Category: CS Professional

Types Of Intellectual Property-Origin And Development-An Overview – Intellectual Property Rights Laws and Practices Important Questions

Question 1.
Write a brief note discussing the relativity between Intellectual Property and Business.
Answer:
Intellectual Property vis-a-vis Business: A Rationale of Relativity:
In today’s world, the abundant supply of goods and services on the markets has made life very challenging for any business, big or small. In its ongoing quest to remain ahead of competitors in this environment, every business strives to create new and improved products (goods and services) that will deliver greater value to users and customers than the products offered by competitors. To differentiate their products – a prerequisite for success in today’s markets – businesses rely on innovations that reduce production costs and/or improve product quality. In a crowded marketplace, businesses have to make an ongoing effort to communicate the specific value offered by their product through effective marketing that relies on well-thought-out ‘ branding strategies.

In the current knowledge-driven, private sector-oriented economic development paradigm, the different types of intangible assets of a business are often more important and valuable than its tangible assets. A key subset of intangible assets is protected by what are labeled collectively as intellectual property rights (IPRs). These include trade secrets protection, copyright, design and trademark rights, and patents, as well as other types of rights. IPRs create tradable assets out of products of human intellect and provide a large array of IPR tools on which businesses can rely to help drive their success through innovative business models.

All businesses, especially those which are already successful, nowadays have to rely on the effective use of one or more types of intellectual property (IP) to gain and maintain a substantial competitive edge in the marketplace. Business leaders and managers, therefore, require a much better understanding of the tools of the IP system to protect and exploit the IP assets they own or wish to use, for their business models and competitive strategies in domestic and international markets.

Question 2.
Write a brief note on the utility model.
Answer:
Utility Models:
A utility model is an exclusive right granted for an invention, which allows the right holder to prevent others from commercially using the protected invention, without his authorization for a limited period of time. In its basic definition, which may vary from one country (where such protection is available) to another, a utility model is similar to a patent. In fact, utility models are sometimes referred to as “petty patents” or “innovation patents.” Only a small but significant number of countries and regions provide the option of utility model protection. At present, India does not have legislation on Utility models.

The main differences between utility models and patents are the following:
The requirements for acquiring a utility model are less stringent than for patents. While the requirement of “novelty” is always to be met, that of “inventive step” or “non-obviousness” may be much lower or absent altogether. In practice, protection for utility models is often sought for innovations of a rather incremental character that may not meet the patentability criteria. The term of protection for utility models is shorter than for patents and varies from country to country (usually between 7 and 10 years without the possibility of extension or renewal).

In most countries where utility model protection is available, patent offices do not examine applications as to substance prior to registration. This means that the registration process is often significantly simpler and faster, taking on an average of six months. Utility models are much cheaper to obtain and maintain. In some J countries, utility model protection can only be obtained for certain fields of * technology, and only for products but not for processes.

Utility models are considered suitable particularly for SMEs that make “minor” improvements to, and adaptations of, existing products. Utility ‘ models are primarily used for mechanical innovations. The “Innovation patent,” launched in Australia some time back was introduced as a result of extensive, research into the needs of small and medium-sized enterprises, with the aim of providing a “low-cost entry point into the intellectual property system.”

Question 3.
Write a brief note on Biodiversity and IPR.
Answer:
In simple terms, the diversity among various life forms within the Biosphere refers to biodiversity. Biodiversity is the foundation of life on Earth. It is crucial for the functioning of ecosystems that provide us with products and services without which we cannot live. By changing biodiversity, we strongly affect human well-being and the well-being of every other living creature.

Biodiversity is normally classified under 3 major categories; ecosystem diversity, representing the principal biogeographic regions and habitats; species diversity, representing variability at the level of families, genera, and ‘ species; and genetic diversity, representing a large amount of variability occurring within a species. Diverse activities and actions have been taken by several stakeholders at the local, state, national, and international levels to conserve/protect valuable resources such as biodiversity to draw the benefits accrued in it for the society.

The Convention on Biological Diversity (CBD) 1992: Opened for signature at the Earth Summit in Rio de Janeiro in 1992, and entering into force in December 1993, the Convention on Biological Diversity is an international treaty for the conservation of biodiversity, the sustainable use of the components of biodiversity and the equitable sharing of the benefits derived from the use of genetic resources.

The interface between biodiversity and intellectual property is shaped at the international level by several treaties and processes, including at the WIPO, and the TRIPS Council of the WTO. With 193 Parties, the Convention has near-universal participation among countries. The Convention seeks to address all threats to biodiversity and ecosystem services, including threats from climate change, through scientific assessments, the development of tools, incentives and processes, the transfer of technologies and good practices, and the full and active involvement of relevant stakeholders including indigenous and local communities, youth, NGOs, women and the business community. The Cartagena Protocol on Biosafety is a subsidiary agreement to the Convention.

It seeks to protect biological diversity from the potential risks posed by living modified organisms resulting from modern biotechnology. The treaty defines biodiversity as “the variability among living organisms from all sources including, inter alia, terrestrial, marine and other aquatic ecosystems and the ecological complexes of which they are part; this includes diversity within species, between species and of ecosystems.” The Convention reaffirms the principle of state sovereignty, which grants states sovereign rights to exploit their resources pursuant to their own environmental policies together with the responsibility to ensure that activities within their own jurisdiction or control do not cause damage to the environment of other states. The Biodiversity Convention also provides a general legal framework regulating access to biological resources and the sharing of benefits arising from their use. India is a party to the Convention on Biological Diversity (1992).

The Convention on Biological Diversity establishes important principles regarding the protection of biodiversity while recognizing the vast commercial value of the planet’s store of germplasm. However, the expansion of international trade agreements establishing a global regime of intellectual property rights creates incentives that may destroy biodiversity, while undercutting social and economic development opportunities as well as cultural diversity. The member countries were pressurized to change their IPR laws to conform to the TRIPS agreement.

Question 4.
What are points, one should consider while adopting a Trademark?
Answer:
A trademark is a word, phrase, symbol, or design that distinguishes the source of products (trademarks) or services (service marks) of one business from its competitors. In order to qualify for patent protection, the mark must be distinctive. For example, the Nike “swoosh” design identifies athletic footwear made by Nike.

The Trade Marks Act 1999 (“TM Act”) provides, inter alia, for registration of marks, filing of multi-class applications, the renewable term of registration of a trademark as ten years as well as recognition of the concept of well-known marks, etc. It is pertinent to note that the letter “R” in a circle i.e. ® with a trademark can only be used after the registration of the trademark under the TM Act.

Question 5.
Discuss the process for the enforcement of Patent Rights.
Answer:
Enforcement of Patent Rights:
It is pertinent to note that the patent “infringement proceedings can only be initiated after grant of patent in India but may include a claim retrospectively from the date of publication of the application for grant of the patent. Infringement of a patent consists of the unauthorized making, importing, using, offering for sale, or selling any patented invention within India. Under the (Indian) Patents Act, 1970 only a civil action can be initiated in a Court of Law. Like trademarks, the relief which a court may usually grant in a suit for infringement of patent includes a permanent and interim injunction, damages or account of profits, delivery of the infringing goods for destruction, and cost of the legal proceedings.

Question 6.
Discuss the salient features of the Design Act, 2000.
Answer:
The salient features of the Design Act, 2000 are as under:

1. Enlarging the scope of the definition of the terms “article”, “design” and introduction of a definition of “original”.
2. Amplifying the scope of “prior publication”.
3. Introduction of provision for delegation of powers of the Controller to other officers and stipulating statutory duties of examiners.
4. Provision of identification of non-registrable designs.
5. Provision for substitution of the applicant before registration of a design.
6. Substitution of Indian classification by the internationally followed system of classification.
7. Provision for inclusion of a register to be maintained on the computer as a Register of Designs.
8. Provision for restoration of lapsed designs.
9. Provisions for appeal against orders of the Controller before the High Court instead of Central Government.
10. Revoking of a period of secrecy of two years of a registered design.
11. Providing for compulsory registration of any document for transfer of right in the registered design.
12. Introduction of additional grounds in cancellation proceedings and provision for initiating the cancellation proceedings before the Controller in place of High Court.
13. Enhancement of quantum of penalty imposed for infringement of a registered design.
14. Provision for grounds of cancellation to be taken as a defense in the infringement proceedings to be in any court not below the Court of District Judge.
15. Enhancing the initial period of registration from 5 to 10 years, to be followed by a further extension of five years.
16. Provision for allowance of priority to other convention countries and. countries belonging to the group of countries or inter-governmental organizations apart from the United Kingdom and other Commonwealth Countries.
17. Provision for the avoidance of certain restrictive conditions for the control of anti-competitive practices in contractual licenses.

Question 7.
Discuss the Salient features of Geographical indications.
Answer:
Geographical Indications: Until recently, Geographical indications were not registrable in India, and in the absence of statutory protection, Indian geographical indications had been misused by persons outside India to indicate goods not originating from the named locality in India. Patenting turmeric, neem, and basmati are the instances that drew a lot of attention towards this aspect of Intellectual property. Mention should be made that under the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS), there is no obligation for other countries to extend reciprocal protection unless a geographical indication is protected in the country of its origin. India did not have such a specific law governing geographical indications of goods that could adequately protect the interest of producers of such goods.

CS Professional Intellectual Property Rights Laws and Practices Notes

Fast Track Mergers – Corporate Restructuring, Insolvency, Liquidation & Winding-Up Important Questions

Question 1.
The Board of directors of MNM Pvt. Ltd., a small company is considering to merge with BRQ Pvt. Ltd., another small company. The Board wants the merger to be fast and seeks your opinion about the conditions to be complied in this respect. Render your opinion based on the provisions of Companies Act, 2013.
Answer:
→ Section 233 of the Companies Act, 2013 provides for mergers between small companies or between holding company and its wholly-owned subsidiary companies

→ As per these provisions, such companies can implement a scheme of merger without the cumbersome procedure of NCLT u/s 232. Hence, such mergers are known ‘fast-track’ mergers.

→ In a Fast Track Merger u/s 233 of the Companies Act, 2013 and rules made thereunder, the steps followed are as under

• Verify the Memorandum and Articles of both companies and ensure that they have the requisite authority under them to enter into a merger.
• Convene the Board meeting and prepare a draft scheme of merger or amalgamation.
• Prepare the financial statement of assets and liabilities and get an Auditor’s Report prepared.
• Get the draft scheme approved in the Board meeting.
• Both the companies need to send a notice to the Registrar of Companies (ROC) and Official Liquidator (OL) of their respective regions inviting suggestions/objections to the scheme, if any, within 30 days of issuing the notice.
• Notice to the ROC shall be in Form CAA-9
• Both the companies are required to file a Declaration of Solvency with their respective ROCs. The declaration of solvency shall be accompanied by
  (a) Board Resolution,
  (b) Statement of Assets and Liabilities, and
  (c) Audit Report.
• Sending notice for holding shareholders meeting and creditors meeting.
• Conducting share holders meeting and creditors meeting and getting the scheme approved by not less than 90% majority in value.
• Filing the results of such meeting with the Regional Director and Official Liquidator by the transferee company.

Question2.
“Under Companies Act, 1956 small companies were deterred from entering into mergers owing to the lengthy process and the Companies Act, 2013 provided a solution”. Comment.
Answer:

• Currently, mergers and amalgamations have become a regular aspect of the business world. M& A is a process of combination of two or more entities/companies through inorganic means.
• Through merger and amalgamation, either a new entity is formed or one entity may be absorbed by another. All the assets and liabilities of the amalgamating or the merging entity will transfer to the merged entity.
• The Companies Act, 1956 did not provide any simple procedure for mergers and amalgamations of small companies. The procedure in the erstwhile Act was cumbersome and time-consuming, for all companies irrespective of their size, net worth and turnover.
• This was proving to be an obstacle for small companies, in the way of their growth and expansion. This need was considered in the Companies Act, 2013, where separate provisions for merger of small companies was included.
• Section 233 of the Companies Act, 2013 has introduced the concept of fast track mergers. It exempts merger between small companies and between holding and wholly owned subsidiary companies entering into merger arrangements as per sections 230-232 of the Companies Act, 2013.
• Fast track merger provide the following benefits –
  • Simplified procedure for merger
  • No judicial approval is required
  • Separate procedures for small companies to enable them to expand without any road blocks
  • Form filings required also significantly reduced
  • Fast track mergers do not require Tribunal approval for mergers. But approval needed from Regional Directors, Registrar of Companies and Official Liquidator.
  • The process has been simplified to a great extent. A provision allowing the government to notify any other company in this regard has also been made

Question 3.
Brakes Pvt. Ltd., a small company manufacturing brakes proposes to merge with Lubricants Pvt. Ltd., another small company. Registrar of Companies (ROC) objected the scheme on the ground that it is not in the interest of the creditors. Comment on further steps as per Companies Act, 2013.
Answer:
→ Section 233 of the Companies Act, 2013 provides for mergers between small companies or between holding company and its wholly-owned subsidiary companies

→ As per these provisions, such companies can implement a scheme of merger without the cumbersome procedure of NCLT u/s 232. Hence, such mergers are known ‘fast-track’ mergers.

→ As per Section 233, small companies shall comply with the following conditions to implement fast track merger:
(a) Notice of the proposed scheme shall be given to Regional Director, Registrar of Companies and Official Liquidator (Form No. CAA. 9). The purpose of notice is inviting objections or suggestions, if any, within 30 days from the notice. Transferor Company and Transferee Company shall send notice to their respective RD, ROC and OL.

(b) Such objections and suggestions received are considered by the Companies in their respective General Meetings and the scheme is approved by the respective members, holding at least 90% of the total number of shares.

(c) Each Company involved in the merger files a Declaration of Solvency, in Form No. CAA. 10, with the respective ROC

(d) The scheme of merger shall be approved by 9/ 10th majority in value of the creditors or class of creditors of respective Companies. Such creditors’ meeting shall be convened by giving notice of 21 days’, along with the scheme for approval purpose.

(e) The Registrar of Companies will communicate the objections or suggestions to the scheme to the Central Government within a period of 30 days. In the absence of any such communication, it would be presumed that no objections were raised.

(f) If the Central Government after receiving the objections or suggestions or for any other reason forms the opinion that the said scheme is not in public interest or in the interest of the creditors, it can file an application before the Tribunal within a period of sixty days.

(g) After filing of such application, the Tribunal has to render its judgment. If it is of the opinion (with reasons recorded in writing) that the scheme should be considered as per the procedure laid down in section 232 of the Companies Act, 2013, it may give directions accordingly. Provided that if the Central Government does not have any objection to the scheme or it does not file any application under this section before the Tribunal, it shall be deemed that it has no objection to the scheme.

→ Hence, the above steps ensure that a scheme of fast track merger is not oppressive to the interest of members and creditors.

Question 4.
“Small Companies can only opt for Fast Track Mergers” – Elucidate briefly for identifying small companies.
Answer:

• Section 233 of the Companies Act, 2013 has introduced the concept of fast track mergers.
• It has exempted small companies and holding-subsidiary companies entering into merger arrangements from the regular merger procedure as stipulated under sections 230-232 of the Companies Act, 2013.
• Section 233 of the Companies Act, 2013 along with the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016 lay down the entire legal framework of fast track mergers.
• As per section 2(85) of the Companies Act, 2013, a ‘Small Company’ means a company, other than a public company
  • paid-up share capital of which does not exceed ₹ 50 lakh or such higher amount as may be prescribed which shall not be more than ₹ 10 crore; and
  • turnover of which as per profit and loss account for the immediately preceding financial year does not exceed ₹ 2 crore or such higher amount as may be prescribed which shall not be more than ₹ 100 crore:
• However, this clause shall not apply to
  • a holding company or a subsidiary company;
  • a company registered under section 8 of the Companies Act, 2013;
  • a company or body corporate governed by any special Act; and
  • a public limited company, irrespective of its capital or turnover.

Corporate Restructuring, Insolvency, Liquidation & Winding-Up Notes

CS Professional Governance, Risk Management, Compliances and Ethics Question Paper New Syllabus

Part 1

Question 1.
Rakesh is the Managing Director of ABC Co. Ltd., a listed company having its registered office in Bangalore. In December, 2018 an allegation of the Managing Director’s immediate family members and Alfa Co. Ltd. which got a Rs. 1,000 crore contract from ABC Co. Ltd. entering into a quid pro quo deal surfaced in the public domain. The matter was personally enquired by the Chairman of the Board of Directors and nothing improper was found. In March, 2019 another complaint from an anonymous “Whistle Blower” was received alleging non-adherence to code to conduct, conflict of interest and quid pro quo by the Managing Director while dealing “with certain customers”.

