribe the minimum number of independent directors for any class or classes of companies.

SEBI (LODR) Regulations, 2015:
Regulation 17(1)(a) of SEBI (LODR) Regulations : 2015 provides that Board of directors shall have an optimum combination of executive and non-executive directors with at least one woman director and not less than fifty per cent of the board of directors shall comprise of non-executive directors.

Regulation 17(1)(6) of SEBI (LODR) Regulations : 2015 provides that the composition of board of directors of the listed entity shall be as follows: Where the chairperson of the board of directors is a non-executive director, at least one-third of the board of directors shall comprise of independent directors; where the listed entity does not have a regular non-executive chairperson, at least half of the board of directors shall comprise of independent directors.

Regulation 17(1)(c) of SEBI (LODR) Regulations : 2015 provides that the board of directors of the top 1000 listed entities (with effect from April 1, 2019) and the top 2000 listed entities (with effect from April 1,2020) shall comprise of not less than six directors.

Question 9.
Pawan, carrying 5.23% shares of Combo Ltd., a listed company, was offered directorship in the company. What will be the consequences of accepting the offer on his holdings?
Answer:
As per Section 184(1) of the Companies Act, 2013:
Every director shall at the first meeting of the Board in which he participates as a director and thereafter at the first meeting of the Board in every financial year or whenever there is any change in the disclosures already made, then at the first Board meeting held after such change, disclose his concern or interest in any company or companies or bodies corporate, firms, or other association of individuals which shall include the shareholding, in such manner as may be prescribed.

As per Rule 9 of the Companies (Meetings of Board and its Powers) Rules, 2014 following are to Disclosures by a director of his interest:
(1) Every director shall disclose his concern or interest in any company or companies or bodies corporate (including shareholding interest), firms or other association of individuals, by giving a notice in writing in Form MBP 1.

(2) It shall be the duty of the director giving notice of interest to cause it to be disclosed at the meeting held immediately after the date of the notice.

(3) All notices shall be kept at the registered office and such notices shall be preserved for a period of eight years from the end of the financial year to which it relates and shall be kept in the custody of the company secretary of the company or any other person authorised by the Board for the purpose.

As per Regulation 7(1) of SEBI (Prohibition of Insider Trading) Regulations, 2015:
Every person on appointment as a Key Managerial Personnel or a Director of the Company or upon becoming a promoter shall disclose his holding | of securities of the company as on the date of appointment or becoming J a promoter, to the company within seven days of such appointment or | becoming a promoter.

Thus, in light of the aforesaid laws on the disclosure requirements, Mr. Pawan shall disclose his shareholding under above laws and regulations in the Combo Ltd. on accepting the offer of Directorship.

Question 10.
“Independent directors are directors who apart from receiving director’s remuneration do not have any other material pecuniary relationship or transactions with the company, its promoters, its management or its , subsidiaries”. Elucidate.
Answer:
Section 149(6) (c) of Companies Act, 2013 requires that an independent director should have no pecuniary relationship with the company, its holding, subsidiary or associate company, or their promoters, or directors, during the two immediately preceding financial years or during the current financial year.

MCA vide a General Circular in 2014 has issued the following clarifications with respect to ‘Pecuniary Relationship’of Independent Director:

In case, a company carries out transactions in the ordinary course of business at arm’s length price with an Independent Director, such Independent Director would not be said to have ‘pecuniary relationship’ with the company.

In case of Independent Directors, ‘Pecuniary Relationship’ does not include receipt of remuneration by way of sitting fees, reimbursement of expenses for participation in the Board and other meetings and remuneration in the form of commission.

The matter has been examined in consultation with SEBI and it is clarified that ‘pecuniary relationship’ provided in section 149(6)(c) of the Act does not include receipt of remuneration, from one or more companies, by way of fee provided under sub-section (5) of section 197, reimbursement of expenses for participation in the Board and other meetings and profit related commission approved by the members, in accordance with the provisions of the Act.

Question 11.
In Pramod Ltd., vacancy of an independent director arose on 15th June, 2014. In the Board meeting held on 14th October, 2014, the Board of directors unanimously passed a resolution to appoint one of the nominee directors as an independent director for next two consecutive terms. Enumerate the selection criteria of an independent director.
Answer:
Section 149(6) of Companies Act, 2013 defines independent director as under : “Independent Director” : in relation to a company, means a director other than a managing director or a whole time director or a nominee director

a. Who, in the opinion of the Board, is a person of integrity and possesses relevant expertise and experience.

b. (i) Who is or was not a promoter of the Company or its Holding, Subsidiary or Associate Company
(ii) Who is not related to Promoters or Directors in the company, its holding, subsidiary or associate company.

c. Who has or had no pecuniary relationship with the company, its holding, subsidiary or associate company, or their promoters, or directors, during the two immediately preceding financial years or during the current financial year.

d. None of whose relatives has or had pecuniary relationship or transaction with the company, its holding, subsidiary or associate company, or their promoters, or directors, amounting to two per cent or more of its gross turnover or total income or fifty lakh rupees or such higher amount as may be prescribed, whichever is lower, during the two immediately preceding financial years or during the current financial year.

e. Who, neither himself nor any of his relatives –
i. Holds or has held the position of a Key Managerial Personnel or is or has been employee of the company or its holding, subsidiary or associate company in any of the three financial years immediately preceding the financial year in which he is proposed to be appointed.

ii. Is or has been an employee or proprietor or a partner, in any of the three financial years immediately preceding the financial year in which he is proposed to be appointed, of-

A firm of auditors or company secretaries in practice or cost auditors of the company or its holding, subsidiary or associate company.
Any legal or a consulting firm that has or had any transaction with the company, its holding, subsidiary or associate company amounting to ten per cent or more of the gross turnover of such firm;.

iii. Holds together with his relatives two per cent or more of the total voting power of the company.

iv. Is a Chief Executive or director, by whatever name called, of any non-profit organisation that receives twenty-five per cent or more of its receipts from the company, any of its promoters, directors or its holding, subsidiary or associate company or that holds two per cent or more of the total voting power of the company.

v. Who possesses such other qualifications as may be prescribed.

Further, – Schedule IV of the Companies Act, 2013, provides that the appointment of Independent Director of the Company shall be approved at the meeting of the Shareholders. Hence, the appointment made by the Board of Directors of Pramod Ltd. is not valid.

Question 12.
“Independent directors are known to bring objective view in board deliberations, they also ensure that there is no dominance of one individual or special interest group or the stifling of healthy debate. They act as the guardians of the interest of all shareholders and stakeholders, especially in the areas of potential conflict”.
Discuss the above statement in the light of Regulation 16(1)(b) of the SEBI.
Answer:
As per Regulation 16(1)(b) of SEBI (LODR) Regulations, ‘Independent director’ means a non-executive director, other than a nominee director of the listed entity:
1. Who, in the opinion of the Board, is a person of integrity and possesses relevant expertise and experience.

2. Who is or was not a promoter of the listed entity or its holding, subsidiary or associate company or member of the promoter group of the listed entity.

3. Who is not related to promoters or directors in the listed entity or its holding, subsidiary or associate company.

4. Who, apart from receiving director’s remuneration, has or had no material pecuniary relationship with the listed entity, its holding, subsidiary or associate company, or their promoters, or directors, during the two immediately preceding financial years or during the current financial year.

5. None of whose relatives has or had pecuniary relationship or transaction with the listed entity, its holding, subsidiary or associate company, or their promoters, or directors, amounting to two per cent or more of g its gross turnover or total income or fifty lakh rupees or such higher amount as may be prescribed, whichever is lower, during the two immediately preceding financial years or during the current financial year.

6. Who, neither himself nor any of his relatives :
A. Holds or has held the position of a key managerial personnel or is or has been employee of the listed entity or its holding, subsidiary or associate company in any of the three financial years immediately preceding the financial year in which he is proposed to be appointed.

B. Is or has been an employee or proprietor or a partner, in any of the three financial years immediately preceding the financial year in which he is proposed to be appointed, of –

A firm of auditors or company secretaries in practice or cost auditors of the listed entity or its holding, subsidiary or associate company.
Any legal or a consulting firm that has or had any transaction with the listed entity, its holding, subsidiary or associate company amounting to ten per cent or more of the gross turnover of such firm.

C. Holds together with his relatives two per cent or more of the total voting power of the listed entity.

D. Is a Chief Executive or director, by whatever name called, of any non-profit organisation that receives twenty-five per cent or more of its receipts or corpus from the listed entity, any of its promoters, directors or its holding, subsidiary or associate company or that holds two per cent or more of the total voting power of the listed company.

E. Is a material supplier, service provider or customer or a lessor or lessee of the listed company.

7. Who is not less than 21 years of age.

8. Who is not a non-independent director of another company on the board of which any non-independent director of the listed entity is an independent director.

Question 13.
Independent directors bring valuable outside perspective and have & objective view in Board deliberations. What are the various roles of an S independent director? OR
Write short note on the following; Role of independent director.
OR
“Independent directors are known to bring an objective view in board deliberations. They act as guardians of the interest of all stakeholders, especially in the areas of potential conflicts”. Discuss
Answer:
Schedule IV of the Companies Act, 2013 provides that, independent directors shall:
1. Help in bringing an independent judgment to bear on the Board’s deliberations especially on issues of strategy, performance, risk management, resources, key appointments and standards of conduct.

2. Bring an objective view in the evaluation of the performance of board and management.

3. Scrutinise the performance of management in meeting agreed goals and objectives and monitor the reporting of performance.

4. Satisfy themselves on the integrity of financial information and that financial controls and the systems of risk management are robust and defensible.

5. Safeguard the interests of all stakeholders, particularly the minority shareholders.

6. Balance the conflicting interest of the stakeholders.

7. Determine appropriate levels of remuneration of executive directors, key managerial personnel and senior management and have a prime role in appointing and where necessary recommend removal of ex¬ecutive directors, key managerial personnel and senior management.

8. Moderate and arbitrate in the interest of the company as a whole, in situations of conflict between management and shareholder’s interest.

Question 14.
“Good governance is decisively the manifestation of personal beliefs and values which configure the organizational values, beliefs and actions of the board. A properly structured board capable of taking independent and objective decisions is the pivot of corporate governance.

A board should, therefore, be a mix of executive and independent directors with a variety of experience and core competence so that the board may effectively fulfil their responsibilities by laying down policies and strategies and monitoring managerial performance objectively”.

In the light of above statement discuss the role of independent directors in the corporate governance and state the provisions of the Companies Act, 2013 and the SEBI Regulations, 2015 with regard to appointment of independent directors on the board of directors of a listed company.

Good governance is a hallmark of the organizational objectives and values.

A properly structured board capable of talking independent and Object decision is the pivot of corporate governance a board should therefore be a mix of executive and independent directors with a variety of experience and code competence so that it may effectively fulfil its responsibilities by laying down policies and strategies, monitoring management performance j objectively.

In the light of the above statement discuss the role of independent directors j in the corporate governance with specific reference to the code of conduct I of independent directors as the provisions of the Companies Act, 2013.
Answer:
1. Help in bringing an independent judgment to bear on the Board’s deliberations especially on issues of strategy, performance, risk man-agement, resources, key appointments and standards of conduct.

2. Bring an objective view in the evaluation of the performance of board and management.

3. Scrutinise the performance of management in meeting agreed goals and objectives and monitor the reporting of performance.

4. Satisfy themselves on the integrity of financial information and that financial controls and the systems of risk management are robust and defensible.

5. Safeguard the interests of all stakeholders, particularly the minority shareholders.

6. Balance the conflicting interest of the stakeholders.

7. Determine appropriate levels of remuneration of executive directors, key managerial personnel and senior management and have a prime role in appointing and where necessary recommend removal of executive directors, key managerial personnel and senior management.

8. Moderate and arbitrate in the interest of the company as a whole, in situations of conflict between management and shareholder’s interest.

Meaning of Independent Director under Section 149(6) of Companies Act, 2013:
Section 149(6) of Companies Act, 2013 defines independent director as under : “Independent Director” : in relation to a company, means a director other than a managing director or a whole time director or a nominee director

a. Who, in the opinion of the Board, is a person of integrity and possesses relevant expertise and experience.

ii. Is or has been an employee or proprietor or a partner, in any of the three financial years immediately preceding the financial year in which he is proposed to be appointed, of-

A firm of auditors or company secretaries in practice or cost auditors of the company or its holding, subsidiary or associate company.
Any legal or a consulting firm that has or had any transaction with the company, its holding, subsidiary or associate company amounting to ten per cent or more of the gross turnover of such firm;.

iii. Holds together with his relatives two per cent or more of the total voting power of the company.

v. Who possesses such other qualifications as may be prescribed.

Conclusion:
In the given case, Board of Directors of Pramod Ltd. has appointed one of the nominee directors as an independent director. The Director so appointed cannot be considered independent as he is a Nominee Director. Further, – Schedule IV of the Companies Act, 2013, provides that the appointment of Independent Director of the Company shall be approved at the meeting of the Shareholders. Hence, the appointment made by the Board of Directors of Pramod Ltd. is not valid.

Meaning of Independent Director under Regulation 16(1)(b) of SEBI (LODR) Regulations:

As per Regulation 16(1)(b) of SEBI (LODR) Regulations, ‘Independent director’ means a non-executive director, other than a nominee director of the listed entity:
1. Who, in the opinion of the Board, is a person of integrity and possesses relevant expertise and experience.

2. Who is or was not a promoter of the listed entity or its holding, sub¬sidiary or associate company or member of the promoter group of the listed entity.

3. Who is not related to promoters or directors in the listed entity or its holding, subsidiary or associate company.

B. Is or has been an employee or proprietor or a partner, in any of the three financial years immediately preceding the financial year in which he is proposed to be appointed, of –

A firm of auditors or company secretaries in practice or cost auditors of the listed entity or its holding, subsidiary or associate company.
Any legal or a consulting firm that has or had any transaction with the listed entity, its holding, subsidiary or associate company amounting to ten per cent or more of the gross turnover of such firm.

C. Holds together with his relatives two per cent or more of the total voting power of the listed entity.

E. Is a material supplier, service provider or customer or a lessor or lessee of the listed company.

7. Who is not less than 21 years of age.

8. Who is not a non-independent director of another company on the board of which any non-independent director of the listed entity is an independent director.

Question 15.
What are qualifications of an Independent Director (ID)? Describe provisions under Companies Act, 2013 about separate meetings of Independent Directors (IDs).
OR
Are there any separate provisions of the meetings of the Independent Directors? If yes, state such provisions and also their rationale.
Answer:
Qualification of an Independent Director:
Section 149(6) of the Companies Act, 2013 read with Rule 5 of Companies (Appointment and Qualification of Directors) Rules, 2014 provides that an independent director shall possess appropriate skills, experience and knowledge in one or more fields of finance, law, management, sales, marketing, administration, research, corporate governance, technical operations or other disciplines related to the company’s business.

Separate meetings of the Independent Directors:
Companies Act, 2013 and SEBI (LODR) Regulations mandates the separate meeting of independent directors for all the listed companies. The provisions given in the Companies Act and that in the SEBI (LODR) Regulations regarding separate meeting are same.

Schedule IV of the Companies Act, 2013 and Regulation 25(3) of SEBI (LODR) Regulations, 2015 provides that:
1. The independent directors of the company shall hold at least one meeting in a year.

2. Such meeting will be without the attendance of non-independent directors and the members of management.

3. All the independent directors of the company shall strive to be present at such meeting to undertake following:

Review the performance of non-independent directors and the Board as a whole.
Review the performance of the Chairperson of the company, taking into account the views of executive directors and non-executive directors.
Assess the quality, quantity and timeliness of flow of information between the company management and the Board that is necessary for the Board to effectively and reasonably perform their duties.