The allegations were refuted by the Board of Directors of ABC Co. Ltd. as “being malicious and baseless” but when the controversy started getting blown out of proportion the company stated in a regulatory filing that its Board had decided to institute an independent enquiry in the matter and – pending such enquiry, the Managing Director had been asked to go on leave. The enquiry revealed that Rakesh did not make proper disclosure about his family links with the corporate customer to the Board. It also transpired that Rakesh gave scant respect to “conflict of interest and due disclosure or recusal requirements” while awarding contracts to Alfa Co. Ltd. with which his close family members had business interests. Upon the findings of the enquiry being made public, Rakesh resigned and the company stated that it will treat his resignation as “termination for cause” and will also stop payments of unpaid benefits due to him.

In the background of the aforesaid case, answer the following question: (5 Marks each)

(a) How, if so, has Rakesh failed to discharge his duties as a director of ABC ; Co. Ltd.? Which regulations of the SEBI LODR have been breached by him?
Answer:
In the present case, Rakesh has clearly failed to discharge his duties as a director of ABC Co. Ltd. as according to the facts of the case; the enquiry revealed that Rakesh did not make proper disclosure about his family links with the corporate customer to the Board. Further Rakesh gave scant respect to “conflict of interest and due disclosure or recusal requirements” while awarding contracts to Alfa Co. Ltd. with which his close family members had business interests. Thus Rakesh has violated various provisions of Companies Act, 2013, SEBI (LODR) Regulations 2015, OECD Principles of Corporate Governance, Related Party Disclosures etc.

(b) State the characteristics of an effective Board of Directors.
Answer:
Following are the characteristics of an effective Board of Directors:

• To be able to undertake functions efficiently and effectively, the Board must possess the necessary blend of qualities, skills, knowledge and experience.
• Each of the directors should make quality contribution to the organizations policies, operations and management.
• Board should have a mix of the following skills, knowledge and experience:
  • Operational or technical expertise, commitment to establish leadership
  • Financial skills
  • Legal skills
  • Knowledge of Government and regulatory requirement.
• Board induction and training: Directors must have a broad under-standing of the area of operation of the company’s business, corporate strategy and challenges being faced by the Board. Attendance at continuing education and professional development programmes is essential to ensure that directors remain abreast of all developments, which are or may impact their corporate governance and other related duties.
• The Board must monitor and evaluate its combined performance and also that of individual directors at periodic intervals, using key performance indicators besides peer review. The Board should establish an appropriate mechanism for reporting the results of Board’s performance evaluation.
• Board independence: Independent Board is essential for sound corpo-rate governance. This goal may be achieved by associating sufficient number of independent directors with the Board.

(c) Analyze the performance of the Board of Directors in handling the complaints against Rakesh, the Managing Director of ABC Co. Ltd.
Answer:
According to the facts of the present case upon the findings of the enquiry being made public, Rakesh resigned and the company stated that it will treat his resignation as “termination for cause” and will also stop payments of unpaid benefits due to him. Action taken by the company was not justified. Mere resignation and stopping payments of unpaid benefits is not sufficient in law. Formal legal proceedings must be initiated against Rakesh to make good the losses. Penal action must be initiated against Rakesh to ensure dubious activities of such nature are not repeated.

(d) Discuss the principles for Corporate Governance in order to improve the practices followed by ABC Co. Ltd. to prevent such situations from recurring.
Answer:
In order to prevent such situations from recurring, ABC Co. Ltd. should inculcate the following practices:
Separation of role 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.

Directors training, development and familarisation director’s training: An important aspect of Board effectiveness would be appropriate attention to development and training of directors. Director orientation/ induction should be seen as the first step of the board’s continuing improvement.

Director’s Development: Professional development should not be treated as merely another training schedule rather it must be more structured so as to sharpen the existing skills and knowledge of directors. It is a good practice for boards to arrange for an ongoing updation of their members with changes in governance, technologies, markets, products, and so on through:

• Ongoing education
• Site visits
• Seminars
• Various short term and long term Courses

Familiarisation Programme for Independent Directors: Regulation 25(7) of SEBI (LODR) Regulations, 2015 provides that the listed entity shall familiarise the independent directors through various programmes about the listed entity, including the following:
a. Nature of the industry in which the listed entity operates
b. Business model of the listed entity.
c. Roles, rights, responsibilities of independent directors.
d. Any other relevant information

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

Question 2.
(a) Write a short note on Dividend distribution policy. (5 Marks)
Answer:
Regulation 43A of SEBI (LODR) Regulations, 2015 provides that:
The top five hundred listed entities based on market capitalization (calculated as on March 31 of every financial year) shall formulate a dividend distribution policy which shall be disclosed in their annual reports and on their websites.

The dividend distribution policy shall include the following parameters:
(a) The circumstances under which the shareholders of the listed entities may or may not expect dividend.
(b) The financial parameters that shall be considered while declaring dividend.
(c) Internal and external factors that shall be considered for declaration of dividend.
(d) Policy as to how the retained earnings shall be utilized.
(e) Parameters that shall be adopted with regard to various classes of shares:

If the listed entity proposes to declare dividend on the basis of parameters in addition to clauses (a) to (e) or proposes to change such additional parameters or the dividend distribution policy contained in any of the parameters, it shall disclose such changes along with the rationale for the same in its annual report and on its website.

The listed entities other than top five hundred listed entities based on market capitalization may disclose their dividend distribution policies on a voluntary basis in their annual reports and on their websites.

(b) “A responsible business activity contributes to good public policy and to human rights in the communities in which it operates.” Explain the responsibilities of business provided in the Caux Round Table’s (CRT) Stakeholder Management Guidelines. (5 Marks)
Answer:
CRT Stakeholder Management Guidelines provide that as a global corporate citizen, a responsible business actively contributes to good public policy and to human rights in the communities in which it operates. Business therefore has a responsibility to:
a. Respect human rights and democratic institutions, and promote them wherever practicable.
b. Recognize government’s legitimate obligation to society at large and support public policies and practices that promote social capital.
c. Promote harmonious relations between business and other segments of society.
d. Collaborate with community initiatives seeking to raise standards of health, education, workplace safety and economic well-being.
e. Promote sustainable development in order to preserve and enhance the physical environment while conserving the earth’s resources.
f. Support peace, security and the rule of law.
g. Respect social diversity including local cultures and minority communities.
h. Be a good corporate citizen through on going community investment and support for employee participation in community and civic affairs.

(c) The Audit Committee of Polar Ltd., a company listed with BSE, consists of three directors, Ashish, Nitin and Rekha. Ashish is the chairman of the Audit Committee and is also the CEO of Polar Ltd., Nitin and Rekha are independent directors and all three directors are financially literate. Rekha is a Chartered Accountant with more than 15 year’s experience in finance and accounting.

Discuss the above constitution of the Audit Committee in the light of the legal requirements in this regard. (5 marks)
Answer:
Facts: The Audit Committee of Polar Ltd., a public listed company consists of three directors, Ashish, Nitin and Rekha. All there directors are financially literate. Ashish is the chairman of the Audit Committee and the CEO of Polar Ltd., Nitin is an independent director. Rekha is an independent directors and a Chartered Accountant with more than 15 year’s experience in finance and accounting.

Legal provisions: A qualified and independent Audit Committee shall comprise of:

• Minimum three Directors as members.
• Two-thirds of the members of audit committee shall be Independent Directors.
• All members of Audit Committee shall have knowledge of financial matters of Company, and at least one member shall have good knowledge of accounting and related financial management expertise.
• The Chairman of the Audit Committee shall be an Independent Director.

Conclusion: The Audit Committee of Polar Ltd. comprises three Directors as members thereby fulfilling the condition of having minimum three Directors as members. Nitin and Rekha are independent directors thereby fulfilling the condition; two-thirds of the members of audit committee shall be Independent Directors.

All there directors, Ashish, Nitin and Rekha are financially literate and at least one member should have good knowledge of accounting and related financial management expertise i.e. Rekha being a CA and all there being financially literate fulfil this condition as well.

The Chairman of the Audit Committee should be an Independent Director. Ashish is the chairman of the Audit Committee however is not an independent director as per the given facts of the case.

Therefore the composition of the Audit Committee of Polar Ltd. is not legally viable as it does not fulfil the necessary conditions as laid down in Companies Act, 2013 and SEBI (LODR) Regulations 2015.

OR (Alternate Question to Q. NO. 2)

Question 2A.
i. KLIP Travels Ltd. (KLIP) is a BSE listed company in the travel industry. Arun Kumar is the Chairperson of KLIP. There has been a major re-shuffle in the composition of the Board of Directors of KLIP with several old directors retiring and many new individuals inducted as directors. The Chairperson of the company, Arun, is keen to give an Induction kit to the newly inducted members on the Board but is unsure of its contents. As the Company Secretary of KLIP, prepare the induction kit. (5 Marks)
Answer:
An induction kit to be given to new director should contain the following:

• Memorandum and Articles of Association with a summary of most important provisions
• Brief history of the company
• Current business plan, market analysis and budgets
• All relevant policies and procedures, such as a policy for obtaining independent professional advice for directors
• Protocol, procedures and dress code for Board meetings, general meetings, staff social events, site visits etc. including the involvement of partners
• Press releases in the last one year
• Copies of recent press cuttings and articles concerning the company
• Annual report for last three years
• Notes on agenda and Minutes of last six Board meetings
• Board’s meeting schedule and Board committee meeting schedule
• Description of Board procedures

ii. You are Company Secretary of XYZ Insurance Co. Ltd. The Board of Directors of your company requires you to draw up a policy based on the principles spelt out in the stewardship code for insurers in India. (5 Marks)
Answer:
Stewardship policy based on the principles spelt out in the stewardship code:

XYZ LTD.
STEWARDSHIP CODE

I. INTRODUCTION AND SCOPE
As part of its Investment Policy, the Company invests its funds in various types of securities including equity shares issued by various investee companies. The Insurance Regulatory and Development Authority of India (“IRDAI”) has prescribed stewardship principles to be adopted and implemented by the insurers (“Stewardship Principles”). Insurers are required to adopt a Code based on the Stewardship Principles. Accordingly, this Stewardship Code was approved by the Board of Directors on and shall be effective from

II. Definitions

• “Company” means XYZ Ltd.
• “Act” means the Insurance Act, 1938
• “Authority” or “IRDAI” means the Insurance Regulatory and Development Authority of India.
• “Guidelines” means Guidelines on Stewardship Code for Insurers in India.

III. STEWARDSHIP PRINCIPLES
1. Key Stewardship Responsibilities
1.1. Primary Stewardship Responsibilities: The Company shall:
a. Take into consideration, the corporate governance practices of investee companies, when undertaking buy and sell decisions.
b. Enhance shareholder/investor value through productive engagement with investee companies.
c. Vote and engage with investee companies on matters including environmental, social and governance principles in a manner which is in the best interests of its shareholders/investors.
d. Be accountable to shareholders/investors within the parameters of professional confidentiality and regulatory regime.

1.2. Discharge of Stewardship Responsibilities: The Company shall discharge its
stewardship responsibilities through:
a. Voting on shareholders’ resolutions, as may be necessary to protect the long term interest of its shareholders and policyholders.
b. Advocating for responsible corporate governance practices in the investee companies.

1.3. Disclosure of Stewardship Code: This Stewardship Code and amendment thereto, shall be disclosed on the website of the Company. Any amendment or modification to this Code shall also be disclosed on the website.

1.4. Disclosure of Stewardship Activities: The Stewardship Officer shall report the requisite compliance with the Stewardship Code to the Investment Committee from time to time.

2. Managing Conflict of Interest
2.1. A conflict of interest exists where the interests or benefits of the Company conflict with the interests or benefits of its shareholder/policyholders or the investee company.

2.2. Avoid conflict of interest: The Access employees of the Company shall undertake reasonable steps to avoid actual or potential conflict of interest situations. In the event of any doubt as to whether a particular transaction would create (or have the potential to create) a conflict of interest, Access Employees shall consult with the Stewardship Officer.

2.3 Identifying conflict of interest: While dealing with investee companies, the Company may be faced with a conflict of interest, inter alia, in the following instances, where:
a. The Company and the investee company are part of same group.
b. The investee company is a client of the Company.
c. The investee company is partner or holds an interest, in the overall business or is a distributor for the Company.
d. A nominee of the Company has been appointed as a director or a key managerial person of the investee company.
e. A director or a key managerial person of the Company has a personal interest in the investee company.

2.4. Manner of managing conflict of interest: The Company will manage conflicts of interest by requiring the Access Employees to:
a. Avoid conflicts of interest where possible.
b. Identify and disclose any conflicts of interest.
c. Carefully manage any conflicts of interest.
d. Follow this Code and respond to any breaches.

3. Monitoring of Investee Companies: The Company shall monitor all investee companies.

4. Active Intervention in the Investee Company

4.1 Applicability: The Company shall consider intervening in the acts/omissions of an investee company, in which it has invested (acquisition cost) more than 1 % of the Investment Assets of the Company, as at the end of the immediately preceding quarter or 50 crores, whichever is lower.

4.2 Intervention by the Company: The decision for intervention shall be decided by the Stewardship Officer on a case to case basis based on all available facts of investee company at that point of time.

5. Collaboration with other Institutional Investors: The Company shall consider collective engagement with other institutional shareholders when it believes a collective engagement will lead to a higher quality and/or a better response from the investee company.

The Company may approach, or may be approached by, other institutional shareholders to provide a joint representation to the investee companies to address specific concerns.

6. Voting and disclosure of voting activity

6.1 The Company may exercise its voting rights and vote on shareholder resolutions of investee companies, as may be deemed necessary in the interest of policyholders.

6.2 Voting decisions shall be made in accordance with the Company’s voting policy, which is available on the website of the Company.

6.3 The Company shall vote against resolutions which are not consistent with the Company’s voting policy.

7. Reporting of Stewardship Activities On an annual basis, the Company shall report the compliance status of this Code to the Authority in the prescribed format.

IV. Review of the Code The Code shall be reviewed on annual basis by the Investment Committee or whenever any changes are to be incorporated in the Code due to any amendment in the Guidelines on Stewardship Code

V. Effective Date: Pursuant to the observations received from IRDAI, certain modifications were made in the original Code and the amended Code was approved by the Board of Directors at its meeting held on …
The amended Code is effective from………

iii. Discuss the need for Internal Audit as a tool for Corporate Governance in the present day organizations. (5 Marks)
Answer:
Internal Audit is an independent management function, which involves a continuous and critical appraisal of the functioning of an entity with a view to suggest improvements thereto and add value to and strengthen the overall governance mechanism of the entity including entity’s strategic risk management and internal control system.

The demand for auditing is sourced in the need to have some means of independent verification to reduce record-keeping errors, asset misappropriation, and fraud within business and non-business organizations.

Internal Audit is an independent appraisal activity within an organization for the review of systems, procedures, practices, compliance with policies for accounting, financial and other operations as a basis for service to management. It is a tool of control:
a. To measure and evaluate the effectiveness of the working of an organization.
b. To ensure that all the laws, rules and regulations governing the operations of the organization are adhered to.
c. To identify risks and also suggests remedial measures, thereby acting as a catalyst for change and action.

Question 3.
Write short notes on :
(a) Factors to be kept in mind for planning to mitigate compliance risk.
Answer:
Following are the factors to be kept in mind for planning to mitigate compliance risk:
a. Impact of failures of compliance that would create significant brand risk or reputational damage.

b. Impact of that damage on the organization’s market value, sales, profit, customer loyalty, or ability to operate.

c. Identification of compliance missteps that could cause the organization to lose the ability to sell or deliver products/services.

d. How should the compliance program design, technology, processes, and resource requirements change in light of growth plans, acquisitions, or product/category/ service expansions?

e. Is the organization doing enough to inform customers, investors, third parties, and other stakeholders about its vision and values? Is it making the most of ethics, compliance, and risk management investments as potential competitive differentiators?

f. Total compliance costs; beyond salaries and benefits at the centralized level and how are costs aligned with the most significant compliance risks that could impact the brand or result in significant fines, penalties, litigation?

g. How well-positioned is the compliance function? Does it have a seat “at the table” in assessing and influencing strategic decisions?

h. The personal and professional exposures of executive management and the board of directors with respect to compliance.

(b) Mission and objectives of International Corporate Governance Network (ICGN).
Answer:
The International Corporate Governance Network (“ICGN”) is a not-for- profit company limited’by guarantee and not having share capital under the laws of England and Wales founded in 1995.

ICGN’s mission:
ICGN’s mission is to promote effective standards of corporate governance and investor stewardship to advance efficient markets and sustainable economies world-wide.

Objective of ICGN:
It has four primary purposes:
a. To provide an investor-led network for the exchange of views and information about corporate governance issues internationally.
b. To examine corporate governance principles and practices.
c. To develop and encourage adherence to corporate governance stan-dards and guidelines.
d. To generally promote good corporate governance.
The Network’s mission is to develop and encourage adherence to corporate governance standards and guidelines, and to promote good corporate governance worldwide.

(c) Regulation 30(3) of SEBI (LODR), 2015 regarding disclosure of events upon application of materiality guidelines.
Answer:
Regulation 30(3) of the Listing Regulations 2015 specifies that the listed entity shall make disclosure of events specified in Part ‘A’ of Schedule III, based on application of the guidelines for materiality. The board of directors of the listed entity shall authorize one or more Key Managerial Personnel for the purpose of determining materiality of an event or information and for the purpose of making disclosures to stock exchange(s) under this regulation and the contact details of such personnel shall be also disclosed to the stock exchange(s) and as well as on the listed entity’s website.

(d) Matters that cannot be discussed in a Board meeting conducted through video-conferencing.
Answer:
As per rule 4 of the Companies (Meeting of Board and its Powers) Rules, 2014, the following types of matters cannot be discussed in a board meeting conducted through video conference:

• Approval of the annual financial statements.
• Approval of the Board’s report.
• Approval of the prospectus.
• Audit Committee Meetings for consideration of accounts.
• Approval of the matter relating to amalgamation, merger, demerger, acquisition and takeover.

(e) Matters to be discussed under “Management Discussion and Analysis” to be disclosed in Annual Report of listed companies’. (3 Marks each)
Answer:
‘Management Discussion and Analysis’ should include discussion on the following matters which are to be disclosed in Annual Report of listed companies:

• Industry structure and developments.
• Opportunities and Threats.
• Segment-wise or product-wise performance.
• Outlook
• Risks and concerns.
• Internal control systems and their adequacy.
• Discussion on financial performance with respect to operational performance.
• Material developments in Human Resources/Industrial Relations front, including number of people employed.
• details of significant changes (z.e. change of 25% or more as compared to the immediately previous financial year) in key financial ratios, along with detailed explanations therefor, including:
  • Debtors Turnover
  • Inventory Turnover
  • Interest Coverage Ratio
  • Current Ratio
  • Debt Equity Ratio
  • Operating Profit Margin (%) (vii) Net Profit Margin (%) or sector specific equivalent ratios, as applicable.
• Details of any change in Return on Net Worth as compared to the immediately previous financial year along with a detailed explanation thereof.

Part – II

Question 4.
(a) Discuss in brief Enterprise Risk Management, its components and limitations. (5 Marks)
Answer:
‘Enterprise risk management’ deals with risks and opportunities affecting value creation or preservation, defined as follows:

“Enterprise risk management is a process, effected by an entity’s board I of directors, management and other personnel, applied in strategy setting | and across the enterprise, designed to identify potential events that may | affect the entity, and manage risk to be within its risk appetite, to provide % reasonable assurance regarding the achievement of entity objectives.”

Components of Enterprise Risk Management:
Enterprise risk management consists of eight interrelated components. These are derived from the way management runs an enterprise and are integrated with the management process. These components are:

Internal Environment: The internal environment encompasses the tone of an organization, and sets the basis for how risk is viewed and addressed by an entity’s people, including risk management philosophy and risk appetite, integrity and ethical values, and the environment in which they operate.

Objective Setting: Objectives must exist before management can identify potential events affecting their achievement. Enterprise risk management ensures that management has in place a process to set objectives and that the chosen objectives support and align with the entity’s mission and are consistent with its risk appetite.

Event Identification: Internal and external events affecting achievement of an entity’s objectives must be identified, distinguishing between risks and opportunities.
Opportunities are channeled back to management’s strategy or objective-setting processes.

Risk Assessment: Risks are analyzed, considering likelihood and impact, as a basis for determining how they should be managed. Risks are assessed on an inherent and a residual basis.

Risk Response: Management selects risk responses – avoiding, accepting, reducing, or sharing risk – developing a set of actions to align risks with the entity’s risk tolerances and risk appetite.

Control Activities: Policies and procedures are established and implemented to help ensure the risk responses are effectively carried out.

Information and Communication: Relevant information is identified, captured, and communicated in a form and timeframe that enable people to carry out their responsibilities. Effective communication also occurs in a broader sense, flowing down, across, and up the entity.

Monitoring: The entirety of enterprise risk management is monitored and modifications made as necessary. Monitoring is accomplished through ongoing management activities, separate evaluations, or both.

Limitations of Enterprise Risk Management:
Limitations of an enterprise risk management preclude a board and § management from having absolute assurance as to achievement of % the entity’s objectives. Following are these limitations:

• Human judgment in decision making can be faulty.
• Decisions on responding to risk and establishing controls need, to consider the relative costs and benefits.
• Breakdowns can occur because of human failures such as simple errors or mistakes.
• Controls can be circumvented by collusion of two or more people.
• Management has the ability to override enterprise risk management decisions.

(b) “Risk analysis is an essential tool and one that could save time, money and reputations.” Explain the statement and bring out the use of risk analysis, (5 Marks)
Answer:
After identification of the risk parameters, the second stage is of analysing the risk which helps to identify and manage potential problems that could undermine key business initiatives or projects.

To carry out a Risk Analysis, first identify the possible threats and then j estimate the likelihood that these threats will materialize. The analysis j should be obj ective and should be industry specific. Within the industry, the scenario based analysis may be adopted taking into consideration of possible j events that may occur and its alternative ways to achieve the given target.

Risk Analysis can be complex, as it requires drawing of detailed information | such as project plans, financial data, security protocols, marketing forecasts and other relevant information. However, it’s an essential planning tool, and one that could save time, money, and reputations.

Risk analysis is useful in the following situations:

• While planning projects, to help in anticipating and neutralizing possible problems.
• While deciding whether or not to move forward with a project.
• While improving safety and managing potential risks in the workplace.
• While preparing for events such as equipment or technology failure, theft, staff sickness, or natural disasters.
• While planning for changes in environment, such as new competitors coming into the market, or changes to government policy.
• When all the permutations-combinations of possible events/threats are listed while analysing the risk parameters and the steps taken to manage such risks, the risk matrix is designed/popped-up before the decision making and implementing authority.

(c) “Non-financial risks do not have direct and immediate impact on business, but the consequences are very serious and later do have significant financial impact as well if not controlled at the initial stage.” List the non-financial: risks encountered during the course of business by a business entity. (5 Marks)

Types of Non- Financial Risks	Meaning
1. Business/Industry & Services Risk	Business risks implies uncertainty in profits or danger of loss and the events that could pose a risk due to some unforeseen events in future, which causes business to fail. Business risk refers to the possibility of inadequate profits or even losses due to uncertainties e.g., changes in tastes, preferences of consumers, strikes, increased competition, change in government policy, obsolescence etc. Every business organization contains various risk elements while doing the business. Such type of risk may also arise due to business dynamics, competition risks affecting tariff prices, customer relation risk etc.
2. Strategic Risk	Business plans which have not been developed properly and comprehensively since inception may lead to strategic risk. For example, strategic risk might arise from making poor business decisions, from the substandard execution of decisions, from inadequate resource allocation, or from a failure to respond well to changes in the business environment.
3. Compliance Risk	This risk arises on account of noncompliance or breaches of laws/regulations which the entity is supposed to adhere. It may result in deterioration of reputation in public eye, penalty and penal provisions.
4. Fraud Risk	Fraud is perpetrated through the abuse of systems, controls, procedures and working practices. It may be perpetrated by an outsider or insider. Fraud may not be usually detected immediately and thus the detection should be planned for on a proactive basis rather than on a reactive basis.
5. Reputation Risk	This type of risk arises from the negative public opinion. Such type of risk may arise from e.g. from the failure to assess and control compliance risk and can result in harm to existing or potential business relationships.
6. Transaction Risk	Transaction risk arises due to the failure or inadequacy of internal system, information channels, employees integrity or operating processes.

What is meant by handling of risk? Explain risk retention as a method of handling risk? (5 Marks)
Answer:
The ownership of risk should be allocated. Responsibilities and S accountabilities of the persons handling risks need to be identified and assigned. The persons concerned when the risk arises, should document it and report it to the higher ups in order to have the early measures to get it minimized. Risk may be handled in the following ways:

• Risk Avoidance
• Risk Retention/absorption – it may be active or positive
• Risk Reduction
• Risk Transfer

Risk Retention/absorption: Handling the unavoidable risk internally and 1 the firm bears absorbs it due to the fact that either because insurance I cannot be purchased of such type of risk or it may be of too expensive to cover the risk and much more cost-effective to handle the risk internally.

Usually, retained risks occur with greater frequency, but have a lower severity. An insurance deductible is a common example of risk retention to save money, since a deductible is a limited risk that can save money on insurance premiums for larger. There are two types of retention methods for containing losses as under:

1. Active Risk Retention: Where the risk is retained as part of deliberate management strategy after conscious evaluation of possible losses and causes.

2. Passive Risk Retention: Where risk retention occurred through neg-ligence. Such type of retaining risk is unknown or because the risk taker either does not know the risk or considers it a lesser risk than it actually is.

Part III
Attempt all parts of either Q. No. 5 or Q. No. 5A

Question 5.
(a) Describe the essentials of an effective compliance program. (5 Marks)
Answer:
The elements of an Effective Compliance Program may be listed as under:
1. High level company personnel who exercise effective oversight: The organization’s governing body should be knowledgeable about the effective compliance program and should have oversight of it. The governing body should have the overall responsibility for the compliance program and shall ensure the effectiveness of it. Specific individuals shall have overall responsibility for the day to day operations of the compliance program.

2. Written policies and procedures: The employees of the organization should be made known the legal requirements so that employees understand their obligations. The employees should be encouraged to report suspected fraud and other irregularities without fear.

3. Training and education: The employees of the organization should be provided reasonable training to understand the organization’s compliance programme and its policies and process.

4. Lines of communication: Information about the compliance program must be widely communicated at all levels of an organization. To enhance the effectiveness of the compliance program, the program must establish lines of communication whereby, employees and agents may seek guidance and report concerns, including the opportunity to report anonymously (such as a compliance hot line); There are assurances that there will be no retaliation for good faith reporting.

5. Standards enforced through well-publicized disciplinary guidelines: The organization’s compliance and ethics program should be promoted and enforced consistently through well-publicized guidelines that provide, incentives to support the compliance and ethics program, disciplinary measures for disobeying the law, the organization’s policies, or the requirements of the compliance and ethics program.

6. Internal compliance monitoring: The organization shall take reasonable steps, including monitoring and auditing, to, ensure that the organization’s compliance and ethics program is followed, periodically evaluate the effectiveness of the organization’s compliance program.

7. Response to detected offenses and corrective action plans: After monitoring and auditing of the compliance program, the organization shall take reasonable steps to, respond appropriately to any violations of the law or policies to prevent future misconduct, modify and improve the organization’s compliance and ethics program.

(b) “Internal control can help an entity in achieving its objectives but it is not a panacea.” Discuss. (5 Marks)
Answer:
Internal control can help an entity achieve its objectives; however it is not a panacea due to its following limitations:

• 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 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.

(c) What do you mean by Corporate Sustainability Reporting? Discuss the benefits and key drivers of sustainability reporting. (5 Marks)
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.

Benefits of sustainability reporting:

• Emphasizing the link between financial and non-financial performance.
• Influencing long term management strategy and policy, and business plans.
• Streamlining processes, reducing costs and improving efficiency
• Benchmarking and assessing sustainability performance with respect to laws, norms, codes, performance standards, and voluntary initiatives
• Avoiding being implicated in publicized environmental, social and governance failures.

Key drivers of sustainability reporting:

• Regulations: Governments, at most levels have stepped up the pressure on corporations to measure the impact of their operations on the environment. Legislation is becoming more innovative and is covering an ever wider range of activities. The most notable shift has been from voluntary to mandatory sustainability, monitoring and reporting.
• 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. Customers significantly influence a company’s reputation through their purchasing choices and brand.
• 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 disposal.
• NGO’s and the media: Public reaction comes not just from customers but from advocates and the media, who shape public opinion. Advocacy organisations, if ignored or slighted, can damage brand value.
• 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.

(d) You are Company ‘Secretary of Super Chef Ltd. Shirley, the newly appointed CEO of Super Chef Ltd., is not clear about the concept of internal control and her role and responsibilities with regard to internal controls of the company. She approaches you to understand the same. Prepare a short note to brief Shirley on Internal control and her role and responsibilities in this regard. (5 Marks)
Answer:
To,
Ms. Shirley
CEO
Super Chef Ltd.
Subject: Role and responsibilities towards Internal Control
Dear Ma’am
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 sub-stantiating its financial statements, and policing previously adopted rules, procedures, and policies as to compliance and effectiveness”

The chief executive officer is ultimately responsible and should assume “ownership” of the system. More than any other individual, the chief executive sets the “tone at the top” that affects integrity and ethics and other factors of a positive control environment. In a large company, the chief executive fulfils this duty by providing leadership and direction to senior managers and reviewing the way they’re controlling the business. Senior managers, in turn, assign responsibility for establishment of more specific internal control policies and procedures to personnel responsible for the unit’s functions. In a smaller entity, the influence of the chief executive, often an owner-manager is usually more direct. In any event, in a cascading responsibility, a manager is effectively a chief executive of his or her sphere of responsibility. Of particular significance are financial officers and their staffs, whose control activities cut across, as well as up and down, the operating and other units of an enterprise

According to Regulation 17(8) of SEBI (LODR) Regulations, 2015, you
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 you:
A. You have reviewed financial statements and the cash flow statement for the year and that to the best of your knowledge and belief: a. These statements do not contain any materially untrue statement or omit any material fact or contain statements that might be misleading.
b. 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 your 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. You accept responsibility for establishing and maintaining internal controls for financial reporting and that you have evaluated the effectiveness of internal control systems of the listed entity’s pertaining to financial reporting and you have disclosed to the auditors and the Audit Committee, deficiencies in the design or operation of such internal controls, if any, of which you are aware and the steps you have taken or propose to take to rectify these deficiencies.

D. You have indicated to the auditors and the Audit committee:
i. Significant changes in internal control over financial reporting during the year.
ii. Significant changes in accounting policies during the year and that the same have been disclosed in the notes to the financial statements.
iii. Instances of significant fraud of which you have become aware g 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.

Thanking You
Mr. A
Company Secretary
Super Chef Ltd.

OR (Alternate Question To Q. NO. 5)

Question 6.
(a) The Board of Directors of Fresco Pvt. Ltd. is in the process of reviewing the list of laws applicable to the company. As the Company Secretary of Fresco Pvt. Ltd., advise the Board on the components of a robust internal compliance reporting program.
Answer:
For a robust internal compliance reporting program Fresco Pvt. Ltd. should:
1. Understand compliance obligations: The primary element to manage compliance is to understand compliance obligation in the light of strategic goals and objectives. Compliance obligations stem from: Laws and regulations, industry or generic standards, internal policies, processes and procedures and contracts executed with clients and other stakeholders.

2. Assess risks: Once compliance obligations are established, a compliance risk assessment exercise should be undertaken to identify risks, causes, the areas they impact and the consequences thereof. A risk analysis to have better understanding of the risks should follow. Such an analysis should consider the factors affecting the consequences and likelihood of these consequences occurring as well as the controls in place.

3. Address all compliance risks: An enterprise should ensure an effective action plan to address all compliance risks with clear ownership, responsibility, accountability and closure timelines. To ensure risks are. addressed effectively, the management should ensure that all employees with compliance obligation are competent. Periodic training and awareness must be carried out and any other medium to communicate assigned responsibilities should be explored. A continuous communication mechanism is required to ensure all employees understand compliance and contribute to it by reporting risks and discharging their responsibilities effectively.

4. Evaluate performance: A mechanism to measure and monitor the performance of the compliance practices and its impact on strategic goals and objectives must be developed. It can be done by seeking feedbacks from clients, stakeholders, suppliers, vendors, employees and government agencies are a good source of data to ascertain compliance performance. Governance mechanisms in the form of management reviews, internal audits and periodic compliance reporting give great insights on the performance of compliance practices.

(b) “Corporate reporting is an essential means by which companies communicate with investors as a part of their accountability and stewardship obligation.”
Comment and list out the expected information required by investors.
Answer:
Investors expects the following information:

• Business model and strategy.
• Intangible factors and sustainability (i.e. economic, environmental, social) commitments.
• Impacts and performance that affect a company’s value today and its ability to create value in the future.
• Key aspects of corporate governance.
• Internal controls.
• Human rights/diversity practices and policies.
• Key financial ratios

(c) “Risk can arise or change due to circumstances.” Comment and point out the circumstances which result into risks for an entity. (5 Marks)
Answer:
Risks can arise or change due to the following circumstances:
1. Changes in operating environment: Changes in the regulatory or operating environment can result in changes in competitive pressures and significantly different risks.