Question 16.
Write short note on the following; Lead independent director.
OR
Discuss and elaborate the following; Senior independent directors.
Answer:
Designating an independent director as a lead independent director or senior independent director is considered as a good practice internationally

Following are the roles of the lead independent directors :

Acts as the principal liaison between the independent directors of the Board and the Chairman of the Board.
Develops the agenda for and preside at executive sessions of the Board’s independent directors.
Advises the Chairman of the Board as to an appropriate schedule for Board meetings, seeking to ensure that the independent directors can perform their duties responsibly while not interfering with the flow of Company operations.
Approves with the Chairman of the Board the agenda for Board and Board Committee meetings and the need for special meetings of the Board.

(Note : This list is inclusive and not exhaustive)

Question 17.
What are the primary responsibilities of the Chairman for leading the Board and ensuring its effectiveness?
OR
“The chairman’s primary responsibility is to lead the board and ensure its effectiveness”. Elucidate this statement.
Answer:
The role of the Chairman includes:
1. Demonstrating ethical leadership.

2. Setting a board agenda which is primarily focused on strategy, performance, value creation and accountability, and ensuring that issues relevant to these areas are reserved for board decision.

3. Ensuring a timely flow of high-quality supporting information; regularly considering succession planning and the composition of the board etc.

4. Encouraging active engagement by all members of the Board.

5. Taking the lead in providing a comprehensive, formal and tailored induction programme for new Directors, and in addressing the development needs of individual Directors to ensure that they have the skills and knowledge to fulfil their role on the Board and on Board Committees.

6. Evaluating annually the performance of each Board member in his/ her role as a Director, and ensuring that the performance of the Board as a whole and its Committees is evaluated annually.

7. Holding meetings with the non-executive Directors without the executives being present.

8. Ensuring effective communication with shareholders and in particular that the company maintains contact with its principal shareholders on matters relating to strategy, governance andTDirectors’ remuneration. Ensuring that the views of shareholders are communicated to the Board as a whole.

Question 18.
Describe briefly the following; Chief Executive Officer (CEO).
Answer:
As per Section 2(18) of the Companies Act, 2013, “Chief Executive Officer” means an officer of a company, who has been designated as such by it. The Board appoints the CEO based on the criterion of his capability and competence to manage the company effectively. He is involved with every aspect of the company’s performance. The CEO is supported and advised by a skilled board and CEO is ultimately accountable to the board for his actions.

His main responsibilities include:

Developing and implementing high-level strategies.
Making major corporate decisions.
Managing the overall operations and resources of a company.
Acting as the main point of communication between the board of directors and the corporate operations.

CEO should be able to, by the virtue of his ability, expertise, resources and authority keep the company prepared to avail the benefit of any change whether external or internal.

Question 19.
Explain the following; Seperation of role of chairman and chief executive. [December 2014, 3 Marks]
Answer:
The first proviso of Section 203(1) of Companies Act, 2013 states that an individual shall not be appointed or reappointed as the chairperson of the company, in pursuance of the articles of the company, as well as the managing director or Chief Executive Officer of the company at the same time after the date of commencement of this Act unless:

The articles of such a company provide otherwise.
The company does not carry multiple businesses.

Need for separation of Chairman and Chief Executive Officer:
It is perceived that separating the roles of chairman and chief executive officer (CEO) increases the effectiveness of a company’s board. It is the board’s and chairman’s job to monitor and evaluate a company’s performance. A CEO, on the other hand, represents the management team. If the two roles are performed by the saflie person, then it’s an individual evaluating himself. When the roles are separate, a CEO is far more accountable.

A clear demarcation of the roles and responsibilities of the Chairman of the Board and that of the Managing Director/CEO promotes balance of power.

Benefits of separation – The benefits of separation of roles of Chairman and CEO can be:

Direct Communication : A separate chairman provides a more effective channel for the board to express its views on management.
Guidance : A separate chairman can provide the CEO with guidance and feedback on his/her performance.
Shareholders’ interest : The chairman can focus on shareholder interests, while the CEO manages the company.
Governance : A separate chairman allows the board to function more effectively and fulfil its regulatory requirements.
Long-Term Outlook : Separating the position allows the chairman to focus on the long-term strategy while the CEO focuses on short-term profitability.
Succession Planning : A separate chairman can more effectively concentrate on corporate succession plans.

Question 20.
Describe the key role of Chief Executive Officer (CEO) and the benefits of separation of roles of Chairman and the CEO.
Answer:
Role of Chief Executive Officer:
As per Section 2(18) of the Companies Act, 2013, “Chief Executive Officer” means an officer of a company, who has been designated as such by it. The Board appoints the CEO based on the criterion of his capability and competence to manage the company effectively. He is involved with every aspect of the company’s performance. The CEO is supported and advised by a skilled board and CEO is ultimately accountable to the board for his actions.

His main responsibilities include:

Developing and implementing high-level strategies.
Making major corporate decisions.
Managing the overall operations and resources of a company.
Acting as the main point of communication between the board of directors and the corporate operations.

CEO should be able to, by the virtue of his ability, expertise, resources and authority keep the company prepared to avail the benefit of any change whether external or internal.

Separation of roles of Chairman and the CEO:
The first proviso of Section 203(1) of Companies Act, 2013 states that an individual shall not be appointed or reappointed as the chairperson of the company, in pursuance of the articles of the company, as well as the managing director or Chief Executive Officer of the company at the same time after the date of commencement of this Act unless:

The articles of such a company provide otherwise.
The company does not carry multiple businesses.

A clear demarcation of the roles and responsibilities of the Chairman of the Board and that of the Managing Director/CEO promotes balance of power.

Benefits of separation – The benefits of separation of roles of Chairman and CEO can be:

Direct Communication : A separate chairman provides a more effective channel for the board to express its views on management.
Guidance : A separate chairman can provide the CEO with guidance and feedback on his/her performance.
Shareholders’ interest : The chairman can focus on shareholder interests, while the CEO manages the company.
Governance : A separate chairman allows the board to function more effectively and fulfil its regulatory requirements.
Long-Term Outlook : Separating the position allows the chairman to focus on the long-term strategy while the CEO focuses on short-term profitability.
Succession Planning : A separate chairman can more effectively concentrate on corporate succession plans.

Question 21.
Discuss briefly the following; Training of directors.
Answer:
Board effectiveness can be achieved by paying appropriate attention to development and training of directors. Director orientation/induction should be seen as the first step of the board’s continuing improvement.

Following are the key points on training of directors:

Purpose	Explanation
Need for training of directors	Since the Board composition is getting more diverse, a system of formal training and evaluation is very important to foster trust, cohesion and communication among board members.
Benefits of Training of directors	Investing in board development strengthens the board and individual directors. As the Board of Directors is primarily responsible for good governance practices, which is quite different from management, it calls for new areas of knowledge and different skills.
Training pro – gramme	It should encompass both a thorough induction pro – gramme and an ongoing training and development opportunities for the board members.
Purpose of Training	Training should focus on improving the knowledge and skills of the board and individual members and on overall board performance.
Training of all board members	Training should be required for each board member and compliance with the requirement used to assess individual board member performance for reappointment to additional terms of board service. Requirements should be set forth in a board policy that describes the focus and type of education available.

Question 22.
Answer the following; Should there be an induction programme for Directors? Discus.
Answer:
Director orientation/induction should be seen as the first step of the board’s continuing improvement. Since the Board composition is getting more diverse, a system of formal training and evaluation is very important to foster trust, cohesion and communication among board members. Investing in board development strengthens the board and individual directors.

As the Board of Directors is primarily responsible for good governance practices, which is quite different from management, it calls for new areas of knowledge and different skills.

Common methods of induction:

Briefing papers
Internal visits
Introductions

An induction programme should be available to enable new directors to gain an understanding of:

The company’s financial, strategic, operational and risk management position.
he rights, duties and responsibilities of the directors.
The roles and responsibilities of senior executives.
The role of board committees.

An induction kit should be given to new directors which should contain MOA, AOA, brief history of the company, Current business plan, market ‘ analysis and budgets, Protocol, procedures and dress code for various meetings, Annual report for last three years, Board’s meeting schedule and Board committee meeting schedule, description of Board procedures, etc.

Question 23.
Write short notes on the following; Training of Independent Directors.
Answer:
As per Regulation 25(7) of SEBI (LODR) Regulations, 2015 : the listed entity shall familiarise the independent directors through various programmes about the listed entity, including the following:

Nature of the industry in which the listed entity operates.
Business model of the listed entity.
Roles, rights, responsibilities of independent directors.
Any other relevant information.

Schedule IV of the Companies Act, 2013 : provides for Code for Independent Directors, wherein the Independent Directors shall undertake appropriate induction and regularly update and refresh their skills, knowledge and familiarity with the company.

Question 24.
Discuss briefly the following; Directors development programme.
Answer:
Directors Development should not be treated as merely another | training schedule rather it should be structured so as to sharpen the existing skills and knowledge of directors. It is good practice for boards to arrange for an ongoing updation of their members with changes in governance, technologies markets, products, and so on through:

Ongoing education;
Site visits;
Seminars;
Various short term and long term courses.

Question 25.
Write short note on the following; Performance evaluation of directors.
OR
RST Ltd. recently issued the Equity Shares on basis of right issue. Due to this, the paid-up capital of the Company has been increased from ₹ 7.5 crore to ₹ 15 crore. The Company Secretary in the Board Meeting put up the proposal for constitution of various committees including Audit ‘ Committee and Nomination & Remuneration Committee.

All members of the Committee were proposed to be Independent Directors. In the scope of Nomination & Remuneration Committee, it was inter alia added that the Committee shall also evaluate the performance of Chairman & Managing Director (CMD) of the company. The Directors present in the Board meeting strictly objected on the said proposal. CMD has also expressed dissent on the proposal.
In view of this, check the validity of the proposal of the Company Secretary.
Answer:
In order to check the validity of the proposal of the Company Secretary, one needs to understand the following:

As per Rule 6 of the Companies (Meeting of Board and its Power) Rules, 2014 read with Rule 4 of the Companies (Appointment and Qualification of Directors) Rules, 2014:

Every listed company or public company having the following shall constitute an Audit Committee and Nomination and Remuneration Committee:
(i) Paid up capital of ₹ 10 crore or more,
or
(ii) Turnover of ₹ 100 Crore or more,
or
(iii) Aggregate outstanding loan, debenture and deposit exceeding ₹ 50 Crore.

Role of Nominations and Remuneration Committee in performance evaluation of directors:

Under Section 178(2) of the Companies Act, 2013:
The Nomination and Remuneration Committee shall identify 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 and shall specify the manner for effective evaluation of performance of Board, its committees and individual directors to be carried out either by the Board, by the Nomination and Remuneration Committee or by an independent external agency and review its implementation and compliance.

Performance of the Chairperson:
The performance of the Chairperson is linked to both the functioning of the Board as a whole as well as the performance of each director. The Nomination and Remuneration Committee provides that the Independent Director should review the performance of the Chairperson of the company taking into account the views of the executive directors and non-executive directors. In view of the above, the proposal of the Company Secretary is valid as per the law.

Question 26.
“The Board of directors plays a pivotal role in ensuring good governance. The role of the Board is two-dimensional; as a cornerstone in evolving sound, efficient, vibrant and dynamic corporate for attaining of high standards in integrity, transparency, code of conduct, accountability as well as in promoting social responsibility. The contribution of the directors on the Board is critical to the way a corporate conducts itself.

An effective Board evaluation requires the right combination of dynamic factors of performance of the Board as entrepreneurial leader of the company within the
framework of prudent and effective controls, which enables risk to be assessed and managed.”
Answer:
As per the Companies Act, 2013 or SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, Board evaluation would include following:
1. Evaluation of the Board as a whole

2. Evaluation of the Committees

3. Evaluation of Individual Directors

Managing Director/Whole time Director/Executive Director
Independent Directors
Non- executive Directors

4. Evaluation of the Chairperson

Following are the provisions on Board’s evaluation:
Provisions under Companies Act, 2013 – Section 134(3)(p) of Companies Act, 2013 : provides that there has to g be a formal annual evaluation of Board of its own performance and < that of its committees and individual directors.

The Company may undertake annual evaluation either in accordance with calendar year or financial year, as there is no clarity on this. Ideally, the same should be as per financial year.

Provisions under the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 – It requires Boards to conduct an annual performance evaluation and its disclosure in the annual report through the following provisions:
1. Regulation 17(10) mandates that entire board of directors shall do the performance evaluation of independent directors, provided that in the evaluation process, the directors who are subject to evaluation shall not participate.

2. Regulation 19(4) read with Part D of Schedule II – It provides | that the role of committee shall, inter alia, include the following:

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

Question 27.
How can an organization facilitate visionary board leadership?
OR
Discuss the barriers to visionary leadership.
OR
Describe briefly the following; Barriers to Visionary leadership.
Answer:
According to Frank Martinelli an organisation can facilitate visionary board leadership by identifying the following barriers and removing them:
1. Lack of Time Management : Lack of time to attend meetings, read materials and maintain contact with each other in between meetings. The board members need to organize themselves for maximum effectiveness and avoid wasting time on trivial matters.

2. Resistance to. risk taking : In order to be innovative and creative in its decision making, boards must be willing to take chances, to try new H things, to take risks. Board leadership must strike a balance between % taking chances and maintaining the traditional stewardship role.

3. Lack of Strategic Planning : Strategic planning offers boards an opportunity to think about changes and trends. Some boards are not involved in strategic planning at all; others are involved in a superficial way. Therefore, the boards lose an important opportunity to exercise visionary leadership skills.

4. Complexity : Board members frequently lack a deep understanding of critical changes, trends and developments. This lack of knowledge results in a lack of confidence on the part of the board to act decisively and authoritatively.

5. Micro Management : It is necessary that the board focuses its attention on items of critical importance to the organization. If the board is tempted to micro manage or to meddle in lesser matters, an opportunity to provide visionary leadership is lost.

6. Clinging to Tradition : Boards often resist change in order to preserve tradition. However, changing environment requires the Boards to be open to change This human tendency to hold on to the known prevents boards from considering and pursuing new opportunities which conflict with the old rules.

7. Confused Roles : Some boards assume that it is the job of the executive director to do the visionary thinking and that the board will sit and wait for direction and inspiration. This lack of clarity can result in boards that do not exercise visionary leadership because they do not think it is their job.

8. Past Habit : Time was when clients, members and consumers would just walk in the door on their own and boards did not consider market place pressures, or for that matter a competitive marketplace. All that has changed, yet for many boards their leadership style has not kept pace with this new awareness.

Question 28.
Describe various mandatory Board Committees for Insurance Companies in India with reference to the Insurance Regulatory and Development Authority of India (IRDAI) Corporate Governance Guidelines on Delegation of Function – Committees of the Board.
Answer:
The Insurance Regulatory and Development Authority of India (IRDAI) has revised the existing Corporate Governance Guidelines for Insurance Companies in the light of changes brought in by the Companies Act, 2013 vide Circular Dated 18th May 2016.

As per the said Guidelines, with a view to provide adequate Board time for g discharge of the significant corporate responsibilities, the Board can consider % setting up of various Committees of Directors by delegating the overall “ monitoring responsibilities after laying down theroles and responsibilities of these Committees to the Board.