2. New personnel: New personnel may have a different focus on or understanding of internal control.

3. New or revamped information systems: Significant and rapid changes in information systems can change the risk relating to internal control.

4. Rapid growth: Significant and rapid expansion of operations can strain controls and increase the risk.

5. New technology: Incorporating new technologies into production processes or information systems may change the risk associated with , internal control.

6. New business models, products, or activities: Entering into business areas or transactions with which an entity has little experience may introduce new risks associated with internal control.

7. Corporate restructurings: Restructurings may be accompanied by staff reductions and changes in supervision and segregation of duties that may change the risk associated with internal control.

8. Expanded foreign operations: The expansion or acquisition of foreign operations carries new and often unique risks that may affect internal control, for example, additional or changed risks from foreign currency transactions.

9. New accounting pronouncements: Adoption of new accounting principles or changing accounting principles may affect risks in preparing financial statements.
(Note: Students can write any five points of their choice)

(d) “Internal check refers to allocation of duties in a scientific way so that no one is responsible for all phases of the transactions.” Explain the essential features of Internal check in the light of above statement. (5 Marks)
Answer:
Following are the essential features of Internal Check:

1. There should be proper division of work and responsibilities.
2. The duties of each person should be properly defined so as to fix definite responsibilities of each individual.
3. Possibilities of giving absolute control to anybody should not be left out unchecked.
4. Too much confidence on a person should be avoided.
5. The duties of staff should be rotated and one person should not be allowed to occupy a particular area of operation for long.
6. Necessary safeguards should be provided so as to avoid collusion of thoughts which quite often leads to commission of fraud.
7. The person handling cash, stock, securities should be given compulsory leave so as to prevent their having uninterrupted control.
8. Physical inventory of fixed assets and stocks should be taken periodically.
9. Assets should be protected from unauthorised use.
10. To prevent loss or misappropriation of cash, mechanical devices such as the automatic cash register, should be employed.
    (Note: Students can write any five points of their choice)

Part IV

Question 6A.
(a) A ‘Code of Ethics’ and a ‘Code of Conduct’ are often confused or used interchangeably. Discuss. (5 Marks)
Answer:
The terms “Code of Ethics” and “Code of Conduct” are often mistakenly used interchangeably. They are, in fact, two unique documents. Codes of ethics govern decision-making, and codes of conduct govern action, represent two common ways that companies self-regulate.

Similarities between “Code of Ethics” and “Code of Conduct”

Ethics guidelines attempt to provide guidance about values and choices to influence decision making. Conduct regulations assert that some specific actions are appropriate, others in appropriate. In both cases, the organization’s desire is to obtain a narrow range of acceptable behaviours from employees. Differences between “Code of Ethics” and “Code of Conduct”

Both are similar as they are used in an attempt to encourage specific forms of behaviour by employees.

Ethical standards generally are wide-ranging and non-specific, designed to provide a set of values or decision making approaches that enable employees to make independent judgments about the most appropriate course of action. Conduct standards generally require a fairly clear set of expectations about which actions are required, acceptable or prohibited. Violation of code of ethics may not lead to action against the employee but violation of code of conduct may lead to disciplinary action.

(b) Explain the concept and need to apply the Triple Bottom approach for CSR. (5 Marks)
Answer:
Triple Bottom Line’ is a phrase coined in 1994 by John Elkington. The concept of the Triple Bottom Line proposed that business goals are inseparable from the society and environment within which they operate. The Triple Bottom Line (TBL) is made up of “Social, Economic and Environmental”aspect and is indicated by the ‘People, Planet, Profit’ phrase.

‘People’ (Human Capital) pertains to fair and beneficial business practices towards labour and the community and region in which a corporation conducts its business.

‘Planet’ (Natural Capital) refers to sustainable environmental practices, Planet concerns include: Climate change, energy, water, biodiversity and land use.

‘Profit’ is bottom line shared by all customers. It is the reflection of | lasting economic impact the organisation has on its business activities. and that too after meeting all costs that would protect society and environment.

The need to apply the concept of TBL is caused due to
(a) Increased consumer sensitivity to corporate social behaviour.
(b) Growing demands for transparency from shareholders/stakeholders.
(c) Increased environmental regulation.
(d) Legal costs of compliances and defaults.
(e) Concerns over global warming.
(f) Increased social awareness.
(g) Awareness about and willingness for respecting human rights.
(h) Media’s attention to social issues.
(i) Growing corporate participation in social upliftment

Governance Risk Management Compliances and Ethics Notes

Cross Border Mergers – Corporate Restructuring, Insolvency, Liquidation & Winding-Up Important Questions

Question 1.
Differentiate between Inbound merger and Outbound merger. What are the laws governing Cross-border mergers in India?
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.

→ 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.

→ The following Acts/laws govern cross border mergers in India:

• The Companies Act, 2013
• The Foreign Exchange Management Act, 1999 (FEMA)
• Foreign Exchange Management (Cross Border Merger) Regulations, 2018
• The Competition Act, 2002
• The Income-tax Act, 1961
• The Transfer of Property Act, 1882
• SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011
• The Insolvency and Bankruptcy Code, 2016
• The Department for Promotion of Industry and Internal Trade (DPHT)
• The Indian Stamp Act, 1899
• IND AS 103 – Business Combinations

Question 2.
GKL Ltd., an Indian company intends to amalgamate with PS International Ltd., a foreign company. Examine the legal provisions that have to be complied with for such an amalgamation.
Answer:
→ Where an Indian company merges with a foreign company, and the resultant company is a foreign company, it is known as ‘Outbound merger’

→ In the given cases, the merger between GKL Ltd. (Indian company) and PS International Ltd. (foreign company) shall be treated as outbound merger.

→ Section 234 of the Companies Act, 2013 deals with cross border mergers. Along with Companies Act, there shall be compliance of RBI and FEMA (Cross Border Merger) Regulations, 2018.

→ Following provisions shall be complied by both the companies:
(a) An office in India, of the Indian company, pursuant to sanction of the scheme of cross border merger, may be deemed to be a branch office in India of the resultant foreign company. Accordingly, the resultant company may undertake any transaction as permitted to a branch office under the aforesaid Regulations.

(b) The guarantees or outstanding borrowings of the Indian company which become the liabilities of the resultant foreign company shall be repaid as per the scheme sanctioned by the National Company Law Tribunal (NCLT).

(c) The resultant foreign company shall not acquire any liability payable towards a lender in India in Rupees which is not in conformity with the FEMA or rules or regulations framed thereunder. A no-objection certificate to this effect should be obtained from the lenders in India of the Indian company.

(d) The resultant company may acquire and hold any asset in India which a foreign company is permitted to acquire under the pro-visions of the Foreign Exchange Management Act, 1999, rules or regulations framed thereunder. Such assets can be transferred in any manner for undertaking a transaction permissible under the said Act or rules or regulations thereunder.

(e) Where the asset or security in India cannot be acquired or held by the resultant foreign company under FEMA, 1999, rules or regulations made thereunder, the resultant company shall sell such asset or security within a period of 2 years from the date of sanction of the Scheme by NCLT and the sale proceeds shall be repatriated outside India immediately through banking channels. Repayment of Indian liabilities from sale proceeds of such assets or securities within the period of 2 years shall be permissible.

(f) The resultant foreign company may open a Special Non-Resident Rupee Account (SNRR) in accordance with the Foreign Exchange Management (Deposit) Regulations, 2016 for the purpose of putting through transactions under these regulations. The account shall run for a maximum period of two years from the date of sanction of the Scheme by NCLT.

(g) A person resident in India may acquire or hold securities of the resultant company as per FEMA (Transfer or Issue of any Foreign Security) Regulations, 2004.

(h) A resident individual may acquire securities outside India provided that the fair market value of such securities is within the limits prescribed under the Liberalized Remittance Scheme (LRS) laid down in the Act or rules or regulations framed thereunder.

Question 3.
“Cross Border Mergers not only bring benefits but also assume risks”.
Briefly comment with specific provision under Companies Act, 2013.
Answer:
→ Section 234 of the Companies Act, 2013, deals with merger between an Indian company and a foreign company, ie. cross border mergers.

→ Cross border mergers shall comply with Companies Act, RBI and FEMA regulations.

→ 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.

→ Cross border merger provides a lot of benefits such as technology advancement, diversification etc. However, where are certain risks associated with cross border mergers such as :
1. Taxation: Double Tax is an important risk faced by such deals. There are Avoidance of Double Taxation Agreements, but the tax implications may prove to be complex and tedious.
Further, this may increase the costs as a local professional is required to be hired.

2. Regulatory Background: The laws and regulations in the host country would be different and may be difficult to comply. An unsuitable regulatory landscape may pose risks to a cross border merger.

3. Political scenario: It is essential to assess the political situation of the country before one enters into a merger with an entity belonging to that country. Unstable political situation may lead to difficulties in carrying out business.

4. Valuation: Valuation is one factor which changes with countries due to changes in exchange rate, stock market transactions and other macroeconomic developments.

Question 4.
Explain Inbound and Outbound merger as defined in the Foreign
Exchange Management (Cross Border Merger) Regulations, 2018.
Answer:

• Section 234 of the Companies Act, 2013 refers to merger of a Foreign Company with an Indian Company. Such mergers are also known as ‘Cross border’ mergers.
• A Foreign company means any company or body corporate incorporated outside India, whether having a place of business in India or not. Apart from the Companies Act, 2013, compliance of FEMA Act and RBI and related guidelines is vital for such mergers. Further, compliance of the Foreign Exchange Management (Cross Border Merger) Regulations, 2018 is required.
• Inbound Merger is one where a foreign company merges with an In-dian company (or domestic company) resulting in an Indian company being formed.
• Following are the key aspects which need to be followed during an inbound merger:
  • The resultant company post cross border merger can transfer any security including a foreign security to a person resident outside India.
  • An office/branch outside India of the foreign company shall be deemed to be the resultant company’s office outside India.
  • Borrowings of Transfer or company would become the borrowings of the resulting company.
  • Assets acquired by the resulting company can be transferred in accordance with the provisions of the Companies Act, 2013 or any regulations framed thereunder for this purpose.
  • Resultant company is allowed to open a bank account in foreign currency outside India.
• Outbound Merger is one where an Indian company (or domestic company) merges with a foreign company resulting in a foreign company being formed.
• The following are the key aspects governing an outbound merger:
  • The securities issued by a foreign company to the Indian company, may be issued to both, persons resident in and outside India.
  • An office of the Indian company in India may be treated as the branch office of the resultant company in India.
  • Borrowings of Resultant company shall be repaid in accordance with the sanctioned scheme.
  • Assets which cannot be acquired or held by the resultant company should be sold within a period of two years.
  • The resultant company can now open a Special Non-Resident Rupee Account.

Question 5.
Secure Source Ltd., an Indian Company, is contemplating to take over Super Securers Pte. Ltd. of Singapore through a process of merger and its top Management seeks your advice. Suggest the required compliances.
Answer:

• A cross border merger refers to any merger or amalgamation between an Indian Company and Foreign Company. A cross border merger essentially helps in global expansion of companies.
• In the given case, Secure Source Ltd. (Indian Company) wishes to takeover Super Securers Pte. Ltd. (Singapore) through a process of merger. Since the Indian company shall continue after the merger, it is known as Inbound merger.
• For cross border mergers, there shall be compliance of Section 234 of the Companies Act, 2013, the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016, the Reserve Bank of India (RBI) and prescribed provisions of Foreign Exchange Management Act.
• The terms and conditions of such merger may include payment of consideration to shareholders of the merging company in cash, or in Depository Receipts, or both.
• The Transferee Company (Secure Source Ltd.) shall ensure that valuation is conducted by registered valuers who are members of a recognized professional body in India. Valuation shall be as per inter-nationally accepted principles on accounting and valuation.
• The Indian Company shall file a petition with the National Company Law Tribunal in terms of sections 230 to 232 of the Companies Act, 2013. Concurrently, a declaration shall be submitted to RBI for ob-taining its approval.
• Cross Border Merger is permitted with companies belong to certain countries –
  • whose securities market regulator is a signatory to International Organization of Securities Commission’s (IOSCO) Multilateral Memorandum of Understanding (MMOU)
  • whose central bank is a member of Bank for International Settlements (BIS), and
  • a country which is identified by Financial Action Task Force (FATF) for not addressing Anti-Money Laundering or Financing Terrorism activates

Question 6.
The amalgamated company has to issue new shares to Non-resident Indians in amalgamation and for that it has to obtain permission of Reserve : Bank of India under the provisions of the Foreign Exchange Management Act, 1999.
Answer:

• Section 234 of the Companies Act, 2013 refers to merger of a Foreign Company with an Indian Company. Such mergers are also known as ‘Cross border’ mergers.
• Apart from the Companies Act, 2013, compliance of FEMA Act and RBI and related guidelines is vital for such mergers. Further, compliance of the Foreign Exchange Management (Cross Border Merger) Regulations, 2018 is required.
• An inbound merger is one where a Foreign company merges with an Indian company resulting in an Indian company being formed. This results in issuing equity shares to non-residents.
• When a scheme of amalgamation includes issue of shares/cash option to non-resident Indians, the amalgamated company is required to obtain the permission of Reserve Bank of India, subject to conditions prescribed under the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2000.
• It shall be ensured that the percentage of shareholding of persons resident outside India in the Transferee company shall not exceed the percentage approved by the Central Govt, or the RBI.
• However, if such percentage is likely to exceed the pre-sanctioned percentage, the Transferor or Transferee Company should get fresh approval from the Central Govt., and RBI.
• The Transferee Company should file a report with the RBI giving full details of the shares held by persons resident outside India. Also, it must furnish a confirmation that all terms and conditions stipulated in the scheme approved by the Tribunal have been complied with.

Corporate Restructuring, Insolvency, Liquidation & Winding-Up Notes

Planning and Strategy – Corporate Restructuring, Insolvency, Liquidation & Winding-Up Important Questions

Question 1.
Write a short note on Leveraged buyout.
Answer:
‘Leverage’ can be defined as a position where an entity uses borrowed funds over and above the ownership funds. In other words, the debt is more than the equity component.

Leveraged Buyout (LBO) is the acquisition of a company in which the acquirer uses only a small amount of own funds and borrows the rest. Leveraged buyout is defined as the acquisition of a company by a small group of investors, financed mainly by borrowing.

LBO is used as a strategy by an acquirer where the targeted acquisition is highly profitable and may provide huge cash inflows. The acquirer can generate such cashflows and use them to repay the debt/borrow¬ing.

The expectation with LBO is that the return/profits (%) generated on the acquisition will more than interest cost (burden) paid on the debt.

Hence, a favourable leverage position enables an acquirer to earn high returns while only risking a small amount of own capital.

LBO is used for acquisition of companies where –

• Stable, strong cash flow business
• Non-cyclical businesses
• Companies with large economic benefits
• Companies with good existing management teams etc.

Question 2.
Internal accruals accumulate to reserves prompts management to venture more avenues through acquisitions or mergers but during and after the process, funds available internally are inadequate. Suggest available avenues to fund the bids for Takeovers and Mergers in addition to internal accruals.
Answer:
Mergers and takeovers involve payment of consideration for acquiring the assets/shares of the target company. Hence, a considerable amount is required to finance such a transaction.

The purchase consideration depends on the Target Company valuation, carried out by registered valuers. Funding mergers and takeovers imply modes of raising finance to service the strategy.

A good funding strategy must ensure an optimum mix of available modes of payment so that the financial package chosen is suitable for both – the acquirer and target.

The capital structure shall also provide a desirable cost advantage to the acquirer. Several modes are available to fund mergers and takeovers, especially for an entity having strong balance sheet.

Where there is inadequacy of internally generated funds, borrowing is a viable option.

Following alternatives are available:

• Debentures and Bonds – secured borrowing from the general public, high fund-raising cost,
• Loans from Banks and Financial Institutions – fixed tenure borrowings, no dilution of control,
• Deposits from its directors, relatives, and business associates,
• External Commercial Borrowings (ECB) from non-resident investors,
• Loans from Central or State financial institutions,
• Rehabilitation Finance etc.

Any kind of borrowing attracts fixed interest/coupon commitment and repayment at maturity. Further, any default results in litigation and loss of goodwill. Hence, the decision to borrow funds shall be taken judiciously and diligently by the company.

Question 3.
“Fairness, reasonableness and made in good faith are the premises on which the Judicial Authority approves any scheme for amalgamation, – merger or demerger.” Offer your comments supported by any judicial pronouncements.
OR
Question 4.
“A Scheme, even approved by majority, can be rejected by Court but such a scheme must be held to be unfair to the meanest intelligence.”Analyse the statement citing important judicial pronouncements.
Answer:
The basic principle of shareholders’ democracy states that the rule of majority shall prevail. Further, it is also necessary to ensure that this power of the majority does not result in oppression of the minority and/or mismanagement of the company. Thus, the minority must be given opportunity to express their opinions during the decision-making process.

Any scheme which is fair, rational and made in good faith shall be sanctioned by the Tribunal, provided it is made in the interest of all stakeholders. Any scheme which is true and reasonable will be sanctioned if it is supported by sensible people to be for the benefit to each class of the members or creditors concerned.

In the case of Sussex Brick Co. Ltd., it was held that a scheme may have faults, but it may not be sufficient to reject it. If the Court/Tribunal is satisfied that the scheme is fair and reasonable and in the interest of general body of shareholders, the Court/Tribunal shall approve the scheme.

Further, it was held that in order to reject a scheme, it must be obviously unfair, prejudiced, unjust, and dishonest to the meanest intelligence.

It is the consistent view of the Courts that no scheme can be said to be fool-proof and it is the possible to find fault in a particular scheme but that by itself is not enough to warrant a dismissal.

Question 5.
Using any evident case, explain the concept of funding through leveraged buy-out for the acquisition of a company.
Answer:
‘Leverage’ can be defined as a position where an entity uses borrowed funds over and above the ownership funds. In other words, the debt is more than the equity component.

Leveraged Buyout (LBO) is the acquisition of a company in which the acquirer uses only a small, amount of own funds and borrows the rest. Leveraged buyout is defined as the acquisition of a company by a small group of investors, financed mainly by borrowing.

In other words, an LBO is the purchase of a company using a large amount of debt or borrowed cash to fund the acquisition, instead of using its own money or raising equity from investors.

The Acquirer borrows large amounts through a combination of re-payable bank facilities and/or public or privately placed bonds.

Further, the Acquiring company may float a Special Purpose Vehicle (SPV) as a 100% subsidiary with a minimum equity capital. The SPV can leverage this equity to raise significantly higher debt to buy out the target company.

The target company’s assets can be used as collaterals for availing the loan and once the debt is redeemed, the acquiring company has the option to merge with the SPV. The debt will be paid off by the SPV using the cash flows of the target company.

The purpose of leveraged buyouts is to allow companies to make large acquisitions without having to commit a lot of capital.

Example – Bharti and Zain deal Bharti started its telecom services business by launching mobile services in India in 1995. Zain established in 1983 was the first mobile operator in Kuwait. In 2010 Bharti Airtel entered into exclusive agreement with KSC (Zain) for the acquisition of Zain Africa International BV (Zain Africa).

The acquisition deal was done as a leveraged buyout and the loan for financing the transaction was availed by two Special Purpose Vehicles (SPVs). The acquisition was routed through SPVs keeping Bharti Airtel’s standalone financials intact. However, it did not relieve Bharti from its responsibility as a borrower.

Question 6.
Merger and Amalgamation is one of the most attractive routes to enter into a new business. Explain the advantages of starting a new business through merger/amalgamation.
Answer:
A merger or amalgamation is a type of arrangement, whereby assets of two or more companies get transferred or come under control of one company. Basically, it is a legal process whereby two or more companies come together for growth, expansion and prosperity

An organisation could venture into a new business taking any of the routes like financing a new start-up, joint venture, strategic partnership.

However, the reasons why mergers and acquisitions appear to be the most attractive route, despite all the compliances are as under –

1. Economies of scale by expansion and diversification to tap global markets.
2. Quick entry into the market as against starting from the scratch vide a start-up route.
3. Bigger market share, large customer base.
4. Reduce the cost of operations.
5. Access to scientific research and technological developments.
6. Augmenting effectiveness of managerial capabilities and available infrastructure.
7. Ensuring regular supply of scarce raw materials.
8. Overcoming entry barriers and attaining competitive advantage.
9. Ready availability of the necessary infrastructure.
10. Ready availability of a brand name.
11. Skipping entire gestation period which is cumbersome and costly in terms of time and effort.

Question 7.
“There may be no express protection to any dissenting minority shareholder to file his objections as a matter of right, yet the Courts/ Tribunals, while approving the Scheme, follow judicious approach by inviting objections through Public Notice in Newspapers.” Elucidate.
Answer:
The basic principle of shareholders’ democracy is that the rule of majority shall prevail. However, it is also necessary to ensure that this power of the majority does not result in oppression of the minority and/or mismanagement of the company.

Generally, minority represent those members who are not in the control or management of the affairs of the company. Thus, the minority must be 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 1096 of the shareholding or 596 of the total outstanding debt can put objection to the proposed scheme.

Other modes of ensuring/providing protection to the minority shareholders as given below –

• Dual majority – minimum 3 /4th in value of shares held and simple majority in number of persons, thereby making it difficult for the resolution to pass.
• Appeal to the Tribunal to set aside the scheme of compromise or arrangement.
• Independent Chairman conducts and supervises the meetings, ordered by the Tribunal.
• Intimation to various regulatory authorities (RBI, SEBI, Income Tax, FEMA, CCI) for inviting and considering their objections/ suggestions.
• Notice of the meeting published in newspapers and websites for maximum coverage.
• In case of takeovers, SEBI (SAST) Regulations shall be followed.
• Tribunal has power to modify the scheme to protect the minority.
• Exit route available to dissenting shareholders.
• NOC from stock exchange where shares of the company are listed.
• Separate hearing of the petition by the Tribunal, prior to sanctioning the scheme.

Question 8.
“In addition to the normal event risks, stock swap mergers involve risks associated with fluctuations in the stock prices of the two companies”. Comment on the statement in view of the funding through swaps or stock to stock mergers.
Answer:
Mergers and takeovers involve payment of consideration for acquiring the assets/shares of the target company. Hence, a considerable amount is required to finance such a transaction.

The purchase consideration depends on the Target Company valuation, carried out by registered valuers. Funding mergers and takeovers imply modes of raising finance to service the strategy.

A good funding strategy must ensure an optimum mix of available modes of payment so that the financial package chosen is suitable for both – the acquirer and target.

In stock swap mergers or stock to stock mergers, the holder of Target company’s shares receives shares of the Acquiring company’s capital. Many mergers used stock for stock deals.

A merger arbitrage specialist will sell the Acquiring company’s stock short and will purchase a long position in the Target company, using the same ratio as that of the proposed transaction.

If the purchasing firm is offering a half share of its stock for every share of the target company, then the merger arbitrageur will sell half as many shares of the purchasing firm as he or she buys of the target company.

By going long and short in this ratio, the manager ensures that the number of shares for which the long position will be swapped is equal to the number of shares sold short. When the deal is .completed, the manager will cover the short and collect the spread that has been locked in.

Stock swap mergers may involve event risk. In addition to the normal event risks, stock swap mergers involve risks associated with fluctuations in the stock prices of the two companies.

The deal involves exchange of shares where there may be drastic fluctuations. Merger arbitrageurs derive returns from stock swap mergers when the spread or potential return justifies the perceived risk of deal’s failing.

Question 9.
“While standard parameters day a crucial role, funding/borrowing for takeover should be organized in such a way that best suits the facts and circumstances of the specific case and should also meet the immediate needs and objectives of the management”. Elucidate the statement with emphasis on the demerits of borrowing from the financial institutions and banks.
Answer:
Mergers and takeovers involve payment of consideration for acquir¬ing the properties/shares of the Target Company. The consideration depends on the target company valuation.

Funding mergers and takeovers imply the modes of raising finance to service the corporate restructuring strategy. A good funding strategy must ensure an optimum mix of available modes of payment so that the financial package chosen suits the financial structures of the acquirer.

The capital structure shall also provide a desirable cost advantage to the acquirer. The cost of capital of funds raised shall differ as per different financial packages selected.

Funding of a merger or takeover can be done using own funds as well as borrowed funds, i.e. through financial leverage. However, borrowings from banks, financial institutions have their own merits and demerits.
Merits of borrowed funds include income tax benefits, fixed maturity, no dilution of control etc.

However, demerits of borrowing include the following –

• Assets provided as a collateral/security;
• Disclosure of financial statements, and other relevant information of the company;
• Fixed and mandatory interest burden each year maximum coverage.
• Mandatory redemption on maturity
• Default risk, leading to insolvency proceedings against the company.

Hence, funding of a merger or takeover shall be thoroughly planned and executed. Borrowings shall be well-organized, based on the current circumstances.

Question 10.
How the rights of the minority shareholders are protected during merger/amalgamation/takeover?
Answer:
Generally, minority represent those members who are not in the control or management of the affafrs of the company. Thus, the minority must be 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.

Following are measures for ensuring protection to the minority shareholders as given below –

• Dual majority – minimum 3/4th in value of shares held and simple majority in number of persons, thereby making it difficult for the resolution to pass.
• Appeal to the Tribunal to set aside the scheme of compromise or arrangement.
• Independent Chairman conducts and supervises the meetings, ordered by the Tribunal.
• Intimation to various regulatory authorities (RBI, SEBI, Income Tax, FEMA, CCI) for inviting and considering their objections suggestions.
• Notice of the meeting published in newspapers and websites for maximum coverage.
• In case of takeovers, SEBI (SAST) Regulations shall be followed.
• Tribunal has power to modify the scheme to protect the minority.
• Exit route available to dissenting shareholders.
• NOC from stock exchange where shares of the company are listed.
• Separate hearing of the petition by the Tribunal, prior to sanc tioning the scheme.

Question 11.
“There have been occasions when shareholders holding miniscule shareholdings have made frivolous objections against the restructuring scheme, just with the objective of stalling or deferring the implementation of the scheme. The courts have, on a number of occasions, overruled their objections.” Comment on the statement with relevant case law.
Answer:
A scheme of merger and amalgamation is approved by majority shareholders, in a meeting, duly convened and conducted under the supervision of the Tribunal. The Tribunal shall sanction the scheme only if the same is approved by the required shareholders’ majority.

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, ie. they vote against the resolution. Such dissenting members are given opportunity to express their opinions during the decision-making process.

However, there have been some occasions where shareholders holding a small number of shares, have made frivolous objections against the scheme, just to defer the implementation of scheme.

On various such instances, the Courts have overruled their objections. But companies had to bear the consequences in the form of time and cost overruns.

In 2003, Parke-Davis India Ltd. and Pfizer Ltd. were considering implementation of a scheme of merger. The minority shareholders of Parke-Davis India Ltd. objected to the scheme on the grounds that approval from requisite majority as prescribed under the Companies Act, 1956 had not been obtained. They filed a petition before the division bench of the Bombay High Court.

The division bench of the Bombay High Court by its order executed a stay order in March 2003 restraining the company from taking further steps in the implementation of the scheme. Later, the dissenting shareholders filed a Special Leave Petition with the Supreme Court. Finally, the Supreme Court dismissed the petition filed by the shareholders. Parke-Davis then proceeded to complete the implementation of the scheme of amalgamation with Pfizer.

Similarly, in the case of the merger of Tomco with HLL, the minority shareholders put forward an argument that, as a result of the amalgamation, a large share of the market would be captured by HLL.

However, the Court turned down the argument and observed that there was nothing unlawful or illegal about it. To curb such practice of frivolous objections, Section 230(4) of the Companies Act, 2013 provides that in a scheme of arrangement any person or persons holding at least 1096 of the shareholding or 596 of the total outstanding debt can put objection to the proposed scheme.

Question 12.
Interna1 accruals are an Important source of funding mergers and takeovers.’ Comment on the same with provisions for Issuing equity with differential voting rights.
Answer:
Mergers and takeovers involve payment of consideration for acquiring the properties/shares of the target company. The consideration depends on the target company valuation.

Funding mergers and takeovers imply the modes of raising finance to service the corporate restructuring strategy.

Funds may be raised through internal sources such as Equity capital, Preference Capital, accumulated reserves and profits.

As per the Companies Act, 2013, an Indian company is permitted to issue equity instruments with differential rights as to dividend and or voting. Companies may issue non-voting shares.

Such issue gives companies an additional source of funds without dividend cost and without the obligation to repay, as these are other forms of the equity capital. Generally, promoters prefer such securities since there is no loss of control.

A company limited by shares may issue equity shares with differential rights subject to the following conditions:

• There must be an authority in the Articles of Association of the company
• Obtain shareholders’ approval through ordinary resolution in general meeting
• The equity capital with differential rights shall not exceed 74% of the total voting power
• No default in filing annual accounts and annual returns for three years
• No default in repaying deposits or paying interest thereon; in redeeming debentures; and paying dividend after declaration; and
• The company has not been convicted of any offence under Securities Contracts (Regulation) Act, 1956; SEBI Act, 1992 and Foreign Exchange Management Act, 1999.
• A company shall not convert its existing equity share capital with normal voting rights into equity shares with differential voting rights and vice versa.

Corporate Restructuring Insolvency Liquidation & Winding-Up Notes

Introduction to Intellectual Property Rights – Intellectual Property Rights Laws and Practices Important Questions

Question 1.
(a) Distinguish between the following:
(i) ‘Intellectual property’ and ‘industrial property’.
Answer:
There are three types of property :

• Movable property
• Immovable property
• See carefully

1. The term ‘intellectual property ’ is coined to indicate that kind of property which covers in it, creations of the human mind and human intellect.
2. It consists of valuable information which can be converted into tangible objects

The two types/branches of intellectual property are:

• Copyright
• Industrial property

1. Owners of the intellectual property enjoy certain rights like the right to use and license and certain limitations are also placed upon them.
2. Intellectual property includes right relating to

• Trademarks and Servicemarks
• Patents
• Industrial designs etc.

While
1. Industrial property

• It is a kind of intellectual property.
• It is a collective name given for rights related to industrial or commercial activities of a person and this reflects industrial or commercial rights.
• Industrial property includes – Patents

• Trademark, service mark
• Utility models
• industrial design
• Geographic origin
• Protection against unfair competition

• It covers:

• Inventions
• Creations
• New products
• New Processes
• New design/model
• Distinct marks

Question 2.
Explain the concept of property. What are the different theories of property?
Answer:
The term ‘Property’ has a very wide connotation, it not only includes the money and other tangible objects of some value, but it also includes the intangible rights which are considered to be a source or an element of income or wealth. It includes the rights and interests which a human possesses overland (and chattel) and which is to the exclusion of all others. It is the right to enjoy and to dispose of certain things in the way that he pleases to, provided that such use is not prohibited by law. However, there are certain things over which property rights by any single individual (or an entity) cannot be exercised. This includes the sea, the air, and the like as they cannot be appropriated. Everyone has a right to enjoy them, but no one has an exclusive right over them.

Different theories laid down on the subject of the concept of “Property” are as follows:

1. Historical Theory of Property
2. Labour theory (Spencer)
3. Psychological Theory (Bentham)
4. Functional Theory (Jenks, Laski)
5. Philosophical Theories (Property as a means to Ethnical Ends and Property as an End in itself).

According to the Historical theory of Property, the concept of Private Property grew out of the joint property. In the words of Henry Maine, “Private Property was chiefly formed by the gradual disentanglement of the separate rights of the individual from the blended rights of the community”. In the earlier days, the ownership rights over property were vested in large societies which were chiefly Patriarchal societies. However, with the disintegration of societies and families, there was a gradual evolution of the concept of individual rights. Roscoe Pound in his theory has also pointed out the fact that the earliest form of property was in the nature of group property and it was later on when families were partitioned that the existence of individual property came to be recognized.

Labour Theory (Spencer):
This theory of property is also known as ‘Positive Theory’. The underlying principle basis of this theory is that the labor of the individuals is the foundation of the property. The theory states that a thing is the property of a person who produces it or brings it into existence. The chief supporter of this theory is Spencer, who developed the theory on the principle of ‘equal freedom’. He stated that property is the result of individual labor, and therefore, no person has a moral right to property that he has not acquired by his personal effort.

Psychological Theory (Bentham):
According to this theory, Property came into existence on account of the acquisitive instinct of human beings. Every individual has a desire to own and have into his possession things which is the factor responsible for bringing Property into existence. According to Bentham, Property is altogether a conception of mind and thus, it is nothing more than an expectation to derive certain advantages from the object according to one’s capacity.

Roscoe Pound also supports Bentham on this school of thought and has observed that the sole basis of the conception of Property is the acquisitive instinct of an individual which motivates him to assert his claim over objects in his possession and control.

Functional Theory (Jenks and Laski):
This theory is also known as the ‘sociological theory of property’. It assumes that the concept of Property should not only be confined to private rights but should be considered as a social institution securing the maximum interests of society. Property is situated in the society and has to be used in the society, itself.