IRDAI advises all insurers that it is mandatory to establish the following committees:

Audit Committee.
Investment Committee.
Risk Management Committee.
Policyholder Protection Committee.
Nomination and Remuneration Committee.
Corporate Social Responsibility Committee (only for insurers earning profits).

Regulation 34 of the IRDA (Non-linked Insurance Products) Regulations, 2019 : requires constitution of a ‘With Profits’ Committee by Life Insurance Companies comprising of one Independent Director of the Board, the Chief Executive Officer, the Appointed Actuary of the Company and an Independent Actuary.

Question 29.
“The Board of Directors is ultimately responsible for its firm’s success or failure, as well as for the ethical climate and practices of its company.” In the light of this statement, mention the areas of oversight by Board as suggested by Conference Board Commission on Public Trusts and Private Enterprises.
Answer:
The actions and attitudes of the board greatly influence the ethical climate of an organization. The directors on a company’s board assume legal responsibility for the firm’s resources and decisions. Board members have a fiduciary duty, Le., a position of trust and confidence.

Due to globalization and enhanced role of media and technology, the demand for accountability and transparency has increased greatly. This calls for ethical decision-makirrg as well as an ethical decision making framework.

A report by the Conference Board Commission on Public Trust and Private Enterprise suggested the following areas of oversight by a Board:

Designation of a Board Committee to oversee ethical issues.
Designation of an officer to oversee ethical practices and employees’ compliance with the code of ethics.
Inclusion of ethics-related criteria in employees’ annual performance reviews and in the evaluation and compensation of management.
Representation by senior management that all known ethical breaches have been reported, investigated, and resolved.
Disclosure of practices and processes the company has adopted to promote ethical behaviour.

Schedule IV of the Companies Act, 2013 prescribes Code for Independent Directors which cast duty on Independent Directors to report concerns about unethical behaviour, actual or suspected fraud or violation of the company’s code of conduct or ethics policy.

Question 29(A).
“Investor Relations (IR) is a strategic management responsibility that integrates finance, communication, marketing & securities law compliance to enable the most effective two-way communication between a company, financial community and other constituencies”.
Elucidate the role and responsibilities of Investor Relations Officer (IRO) In the light of the above statement.
Answer:
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 between a company, the financial community, and other constituencies, which ultimately contributes to a company’s securities achieving fair valuation.

They have the following roles and responsibilities:

To oversee most aspects of shareholder meetings, press conferences, private meetings with investors, (known as “one-on-one” briefings), investor relations sections of company websites, and company annual reports.
Responsible for transmission of information relating to intangible values such as the company’s policy on corporate governance or corporate social responsibility.
Managing the interactive data and the management of company filings through streaming-data solutions such as XBRL or other forms of electronic disclosure.
To be aware of current and upcoming issues that an organization may face, particularly those that relate to fiduciary duty and have an organizational impact.
Must be able to assess the various patterns of stock-trading that a public company may experience as the result of a public disclosure (or any research reports issued by financial analysts).
Must work closely with the Company Secretary on legal and regulatory matters that affect shareholders.

Question 30.
Write short note on the following; Board Charter.
OR
As a company secretary of ABC Ltd. prepare a board note listing out the items that should be included in the board charter.
Answer:
To
The Board of Directors ABC Ltd.

Subject: Contents of a Board Charter

Dear Sir
A Board Charter is a tool to assist directors in fulfilling their responsibilities as Board members. It sets out the respective roles, responsibilities and authorities of the Board and of Management in the governance, management and control of the organization. This charter should be read in conjunction with the Company’s Memorandum and Articles.

A Model Charter may include the following:

The Role of the Board
The Role of the CEO and Chairman
The Role of the Company Secretary
Directors Code of Conduct
Conflicts of Interests
Related Party transactions
Board Members Qualifications, skills, etc.
Board Meetings
Delegation of Authority by the Board
Role & power of Committees
Committee Meetings
Protocol for media contact and comment
Hospitality and Gifts
Board Evaluation
Directors liability insurance
Director Induction, training and familiarization
Non-Executive Director Remuneration
Reimbursement of expenses.

Thanking you
Your faithfully
Company Secretary
ABC Ltd.

Question 31.
Who are Directors and Board of Directors under Companies Act, 2013?
Answer:
Directors:
A Company being an artificial person it requires certain natural persons to represent the company at various fronts. The position of directors in their relationship to the company is not only as the agents, but also trustees of the company.

As per Section 2(34) of the Companies Act, 2013 ‘director’ means a director appointed to the Board of the Company.

Board of Directors:
Board of directors is a body of elected or appointed persons who jointly oversee the activities of a company. They are also referred to as board of governors, board of managers, board of regents, board of trustees, or simply referred to as “the board”.

As per Section 2(10) of the Companies Act, 2013 “Board of Directors” or “Board”, in relation to a company means the collective body of directors of the company.

Question 32.
Write a short note on the following; The duties of a director under Section 166 of the Companies Act, 2013.
Answer:
The following duties of the directors have been provided under section 166 of the Companies Act, 2013 which apply to all types of directors including Independent

Directors:

Subject to the provisions of this Act, a director of a company shall act in accordance with the articles of the company.
A director of a company shall act in good faith in order to promote the objects of the company for the benefit of its members as a whole, and ” in the best interests of the company, its employees, the shareholders, the community and for the protection of environment.
A director of a company shall exercise his duties with due and reasonable care, skill and diligence and shall exercise independent judgment.
A director of a company shall not involve in a situation in which he may have a direct or indirect interest that conflicts, or possibly may conflict, with the interest of the company.
A director of a company shall not achieve or attempt to achieve any undue gain or advantage either to himself or to his relatives, partners, or associates and if such director is found guilty of making any undue gain, he shall be liable to pay an amount equal to that gain to the company.
A director of a company shall not assign his office and any assignment so made shall be void.
If a director of the company contravenes the provisions of this section such director shall be punishable with fine which shall not be less than one lakh rupees but which may extend to five lakh rupees.

Question 33.
Briefly explain the following; Powers of the board that can be exercised only by means of a resolution passed at a meeting of the Board
Answer:
As per Section 179(3) read with Rule 8 of Companies (Meetings of Board and its Powers) Rules, 2014, the Board of Directors of a company shall exercise the following powers on behalf of the company only by means of resolutions passed at meetings of the Board, namely:

To make calls on shareholders in respect of money unpaid on their shares.
To authorise buy-back of securities under section 68.
To issue securities, including debentures, whether in or outside India.
To borrow monies.
To invest the funds of the company.
To grant loans or give guarantee or provide security in respect of loans.
To approve financial statement and the Board’s report.
To diversify the business of the company. .
To approve amalgamation, merger or reconstruction.
To take over a company or acquire a controlling or substantial stake ‘ in another company.
To make political contributions.
To appoint or remove Key Managerial Personnel (KMP).
To appoint internal auditors and secretarial auditor.

Question 34.
Write a short note on the following; The duties of an independent director.
Answer:
Schedule IV of the Companies Act, 2013 provides that the independent directors shall have following duties –

Undertake appropriate induction and regularly update and refresh their skills, knowledge and familiarity with the company.
Seek appropriate clarification or amplification of information and, where necessary, take and follow appropriate professional advice and opinion of outside experts at the expense of the company.
Strive to attend all meetings of the Board of Directors and of the Board committees of which he is a member.
Participate constructively and actively in the committees of the Board in which they are chairpersons or members.
Strive to attend the general meetings of the company.
Keep themselves well informed about the company and the external environment in which it operates.
Not to unfairly obstruct the functioning of an otherwise proper Board or committee of the Board;

(Note: This list is inclusive and not exhaustive)

Question 35.
Write a note on the following; Succession planning.
Answer:
‘Succession planning’ is a strategy for identifying and developing future leaders. Succession plans are used to address the inevitable bhanges that occur when directors resign, retire or die.

A well-prepared board should develop a succession plan. It is an ongoing process of identifying, assessing and developing people to ensure the continuity of the Board.

Some leading practices for board succession planning are:

Using a skills matrix to proactively shape board composition that incorporates strategic direction and opportunities, regulatory and industry developments, challenges, and transformation.
Conducting robust annual performance evaluations, including facilitation by an independent third party.
Reviewing evolving committee and board leadership needs, including the time commitments required.
Considering director election results and engagement by investors regarding board composition, independence, leadership and diversity.

Legal Provisions on Succession planning.
Companies Act, 2013: There is no specific provision. It is usually included in terms of reference of NRC.

SEBI (LODR) Regulations, 2015:
Regulation 17(4) The Board of the listed entity shall satisfy itself that plans are in place for orderly succession for appointments to the Board and to senior management.

Question 36.
Briefly explain the following; Board effectiveness and the role of the company secretary.
Answer:
As per Section 2(24) of the Companies Act, 2013, “company secretary” or “secretary” means a company secretary as defined in clause (c) of sub-section (1) of section 2 of the Company Secretaries Act, 1980 who is appointed by a company to perform the functions of a company secretary under this Act.

As per Section 2(60) of the Companies Act, 2013, the company secretary has also been included in the category of the officer of the company and shall be considered to be in default in complying with any provisions of the Companies Act, 2013.

Role of Company Secretary:

Acts as a vital link between the company and its Board of Directors, shareholders and other stakeholders and regulatory authorities.
Plays a key role in ensuring that the Board procedures are followed and regularly reviewed.
Provides the Board with guidance as to its duties, responsibilities and powers under various laws, rules and regulations.
Acts as a compliance officer as well as an in-house legal counsel to advise the Board and the functional departments of the company on various corporate, business, economic and tax laws.
Is an important member of the corporate management team and acts as conscience keeper of the company.

Governance Risk Management Compliances and Ethics Notes

Taxation and Stamp Duty Aspects – Corporate Restructuring, Insolvency, Liquidation & Winding-Up Important Questions

December 28, 2022

Taxation and Stamp Duty Aspects – Corporate Restructuring, Insolvency, Liquidation & Winding-Up Important Questions

Question 1.
Define capital assets as per Income Tax Act, 1961
Answer:
As per section 2(14) of the Income Tax Act, 1961, a ‘Capital asset’ is defined as
(a) Property of any kind held by an assessee, whether or not connected with his business or profession;

(b) Any securities held by a Foreign Portfolio Investor which has invested in such securities in accordance with the regulations made under Securities and Exchange Board of India Act, 1992.

Any stock in trade, consumables stores or raw materials held for the purpose of his business or profession;
Personal effects; and
Agricultural land in India, (not an urban agricultural land) i.e. rural agricultural land.

Question 2.
“Orders sanctioning amalgamation or absorption are covered by the Indian Stamp Act as if it were a Conveyance Deed.” Justify statement with judicial pronouncements. [Dec. 2019 – Old Syllabus – 3 Marks]
Answer:

Stamp duty is an important consideration in planning any merger, since the incidence of stamp duty on transfer of immovable property is high.
As per the Indian Stamp Act, 1899, an instrument includes every document by which any right or liability is or purports to be created, transferred limited extended, extinguished or recorded.
As per section 2( 10) of the Indian Stamp Act, 1899, ‘Conveyance’ refers to any instrument by which any movable or immovable property is transferred.
Conveyance includes sale conveyance, every instrument, every decree or final order of any Civil Court, and every order made by the Tribunal in respect of amalgamation of companies; by which property, whether movable or immovable, or any estate is transferred to, any other person.
In the landmark case of Li-taka Pharma. Vs. State of Maharashtra, it was held that sanction order of the Tribunal requiring transfer of assets and liabilities of the Transferor Company to the Transferee Company is a conveyance and hence chargeable to stamp duty.

Following are important conclusions of this landmark ruling:

An amalgamation under Tribunal order is an instrument under Bombay Stamp Act, 1958.
States are within their jurisdiction to levy stamp duty on instrument of amalgamation.
Stamp duty would be levied on the ‘undertaking’, when the transfer is on a going concern basis, ie. assets less liabilities. The value used for levying stamp duty would be the value of shares allotted plus other consideration paid. Similar view given in Emami Biotech Ltd.

Question 3.
The incidence of stamp duty is an important consideration for the planning of any merger. Discuss the stamp duty payable when amalgamation is between a holding company and a subsidiary coritpany.
Answer:

Stamp duty is an important consideration in planning any merger, since the amount of stamp duty on transfer of immovable property is high.
Article 265 of the Constitution permits levy and collection of tax by an authority of law. In India, stamp duty is levied by the States and hence rate and incidence of stamp in different states varies.
As per the Indian Stamp Act, 1899, an instrument includes every document by which any right or liability is or purports to be created, transferred limited extended, extinguished or recorded.
In the landmark case of Li-taka Pharma, vs. State of Maharashtra, it was held that Tribunal order for sanctioning a merger and requiring transfer of assets and liabilities of the Transferor Company to the Transferee Company is a conveyance and hence chargeable to stamp duty.
However, there are certain exemptions from payment of stamp duty. No stamp duty is payable on an instrument sanctioning an amalgamation for rehabilitating business and undertaking of a sick industrial company.
Further, the Central Govt, has exempted payment of stamp duty for cases of amalgamation between Holding and Subsidiary company, subject to fulfilment of following conditions –
- When at least 90% of the issued capital of the transferee company is in the beneficial ownership of the transferor company, or
- When the transfer is between a parent and a subsidiary company, one of which is beneficial owner of not less than 90% of the issued share capital of the other, or
- When the transfer takes place between two subsidiary companies each of which is having not less than 90% of the share capital in the beneficial ownership of the parent company.
However, since stamp duty is a State matter, above exemption (Holding-Subsidiary) will be applicable only in those States where the State Govt, follows the notification of the Central Govt.

Question 4.
“In comparison to demerger, slump sale is not generally tax efficient.” Comment briefly with any case that had taken place.
Answer:

Demerger is a corporate partition of a company into two or more undertakings, thereby retaining one undertaking with it and transferring the other undertaking to the Resulting Company.
Slump sale involves sale of an undertaking for lumpsum consideration without values being assigned to the individual assets and liabilities.
Demerger and slump sale are different forms of corporate restructuring and hence different legal provisions are applicable.
Section 2 (19AA) of the Income Tax Act, 1961 defines demerger and provides tax benefits, subject to fulfilment of certain conditions. As per Section 47, where there is a transfer of any capital asset in a demerger by Demerged Company to Resulting Company, such transfer will not be regarded as a transfer for the purpose of capital gains provided the Resulting Company is an Indian company. Thus, there is no income tax on such transaction.
However, slump sale transaction does not attract such tax benefits. As per section 50B of the Income Tax Act, 1961 any profits or gains arising from a slump sale effected in the previous year shall be chargeable to income-tax as capital gains. If an undertaking being transferred is held for more than 36 months, it shall be treated as long-term capital gains, and where the period of holding is up to 36 months, it is treated as short term capital gains. However, even in case of long-term capital asset, no indexation benefit is available for slump sale transaction, which increases the tax liability.
Hence, although slump sale is a legal transaction, it is not a tax efficient transaction. Example – in the year 2010, Abbott Healthcare acquired the Formulation Business from Piramal Health Care Ltd. on a slump sale basis.