According to Jenks, no one can be allowed to have unrestricted use of his property, to the detriment of others. He just states that the use of property should conform to the rules of reason and welfare of the community. According to Laski, who also supports this school of thought, Property is a social fact like any other, and it is the character of social facts to alter. Property has further assumed varied aspects and is capable of changing further with the changing norms of society.

Property is the creation of the State:
The origin of ‘Property’ is to be traced back to the origin of ‘Law’ and the ‘State’. Jenks observed that Property and Law were born together and would die together. It means that Property came into existence when the State framed Laws. As per this theory, Property was non-existent before Law. According to Rousseau, ‘it was to convert possession into property and usurpation into a right that Law and State were founded.’ The first who enclosed a piece of land and said – this is mine – he was the founder of real society. He insisted on the fact that property is nothing but a systematic

expression of degrees and forms of control, use, and enjoyment of things by persons that are recognized and protected by law. Thus, the conclusion is that property was a creation of the State.

Philosophical Theories (Property as a means to Ethical Ends):
In the views of Aristotle, Hegel and Green, Property has never been treated as an end, but always as a means to some other end. According to Aristotle, it may be a means to the end of the Good Life of citizens. In the views of Hegal and Green, it may be a means to the fulfillment of the Will without which individuals are not fully human. According to Rousseau, Jefferson, Friendman, it may be a means as a pre-requisite of individual freedom seen as a human essence. Similarly, the outstanding critics of property like Winstanley, Marx have denounced it as something which is destructive of human essence, a negative means in relation to the ontological end.

Question 3.
Explain different connecting points of the Intellectual Property Law regime and Cyber Law regime in India as well as from the international perspective.
Answer:
Intellectual Property Rights in the Cyber World: Though both Intellectual Property and the Cyber Law are independent subjects and have their own area of operation, however, the influence of one on the other cannot be denied and the same is becoming all the more evident these days. We live in a world which is dominated by computers and the internet and therefore the world today is appropriately called the Cyber World. Intellectual Property (IP) equally is an expanding phenomenon with more and more innovations coming to the surface, which also acts as a catalyst to the expanding businesses. However, in terms of vintage and history, Intellectual Property is relatively a longstanding field of legal practice than Cyber Law. In the Indian context particularly, Cyber Law emerged only with the passage of the Information Technology Act, 2000, while as an IP law, the Copyright Act was passed in the year 1957.

However, the common theme which runs through both these areas of law is that both have been significantly impacted by the development taking place in the field of technology as also the growth of Internet medium. For instance, a lot of issues cropped up in the area of Copyright law the internet-enabled its users to readily reproduce materials available online. In an effort to meet such challenges, the Governments have been, time and again, bringing stringent provisions in the criminal law so as to catch up with the criminals and thus create deterrence in the society towards such malpractices.

Copyright and Cyberspace:
Copyright protection gives the author of work a certain “bundle of rights”, including the exclusive right to reproduce the work in copies, to prepare derivative works based on the copyrighted work, and to perform or display the work publicly.

Public Performance and Display Rights:
The right that does get affected is that of the display. Display of the work is also done by making copies, which are then retailed or lent out. This also falls under the right to display, which the holder of the copyright has.

Distribution Rights:
Copyright Law grants the holder of the copyright the exclusive right to distribute copies of the work to the public by sale or by the transfer of the ownership.

Caching (Mirroring):
It is a violation of the internet. Caching may be local caching and proxy caching. In addition, proxy caching may give rise to an infringement of the right of public distribution, public policy, public performance, and digital performance.

Protection of Database in India:
The Indian Copyright Act, 1957 protects “Databases” as “Literary Works” under Section 13(1) (a) of the Act which says that copyright shall subsist throughout India in original literary, dramatic, musical, and artistic works. The term computer Database has been defined in the Information Technology Act, 2000 for the first time. Section 43 of the IT Act, 2000 provides for compensation to the aggrieved party up to One Crore rupees from a person who violates the copyright and cyberspace norms. Also Section 66 of the IT Act, 2000 provides for penal liabilities in such a case.

Internet Protection in India:
The internet challenge for the protection Of the internet is the protection of intellectual property. It is still unclear as to how copyright law governs or will govern these materials (literary works, pictures, and other creative works) as they appear on the internet. Section 79 of the IT Act 2000 provides for the liability of ISP’s “Network Service Providers not to be liable in certain cases.” Section 79 of the IT Act exempts ISP’s from liability for third-party information.

Indian Cyber Jurisdiction:
Though it is the in nascent stage as of now, jurisprudential development would become essential in the near future; as the internet and e-commerce shall shrink borders and merge geographical and territorial restrictions on jurisdiction. There are two dimensions to deal with.

1. The manner in which foreign courts assume jurisdiction over the internet and relative issues.
2. The consequences of the decree passed by a foreign. court.

Thus, there is an immense need for Indian society to be made aware of the necessity of copyright protection on all fronts to prevent any unauthorized use and pilferage of the system. The analysis of copyright in cyberspace reveals a mixed result of new opportunities and threats. Such threats often outweigh the opportunities offered by cyberspace and the necessity arises for increasing regulations of cyberspace to protect copyrights. Further lack of internationally agreed principles relating to copyrights in cyberspace gives ample room for divergent domestic standards.

Cyberspace:
Cyberspace can be described as the virtual world interconnecting human beings through computers and telecommunication without regard to the limitations of physical geography. With the onset of modern technology, more importantly, the internet, copyright protection has taken a hit and thus the issues relating to it assumed greater significance. Nowadays, the protection of copyright law have been extended to protect internet items too. It protects original work or work that is fixed in a tangible medium i.e. it is written, typed, or recorded. Although the current copyright law provides protection to the copyright owners, it has its own shortcomings when it comes to its implementation and enforcement in the Cyber World. Cyberspace is a virtual world, which technically exists only in computer memory, but it is interactive and pulsing with life.

IPR and Cyber Space – While the Internet is undoubtedly acclaimed as a major achievement of humankind it cannot be denied that it has come with its own set of challenges. One of the major challenges that it poses is on account of the fact that it has captured the physical marketplace and has created a new substitute which is the virtual marketplace. It is thus the responsibility of all IPR owners to protect their IPRs from any mala fide actions of the miscreants operating on the internet medium by invalidating and reducing such mala fide acts/attempts of such criminals by taking proactive measures. It is important to know. about the copyright issues associated with the computer programs/software, computer database, and various other works in cyberspace. Under the TRIPS (Trade-Related aspects of Intellectual Property Rights) agreement, Computer Programs also now qualify for Copyright protection just as any other literary work is afforded to.

Question 4.
Trace the common features of Intellectual Property Rights and Human Rights.
Answer:
Intellectual Property Rights as Human Right: Human Rights and Intellectual Property, though two very different sets of laws with no apparent connection, have gradually become intimate bedfellows. Since inception, the two subjects developed virtually in isolation from each other. But in the last few years, international standard-setting activities have begun to map previously uncharted intersections between intellectual property law on the one hand and human rights law on the other. Exactly how this new-found relationship will evolve is being actively studied – and sometimes even fought over – by states and non-governmental organizations (NGOs) in international venues such as the World Intellectual Property Organization (WIPO), the U.N. Commission on Human Rights, and the Sub-Commission on the Promotion and Protection of Human Rights, the World Trade Organization (WTO), the World Health Organization (WHO), and the Conference of the Parties to the Convention on Biological Diversity (CBD).

A look at the lawmaking which is underway in these for a prima facie reveals two distinct conceptual approaches to the interface between human rights and intellectual property.

The first approach finds that there is a conflict between human rights and intellectual property rights. This view believes that a regime of strong intellectual property protection undermines and therefore is incompatible with the human rights obligations, especially in the area of economic, social, and cultural rights. In order to resolve this conflict, it is suggested the normative primacy of human rights law over intellectual property law should be recognized in areas where specific treaty obligations conflict.

In the second approach, the Human Rights and Intellectual Property Rights are seen as concerned with the same fundamental question, i.e., defining the appropriate scope of private monopoly power that gives authors and inventors a sufficient incentive to create and innovate, while ensuring that the consuming public has adequate access to the fruits of their efforts. This school of thought sees Human Rights law and Intellectual Property Rights law as essentially compatible, although often disagreeing over where to strike the balance between incentives on the one hand and access on the other.

But the principal reason for the execution of these agreements lies not in deontological claims about inalienable liberties, rather in the economic and instrumental benefits that flow from protecting Intellectual Property products across the national borders. It is also true that both areas of law were preoccupied with more important issues, and neither saw the other as either aiding or threatening its sphere of influence or opportunities for expansion.

This evolutionary process resulted in a de facto separation of human rights into categories, ranging from a core set of peremptory norms for the most egregious forms of state misconduct to civil and political rights, economic, social, and cultural rights. Among these categories, economic, social, and cultural rights are the least well developed and the least prescriptive, having received significant jurisprudential attention only in the last decade.

Human Rights law added little to these two enterprises. It provided neither a necessity nor a sufficient justification for demanding a strong, state-granted intellectual property monopoly (Whether bundled with trade rules or not). Nor, conversely, did it function as a potential check on the expansion of Intellectual Property Law.

Question 5.
List a few advantages of including the process of evaluation of Intellectual Property in an Organisation. What are the different methods adopted for such evaluation?
Answer:
Advantages of Intellectual Property Valuation: Intellectual Property Rights, such as Patents and Trademarks, which require necessary registration with the concerned authority, provide legal evidence of one’s ownership over such intangible assets while also ensuring one’s peaceful and exclusive right to the use of such property. It gives one the right to exclude others from the use of such rights. This means that one is armed with the legal remedy against any infringement by the competitor(s). Moreover, it is also an asset that can be profitably licensed or sold to others to provide them with the rights they would otherwise not have, and consequent. to these benefits an increase in the total value of one’s business.

At times, the process of valuation of an enterprise’s Intellectual Property itself requires registration of such property as a precondition that enables the process of monetizing one’s intangible assets. Conducting valuation of one’s Intellectual Property has its own significance and advantages. For instance, assessing the value of one’s Patent, Trademark or Copyright may simplify the licensing or assignment process, and help one to determine the royalty rates that should be paid as a result of using one’s intellectual property assets. Further, ascribing a reasonable valuation to one’s intellectual property, if not currently accounted for, increases the overall value of one’s business and provides one with collateral for loans and mortgages.

The difference between quantitative and qualitative valuations: An intellectual property can be valued on various parameters, but the overarching principle guiding the valuation process is, how much of competitive advantage does one’s intellectual property provide over others in the industry. While evaluating the worth of intellectual property, the following two methods of valuation have traditionally been used:

1. Quantitative valuation: As the name itself suggests, this method relies on measurable data or numerical information to produce an estimate of the value of one’s intangible assets. It attempts to answer the question by providing a monetary value or contribution that the intellectual property provides, whether directly to the business or indirectly by increasing the value of other parts of the operation or the appeal to investors.

2. Qualitative methods: The parameters of valuation under this method are very different from the quantitative valuation method. This method provides a non-monetary estimate of the value of an Intellectual Property by rating it on the basis of its strategic impact, loyalty held by consumers, its impact on the company’s future growth, and other intangible metrics that do not rely solely on numbers.

These two kinds of valuation methods should however not be presumed to be contradictory or mutually exclusive; depending on the needs of one’s business, one may employ a variety of methods that falls into both categories. It will not be wrong to suggest that the two valuation methods are perhaps the two sides of the same coin. Quantitative and qualitative attempts to tackle the question of firm value from different viewpoints, which may both come in useful depending on the audience in question and the reason for valuation.

In conclusion, it can be said that determining the value of one’s Intellectual property can be a very challenging task and exhausting process. But obtaining a valuation can result in significant benefits to one’s business and thus the need for valuation can neither be underestimated nor be undermined. Following the valuation models described above to break down the process into simple steps and establishing a clear purpose and audience for the valuation, can make valuation manageable.

Question 6.
What are the different competing rationales put forward for the protection of Intellectual Property?
Answer:
Competing Rationales for Protection of Intellectual Property Rights:
Intellectual property indeed is now one of the valuable assets in commercial transactions, be it intellectual property licensing, joint ventures, foreign collaborations, manufacturing, purchase or distribution agreements, or mergers and acquisitions. Licenses to use patents, copyrights, and trademarks, are often combined with transfers of know-how and are increasingly an important term in technology transactions.

These licenses provide royalty revenues to the owner of the Intellectual Property and distribute products and technologies to licensees who might not otherwise have had access to them. In such transactions, the licensees may also gain rights to create improvements or derivative works and to develop their own Intellectual Property assets, which can then be cross-licensed or licensed to others. This creates a very productive cycle of innovation and invention and adds to the revenues of the companies.

Intellectual property laws confer the right to own intellectual assets by its creator and also enable him to make profits from his artistic, scientific, and technological creations for a defined period of time. Such rights are applicable to the intellectual creations and not the physical object in which it is embodied. Countries have enacted laws to protect intellectual property for two main reasons. One is to give statutory expression to the moral and economic rights of creators in their creations and the rights of the public to access such creations. The second is to promote creativity and its dissemination which results in economic and social development.

The World Intellectual Property Report 2011:
The Changing Face of Innovation – a new WIPO publication describes how ownership of intellectual property (IP) rights has become central to the strategies of innovating firms worldwide. With global demand for patents rising from 800,000 applications in the early 1980s to 1.8 million in 2009, the Report concludes that growing investments in innovation and the globalization of economic activities are key drivers of this trend. As a result, IP policy has moved to the forefront of innovation policy.

WIPO Director General, Francis Gurry, notes that “innovation growth is no longer the prerogative of high-income countries alone; the technological gap between richer and poorer countries is narrowing. Incremental and more local forms of innovation contribute to economic and social development, on. a par with world-class technological innovations.”

Intellectual property assets are used not only in business transactions but are also traded in their own right such as online exchanges for the evaluation, buying, selling, and licensing of patents and other forms of Intellectual Property. The buyers and sellers of intellectual property manage their intellectual property as financial assets just as investors in stocks, options, and other financial instruments.

Strong intellectual property rights help consumers make an educated choice about the safety, reliability, and effectiveness of their purchases. Enforced intellectual property rights ensure products are authentic, and of the high quality that consumers recognize and expect. IP rights foster the confidence and ease of mind that consumers’ demand and markets rely on.

Question 7.
What are “intellectual property rights”. List out the subject matter f protected by IPR under the World Intellectual Property Organization.
Answer:
Intellect means perception. It is the barometer of one’s understanding of persons or things of events and concepts, individually or collectively. Intellectual Property (IP) refers to the creations of the human mind like inventions, literary and artistic works and symbols, names, images, and { designs used in commerce.

Intellectual property is divided into two parts:

1. Industrial property and
2. Copyright.

Industrial property includes inventions (patents), trademarks, industrial designs and geographic indications of source and Copyright includes literary and artistic works such as novels, poems and !’ plays, films, musical works, artistic works such as drawings, paintings, sculptures, and architectural designs.
Intellectual property encompasses four separate and distinct types of l intangible property namely:

1. patents
2. trademarks
3. copyrights
4. trade secrets

All the above types of intangible property collectively are referred to as “intellectual property”. Products that are used to be traded as low-technology goods or commodities now contain a higher proportion of invention and design in their value. For example, brand-name clothing. Therefore, creators are given the right to prevent others from using their inventions, designs, or other creations. These rights are known as “intellectual property rights”.

The convention establishing the World Intellectual Property Organization (1967) listed the subject matter protected by intellectual property rights are as follows:

1. literary, artistic, and scientific works
2. performances of performing artists, phonograms, and broadcasts
3. inventions in all fields of human endeavor
4. scientific discoveries
5. industrial designs
6. trademarks, service marks, commercial names, and designations
7. “all other rights resulting from intellectual activity in the industrial, scientific, literary or artistic fields” and
8. protection against unfair competition.

CS Professional Intellectual Property Rights Laws and Practices Notes

Documents, Accounts and Records and Filing of Returns – Advanced Tax Laws and Practice Important Questions

Question 1.
Badrinath Filters Ltd., a registered supplier of industrial air filters, is required to send from Mumbai (Maharashtra), a consignment of parts of air Biters to be replaced under warranty at various client locations in Ahmedabad, Gujarat. The value of consignment declared in delivery challan accompanying the goods is ₹52,000.

Badrinath Filters Ltd. is of the view that since movement of goods to Gujarat is caused due to reasons other than supply, e-way bill is not mandatorily required to be generated in this case.

You are required to examine whether the a fore said view is correct.