Question 5.
“Price received on sale of an undertaking as a Going Concern is a Capital Receipt”. Comment on the statement with judicial pronouncements, supporting the statement. [Dec. 2018 – Old Syllabus – 3 Marks]
Answer:

As per section 2(420) of Income Tax Act, slump sale is defined as transfer of one or more undertakings (on a going concern basis or during winding-up) as a result of sale for a lump-sum consideration without values being assigned to individual assets and liabilities
Normally, any sale of a capital asset is considered as capital receipts and subjected to capital gain tax and stock in trade is subjected to tax as revenue profit or loss.
As per section 50B of the Income Tax Act, 1961 any profits or gains arising from the slump sale effected in the previous year shall be chargeable to income-tax as capital gains, and shall deemed to be the income of the previous year in which the transfer took place.
In the cases of CIT vs. West Coast Chemicals and CIT vs. Mugneeram Bangur, the Supreme Court held that any money received from sale of an undertaking is a capital receipt and hence capital gain tax shall be attracted. If the undertaking is held for more than 3 years, it shall be Long Term Capital Gains, else as Short-Term Capital Gains.
The Gujarat and Bombay High Courts have also held that there will be a capital gain only when a sale of business as a whole occurs. Undertaking of a business is a capital asset as its disposal at slump price is capital receipt which can attract capital gain tax alone.

Question 6.
Apart from availing the benefit of set off and carry forward of unabsorbed depreciation and accumulated losses, what are the other tax benefits if the strategy of the acquirer to merge with a loss-making company is in the form of a reverse merger?
Answer:
→ In any merger or amalgamation, financial aspects of the transaction are of prime importance as the same are expected to accrue financial benefits. Tax considerations play a vital role in designing the scheme of merger and amalgamation.

→ Hence, tax planning is most crucial element decision-making. Every company planning a merger must do intensive tax planning before finalizing the deal to get the maximum tax concessions.

→ One of the modes of corporate restructuring strategy is to merge with a sick or a company with accumulated losses. If the scheme of merger gets approval of the competent authority under section 72A of the Income-tax Act, 1961, the resultant company avails the opportunity of getting losses of sick undertakings offset against profit making undertakings of the transferee company.

→ Apart from set-off and carry-forward benefits, the merged undertakings may avail other benefits and privileges as detailed below under the Income-tax Act, 1961
(a) Benefit of amortization of preliminary expenses under section 35D for the balance unexpired period out 5 years shall be available to the resultant company.
(b) Capital expenditure on scientific research u/s 35 can be availed by the resultant company.
(c) Expenditure for patent or copyrights u/s 35A for balance unexpired period of out of 14 years.
(d) Section 35DD for expenses towards amalgamation or demerger for next 5 years equally.

Question 7.
Name various documents which requires Stamping in case of merger.
Answer:
→ Article 265 of the Constitution permits levy and collection of tax by an authority of law. In India, stamp duty is levied by the States and hence rate and incidence of stamp in different states varies.

→ As per the Indian Stamp Act, 1899, an instrument includes every document by which any right or liability is or purports to be created, transferred limited extended, extinguished or recorded.

→ Following documents require stamping in case of merger
(a) Tribunal Order: When transfer takes place by virtue of a Tribunal order to a scheme of amalgamation, stamp duty is payable. The Tribunal order directing the transfer of assets and liabilities of the transferor company to the transferee company is deemed to be a conveyance.

(b) Other documents: Usually, in a merger, several other documents, agreements, indemnity bonds, etc. are executed, depending on the facts of each case and requirements of the parties. Stamp duty would also be leviable as per the nature of the instrument and its contents.

Question 8.
Discuss in brief the provisions regarding carry forward and set-off of accumulated business losses and unabsorbed depreciation by an amalgamated company.
Answer:
→ In any merger or amalgamation, tax considerations play a vital role in designing the scheme. Hence, tax planning is most crucial element decision-making. Every company planning a merger must do intensive tax planning before finalizing the deal to get the maximum tax concessions.

→ Section 72A of Income Tax Act, 1961 provides for carry forward and set-off of accumulated business losses and unabsorbed depreciation in certain cases of amalgamation.

→ For example: industrial undertaking, ship, hotel, banking company etc. Industrial undertaking includes an undertaking involved in manufacture, processing of goods, computer software, electricity, telecommunications, mining etc.

→ It shall be noted that as unabsorbed losses of the amalgamating company are deemed to be the losses for the previous year in which the amalgamation was sanctioned.

→ The amalgamated company will have the right to carry forward the loss for a period of 8 assessment years immediately succeeding the assessment year relevant to the previous year in which the amalgamation was approved.

→ Following conditions shall be satisfied to avail the set-off benefit – (a) the amalgamating (loss-making) company

has been engaged in the business in which the accumulated loss occurred or depreciation remains unabsorbed, for 3 or more years;
has held continuously as on date of the amalgamation at least 3/4th of the book value of fixed assets held by it 2 years prior to the date of amalgamation;

(b) the amalgamated company

holds continuously for a minimum of 5 years from date of amalgamation at least 3/4th of book value of fixed assets of amalgamating company acquired in amalgamation scheme;
continues the business of the amalgamating company for a minimum period of 5 years from the date of amalgamation;
fulfils such other conditions as may be prescribed to ensure the revival of the business of the amalgamating company.

→ It further provides that in case where any of the above conditions are not complied with, the set-off of loss or allowance of depreciation made in any previous year in the hands of the amalgamated company shall be deemed to be the income of amalgamated company chargeable to tax for the year in which such conditions are not complied with.

Question 9.
Explain the tax aspects on slump sale.

Question 10.
Explain the provisions of the Income-tax Act, 1961 in relation to computation of capital gains arising out of slump sale.
Answer:

As per section 2(42C) of Income Tax Act, 1961, slump sale is defined as transfer of one or more undertakings (on a going concern basis or during winding-up) as a result of sale for a lump-sum consideration without values being assigned to individual assets and liabilities?
Normally, any sale of a capital asset is considered as capital receipts and subjected to capital gain tax and stock in trade is subjected to tax as revenue profit or loss.
As per section 50B of the Income Tax Act, 1961 any profits or gains arising from the slump sale effected in the previous year shall be chargeable to income-tax as capital gains, and shall deemed to be the income of the previous year in which the transfer took place.
Any profits or gains arising from the transfer under the slump sale of any capital asset being one or more undertakings owned and held by an assessee for not more than 36 months immediately preceding the date of transfer shall be deemed to be the capital gains arising from the transfer of short-term capital assets.
In case of slump sale, every assessee shall furnish in the prescribed form along with the return of income, a report of an accountant indicating the computation of the net worth of the undertaking or division, as the case may be, and certifying that the net worth of the undertaking or division, as the case may be, has been correctly arrived at.
Capital gains arising on slump sale are calculated as the difference between sale consideration and the net worth of the undertaking. Net worth is deemed to be the cost of acquisition and cost of improvement for the purpose of calculation of capital gains tax.

Capital Gains = Sale Consideration (-) Net-worth of the Undertaking
Net Worth = Value of Total Assets (-) Value of Total Liabilities
Value of Total Assets = WDV of Fixed Assets (+) Book value of other assets

Question 11.
Yellow Overseas Ltd. (YOL) merged with Yellow India Ltd. (YIL). YOL availed the benefit of amortisation of preliminary expenses only for two years till merger order. Whether YIL is eligible to avail this benefit for the remaining period? Substantiate your answer.
Answer:

In any merger or amalgamation, tax considerations play a vital role in designing the scheme. Hence, tax planning is most crucial element decision-making. Every company planning a merger must do intensive tax planning before finalizing the deal to get the maximum tax concessions.
Apart from the set-off and carry-forward benefits (u/s 12k), the merged undertakings may avail benefit of amortization of preliminary expenses u/s 35D of the Income Tax Act, 1961.
As per section 25D, amortization of preliminary expenses is deductible only to the assessee who incurred the expenditure. However, the benefit will be available in case of a merger.
As per section 35D, the benefit of amortization expenses is available to the amalgamated company for the balance unexpired period out 5 years.
Hence, the amount of preliminary expenses of the amalgamating company to the extent not yet written off shall be allowed as deduction to the amalgamated company in the same manner as would have been allowed to the amalgamating company.
In the given case, Yellow Overseas Ltd. (YOL) merged with Yellow India Ltd. (YIL). YOL availed the benefit of amortization of preliminary expenses only for two years till merger order. Thus, YIL is eligible to avail this benefit for the remaining period of three years.

Corporate Restructuring, Insolvency, Liquidation & Winding-Up Notes

Role Of International Institutions – Intellectual Property Rights Laws and Practices Important Questions

December 28, 2022

Role Of Interna Tional Institutions – Intellectual Property Rights Laws and Practices Important Questions

Question 1.
State The Relationship Between The ‘Trips Agreement’ And the ‘pre-existing international conventions’ covered under it.
Answer:
(1) The TRIPS Agreement says WTO member countries must comply with the substantive obligations of the main conventions of WIPO the Paris Convention on industrial property, and the Berne Convention on copyright (in their most recent versions).

(2) With the exception of the provisions of the Berne Convention on moral rights, all the substantive provisions of these conventions are incorporated by reference. They, therefore, become obligations for WTO member countries under the TRIPS Agreement – they have to apply these main provisions and apply them to the individuals and companies of all other WTO members.

(3) The TRIPS Agreement also introduces additional obligations in areas that were not addressed in these conventions or were thought not to be sufficiently addressed in them.

(4) The TRIPS Agreement is therefore sometimes described as a “Berne and Paris- plus” Agreement. The text of the TRIPS Agreement also makes use of the provisions of some other international agreements on intellectual property rights:

WTO members are required to protect integrated circuit layout designs in accordance with the provisions of the Treaty on Intellectual Property in Respect of Integrated Circuits (IPIC Treaty) together with certain additional obligations.
The TRIPS Agreement refers to a number of provisions of the International Convention for the Protection fo-Performers, Producers of Phonograms, and Broadcast in Organizations (Rome Convention), without entailing a general requirement to comply with the substantive provisions of that Convention.

Note: Article 2 of the TRIPS Agreement specifies that nothing in Parts I to IV of the agreement shall derogate from existing obligations that members may have to each other under the Paris Convention, the Berne Convention, the Rome Convention, and the Treaty on Intellectual Property in respect of integrated circuits.

Question 2.
What is the relationship between the TRIPS Agreement and the Pre-existing International Conventions covered under it?
Answer:
The TRIPS Agreement says WTO member countries must comply with the substantive obligations of the main conventions of WIPO, the Paris Conventions on Industrial Property, and the Berne Convention on Copyright (in their most recent versions).

With the exception of the provisions of the Berne Convention on moral rights, all the substantive provisions of these conventions are incorporated by reference. They, therefore, become obligations for WTO member countries under the TRIPS Agreement – they have to apply these main provisions and apply them to the individuals and companies of all other WTO members.

The TRIPS Agreement also introduces additional obligations in areas that were not addressed in these conventions or were though not to be sufficiently addressed in them.

The TRIPS Agreement is therefore sometimes described as a Berne and ‘Paris-Plus’ Agreement.

The TRIPS Agreement contains references to the provisions of certain pre-existing intellectual property conventions. According to Article 2.1 of the Agreement, the WTO Members shall, in respect of Parts II, III, and IV of the Agreement, comply with Articles 1 through 12, and Article 19, of the Paris Convention (1967) (the Stockholm Act of 14 July 1967 of the Paris Convention for the Protection of Industrial Property). Article 9.1 of the Agreement requires Members to comply with Articles 1 through 21 of the Berne Convention (1971) and the Appendix thereto (the Paris Act of 24 July 1971 of the Berne Convention for the Protection of Literary and Artistic Works).

However, Members do not have rights or obligations under the TRIPS Agreement in respect of the rights conferred under Article 6b is of that Convention, i.e. the moral rights, or of the rights derived therefrom. As regards the protection of the layout-design of integrated circuits, Article 35 of the Agreement requires Members to comply with Articles 2 through 7 (other than Article 6.3), Article 12 and Article 16.3 of the Treaty on Intellectual Property in respect of Integrated Circuits, adopted at Washington on 26 May 1989.

The Agreement contains some references to certain provisions of the Rome Convention (the International Convention for the Protection of Performers, Producers of Phonograms and Broadcasting Organizations, adopted in Rome on 26 October 1961). However, there is no general obligation to comply with the substantive provisions of that Convention.

The TRIPS Agreement provisions on copyright and related rights clarify or add obligations on a number of points:

The TRIPS Agreement ensures that computer programs will be protected as literary works under the Berne Convention and outlines how databases must be protected under copyright;
It also expands international copyright rules to cover rental rights. Authors of computer programs and producers of sound recordings must have the right to prohibit the commercial rental of their works to the public. A similar exclusive right applies to films where commercial rental has led to widespread copying, affecting copyright owner’s potential earnings from their films; and
It says performers must also have the right to prevent unauthorized recording, reproduction, and broadcast of live performances (bootlegging) for no less than 50 years. Producers of sound recordings must have the right to prevent the unauthorized reproduction of recordings for a period of 50 years.

The test of the TRIPs agreement also makes use of the provisions of some other international agreements on intellectual property rights:

WTO members are required to protect “Integrated Circuit Layout Designs” in accordance with the provisions of the Treaty on Intellectual Property In Respect of Integrated Circuits (IPIC Treaty) together with certain additional obligations
The TRIPS Agreement refers to a number of provisions of the International Convention for the Protection of Performers, Producers of Phonograms, and Broadcasting Organizations (Rome Convention) without entailing a general requirement to comply with the substantive provisions of that Convention.

Article 2 of the TRIPS Agreement specifies that nothing in Paris I to IV of the agreement shall derogate from existing obligations that members may have to comply with each other under the Paris Convention, the Berne Convention, the Rome Convention, and the Treaty on Intellectual Property in respect of Integrated circuits.

Question 3.
Read the following case on patent law and answer the questions that follow:

Trade-Related Aspects of Intellectual Property Rights (TRIPS) defines geographical indication as “goods originating in the territory of a member, or a region or locality in that territory, where a given quality, reputation, or another characteristic of the goods is essentially attributable to its geographical origin”.

In the Indian legal system, Geographical Indication (Gl) is governed by the Geographical Indications of Goods (Registration and Protection) Act, 1999. A case relating to Gl is that of ‘Basmati rice’ being patented in the United States of America (USA).

Basmati rice is regarded as the ‘queen of fragrance or the perfumed one’ and is also acclaimed as the ‘crown jewel’ of South Asian rice. It is treasured for its intense fragrance and taste, famous in national as well as international markets. This kind of rice is grown in the Himalayan hills, Punjab, Haryana, and Uttar Pradesh since times immemorial. Basmati is the finest quality of rice, long-grained, and the costliest in the world.

Agricultural and Processed Food Products Export Development Authority (APEDA) states India to be the second-largest exporter of rice after China. The USA is a major importer of Basmati rice totaling 45,000 tonnes. An important case in the history of Gl and bio-piracy arose in 1997.

Royal Rice Tec Inc. (RRT), a tiny American rice company with an annual income of around the US $10 million and working staff totaling 120, produces a small fraction of the world’s (Basmati like) rice with names ‘Kasmati’ and ‘Texmati’, RRT had been trying to enter the world rice market since long, but in vain. On 2nd September 1997, RRT was issued a patent for its Basmati rice lines and grains by the United States Patent and Trademark Office (USPTO) bearing patent number 5663484, which gave it the ultimate rights to call the odoriferous rice ‘Basmati’ within US and label it the same for export internationally. According to RRT, its invention of Basmati rice relates to novel rice lines, which affords novel means for determining cooking and which has unique starch properties, etc.

Since times immemorial, the majority of farmers from India have been sustaining the cultivation of Basmati rice and have been among the leading rice producers of the world. Cultivation of rice is not merely a life sustainer but also a part of socio-culture in India. Basmati rice produced in India has been exported to countries like Saudi Arabia and the UK. Basmati is a ‘brand name’ of the rice grown in India.

Two Indian NGOs, namely, the Centre for Food Safety, an international NGO that campaigns against bio-piracy, and the Research Foundation for Science, Technology, and Ecology, an Indian environmental NGO, objected to the patent granted by USPTO and filed petitions in the USA. Council for Scientific and Industrial Research (CSIR), a Government of India organization also objected to the patent granted to RRT. They demanded an amendment of US Rice Standards on the ground that the term ‘Basmati’ can be used only for the rice produced/grown in the territories of India. According to RRT, the invention relates to novel rice lines and to plants and grains of these lines.

The invention also relates to a novel means for determining the cooking and starch properties of rice grains and identifying desirable rice lines. Specifically, one aspect of the invention relates to novel rice lines whose plants are semi-dwarf in stature and give high-yielding rice grains having characteristics similar or superior to those of good quality Basmati rice. Another aspect of the invention relates to novel rice lines produced from novel rice lines. The invention provides a method for breeding these novel lines. A third aspect relates to the starch index (SI) of the rice grain, which can predict the grain’s cooking and starch properties and for selecting desirable segregates in -rice breeding programs.

The Government of India reacted immediately after learning of the Basmati patent issued to RRT, stating that it would approach the USPTO and urge them to re: examine the patent to a US firm to grow and sell rice under the Basmati brand name, in order to protect India’s interests, particularly those of growers and exporters. Furthermore, a high-level Inter-Ministerial Group comprising representatives of the Ministries and Departments of Commerce, Industry, External Affairs, Agriculture and Bio-Technology, CSIR, All India Rice Exporters Association (AIREA), APEDA, and Indian Council of Agricultural Research (ICAR) was mobilized to begin an in-depth examination of the case.

In the presence of widespread uprising among farmers and exporters, India as a whole feels confident of being able to successfully challenge the Basmati patent by RRT, which got a patent for three things: growing rice plants with certain characteristics identical to Basmati, the grain produced by such plants and the method of selecting the rice plant based on a starch index (SI) test devised by RRT. The lawyers plan to challenge this patent on the basis that the abovementioned plant varieties and grains already exist and thus cannot be patented. In addition, they accessed some information from the US National Agricultural Statistics Service in its Rice Yearbook 1997, released in January 1998 to the effect that almost 75 percent of US rice imports are Jasmine rice from Thailand and most of the remainder are from India, ‘varieties that cannot be grown in the US.

This piece of information is sought to be used as a weapon against RRT’s Basmati patent. Indians feel that the USPTO’s decision to grant a patent for the prized Basmati rice violates the International Treaty on TRIPS. The President of the Associated Chambers of Commerce (ASSOCHAM) said that Basmati rice is traditionally grown in India and granting a patent to it violates the Geographical Indications Act under the TRIPS.

The TRIPS clause defines Geographical indication as “a good originating in the territory of a member, or a region or locality in that territory, where a given quality, reputation, or another characteristic of the goods is essentially attributable to its geographical origin.” As a result, it is safe to say that Basmati rice is as exclusively associated. with India as Champagne is with France and Scotch Whiskey with Scotland. Indians argue that just as the USA cannot label their wine as Champagne, they should not be able to label their rice as Basmati. If the patent is not revoked in the USA, because, unlike the Turmeric case, rice growers lack documentation of their traditional skills and knowledge, India may be forced to take the case to the WTO for an authoritative ruling based on violation of the TRIPS. In the wake of the problems with patents that India has experienced in recent years, it has realized the importance of enacting laws for conserving biodiversity and controlling piracy as well as intellectual property protection legislation that conform to international laws.

There is a widespread belief that RRT took out a patent on Basmati only because of weak, non-existent Indian laws and the Government’s philosophical attitude that natural products should not be patented. According to some Indian experts in the field of genetic wealth, India needs to formulate a long-term strategy to protect its bio-resources from future bio-piracy and/or theft. British traders are also supporting India. According to Howard Jones, marketing controller of the UK’s privately-owned distributor Tilda Ltd., “true Basmati can only be grown in India. We will support them in any way if it’s necessary”. The Middle East is also according support by labeling only the Indian rice as Basmati. Government and government agencies have gathered the necessary data and information to support their case and to prevent their cultural heritage from being taken away from them.
Questions:
(a) Whether Royal Rice Tec Inc. is guilty of bio-piracy? Explain,
(b) Discuss whether the decision of the USPTO of granting a patent for the valued Basmati rice violates TRIPS.
(c) How does the patent grant to RRT by USPTO impact the farmers in India?
(d) Whether adequate legislations exist in India with respect to geographical indications? Discuss the salient features.
(e) Explain the provisions for registration of geographical indications in India.
Answer:
(a) Bio-piracy, in general, can be defined as the practice of commercially exploiting naturally occurring biochemical or generic material, especially by obtaining patents that restrict its future use, while failing to pay reasonable compensation to the community from which it originates. It is a manipulation of the Intellectual Property Rights by the corporations, entities, and persons to gain exclusive control over the national genetic resources, without giving adequate recognition and remuneration to the original possessors of those resources.

Indigenous people possess significant old knowledge that has allowed them to sustainably live and make use of biological and genetic diversity within their natural environment for generations. Traditional knowledge naturally includes a deep understanding of ecological processes and the ability to sustainably extract useful products from the local habitat. Example of bio-piracy includes the recent patents granted by the US Patent and Trademark Office to different American companies on ‘Turmeric’, ‘Neem’ and most notably, ‘Basmati Rice.

All three products are indigenous to the Indian subcontinent since time immemorial. RRT’s actions constitute bio-piracy because it infringement the provisions of the Convention on Biological Diversity (‘CBD’ in short), which provides for the State’s sovereignty over its genetic resources. The CBD aims to bring about a system for the conservation and sustainable use of biological diversity and the fair and equitable sharing of benefits arising from the use of their genetic resources. The manner in which RRT established its patent demonstrates that it has ignored the contributions of the local communities in the production of Basmati and that it does not intend to share the benefits accruing from the use of the genetic resources.

This includes both the informal contributions of the farmers who have been growing Basmati for hundreds of years in India and the neighboring sub-continents, as well as the more formal, scientific breeding work that has been done by rich research institutes to evolve better varieties of Basmati. RRT has capitalized on this work of the indigenous community by taking out a Patent on Basmati and intends to monopolize the commercial use of past research, without giving any recognition or remuneration to those who played a key role in the evolution and breeding of Basmati rice in its natural habitat.

The theft involved in the Basmati patent is therefore classified threefold namely a theft of collective intellectual and biodiversity heritage on Indian farmers, a theft from Indian traders and exporters whose markets are being stolen by RRT, and finally a deception of consumers because RRT is using a stolen name Basmati for rice which is derived from Indian rice but not grown in India, and therefore are not the same quality. RRT has unfairly appropriated and exploited the genetic resources in this case by attempting to gain exclusive control over its development and propagation through a legal process that threatens the traditional rights of the original possessors of the resource.

The key concern relates to RRT’s use of the term ‘Basmati’ to describe its rice lines and grains. ‘Basmati’ is associated with the specific aromatic rice variety grown in India and by taking out a Patent on the use of the term to describe its invention. RRT has potentially reversed the culpability and made India the violator of RRT’s legally protected rights despite the fact that the latter is the original possessors and breeders of the ‘Basmati’ rice. RRT is guilty of bio-piracy.

(b) The grant of a Patent to RRT on Basmati does violate certain provisions of TRIPS. The TRIPS Agreement provides for certain standards to be fulfilled before granting of protection in the form of Intellectual Property Rights which are particularly relevant for the purposes of determining whether there was any act of bio-piracy involved in the above case.

RRT’s patent on Basmati violates Article 22 of the TRIPS, which deals with Geographical Indications. As defined under Article 22(1) of TRIPS, Geographical Indications are indications that identify a good as originating in the territory of a member, or a region or locality in that territory, where a given quality, reputation, or other features of the goods is essentially attributable to its geographical origin.

For example, wines and liquors are most commonly associated with Geographical Indications of their place of origin. The term “Champagne” can only be used to describe a wine that has been produced in the Champagne region of France, the area from which the wine derives its name. Wine with similar features but produced in another part of the world, cannot be described as a “Champagne”.

“Champagne” remains an exclusive product and the name as the exclusive property of the French company producers. A similar case of Geographical Indication is that of a “Scotch”, a whisky, which is produced in the Scottish highlands. This protection for Geographical Indications for Wines and liquors is outlined in Article 23 of the TRIPS. Basmati falls in this category because it enjoys the same closely linked and exclusive relationship with its place of origin in India.

In India, Basmati is grown mainly in some scattered districts of Punjab, Haryana, and Uttar Pradesh. India grows tons of rice annually. Hence, it is clear that Basmati rice, as it is traditionally recognized, is geographically unique in its origin. The Basmati Patent resulted in a brief diplomatic crisis between India and the United States with India threatening to take the matter to WTO as an infringement of TRIPs since a Gl product cannot be patented under the provision of TRIPs. However, ultimately, due to review decisions by the United States Patent Office, RRT has lost most of their claims of the patent, including, most significantly, the right to call their rice “basmati.” There is a precedent also for the recognition of Basmati as a Geographical Indication by the International Buyers.

The European Commission recognizes India’s and other neighboring sub-continent’s rights over products bearing their distinctive geographical indications, allowing only Basmati rice that has been grown in India and neighboring sub-continent to be labeled as such. Similarly, the code of practice for rice in the UK, the largest market for Basmati rice in Europe, describes long-grain, aromatic rice grown only in India and neighboring sub-continent as Basmati.

By displacement of Basmati exports from India; and
By monopolizing the Basmati seed supplies.

Regarding the first possible inroads which may be made by the USA into the South Asian export markets, it is a matter of concern to the Indian farmers. In 1995, the USA produced 7.89 million metric tons of rice and in the same year, India produced 122.37 million metric tons of rice. American rice exports are significantly greater than India, implying that the USA has a greater production surplus. In 1994 itself, the USA exported more volumes of rice as compared to India and its neighboring sub-continent. Hence, owing to the RRT’s patent, it seems that potential exists for the USA to displace Indian Basmati exports. Criticism from Indian rice farmers logically ensued, as many were forced to pay royalties to the conglomerate. The production and cultivation of Basmati have with it a history dating! back to centuries ago.

For farmers, the grain is an entity that is constantly evolving. In the context of India, Basmati rice has always been considered a common resource dependent upon word of mouth knowledge and transfer. Using this logic, Rice Tec alleged that the ‘Basmati name was in the public domain and that by” patenting if; they were in actuality protecting its, name and origins. RRT soon came out with hybrid versions Kasmati, Texmati, Jasmati, which for rural farmers clearly illustrated the profit-based interest of the conglomerate. Through its acquisition, RRT patented some 22 varieties of rice. One of which being Basmati 867, a rice grain that was very similar to the original Basmati but was advertised to have a less chalky more refined taste.

The severity of RRT’s biopiracy cannot be underestimated, as the conglomerate was claiming to have invented the physical characteristics of Basmati such as the plant height and grain length. By claiming ownership of the rice plant itself, RRT was directly threatening rural farming communities. A second and more serious threat is that, through its patent, RRT could acquire a monopoly over Basmati seed supply to the sub-continent. It is a premier developer of commercial hybrid rice varieties in the USA. A precedent exists that foreign agri-business companies have bought hybrid seeds to Third World Countries. For instance, Monsanto has recently undertaken a joint venture with Grameen Bank in Bangladesh to distribute its hybrid seeds through loan packages to small farmers. Hybridization is likely to harm small farmers more as they are less able to absorb the higher seed costs. In its extreme form, such hybridization could harm genetic diversity and deplete farmlands of their intrinsic resources.

(d) In India, the legal system for Geographical Indication (‘G!’ in short) protection has been developed very recently. The provisions in that regard are contained in the Geographical Indications of Goods (Registration and Protection) Act (‘Gl Act’ in short) which was enacted in the year 1999 and came into force only in September 2003.

Comprehensive Definition of Gl	From the perspective of a developing country, one of the best features of the Gl Act is the comprehensive definition of Gl laid down therein, whereby agricultural, natural and manufactured goods all come under the ambit of the term Gl.
Detailed Registration Mechanism	The Act provides a mechanism for registration of GIs, establishes a Gl Registry, and elaborates the concept of ‘authorized user’ and ‘registered proprietor’. Section 11 of the Act provides that any association of persons, producers, organization,s or authority established by or under the law can apply for registration of a Gl.
Extended Protection	Another important aspect of the Act is the possibility of protecting a Gl indefinitely by renewing the registration when it expires after a period of ten years.
Higher level of Protection to Notified Goods	The Act provides a higher level of protection for notified goods and the corresponding remedies for their infringement. In the Indian context, the Gl Act has tried to extend the additional protection reserved for wines and spirits mandated by TRIPS to include goods of national interest on a case-to-case basis. Section 22(2) of the Act endows the Central Government with the authority to give additional protection to certain goods or classes of goods.
Restrictions on Appropriation, Assignment, and Transmission	Section 25 of the Act, by prohibiting the registration of a Gl as a trademark, tries to prevent appropriation of public property in the nature of a Gl by an individual as a trademark, leading to confusion in the market. Also according to Section 24 of the Act, a Gl cannot be assigned or transmitted. The Act recognizes that a Gl is a public property belonging to the producers of the goods concerned; as such, it cannot be the subject matter of assignment, transmission, licensing, pledge, mortgage or any contract for transferring the ownership or possession.
Infringement of Geographical Indications	The remedies relating to the infringement of Geographical Indications are similar to the remedies relating to the infringement to Trademark. Similarly, under the (Indian) Geographical Indications of Goods (Registration and Protection) Act, 1999, falsification of a Geographical Indication will carry a penalty with imprisonment for a term which may not be less than six months but may extend to three years and with fine which may not be less than INR 50,000 but may extend to INR 2,00,000. Action for infringement of a Geographical Indication may be instituted at a District Court or High Court having jurisdiction.

Available relief includes:

Injunction
Discovery of documents
Damages or accounts of profits
Delivery-up Of the infringing labels and indications for destruction or erasure.

(e) Provisions for the registration on Geographical Indication are as follows:
Section 8 of the Geographical Indications of Goods (Registration & Protection) Act, 1999 provides that a geographical indication may be registered in respect of any or all of the goods, comprised in such class of goods as may be classified by the Registrar and in respect of a definite territory of a country, or a region or locality in that territory, as the case may be.

The Registrar may also classify the goods in accordance with the International Classification of goods for the purposes of registration of geographical indications and publish in the prescribed manner in an alphabetical index of classification of goods. Any question arising as to the class within which any goods fall or the definite area in respect of which the geographical indication is to be registered or where any goods are not specified in the alphabetical index of goods published shall be determined by the Registrar whose decision in the matter shall be final.

Question 4.
Discuss in brief at least five leading International Instruments concerning Intellectual Property Rights.
Answer:
Introduction to the leading International Instruments concerning Intellectual Property Rights: Intellectual property has a dual nature, i.e. it has both a national and international dimension. For instance, patents are governed by national laws and rules of a given country, while international conventions on patents ensure minimum rights and provide certain measures for the enforcement of rights by the contracting states. Strong protection for intellectual property rights (IPR) worldwide is vital to the future economic growth and development of all countries. Because they create common rules and regulations, international IPR treaties, in turn, are essential to achieving the robust intellectual property protection that spurs global economic expansion and the growth of new technologies.