Answer:

The goods to be moved to another State for replacement under warranty is not a ‘supply’. However, Rule 138(1) of the CGST Act, 2017, inter alia, stipulates that every registered person who causes movement of goods of consignment value exceeding ₹50,000:

• in relation to a supply; or
• for reasons other than supply; or
• due to inward supply from an unregistered person, shall, generate an electronic way bill (E-way Bill) before commencement of such movement.

CBIC vide Q9. of FAQs on E-way Bill has also clarified that even if the movement of goods is caused due to reasons others than supply [including replacement of goods under warranty], e-way bill is required to be issued. Thus, in the given case, since the consignment value exceeds ₹50,000, e-way bill is required to be mandatorily generated.

Therefore, the contention of Badrinath Filters Ltd. that e-way bill is not mandatorily required to be generated as the movement of goods is caused due to reasons other than supply, is not correct.

Question 2.
Amar Publishing House, registered under CGST Act, 2017 in Delhi is engaged in printing and selling of books as well as trading of stationery items. It has provided following information of a single consignment which is to be supplied to a person in Jaipur (Rajasthan):
(i) Value of exempted supplies of ₹12,000 and value of taxable supplies of ₹32,000 are indicated on tax invoice.
(ii) Value of goods to be sent to unregistered job worker on delivery challange having value of ₹16,000.
Note: All amounts given above are excluding GST.

Calculate the consignment value, for the purpose of generating e-way bill for Inter-State supply of goods. Take rate of tax on taxable goods of IGST @ 12%.

Legal provision explained in brief should form part of the answer.
Answer:
Determination of the value of consignment for E-way Bill

As per Rule 138 of the CGST Rules, 2017, Consignment value of goods shall be the value, determined in accordance with the provisions of section 15 of the CGST Act, 2017, declared in an invoice, a bill of supply or a delivery challan, as the case may be, issued in respect of the said consignment and also includes the central tax, State or Union territory tax, integrated tax and cess charged, if any, in the document and shall exclude the value of exempt supply of goods where the invoice is issued in respect of both exempt and taxable supply of goods.

Hence, according to the above rule, consignment value shall be:

Particulars	Amount (₹)
Taxable value of supply	32,000
Add: IGST on taxable value of supply @ 12% on 32,000	3,840
Add: Value of goods to be sent to job worker on delivery challan	16,000
Total value of consignment	51,840

Question 3.
Briefly explain provisions related to e-way bill as per CGST Act, 2017; relating to:
(i) What is e-way bill and when it is being required? (1 Mark)
(ii) What is its validity period? (2 Marks)
Answer:
(i) E-way bill is an electronic way bill for movement of goods which is generated on the GSTN portal. It is required when a “movement” of goods is of more than ₹50,000 in value. A registered person cannot move goods without an e-way bill.
(ii) The validity period of e-way bill is tabulated as under:

Distance	Validity Period
Upto 100 kms.	One day in case of other than over dimensional cargo or multimodal shipment in which atleast one leg involves transport by ship
For every 100 kms. or part thereof thereafter	One additional day in cases other than over dimensional cargo or multimodal shipment in which atleast one leg involves transport bv ship
Upto 20 kms.	One day in case of over dimensional cargo or multimodal shipment in which atleast one leg involves transport by ship
For every 20 kms. or part thereof thereafter	One additional day in case of over dimensional cargo or multimodal shipment in which atleast one leg involves transport by ship

Question 4.
Zebra, a registered supplier, runs a general store in Ludhiana, Punjab. Some of the goods sold by him are exempt whereas some are taxable. You are required to advise him on the following issues:
(a) Whether Zebra is required to issue a tax invoices in all cases, even if he is selling the goods to the end consumers?
(b) Zebra sells some exempted as well as taxable goods valuing ₹5,000 to a school student. Is he mandatorily required to issue two separate GST documents?
(c) Zebra wishes to know whether it’s necessary to show tax amount separately in the tax invoices issued to the customers. Advise Accordingly?
Answer:
(a) No, he is not required to issue tax invoice in all cases.

As per Section 31(1) of the CGST Act, 2017, every registered person supplying taxable goods is required to issue a ‘Tax invoice’.

Section 31 (3)(c) of the CGST Act, 2017 stipulates that every registered person supplying exempted goods is required to issue a bill of supply instead of tax invoice. Further, Rule 46A of the CGST Rules, 2017 provides that a registered person supplying taxable as well as exempted goods or services or both to an unregistered person may issue a single ‘invoice-cwm-bill of supply’ for all such supplies. However, as per section 31(3)(b) of the CGST Act, 2017 read with rule 46 of the CGST Rules, 2017,

(i) a registered person may not issue a tax invoice if: Value of the goods supplied < ₹200,
(ii) the recipient is unregistered; and
(iii) the recipient does not require such invoice. Instead, such registered person shall issue a Consolidated Tax Invoice for such supplies at the close of each day in respect of all such supplies.

(b) As per rule 46A of the CGST Rules, 2017, where a registered person is supplying taxable as well as exempted goods or services or both to an unregistered person, a single “invoice-cum-bill of supply” may be issued for all such supplies. Thus, there is no need to issue a tax invoice and a bill of supply separately to the school student in respect of supply of the taxable and exempted goods respectively.

(c) As per section 33 of the CGST Act, 2017 read with rule 46(m) of the CGST Rules, 2017, where any supply is made for a consideration, every person who is liable to pay tax for such supply shall prominently indicate in all documents relating to assessment, tax invoice and other like documents, the amount of tax which shall form part of the price at which such supply is made.

Hence, Zebra has to show the tax amount separately in the tax invoices issued to customers.

Question 5.
Explain the provisions of the CGST Act, 2017 relating to issuance of Credit Note in the context of CGST. What is its impact on GST liability in this regard?
Answer:
Issuance of Credit Note

Section 34(1) of CGST Act, 2017 reveals that where one or more tax invoices have been issued for supply of goods or services or both, and

(i) Taxable value charged in the tax invoice is found to exceed the taxable value in respect of such supply; or
(ii) Tax charged in invoice is found to exceed the tax payable in respect of such supply; or
(iii) Where goods supplied are returned by the recipient; or
(iv) Where goods or services or both supplied are found to be deficient registered supplier of goods and services or both may issue one or more credit note to recipient of such supply.

Impact of issuance of Credit Note

As per section 34(2) of the CGST Act, 2017, provides that the details of credit note should be declared in the return for the month during which such credit note has been issued but not later than

(i) September following the end of the financial year in which such supply was made or
(ii) the date of furnishing of the relevant annual return, whichever is earlier and the tax liability shall be adjusted in such manner as may be prescribed. However, such reduction in output tax liability of the supplier shall not be permitted, if the incidence of tax and interest on such supply has been passed on to any other person.

Question 6.
Determine with reason, whether the following statements are true or false with reference to provisions of GST law:
(i) “A registered person shall issue separate invoices for taxable and exempted goods when supplying both taxable as well as exempted goods to an unregistered person”.
(ii) “A Non-banking financial company (NBFC) can issue a consolidated tax invoice at the end of every month for the supply made during that month”.
(iii) “It is mandatory to issue a tax invoice in case a registered person has opted for composition levy scheme”.
Answer:
(i) The given statement is false.

Where a registered person is supplying taxable as well as exempted goods or services or both to an unregistered person, a single “invoice- cnm-bill of supply” may be issued for all such supplies.

(ii) The given statement is true.

A non-banking financial company is allowed to issue a consolidated tax invoice or any other document in lieu thereof for the supply of services made during a month at the end of the month.

(iii) The given statement is false.
A registered person paying tax under the provisions of section 10 of CGST Act, 2017 (composition levy) is required to issue, instead of tax invoice, a “bill of supply” containing the specified particulars in the prescribed manner.

Question 7.
Explain the accounts and records required to be maintained by registered person under GST law.
Answer:
Every registered person is required to self-assess the taxes payable and furnish a return for each tax period (i.e. the period for which return is required to be filed).

The compliance verification is done by the department through scrutiny of returns, audit and/or investigation. Thus, the compliance verification is to be done through documentary checks rather than physical controls. This requires certain obligations to be cast on the taxpayer for keeping and maintaining accounts and records.

As per section 35(1) of the CGST Act, 2017:

Every registered person is required maintain a true and correct account of the following:

(a) Production or manufacture of goods
(b) Inward and outward supply of goods or services, or both
(c) Stock of goods
(d) Input tax credit availed
(e) Output tax payable and paid
(f) Any other particulars deemed necessary

The above records must be maintained at each place of business registered under GST. In addition, the rules (Le. Rule 56(1) of the CGST Rules, 2017) also provide that the registered person shall keep and maintain records of –

(a) Goods or services imported or exported or
(b) Supplies attracting payment of tax on reverse charge along with the relevant documents, including invoices, bills of supply, delivery chal- lans, credit notes, debit notes, receipt vouchers, payment vouchers, refund vouchers and e-way bills.

Rule 56(2) of the CGST Rules, 2017 states that every registered person, other than a person paying tax under section 10, shall maintain the accounts of stock in respect of goods received and supplied by him.

It means the above records are not required to be maintained by a supplier opting for composition levy.

Question 8.
What are the documents required to be prepared by the recipient of supplies from an unregistered person as per GST law?
Answer:
(i) A registered person who is liable to pay tax under reverse charge shall issue an invoice in respect of goods or services or both received by him from the supplier who is not registered on the date of receipt of goods or services or both;

(ii) A registered person who is liable to pay tax under shall issue a payment voucher at the time of making payment to the supplier.

Question 9.
Explain the procedure of furnishing details of outward supplies and of (revision for rectification of errors and omissions as per CGST Act, 2017.
Answer:
Due date:
Every Registered taxable person (other than an Input Service Distributor, a non-resident taxable person and a person paying tax under section 10 (composition scheme) or section 51 (TDS) or section 52 (TCS) by e-commerce operator) shall furnish electronically details of outward supplies of goods or services or both effected during the tax period by 10th of the month succeeding the tax period.

2. Contents: Details of outward supplies will include invoice relating to zero rated supplies, inter-State supplies, intra-State supplies, Goods/Services return, Exports, Supplementary invoices, debit notes and credit notes.

3. No revision, but, rectification allowed in subsequent returns:

Once return is filed/uploaded it cannot be revised. The mechanism of filing revised returns for any correction of errors/omissions has been done away with. The rectification of errors/omissions is allowed in the subsequent returns. However, no rectification is allowed after furnishing the return for the month of September following the end of the financial year to which such details pertain, or furnishing of the relevant annual return, whichever is earlier.

Question 10.
Who are required to file Annual Return under CGST Act, 2017? Also explain the time limit for filing such return. Is there any requirement of furnishing of the audited annual accounts?
Answer:
(i) Person liable to file annual return: Every registered person, other than an Input Service Distributor, a person paying tax under section 51 or Section 52, casual taxable person and a non-resident taxable person, shall furnish an annual return for every financial year electronically in such form and manner as may be prescribed.

(ii) Due date is 31st Dec. after end of year: Annual return shall be filed on or before the 31 st day of December following the end of such financial year.

(iii) Persons liable to Audit: Audit report to be furnished along with reconciliation statement:
Every registered person who is required to get his accounts audited in accordance with the provisions of sub-section (5) of section 35 shall furnish, electronically, the annual return under sub-section (1) along with a copy of the audited annual accounts and a reconciliation statement, reconciling the value of supplies declared in the return furnished for the financial year with the audited annual financial statement, and such other particulars as may be prescribed.

Question 11.
Briefly discuss the provisions related to Levy of late fee as per section 46 of CGST Act, 2017 on a person who fails to furnish the details I of outward or inward supplies required under section 37, 38, 39 or 45 of CGST Act, 2017.
Answer:
As per section 47 of CGST Act, 2017 read with notification No. 64/2017-Central Tax and 4/2018-Central Tax, any registered person who fails to furnish the return under section 37 or 38 or 39 or 45 of CGST Act, 2017 shall pay the late fees of ₹25 for every day during which such failure continues and ₹10 in case of nil return subject to a maximum of ₹5,000.

As per Central Government notifications the late fees has been reduced to ₹25 for every day during which such failure continues and ₹10 in case of nil return subject to a maximum of ₹5,000

Note: ₹25/₹10 is late fees in CGST Act, equal late fees shall be charged under respective SGST Act of the state.

Question 12.
State the Form Number and the due date for its filing under CGST Act, 2017 of the return by:
(i) a composition scheme taxable person
(ii) a registered person deducting tax at source
(iii) an input service distributor.
Answer:

Tax Payer	Form No.to be filed	Due date of Filing Return
Composition scheme taxable person	GSTR-4	30th April of the month following the end of such financial year
Registered person deducting tax at source	GSTR-7	10th of next month
Input Service Distributor	GSTR-6	13th of next month

Question 13.
What is form GSTR 3B? What are its features? Who is exempt from filing GSTR 3B?
Answer:
1. GSTR-3B is a monthly self-declaration that has to be filed by a registered dealer.
The features of GSTR-3B are given below:-
– A separate GSTR-3B must be filed for each GSTIN
– Tax liability of GSTR-3B must be paid by the last date of filing GSTR-3B for that month
– GSTR-3B cannot be revised

2. Every person who has registered for GST must file the return GSTR-3B including nil returns. However, the following Registered Persons do not have to file GSTR-3B:

– Input Service Distributors & Composition Dealers
– Suppliers of OIDAR
– Non-resident taxable person

Question 14.
Mr. X, a registered person in Mumbai has made outward supplies of taxable goods as under:
Mr. X has become liable for registration on 1st October, 2018. He was granted registration on 1st January, 2019.

(I) Supplies made from 1st April, 2018 to 30th September, 2018 ₹19,50,000
(II) Supplies made from 1st October, to 31st December, 2018 ₹8,00,000
(III) Supplies made from 1st January, 2019 to 31st January, 2019 ₹2,00,000

The first return furnished by Mr. X is for the month of January, 2019. What is the taxable turnover to be declared in the return filed for January, 2019?
Answer:
As per section 40 of the CGST Act, 2017 every registered person who has made outward supplies in the period between the date on which he become liable to registration till the date on which registration has been granted shall declare the same in the first return furnished by him after grant of registration. Hence taxable turnover to be declared by Mr. X for January 2019 is
(₹8,00,000 + ₹2,00,000) = ₹10,00,000.

Question 15.
I am a non-resident taxable assessee. What are the returns to be furnished by me?
Answer:
A non-resident taxable assessee is liable to file FORM GSTR-5 for furnishing the monthly details of inward and outward supplies, debit/credit notes, tax paid details, details of closing stock and refund claimed, if any. The return should be furnished by 20th of the month succeeding the tax period, or within 7 days from the last day of the validity of registration, whichever is earlier.

Question 16.
How will a person desirous of becoming a GST Practitioner apply and whether a GST Practitioner need to register separately under GST?
Answer:
A person desirous of becoming GST practitioner has to submit an application in the Form GST PCT-1. The application shall be scrutinized and, if found eligible, the GST practitioner certificate shall be granted in the form GST PCT-2. If the aggregate turnover of the GST practitioner crosses the prescribed threshold limit, he will need to register as a normal taxpayer.

Question 17.
How can a taxpayer search for a GST Practitioner?
Answer:
There is functionality on the dashboard of the registered person on the GST Portal wherein he can get the contact details of all GST Practitioners in a State, district and Pin code wise.

Question 18.
What are the documents required for registering as a GST Practitioner?
Answer:
Documents required for registration as a GST practitioner
Enrolment type (Central or State application),
Bar Council Membership Proof – For Advocates
Date of enrolment,
Photograph (JPEG-100kb),
date of enrolment,
Valid e-mail id,
Valid Phone number,
Membership number and valid up to,
Name of university/institute,
Office address proof, A digital signature,
Year of passing, and

Qualification proof:
Certificate of Practice – For Chartered Accountant, Company Secretary, Cost and Management Accountant, Bar Council Membership Proof – For Advocates.

Question 19.
What is the difference between a taxpayer and a GST practitioner?
Answer:
A taxpayer is a person registered under GST Act for the purpose of filing returns, payment of tax, availing input tax credit and other compliances. Such a person is defined as a ‘taxable person’ under GST Act. He is a person who carries on any business at any place in India and who is registered or required to be registered under the GST Act. Any person who engages in economic activity including trade and commerce is treated as taxable person.

On the contrary, a GST practitioner is a person registered as a GST professional under GST Act. A taxpayer may authorise a GST practitioner to furnish monthly/quarterly/annual returns and information, on his behalf, to the government. The manner of approval of GST practitioners, the manner of removal, eligibility and qualification, roles and responsibilities and other conditions relevant for the functioning of a GST Practitioner have been prescribed in rules 24 and 25 of the Return Rules. A taxable person can add a GST practitioner to his GST Portal, to allow such a person to make compliance under GST on his behalf.