List of some leading Instruments concerning Intellectual Property Rights is as below:
The Paris Convention for the Protection of Industrial Property
The Berne Convention for the Protection of Literary and Artistic Works
The WIPO Copyright Treaty (WCT)
The Patent Cooperation Treaty (PCT)
Budapest Treaty on the International Recognition of the Deposit of Microorganisms for the Purposes of Patent Procedure
The Madrid Agreement Concerning the International Registration of Marks and the Protocol Relating to the Madrid Agreement
The Hague Agreement Concerning the International Deposit of Industrial Designs
The Trademark Law Treaty (TLT)
The Patent Law Treaty (PLT)
Treaties on Classification
Special Conventions in the Field of Related Rights: The International Convention for the Protection of Performers, Producers of Phonograms and Broadcasting Organizations (“the Rome Convention”)
Other Special Conventions in the Field of Related Rights
The WIPO Performances and Phonograms Treaty (WPPT)
The International Convention for the Protection of New Varieties of Plants
The Agreement on Trade-Related Aspects of Intellectual Property Rights (“TRIPS”) and WIPO-WTO Cooperation

Application	According to Section 11 of the Act, an application for registration must be made before the Registrar of Geographical Indications by an association of persons or producers or any organization or authority established by or under any law for the time being in force representing the interest of the producers of the concerned goods.
Particulars of Application	The application must be made in an appropriate form giving details with respect to the nature, quality, reputation or other characteristics which are due exclusively or essentially to the geographical environment, manufacturing process, natural and human factors, map of the territory of production, the appearance of geographical indication (figurative or words), list of producers, along with prescribed fees.
Examination of Application	The examiner will make preliminary scrutiny for deficiencies and in case of deficiencies, the applicant shall have to remedy it within a period of one month from the date of communication of such deficiencies.
Acceptance or Refusal of Application	The Registrar may accept, partially accept or refuse the application. In case of refusal, the Registrar will give written grounds for non-acceptance. The applicant must within two months file its reply. In case of re-refusal, the applicant can make an appeal within one month of such a decision.
Advertisement of the Application	Section 13 of the Act states that the Registrar shall, within three months of acceptance of the application for registration of a Gl, but before its registration, may advertise the application in the Gl Journal.
Registration	As per Section 16 of the Act, if there is no opposition to the grant of Gl, the Registrar will grant a certificate of registration to the applicant and its authorized users.

Question 5.
Discuss in brief at least five leading International Instruments concerning Intellectual Property Rights.
Answer:
Introduction to the leading International Instruments concerning Intellectual Property Rights: Intellectual property has a dual nature, i.e. It has both a national and international dimension. For instance, patents are governed by national laws and rules of a given country, while international conventions on patents ensure minimum rights and provide certain measures for the enforcement of rights by the contracting states. Strong protection for intellectual property rights (IPR) worldwide is vital to the future economic growth and development of all countries. Because they create common rules and regulations, international IPR treaties, in turn, are essential to achieving the robust intellectual property protection that spurs global economic expansion and the growth of new technologies.

List of some leading Instruments concerning Intellectual Property Rights is as below:
The Paris Convention for the Protection of Industrial Property
The Berne Convention for the Protection of Literary and Artistic W0rs
The WIPO Copyright Treaty (WCT)
The Patent Cooperation Treaty (PCT)
Budapest Treaty on the International Recognition of the Deposit of Microorganisms for the Purposes of Patent Procedure
The Madrid Agreement Concerning the International Registration of Marks and the Protocol Relating to the Madrid Agreement
The Hague Agreement Concerning the International Deposit of Industrial Designs
The Trademark Law Treaty (TLT)
The Patent Law Treaty (PLT)
Treaties on Classification
Special Conventions in the Field of Related Rights: The International Convention for the Protection of Performers. Producers of Phonograms and Broadcasting Organizations (he Rome Convention’)
Other Special Conventions in the Field of Related Rights
The WIPO Performances and Phonograms Treaty (WPPT)
The International Convention for the Protection of New Varieties of Plants
The Agreement on Trade-Related Aspects of Intellectual Property Rights (TRlPS’) and WIPO-WTO Cooperation

International Instrument	Summary
The Paris Convention for the Protection of Industrial Property	The Paris Convention for the Protection of Industrial Property, signed in Paris, France, on 20 March 1883, was one of the first intellectual property treaties. It established a Union for the protection of industrial property. The Convention is still in force. The substantive provisions of the Convention fall into three main categories: national treatment, priority right and common rules.
The Berne Convention for the Protection of Literary and Artistic Works	The Berne Convention, adopted in 1886, deals with the protection of works and the rights of their authors. It provides creators such as authors, musicians, poets, painters etc. with the means to control how their works are used, by whom, and on what terms. It is based on three basic principles and contains a series of provisions determining the minimum protection to be granted, as well as special provisions available to developing countries that want to make use of them.
The WIPO Copyright Treaty (WCT)	The WIPO Copyright Treaty (WCT) is a special agreement under the Berne Convention which deals with the protection of works and the rights of the authors in the digital environment. In addition to the rights recognized by the Berne Convention, certain economic rights are also grated. The Treaty also deals with two subject matters to be protected by copyright: (i) computer programs, whatever the mode or form of their expression; and (ii) compilations of data or other material (“databases”).
The Patent Cooperation Treaty (PCT)	The Patent Cooperation Treaty (PCT) makes it possible to seek patent protection for an invention simultaneously in each of a large number of countries by filing an “international’1 patent application. Such an application may be filed by anyone who is a national or resident of a PCT Contracting State. It may generally be filed with the national patent office of the Contracting State of which the applicant is a national or resident or, at the applicant’s option, with the International Bureau of WIPO in Geneva.
Budapest Treaty on the International Recognition of the Deposit of Micoorganisms for the Purposes of Patent Procedure	Adopted in 1977, the Budapest Treaty concerns a specific topic in thje international patent process: microorganisms. All states party to the Treaty are obliged to recognize microorganisms deposited as a part of the patent procedure, irrespective of where the depository authority is located. In practice this means that the requirement to submit microorganisms to each and every national authority in which patent protection is sought no longer exists.
The Madrid Agreement Concerning the International Registration of Marks and the Protocol Relating to the Madrid Agreement	The Madrid System for the International Registration of Marks is governed by two treaties: The Madrid Agreement, concluded in 1891 and revised at Brussels (1900), Washington (1911), The Hague (1925), London (1934), Nice (1957), and Stockholm (1967), and amended in 1979, and The Protocol relating to that Agreement, concluded in 1989, which aims to make the Madrid system more flexible and more compatible with the domestic legislation of certain countries or inter¬governmental organizations that had not been able to accede to the Agreement. States and organizations party to the Madrid system are collectively referred to as Contracting Parties. The system makes it possible to protect a mark in a large number of countries by obtaining an international registration that has effect in each of the designated Contracting Parties.

Question 6.
Write a brief note on Berne Convention.
Answer:
The Berne Convention deals with the protection of works and the rights of their authors. It is based on three basic principles and contains a series of provisions determining the minimum protection to be granted, as well as special provisions available to developing countries that want to make use of them.

1. The three basic principles are the following:

(1) Works originating in one of the Contracting States (that is, works the author of which is a national of such a State or works first published in such a State) must be given the same protection in each of the other Contracting States as the latter grants to the works of its own nationals (principle of “national treatment”).

(2) Protection must not be conditional upon compliance with any formality (principle of “automatic” protection).

(3) Protection is independent of the existence of protection in the country of origin of the work (principle of “independence” of protection). If, however, a Contracting State provides for a longer term of protection than the minimum prescribed by the Convention and the work ceases to be protected in the country of origin, protection may be denied once protection in the country of origin ceases.

2. The minimum standards of protection relate to the works and rights to be protected, and to the duration of protection:

(1) As to works, protection must include “every production in the literary, scientific and artistic domain, whatever the mode or form of its expression” (Article 2(1) of the Convention).

(2) Subject to certain allowed reservations, limitations, or exceptions, the following are among the rights that must be recognized as exclusive rights of authorization:

the right to translate
the right to make adaptations and arrangements of the work
the right to perform in public dramatic, dramaticomusical, and musical works
the right to recite literary works in public
the right to communicate to the public the performance of such works
the right to broadcast (with the possibility that a Contracting State may provide for a mere right to equitable remuneration instead of a right of authorization)
the right to make reproductions in any manner or form (with the possibility that a Contracting State may permit, in certain special cases, reproduction without authorization, provided that the reproduction does not conflict with the normal exploitation of the work and does not unreasonably prejudice the legitimate interests of the author; and the possibility that a Contracting State may provide, in the case of sound recordings of musical works, for a right to equitable remuneration)
the right to use the work as a basis for an audiovisual work, and the right to reproduce, distribute, perform in public or communicate to the public that audiovisual work.

The Convention also provides for “moral rights”, that is, the right to claim authorship of the work and the right to object to any mutilation, deformation or other modification of, or other derogatory action in relation to, the work that would be prejudicial to the author’s honor or reputation.

3. The Berne Convention allows certain limitations and exceptions on economic rights, that is, cases in which protected works may be used without the authorization of the owner of the copyright, and without payment of compensation. These limitations are commonly referred to as “free uses” of protected works and are set forth in Articles 9(2) (reproduction in certain special cases), 10 (quotations and use of works by way of illustration for teaching purposes), 10bis (reproduction of newspaper or similar articles and use of works for the purpose of reporting current events) and 11 bis (3) (ephemeral recordings for broadcasting purposes).

4. The Appendix to the Paris Act of the Convention also permits developing countries to implement non-voluntary licenses for translation and reproduction of works in certain cases, in connection with educational activities. In these cases, the described use is allowed without the authorization of the right holder, subject to the payment of remuneration to be fixed by the law. The Berne Union has an Assembly and an Executive Committee. Every country that is a member of the Union and has adhered to at least the administrative and final provisions of the Stockholm Act is a member of the Assembly. The members of the Executive Committee are elected from among the members of the Union, except for Switzerland, which is a member ex officio.

Question 7.
Write a brief note on universal copyright conventions.
Answer:
Universal Copyright Convention: The Universal Copyright Convention (UCC), adopted in Geneva, Switzerland, in 1952, is one of the two principal international conventions protecting copyright; the other is the Berne Convention.

The UCC was developed by United Nations Educational, Scientific and Cultural Organization (UNESCO) as an alternative to the Berne Convention for those states which disagreed with it. aspects of the Berne Convention, but still wished to participate in some form of multilateral copyright protection. These states included developing countries as well as the United States and most of Latin America. The former thought that the strong copyright protections granted by the Berne Convention overly benefited Western, developed, copyright-exporting nations, whereas the latter two were already members of the Buenos Aires Convention, a Pan-American copyright convention that was weaker than the Berne Convention.

The Berne Convention states also became a party to the UCC, so that their copyrights would exist in non-Berne convention states. In 1973, the Soviet Union joined the UCC. Under the Second Protocol of the Universal Copyright Convention (Paris text), protection under U.S. copyright law is expressly required for works published by the United Nations, by UN specialized agencies, and by the Organization of American States (OAS). The same requirement applies to other contracting states as well.

Berne Convention states were concerned that the existence of the UCC would encourage parties to the Berne Convention to leave that convention and adopt the UCC instead. So the UCC included a clause stating that parties which were also Berne Convention parties need not apply the provisions of the Convention to any former Berne Convention state which renounced the Berne Convention after 1951. Thus, any state which adopts the Berne Convention is penalized if it then decides to renounce it and use the UCC protections instead, since its copyrights might no longer exist in Berne Convention states. Since almost all countries are either members or aspiring members of the World Trade Organization (WTO) and are thus conforming to the Agreement on Trade-Related Aspects of Intellectual Property Rights Agreement (TRIPS), the UCC has lost significance.

Question 8.
Write a note on the patent co-operation treaty.
Answer:
Patent Co-operation Treaty:
The Patent Cooperation Treaty (PCT) is an international patent law treaty, concluded in 1970. It provides a unified procedure for filing patent applications to protect inventions in each of its contracting states. A patent application filed under the PCT is called an international application, or PCT application.

A single filing of a PCT application is made with a Receiving Office (RO) in one language. It then results in a search performed by an International Searching Authority (ISA), accompanied by a written opinion regarding the patentability of the invention, which is the subject of the application. It is optionally followed by a preliminary examination, performed by an International Preliminary Examining Authority (IPEA). Finally, the relevant national or regional authorities administer matters related to the examination of application (if provided by national law) and issuance of the patent.

A PCT application does not itself result in the grant of a patent, since there is no such thing as an “international patent”, and the grant of patent is a prerogative of each national or regional authority. In other words, a PCT application, which establishes a filing date in all contracting states, must be followed up with the step of entering into national or regional phases to proceed towards the grant of one or more patents. The PCT procedure essentially leads to a standard national or regional patent application, which may be granted or rejected according to applicable law, in each jurisdiction in which a patent is desired.

The Patent Cooperation Treaty (PCT) assists applicants in seeking patent protection internationally for their inventions, helps patent Offices with their patent granting decisions and facilitates public access to a wealth of « technical information relating to those inventions. By filing one international patent application under the PCT, applicants can simultaneously seek protection for an invention in a very large number of countries. The contracting states, the states which are parties to the PCT, constitute the International Patent Cooperation Union.

Question 9.
What is WIPO – Development Agenda?
Answer:
The World Intellectual Property Organization (WIPO):
The World Intellectual Property Organization (WIPO) is one of the 15 specialized agencies of the United Nations (UN). WIPO was created in 1967 “to encourage creative activity, to promote the protection of intellectual property throughout the world”. WIPO currently has 191 member states, administers 26 international treaties, and is headquartered in Geneva, Switzerland. The current Director-General of WIPO is Francis Gurry, who took office on 1 October 2008.188 of the UN member states as well as the Cook Islands, Holy See and Niue are members of WIPO. Non-members are the states of Federated States of Micronesia, Nauru, Palau, Solomon Islands, and South Sudan. Palestine has permanent observer status.

WIPO- Development Agenda:
In October 2004, WIPO agreed to adopt a proposal offered by Argentina and Brazil, the “Proposal for the Establishment of a Development Agenda for WIPO” from the Geneva Declaration on the Future of the World Intellectual Property Organization. This proposal was well supported by developing countries. The agreed “WIPO Development Agenda” (composed of over 45 recommendations) was the culmination of a long process of transformation for the organization from one that had historically been primarily aimed at protecting the interests of right holders, to one that has increasingly incorporated the interests of other stakeholders in the international intellectual property system as well as integrating into the broader corpus of international law on human rights, environment, and economic cooperation.

A number of civil society bodies have been working on a draft Access to Knowledge (A2K)treaty which they would like to see introduced. In December 2011, WIPO published its first World Intellectual Property Report on the Changing Face of Innovation, the first such report of the new Office of the Chief Economist. WIPO is also a co-publisher of the Global Innovation Index.

Question 10.
Write a note on UNESCO.
Answer:
Copyright a traditional tool for encouraging creativity nowadays has even greater potential to encourage creativity at the beginning of the 21st century. Committed to promoting copyright protection since its early days (the Universal Copyright Convention was adopted under UNESCO’s aegis in 1952), UNESCO has over time grown concerned with ensuring general respect for copyright in all fields of creation and cultural industries. It conducts, in the framework of the Global Alliance for Cultural Diversity, awareness-raising, and capacity-building projects, in addition to information, training, and research in the field of copyright law. It is particularly involved in developing new initiatives to fight against piracy.

The digital revolution has not left copyright protection unaffected. UNESCO endeavors to make a contribution to the international debate on this issue, taking into account the development perspective and paying particular attention to the need of maintaining the fair balance between the interests of authors and the interest of the general public of access to knowledge and information.

Question 11.
Write a brief note on the TRIPS agreement.
Answer:
Trade-Related Aspects of Intellectual Property Rights (TRIPS) Agreement: With the establishment of the world trade Organization (WTO), the importance and role of intellectual property protection have been crystallized in the Trade-Related Intellectual Property Systems (TRIPS) Agreement. It was negotiated at the end of the Uruguay Round of the General Agreement on Tariffs and Trade (GATT) treaty in 1994.

The general goals of the TRIPS Agreement are contained in the Preamble to the Agreement, which reproduces the basic Uruguay Round negotiating objectives established in the TRIPS area by the 1986 Punta del Este Declaration and the 1988-89 Mid-Term Review. These objectives include the reduction of distortions and impediments to international trade, promotion of effective and adequate protection of intellectual property rights, and ensuring that measures and procedures to enforce intellectual property rights do not themselves become barriers to legitimate trade.

The obligations under TRIPS apply equally to all member states. However, developing countries were allowed extra time to implement the applicable changes to their national laws, in two tiers of transition according to their level of development. The transition period for developing countries expired in 2005. For least developed countries, the transition period has been extended to 2016 and could be extended beyond that. The TRIPS Agreement, which came into effect on 1 January 1995, is to date the most comprehensive multilateral agreement on intellectual property. The areas of intellectual property that it covers are:

Copyright and related rights (i.e. the rights of performers, producers of sound recordings, and broadcasting organizations)
Trademarks including service marks
Geographical indications including appellations of origin
Industrial designs
Patents including protection of new varieties of plants
The layout designs (topographies) of integrated circuits
The undisclosed information including trade secrets and test data. Issues Covered under TRIPS Agreement

The TRIPS agreement broadly focuses on the following issues:

How basic principles of the trading system and other international intellectual property agreements should be applied.
How to give adequate protection to intellectual property rights.
How countries should enforce those rights adequately in their own territories.
How to settle disputes on intellectual property between members of the WTO.
Special transitional agreements during the period when the new system is being introduced.

Features of the Agreement:
The main three features of the TRIPS Agreement are as follows Standards: The TRIPS Agreement sets out the minimum standards of protection to be provided by each Member.

Enforcement:
The second main set of provisions deals with domestic procedures and remedies for the enforcement of intellectual property rights. The Agreement lays down certain general principles applicable to all IPR enforcement procedures.

Dispute settlement:
The Agreement makes disputes between WTO Members about the respect of the TRIPS obligations subject to the WTO’s dispute settlement procedures. In addition, the Agreement provides for certain basic principles, such as national and most-favored-nation treatment (non-discrimination), and some general rules to ensure that procedural difficulties in acquiring or maintaining IPRS do not nullify the substantive benefits that should flow from the Agreement. The TRIPS Agreement is a minimum standards agreement, which allows Members to provide more extensive protection of intellectual property if they so wish. Members are left free to determine the appropriate method of implementing the provisions of the Agreement within their own legal system and practice.

CS Professional Intellectual Property Rights Laws and Practices Notes

Documentation- Corporate Restructuring, Insolvency, Liquidation & Winding-Up Important Questions

December 28, 2022

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

Question 1.
What are the various stages involved in the merger of a company under the Companies Act, 2013?
Answer:
A merger can be defined as a fusion of one company with another. Amalgamation may be an arrangement, whereby assets of two companies get transferred to one company.

Basically, merger or amalgamation is a legal process whereby two or more companies come together for growth, expansion and prosperity.

Documentation is an important aspect in fulfilment of legal requirements and obligations in mergers and amalgamation.

Broad stages involved in merger of a company are listed below:

Stage 1. Drafting of the Scheme
Stage 2. Obtaining the approval of the Board of Directors of the companies involved
Stage 3. Obtaining approval of the stock exchanges in case of listed companies
Stage 4. Application/ Petition for convening the meeting of members/creditors shall be filed with National Company Law Tribunal
Stage 5. Convening meetings of the shareholders and creditors and obtaining their consent on Scheme
Stage 6. Approvals or No objection from Regional Director/Official Liquidator
Stage 7. Filing of final petition with NCLT for approving the Scheme
Stage 8. Obtaining order for approval for scheme of merger/amalgamation from the National Company Law Tribunal.

Question 2.
Central Government has power to examine the books and papers, financial reports even after sanctioning of the scheme by National Company Law Tribunal – Elaborate the issue in relation to preservation of records of amalgamated Companies.
Answer:
Section 239 provides for preservation of books and papers of the amalgamated companies:
The books and papers of a company which has been amalgamated with, or whose shares have been acquired by another company, shall not be disposed-off without the prior permission of the Central Govt.

Prior to granting such permission, that Government may appoint a person to examine the books and papers for the purpose of ascertaining whether they contain any evidence of any offence in connection with the promotion or formation, or the management of the affairs, of the Transferor Company or its amalgamation or the acquisition of its shares.

Corporate Restructuring Insolvency Liquidation & Winding-Up Notes

Levy and Collection Under GST – Advanced Tax Laws and Practice Important Questions

December 28, 2022

Levy and Collection Under GST – Advanced Tax Laws and Practice Important Questions

Question 1.
Parikh is a practising Company Secretary at Mumbai. His gross fee receipts for the financial year 2018-19 was ₹28 lakhs. He estimated his gross receipts at ₹32 lakhs for the financial year 2019-20. He wants to avail composition scheme for the financial year 2020-21. Briefly narrate whether he can avail composition scheme for the financial year 2020-21 with attendant conditions. Will he be eligible to avail input tax credit? Can he issue tax invoice?
Answer:

Applicability of Composition Scheme

The new composition scheme, introduced vide section 10(2A) of CGST Act, provides for concessional rate of tax particularly to the suppliers of services. It is applicable to suppliers of services who have to pay tax at a rate of 696 (396 CGST and 396 SGST). The basic condition for its applicability is that the Aggregate turnover of the person in preceding financial year must not have exceeded ₹50 lakhs.

In the present case, since Mr. Parikh has estimated turnover of ₹32 lakhs in the year 2019-20 which is below the minimum threshold of ₹50 lakhs, he can avail the new composition scheme for supply of service in the F.Y. 2020-21.

The registered person opting for new composition scheme is not eligible to avail input tax credit nor shall he be eligible to charge output tax from its recipients of supply. The registered person shall issue bill of supply instead of tax invoice.

Question 2.
Gokhale & Sons is registered in Karnataka and paying GST under composition scheme, provides the following details for the tax period ended on 31st December, 2020:

Particulars	Amount (₹)
Taxable turnover of goods within state	25,00,000
Exempted turnover of goods within state	27,00,000

Answer:
As per amendment in Notification No. 8/2017 vide Notification No. 1/2018 Central Tax dated 01.01.2018, effective rate of tax under composition scheme for manufacturers has been reduced from 2% to 1% (CGST + SGST) w.e.f. 01.01.2018. Thus, w.e.f. 01.01.2018, uniform rate of 1% is applicable for both manufacturers and traders paying tax under composition scheme.

Further, Notification No. 8/2017-Central Tax, dated 27.06.2017 has also been amended to provide that for other categories of composition suppliers (other than manufacturers and restaurants), composition tax would be leviable as percentage of turnover of taxable supplies of goods. Prior to the amendment, the tax was payable as a percentage of the total turnover.

Hence, total tax will be as follow:

(i) ₹52,000 (1% of 52,00,000) (if Gokhale & Sons is a Manufacturer)
(ii) ₹25000 (1% of 25,00,000) (if Gokhale & Sons is a Trader)

Question 3.
Explain by giving brief reasons in the context of provisions contained under the CGST Act, 2017 pertaining to composition scheme:

Can a registered person, who purchases goods from a supplier paying tax under the Composition Scheme, avail credit of tax paid on purchases made from the composition dealer?
Can a person paying tax under the Composition Scheme issue a tax invoice under GST?
Can a person who has opted to pay tax under the Composition Scheme avail Input Tax Credit on his inward supplies?

Answer:

No, as the composition dealer cannot collect tax paid by him on outward supplies from his customers, the registered person making purchases from a taxable person paying tax under the composition scheme cannot avail credit of tax.
No, the person shall be issuing a bill of supply in lieu of tax invoice.
No, as per section 10(4) of CGST Act, 2017 person opting to pay tax under the composition scheme cannot avail credit on his inward supplies.

Question 4.
Explain: Composition Levy?
Answer:
Composition levy is an optional alternative method of levy of tax designed for small taxpayers:-
Provisions for the same are in section 10 of CGST Act, 2017.

(a) Threshold limit viz. aggregate turnover in state of taxable person should not exceed 11.5 crore (ort 75 Lakh in special category states)

(b) Rates of composition levy Le. 1% of Total turnover for manufacturers, 1% of Taxable turnover for traders, and 5% of turnover for restaurants. There are other conditions, which need be fulfilled to avail of composition levy and further, there are restrictions as to input tax credit.

Question 5.
X is a registered trader in Ghaziabad (Uttar Pradesh). In the Financial Year 2020-21 total value of supplies are as follows:

Intra-state supplies made under forward charge: ₹35 lakh
Intra-state supplies made which are chargeable to GST at Nil rate: ₹25 lakh
Intra-state supplies of goods which ace wholly exempt under section 11 of CGST Act: ₹30 lakh
Value of inward supplies on which tax payable under Reverse Charge Basis (RCM): ₹20 lakh

Briefly explain whether X is eligible to opt for Composition Scheme in the financial year 2021 – 22?

Answer:
As per section 10 of CGST, 2017, a registered person, whose aggregate turnover in the preceding financial year did not exceed ₹1.5 crore or ₹75 lakhs in notified special category states, as the case may be may opt for Composition Scheme.

As per section 2(6) of CGST Act, 2017, “aggregate turnover” means the aggregate value of all taxable supplies (excluding the value of inward supplies on which tax is payable by a person on reverse charge basis), exempt supplies, exports of goods or services or both and inter-State supplies of persons having the same Permanent Account Number.

Computation of Aggregate Turnover in FY 2020-21:

	₹ in lakhs
Intra-state supplies made under forward charge	35
Intra-state supplies made which are chargeable to GST at Nil rate	25
Intra-state supplies of goods which are wholly exempt under section 11 of CGST Act, 2017	30
Value of inward supplies under Reverse Charge Basis (not to be included in computing aggregate turnover)	Nil
Total	90

Since, aggregate turnover does not exceed ₹1.5 crore during the financial year 2020-21, Mr. X is entitled for Composition Scheme for FY 2021-22. Note: Aggregate Turnover threshold limit of ₹1.5 crore is considered as supplier Mr. X is registered in Uttar Pradesh i.e. other than special category State.

Question 6.
Mr. Shankar is running a fancy store and is also having a consulting firm, registered under the same PAN. During the earlier year, the turnover was ₹150 lakhs in the grocery stores and receipts in the consulting firm was ₹9 lakhs. In the light of these facts, answer the following:

(i) Examine whether Mr. Shankar eligible to opt for Composition Scheme under CGST Act.
(ii) Can he opt for the Composition Scheme in respect of the grocery store alone, though he has the consulting firm also, in addition to the store?
Answer:
Eligibility to opt for Composition Scheme

(i) No, Shankar is not eligible for Composition Scheme. The reason is that the turnover in the earlier year was in excess of ₹150 lakhs.

Note: W.e.f. 01.02.2019, other services, with restaurant & catering services, also eligible vide CGST (Amendment) Act, 2018 for composition scheme, subject to 10% of turnover in a State or Union Territory in preceding financial year or 5,00,000 whichever is higher.

(ii) No, it is not possible for Mr. Shankar to opt for Composition Scheme, for the grocery store alone. All the registrations under the same PAN have to opt for composition scheme in terms of proviso to section 10(2) of the CGST Act, 2017.

Question 7.
Ganga Co. Ltd. commenced business on 01-07-2020. It applied for registration on 05-08-2020. The registration was granted on 07-08-2020. What Is the effective date of registration? Instead of 01-07-2020, if it had commenced business on 20-07-2020, what would be your answer?

Ganga Co. Ltd. is an authorized dealer of two-wheeler vehicles. Its sales turnover was ₹125 lakhs for the year ended 31-03-2021. It also provided after sales service to customers for ₹7 lakhs. Is it eligible for composition levy for the financial year 2020-21?
Answer:
Effective date of registration:

As per rule 10(3) of CGST Rules, 2017 if the applicant has submitted an application for registration after the expiry of 30 days from the date of his becoming liable to registration, the effective date of registration shall be the date of the grant of registration.

Ganga Co. Ltd. commenced business on 01.07.2020 but applied on 05.08.2020 and it was granted on 07.08.2020. Since, the application for registration has been made after the expiry of 30 days from the date when it was liable to obtain registration; the effective date of registration would be the date of grant of registration ie. 07.08.2020.

If it had commenced business on 20.07.2020, the application for registration submitted within 30 days i.e. 07.08.2020, hence the effective date of registration would be 20.07.2020.

Eligibility for composition levy:

Under section 10 of the CGST Act, a registered person opting to pay tax under composition levy can apart from manufacture/supply of goods, provide service not exceeding 10% of total turnover or ₹5 lakhs whichever is higher. In this case the annual turnover is ₹125 lakhs and hence the higher of the two limits is ₹12.5 lakhs; the amount received by way of supply of service is ₹7 lakhs which is less than 10% of the total turn over. Hence, Ganga Co. Ltd. is eligible for composition levy.

Author’s Note:
It is actually a question testing knowledge on REGISTRATION provisions as well as Composition levy.

Question 8.
What is GST Composition Scheme? What is the GST Composition Scheme Limit?
Answer:
GST Composition scheme is a tax paying mechanism offered to small businesses. When compared to normal GST filing, the composite scheme offers two main benefits: reduced paperwork and compliance, and lower tax liability.

For instance, normal taxpayers need to submit 3 monthly GST returns (GST-1, GST-2, and GST-3) and one annual return (GST 9). However, if you’ve applied for the composition scheme, GST filing gets easier as you need to file just one Annual return (GSTR 4), and on quarterly basis a statement in Form GST CMP-08 shall be furnished to declare details of tax paid.

The composition scheme limit under GST varies depending on the type of business:

For manufacturers and traders: As a newly registered business, your turnover should not exceed ₹1.5 crore in the current financial year. If you have already registered, then your turnover must not exceed ₹1.5 crore in the previous financial year.

For restaurants not serving alcohol: The above provisions apply here as well.

For service providers:
As a newly registered business, your turnover should not exceed ₹50 lakh in the current financial year. If you have already registered, then your turnover must not exceed ₹50 lakhs in the previous financial year [Section 10(2A) of CGST Act].

Additionally, the ₹1.5 crore cap is further limited in Special Category States to ₹75 lakh.

Further, in the event that your turnover exceeds the specified composition scheme limit in a financial year, you will have to convert to the regular GST payment mechanism.

Question 9.
State the necessary pre-conditions for levy of Goods and Services Tax (GST) on goods and services?
Answer:
The following conditions are required to be satisfied for a transaction to be chargeable to Goods and Services Tax, ie:
(a) It involves supply of goods or services or both in terms of Section 7 of the CGST Act, 2017;
(b) The supply is a taxable supply; and
(c) The supply is made by a taxable person.

Question 10.
(i) B, a supplier registered in Chennai (Tamil Nadu) procures goods from China and directly supplies the same to a customer in UAE without bringing to India. With reference to the provisions of GST law examine whether the supply of goods by B to customer in UAE is an inter-state supply and is it either import or export in terms of Customs Act, 1962?

(ii) Is a dealer, who is not required to be registered because he has not crossed the turnover limit, required to pay GST under reverse charge in respect of supplies for which reverse charge is applicable?
Answer:
(i) The transaction undertaken by Mr. B is neither import nor export of goods in terms of Customs Act, 1962.

However, it is an inter-state supply in terms of provision of section 7(5)(a) of IGST Act, 2017, which provides that when the supplier is located in India and the place of supply is outside India, supply of goods or services or both shall be treated to be a supply of goods or services or both in the course of inter-state trade.

(ii) Yes, as per section 24 of CGST Act, 2017 the taxpayer who is required to pay tax under reverse charge have to compulsorily register under GST and threshold limit of ₹20 lakhs shall not be applicable to him.

Question 11.
Siddharth Transports Ltd., is running a regular tourist bus service, carrying passengers and goods from Coimbatore, Tamil Nadu to Trivandrum, Kerala, with effect from 1st August, 2017. Discuss whether such inter-state movement of various modes of conveyance carrying goods or passengers or both, between distinct persons as specified in section 25(4) of the CGST Act, 2017 [except in cases where such movement is for further supply of the same conveyance], is leviable to IGST.
Answer:
The legal provisions in GST laws are as under:
(a) As per section 24(1) of the CGST Act, persons making any inter-State taxable supply shall be required to be registered under this Act.

(b) As per section 25(4) of the said Act a person who has obtained or is required to obtain more than one registration, whether in one State or Union territory or more than one State or Union territory shall, in respect of each such registration, be treated as distinct persons for the purposes of this Act.

(c) Schedule I of the said Act specifies situations where activities Eire to be treated as supply even if made without consideration which also includes supply of as specified in section 25, when made in the course or furtherance of business.

(d) Section 7(2) of the CGST Act envisages that activities or transactions undertaken by the Central Government, a State Government or any local authority in which they are engaged as public authorities, as may be notified by the Government on the recommendations of the Council, shall be treated neither as a supply of goods nor a supply of services.

The issue of inter-state movement of goods like movement of various modes of conveyance, between distinct persons as specified in section 25(4) of the said Act, not involving further supply of such conveyance, including trucks, buses, etc., (a) carrying goods or passengers or both; or (b) for repairs and maintenance, [except in cases where such movement is for further supply of the same conveyance] was discussed in GST Council’s meeting held on 11th June, 2017 and the Council recommended that such inter-state movement shall be treated ‘neither as a supply of goods or supply of service’ and therefore not be leviable to IGST.

In view of above, the inter-state movement of goods like movement of various modes of conveyance, between distinct persons as specified in section 25(4) of the CGST Act including TRUCKS, BUSES, TRAINS, TANKERS, TRAILERS, VESSELS, AIRCRAFT ETC., may not be treated as supply and consequently IGST will not be payable on such supply.

(Reference in this regard may be made to Circular No. 1/1/2017-IGST dated 07.07.2017)

Question 12.
From the following information, compute the SGST/CGST/IGST payable for the month of April, 2021:
(1) Sales of mixers of grinders within the State (taxable 2,20,00,000 value)
(2) Sales of mixers of grinders outside the State (taxable 1,40,00,000 value)
(3) Value excluding taxes of steel jars supplied free to 7,00,000 buyers, as per promotion scheme for sales outside the state:
(4) Cash incentive given to dealers outside the State for 3,28,000 achieving target during the year 2017-18:
(5) Taxable value of supplies of parts, made free to fulfil 1,50,000 warranty obligations
(6) Late payment penalty collected from dealers for delayed 50,000 payments (intra-State only)
Answer:
Computation of CGST, SGST and IGST payable for the month of April, 2021:

Particulars	CGST (₹)	SGST (₹)	IGST (₹)
1. Sales of Mixers of grinders within the state (₹ 2,20,00,000 × 9% each)	19,80,000	19,80,000
2. Sales of Mixers of grinders outside the state (₹ 1,40,00,000 × 18%)			25,20,000
3. Steel bars supplied free to buyers of mixers as per promotion scheme for sales outside the state	–	–	–
4. Cash incentive given to dealers outside the state for achieving target during the year 2017-18	–	–	–
5. Supplies of parts made free to fulfil warrantly obligations	–	–	–
6. Late payment penalty collected from dealers for delayed payments (Intra-state only) [₹50,000 × 9% each]	4,500	4,500	–
Total GST Payable	19,84,500	19,84,500	25,20,000

Notes:

1. GST tax rate on mixers of grinders is assumed to be 18%.

2. Activities without consideration shall be treated as supply for cases covered under Schedule I read with section 7 of the CGST Act, 2017. In this case jars have been supplied free to customers to promote the sale. Hence, not taxable subject to input tax credit on the inward supply of such jars has been blocked as provided under section 17(5)(h) of the CGST Act, 2017.

3. In the absence of prior understanding about the discount (though called incentive), it is not deductible from the value. Moreover incentive is not linked to each invoice.

4. Supplies of parts made free to fulfil warranty obligations are not considered free supplies since the value of supply made earlier includes the charges to be incurred during the warranty period, hence no GST is chargeable on such replacements.

5. Penalty, late fee or interest collected from the recipients is includible in consideration for tax purposes as per the provisions of Section 15(2)(d) of CGST Act, 2017.

Question 13.
CMA Mr. Sandesh, an unregistered person under GST, has place of profession in Bhubaneswar, Odisha, supplies taxable services to Infosys Ltd., a registered person under GST in Bangalore.
(i) Is it inter-State supply or intra-State supply?
(ii) Who is liable to pay GST?
Note: CMA Mr. Sandesh turnover in the P.Y. is ₹18 lakhs.
Answer:
Any person making inter-state supply has to compulsorily obtain registration. However, service providers providing aggregate supplies including interstate services up to ₹20 lakh will be exempted from registration under GST.

(i) It is inter-state supply.
(ii) CMA Mr. Sandesh is not liable to pay IGST if he chooses not to register under GST. Since, registration is not made mandatory to him. Infosys Ltd. will also not be liable to pay GST under RCM as section 9(4) applies only to notified cases.

Question 14.
What is the difference in tax consequence between intra-State (from HO to branch in same State) and inter-State stock transfers (from HO to branch in different State) of the same supplier, which is a private limited company? What kind of GST will be levied?
Answer:
GST will be leviable only where the supply is made by an entity having a GST number to another GST number. Where a supplier has branch within the same State, only one GST registration and GST number will be there. Hence transfer to a branch within the same State will not attract any GST.

Where the company has a branch in another State, separate registration is required in the said State, hence the GST number in that State will be different.

As a consequence, when the company transfers stock to its branch in different State, it will be treated as inter-State supply. As a consequence, IGST will be leviable.

Intra-state stock transfer is taxable only when entity has more than one registration in one state. In that case, CGST plus SGST will be levied.

Question 15.
What are inter-state supplies under GST?
Answer:
As per Section 7 of the IGST Act, 2017, supply of goods and/or services in the course of inter-State trade or commerce means any supply where the location of the supplier and the place of supply are in

two different States;
two different Union territories;
a State and a Union territory further,
import of goods and services;
supplies where the supplier is located in India and the place of supply is outside India;
supplies to/by SEZ units or developer; or any supply that is not an intra-state supply shall be treated to be supply of goods and/or services in the course of inter-State trade or commerce.

Question 16.
Mr. Bhudev Aggarwal, an unregistered person receives commission of ₹21,00,000 as an insurance agent from insurance company. Will he be required to charge GST on the same?
Answer:
Though commission for providing insurance agent’s services is liable to GST, the tax payable thereon is to be paid by the recipient of service Le., insurance company, under reverse charge in terms of Notification No. 13/2017 CT(R) dated 28.06.2017. Thus, Mr. Bhudev Aggarwal will not be liable to pay GST on such commission. Instead, the insurance company will pay tax under reverse charge on this particular transaction.

Question 17.
Mr. Shyam Ahuja, an unregistered famous author, received ₹3 crores of consideration from Har Shiv Publications (HSP) located In Indore for supply of services by way of temporary transfer of a copyright covered under section 13(1)(a) of the Copyright Act, 1957 relating to Original literary works of his new book. He finished his work & made available the book to the publisher, but has yet not raised the invoice. Mr. Shyam Ahuja is of the view that HSP is liable to pay tax under reverse charge on services provided by him. HSP does not concur with his view and is not ready to deposit the tax under any circumstances. Examine whether the view of Mr. Shyam Ahuja is’correct. Further, if the view of Mr. Shyam Ahuja is correct, what is the recourse available with Mr. Shyam Ahuja to comply with the requirements of GST law as HSP has completely refused to deposit the tax.
Answer:
Yes, the view of Mr. Shyam Ahuja is Correct.

GST is payable under reverse charge in case of supply of services by an author by way of transfer/permitting the use or enjoyment of a copyright covered under section 13(1)(a) of the Copyright Act, 1957 relating to original literary work to a publisher located in the taxable territory in terms of reverse charge Notification No. 13/2017-CT(R) dated 28.06.2017.

Therefore, in the given case, person liable to pay tax is the publisher – HSP. However, since HSP has completely refused to deposit the tax on the given transaction, Mr. Shyam Ahuja has an option to pay tax under forward charge on the same. For the purpose, he needs to fulfil the following conditions:

(i) since he is unregistered, he has to first take registration under the CGST Act, 2017;

(ii) he needs to file a declaration, in the prescribed form, that he exercises the option to pay CGST on the said service under forward charge in accordance with section 9(1) of the CGST Act and to comply with all the provisions as they apply to a person liable for paying the tax in relation to the supply of any goods and/or services and that he shall not withdraw the said option within a period of 1 year from the date of exercising such option;

(iii) he has to make a declaration on the invoice, which he would issue to HSP in prescribed form.

Question 18.
Mr. Sanjay of New Delhi made a request for a motor cab to “Super Ride” for travelling from New Delhi to Gurgaon (Haryana). After Mr. Sanjay pays the cab charges using his debit card, he gets details of the driver Mr. Jorawar Singh and the cab’s registration number, “Super Ride” is mobile application owned and managed by D.T. located in India. The application “Super Ride” facilitates the potential customer to connect with the persons providing cab service under the brand name of “Super Ride”. D.T. Ltd. claims that cab service is provided by Mr. Jorawar Singh and hence, he is liable to pay GST under the provisions of GST laws.

With reference to the provisions of IGST Act, 2017, determine who is liable to pay GST in this case Would your answer be different, if D.T. Ltd. is located in New York (USA)? Also briefly state the statutory provisions involved.
Answer:
Section 5 of IGST Act, 2017 provides that tax on inter-state supplies of specified services notified by Government shall be paid by Electronic Commerce Operator located in taxable territory if such services are supplied through it.

Services by way of transportation of passengers by a motor cab supplied through ECO is one of the notified services. Electronic Commerce Operator means any person who owns, operates or manages digital or electronic facility or platform for supply of goods or services or both, including digital products over digital or electronic network.

Since DT Ltd. owns and manages a mobile application to facilitate supply of passenger transportation service in motor cabs over a digital network, it is an ECO. Thus, DT Ltd., an ECO located in India is liable to pay GST in the given case.

However, where an ECO does not have a physical presence in the taxable territory, person representing ECO is liable to pay tax. Further, where ECO has neither the physical presence nor any representative in the taxable territory, person appointed by the ECO for the purpose of paying tax is liable to pay the tax.

Accordingly, if DT Ltd. is located in New York (USA), any person representing DT Ltd. for any purpose in India is liable to pay tax. Further, if DT Ltd. also does not have a representative in India, it shall appoint a person in India for the purpose of paying tax and such person shall be liable to pay tax.

Author’s Note:

If in this Question, it is intra-State supply instead of inter-State supply, then it would be covered by section 9(5) of CGST Act. The fundamental of sub-section (5) is same of section 9 of CGST Act and section 5 of IGST Act.

Levy And Collection Under Gst (Including Composition Levy) Notes

Sections involved: 9 and 10 of CGST Act.

Section 9: Levy and collection of CGST/Section 5: Levy and collection of IGST

Levy of “CGST + SGST/UTGST”, as the case may be in case of Intra-state supply of goods and/or services.
Levy of “IGST” in case of Inter-state supply of goods and/or services, (section 5 of IGST Act)
GST is charged on value as determined in section 15 of the CGST Act.
Rates of GST are set by Central Government by way of notification. However, the maximum rate of total GST cannot exceed 40%. (CGST + SGST/IGST)
GST is not chargeable on supply of Alcoholic liquor for Human consumption.
Levy of GST on petroleum products is to be effective from a notified date in the future. (In short, temporarily 5 petroleum products are kept out of levy of GST.)
Reverse Charge Mechanism – RCM (i.e. recipient of supply is liable to pay GST) is applicable in notified cases.
Also, RCM is applicable for notified persons on notified goods /services when received from unregistered suppliers.
E-commerce Operator (ECO) is liable to pay GST on notified services when supplied through it. (3 services notified are: Transportation of passengers by radio taxi/motor cab/maxi cab/motor cycle, Accommodation services by unregistered persons & House-keeping services by unregistered persons). Provisos 1st: If ECO does not have physical presence in India, then his representative shall be liable to pay tax.

2nd: If there is no representative also, then ECO should appoint rep¬resentative for purpose of paying tax.

Composition scheme is discussed in section 10 of CGST Act

a. It is optional scheme

b. Eligibility: Aggregate Turnover as per section 2(6) of a registered person is upto 11.5 crore/? 75 lakhs* in the preceding Financial Year.
(‘Arunachal Pradesh, Mizoram, Tripura, Manipur, Nagaland, Uttarakhand, Meghalaya & Sikkim)

c. Rates of tax under Composition scheme:
Manufacturer: 1% of turnover in the state or UT. (CGST: 0.5% + SGST/UTGST: 0.5%)
Restaurant Service: 5% of turnover in the state or UT. (CGST: 2.5% + SGST/UTGST: 2.5%)
Other Suppliers: 1% of the turnover of taxable supplies in the state or UT.
(CGST: 0.5% + SGST/UTGST: 0.5%)

d. Extent of services that can be supplied by registered persons opting for composition scheme:
Higher of 2: 10% of turnover in a state/UT in the preceding F.Y. or ₹ 5,00,000
e. Persons not eligible to opt for composition scheme (6 categories)
f. Option of Composition scheme lapses during the F.Y. when turnover exceeds ₹ 1.5 crores/₹ 75 lakhs in the year.
g. Composition tax is not to be collected from recipients.
h. Input Tax Credit cannot be availed by registered persons opting for a composition scheme.
L Composition scheme is not applicable for tax payable under reverse charge mechanism.

Section 10(2A) scheme: Composition scheme for service suppliers and Mixed suppliers

a. Optional scheme
b. Eligibility: Registered persons whose aggregate turnover in preceding financial year has not exceeded ? 50,00,000 and he is not eligible to pay tax as per section 10(1) i.e. the earlier discussed composition scheme.
c. Rate of Tax: CGST @ 3% + SGST @ 3% of aggregate turnover.
d. There are other conditions to be satisfied to opt for section 10(2A) of CGST Act.
e. It is to be noted that most of things are same for section 10(2A) as are applicable in cases of section 10(1).

Registered Persons opting for section 10/ 10(2A) have to issue a “Bill of Supply” instead of Tax invoice for outward supply as they are not entitled to collect GST from recipient of supply.
Registered Persons opting for section 10/10(2A) has to furnish a statement in GST CMP-08 by the 18th day of the month succeeding such quarter and a Return in Form GSTR-4 for every financial year on or before 30th day of April following the end of such financial year.

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