Documents, Accounts And Records And Filing Of Returns Notes

• Sections involved are as follows:
  a. Documents: 31, 32, 33 & 34 of CGST Act.
  b. Accounts and Records: 35 & 36 of CGST Act.
  c. Filing of Returns: 37 to 48 of CGST Act.
• Tax Invoice under GST: Contents, Time limit for issuance of invoice for goods as well as services in usual cases.
• Concept of continuous supply of goods as well as continuous supply of services and time of issuance of invoice in those cases.
• Goods sent on approval – invoice requirements.
• Concept of Bill of supply and Invoice-cum-Bill of supply
• Concept of Revised Tax Invoice
• No Tax Invoice/Bill of supply if the value of supply is less than ? 200 and supply is to unregistered recipient and recipient does not require such invoice (Include details of such supply in Consolidated Tax Invoice/ Bill of supply made at the close of the day).
• Invoice requirements in case of reverse charge.
• Relaxation from issuance of tax invoice in respect of notified services: Insurers, Banks, Passenger transporters and multiplex screen exhibiting films (No need to mention the address of the customer and serial number in their invoices keeping in view large number of transactions).
• Provisions relating to Receipt Voucher
• Provisions relating to Refund Voucher
• Provisions relating to Credit Notes and Debit Notes
• Prohibition of unauthorized collection of tax.
• E-Way Bill: concept, benefits, when required to generate, who is required to generate, cancellation, validity period, documents and devices to be carried by Person-in-charge of a conveyance.
• Accounts and other records: Need for maintenance, List of records, Place of maintenance Audit of accounts, period of retention, and manner of maintenance of accounts.
• *Period of retention of accounts (Usual cases): Accounts to be kept for 72 months from the due date of furnishing of Annual Return
• *Period of retention of accounts (Pertaining to the subject matter of appeal, etc.): To be kept for the period of one year after final disposal of such appeal, etc., or for 72 months from the due date of furnishing of annual return, whichever period expires later.
• Returns: Form Nos., content, who is required to file, and due date of filing.
• GST Practitioners.
• Obligation to furnish Information Return.

CS Professional Advance Tax Law Notes

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

Question 1.
Terms “Insolvency” and “Bankruptcy” are synonymous in result but practically refer to different situations and consequences Briefly explain.
Answer:

• Normally, the terms ‘Insolvency’ and ‘Bankruptcy’ are used interchangeably. Both indicate that a company is not in a good financial position. But there is a clear difference between these two words, viz. insolvency and bankruptcy.
• ‘Insolvency’ means a scenario where assets of a person are insufficient to pay his debts; or his general inability to pay his debts. The term insolvency has restricted use as it mentions inability of a party to pay his debts in the ordinary course of business, (i.e. commercial insolvency)
• ‘Bankruptcy’ is a legal status of an entity who cannot repay debts to creditors. The bankruptcy process begins with filing a petition in a Court or before any other appropriate authority. The debtor’s assets are then evaluated and used to pay the creditors in accordance with law.
• Hence, insolvency describes a situation where the debtor is unable to meet his obligations and bankruptcy occurs when a court declares insolvency, and gives legal orders for it to be resolved.
• Thus, insolvency is a state and bankruptcy are the conclusion. If insolvency is not resolved, it leads to bankruptcy in case of individuals and liquidation in case of corporates.

Question 2.
Explain the changes brought about in section 30 of Insolvency and Bankruptcy Code, 2016 by the Insolvency and Bankruptcy (Second Amendment) Act, 2018
Answer:
The Insolvency and Bankruptcy Code (Second Amendment) Act, 2018 made certain amendments in Section 30 of the Insolvency and Bankruptcy Code, 2016. The changes are given below
(a) A resolution applicant to file an affidavit stating that it is eligible under section 29A of the Code.

(b) Additional clarification for any approval of shareholders under the Companies Act, 2013 or any other law for the time being in force for the implementation of actions under the resolution plan.

(c) Reducing threshold for voting from 75% to 66% for approving a resolution plan by Committee of Creditors.

(d) The eligibility criteria in Section 29A shall apply to the resolution applicant who has not submitted resolution plan as on the date of commencement of the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2018.

Question 3.
While adjudication was available for each kind of insolvency and bankruptcy, do you feel the necessity of a single code in the name of Insolvency and Bankruptcy Code, 2016 – Discuss with relevant background.
Answer:

• Prior to the enactment of the Insolvency and Bankruptcy Code 2016, there was no single law in India to deal with insolvency and bankruptcy. There were multiple overlapping laws and adjudicating forums dealing with financial failure and insolvency of companies and individuals.
• Further, the framework for insolvency and bankruptcy resolution was inadequate, ineffective and resulted in undue delays. The legal framework did not help lenders in effective and timely recovery of defaulted assets and causes undue pressure on the Indian credit sys-tem.
• The liquidation of companies was handled under various laws and different authorities such as High Court and Debt Recovery Tribunal had overlapping jurisdiction which was adversely affecting the debt recovery process.
• There were multiple legislations such as –
  • the Presidency Towns Insolvency Act, 1909
  • the Provincial Insolvency Act, 1920
  • the Sick Industrial Companies (Special Provisions) Act, 1985,
  • the Companies Act, 2013.
• There were multiple authorities such as Board of Industrial & Financial Reconstruction (BIFR), Debt Recovery Tribunal (DRT) and National Company Law Tribunal (NCLT) and their respective Appellate Tribunals. Liquidation of companies was handled by the High Courts.
• ‘Ease of doing Business’ also includes ‘Easy Exit’ by investors and creditors. Based on this belief, national policy makers constantly strive to reform the laws relating to bankruptcy. The objective of the Insolvency and Bankruptcy Code is:
  • to consolidate and amend the laws relating to reorganization and insolvency resolution of corporate persons, partnership firms and individuals in a time bound manner,
  • provide effective legal framework for timely resolution of insolvency and bankruptcy,
  • to encourage entrepreneurship,
  • to improve Ease of Doing Business, and
  • to facilitate more investments leading to higher economic growth and development.

Question 4.
Define “bankrupt” under Insolvency and Bankruptcy Code, 2016.
Answer:
→ The word bankrupt is derived from the Italian words ‘banca’ (bench or table) and ‘rotta’ (broken). When a trader fails, he breaks his bank (or bench), to inform to the public that he is no longer able to conduct business.

→ Bankruptcy is a legal status of an entity who cannot repay debts to creditors. The bankruptcy process begins with filing a petition in a Court or before any other appropriate authority.

→ Section 79 of the Insolvency and Bankruptcy Code, 2016 defines the term ‘bankruptcy’ as the state of being bankrupt.

→ According to section 79 of the Insolvency and Bankruptcy Code, 2016 ‘bankrupt’ means –
(a) a debtor who has been adjudged as bankrupt by a bankruptcy order;
(b) each of the partners of a firm, where a bankruptcy order has been made against a firm; or
(c) any person adjudged as an undischarged insolvent.

Question 5.
“Default by Debtor was a crime punishable with imprisonment or death” – forgotten perception in the Law of Bankruptcy, transformed the phrase by giving opportunity to a Bankrupt or Insolvent for revival – express your views on evolution of Insolvency Law in Britain and U.S.A.?
Answer:

• “Default by Debtor was a crime punishable with imprisonment or death” – the statement today is a forgotten perception.
• The first Bankruptcy Law enacted in England in 1542 wherein debtor was looked upon as if an offender, and the Law was mainly for the benefit of creditors. The law was providing equal distribution of debtor’s assets among creditors yet not relieving the debtor from punishment.
• However, presently, the UK Insolvency Act, 1986 is deals with insol-vencies of individuals and companies. Opportunity is given to revive the company to emulate the ‘rescue’ culture that characterized the Corporate Sector in U.S.A.
• Similarly, the early bankruptcy laws in USA were also stringent in nature. Bankruptcy Abuse Prevention & Consumer Protection Act, 2005 in USA attempts to change the earlier codes with specific reference to consumer protection, restoring personal responsibilities and integrity in the Bankruptcy system.
• In USA, Chapter 11 bankruptcy proceedings are considered as re-organization/resurrection process for corporates. Companies, while remaining operational, are permitted to restructure their debt obligations.
• In India also with promulgation of Insolvency and Bankruptcy Code, 2016, debtor is given revival opportunity before liquidation.

Question 6.
Progress of enforcement of Insolvency and Bankruptcy Code, 2016 depends on four pillars apart from the Adjudicating Authorities – Briefly state the role of such pillars.
Answer:

• The Insolvency and Bankruptcy Code, 2016 (IBC) offers a uniform, comprehensive insolvency legislation covering all companies, partnerships and individuals. The main purpose of IBC is to ensure a formal and time bound insolvency resolution process.
• To achieve its purpose and for the progress and implementation of Insolvency and Bankruptcy Code, 2016, a new framework is designed which consists of four pillars –

1. Insolvency and Bankruptcy Board of India (IBBI)

• The Insolvency and Bankruptcy Board of India (IBBI) is a new insolvency regulator,
• Role of IBBI includes supervising the functioning of insolvency intermediaries ie., Insolvency Professionals, Insolvency Professional Agencies and Information Utilities.
• The Board is empowered to frame and enforce rules for various processes under the IBC, including corporate insolvency resolution, corporate liquidation, individual insolvency resolution and individual bankruptcy.
• The Board consists of a Chairperson, three members representing Ministry of Finance, Law, and MCA, one member of RBI and five members appointed by the Central Govt.

2. Insolvency Professionals

• Insolvency Professionals (IPs) are an intermediary in the insolvency resolution process. They are private professionals having professional standards and ethical conduct.
• Insolvency Professional is a person enrolled with Insolvency Professional Agency as its member and registered with the Board as an insolvency professional.
• An Insolvency Professional acts as ‘resolution professional’ in corporate insolvency resolution process as well as insolvency of individual w.r.t. fresh start process.
• An Insolvency Professional also acts as a liquidator as well as a ‘bankruptcy trustee’.
• Every Insolvency Professional shall be enrolled as a member of an Insolvency Professional Agency and registered with the Board (IBBI).

3. Insolvency Professional Agency (IPA)

• Insolvency Professional Agencies registered with the IBBI, for the purpose of regulating Insolvency Professionals.
• IPA conduct examinations to enroll Insolvency Professionals and enforce a code of conduct for their functioning.
• Presently, following Insolvency Professional Agencies (IPAs) are designated under the Insolvency and Bankruptcy Code:
  • The Indian Institute of Insolvency Professionals of ICAI
  • ICSI Institute of Insolvency Professionals and
  • Insolvency Professional Agency of Institute of Cost Accountants of India

4. Information Utilities

• The IBC, 2016 provides for creation of Information Utility to collect, collate, authenticate and disseminate financial information of debtors.
• The purpose of such collection, collation, authentication and dissemination of financial information of debtors is to facilitate swift decision making in the resolution proceedings.

Question 7.
The term ‘Person’ and ‘Corporate Person’ have been used differently at different places in the Insolvency and Bankruptcy Code, 2016. Define the term person and corporate person and explain the difference between the two.
Answer:

• The Insolvency and Bankruptcy Code, 2016 (IBC) offers a uniform, comprehensive insolvency legislation covering all companies, partnerships and individuals. The main purpose of IBC is to ensure a formal and time bound insolvency resolution process.
• As per the IBC, 2016, ‘Person’ includes individual, HUF, Company, Trust, Partnership, LLP and any other entity established under the Statute. It also includes a person resident outside India.
• As per the IBC, 2016, ‘Corporate Person’ means a company as defined in the Companies Act, 2013, a limited liability partnership as defined in the Limited Liability Partnership Act, 2009, or any other persons incorporated with limited liability under any law for the time being in force. But it shall not include any financial service provider.
• The definition of Corporate Person excludes financial service providers, since they are regulated by specialized agency. Thus, the Code does not cover Banks, Financial Institutions, Insurance Companies, ARCs, Mutual Funds or Pension Funds, etc.
• Hence, as per the IBC, 2016, the terms ‘person’ and ‘corporate person’ have been used differently.

Question 8.
What is the time limit for completion of the corporate insolvency resolution process under the IBC, 2016? A resolution process could not be completed within the specified time limit, what recourse is available to the Resolution Professional to get an extension of time period?
Answer:

• The Insolvency and Bankruptcy Code, 2016 (IBC) offers a uniform, comprehensive insolvency legislation covering all companies, partnerships and individuals. The main purpose of IBC is to ensure a formal and time bound insolvency resolution process.
• Section 12 of the Code prescribes a time limit for completion of insolvency resolution process.
• The corporate insolvency resolution process shall be completed within a period of 180 days from the date of admission of the application to initiate such process.
• The resolution professional can file an application to the Adjudicating Authority to extend the period of corporate insolvency resolution process beyond 180 days. However, such extension can be applied only if approved in a meeting of Committee of Creditors by 66% majority.
• On receipt of extension application, if the Adjudicating Authority is satisfied that the corporate insolvency resolution process cannot be completed within 180 days, it may by order extend the duration of such process, but not exceeding 90 days, i.e. 180 days + 90 days = 270 days.
• However, as per amended Section 12, the CIRP shall be mandatorily completed within a period of 330 days from the insolvency commencement date including any extension of the period of CIRP and the time taken in legal proceedings in relation to such resolution process of the corporate debtor.
• The well-defined time limit ensures that commercially impractical corporate debtors are not kept in the resolution process for long periods and are liquidated at the earliest opportunity.
• The strict time-limit would not only reduce the cost to creditors and other stakeholders due to a lengthy procedure, but also avoid any reduction in value of corporate debtor’s business. This would also enable promoters of a failed businesses to exit the ventures swiftly.

Question 9.
Explain the concept “Ease of doing business includes easy exit by investors and creditors that prompts national policy makers’ constant endeavour to reform law relating to Insolvency or Bankruptcy”.
Answer:

• The Insolvency and Bankruptcy Code, 2016 (IBC) offers a uniform, comprehensive insolvency legislation covering all companies, partnerships and individuals. The main purpose of IBC is to ensure a formal and time bound insolvency resolution process.
• Prior to the enactment of the Insolvency and Bankruptcy Code, 2016, there was no single law in India to deal with insolvency and bankruptcy. There were multiple overlapping laws and adjudicating forums dealing with financial failure and insolvency of companies and individuals.
• Further, the framework for insolvency and bankruptcy resolution was inadequate, ineffective and resulted in undue delays. The legal framework did not help lenders in effective and timely recovery of defaulted assets and causes undue pressure on the Indian credit system
• ‘Ease of doing Business’ also includes ‘Easy Exit’ by investors and creditors. Based on this belief, national policy makers constantly strive to reform the laws relating to bankruptcy. The objective of the Insolvency and Bankruptcy Code is
  • to consolidate and amend the laws relating to reorganization and insolvency resolution of corporate persons, partnership firms and individuals in a time bound manner,
  • provide effective legal framework for timely resolution of insolvency and bankruptcy,
  • to encourage entrepreneurship,
  • to improve Ease of Doing Business, and
  • to facilitate more investments leading to higher economic growth and development

Question 10.
Write a short note on the role of Insolvency and Bankruptcy Board of India.
Answer:
→ The Insolvency and Bankruptcy Code, 2016 (IBC) offers a uniform, comprehensive insolvency legislation covering all companies, partner-ships and individuals. The main purpose of IBC is to ensure a formal and time bound insolvency resolution process.

→ To achieve its purpose, a new framework is designed consisting of the Bankruptcy Board of India, Adjudicating Authorities, Insolvency Professional Agencies, Insolvency Professionals, and Information Utilities.

→ The Insolvency and Bankruptcy Board of India (TBBI Board’) will perform the role of a regulator for insolvency and bankruptcy matters similar to the role SEBI performs for the securities market.

→ Role of IBBI includes supervising the functioning of insolvency intermediaries i.e., Insolvency Professionals, Insolvency Professional Agencies and Information Utilities.

→ The Board is empowered to frame and enforce rules for various processes under the IBC, including corporate insolvency resolution, corporate liquidation, individual insolvency resolution and individual bankruptcy.

→ Powers and Functions of the Board
(a) Register Insolvency Professional Agencies, Insolvency Professionals & Information Utilities, along with renewal, withdrawal, suspension or cancellation of such registrations.

(b) Regulations standards for the functioning of Insolvency Professional Agencies, Insolvency Professionals and Information Utilities.

(c) Regulations the curriculum for the examination of the Insolvency Professionals for their enrolment as members of the Insolvency Professional Agencies.

(d) Carry out inspections and investigations on Insolvency Professional Agencies, Insolvency Professionals and Information Utilities and pass such orders as may deem fit.

(e) Monitor the performance of Insolvency Professional Agencies, Insolvency Professionals and Information Utilities and give directions as required for better compliance of the Code.

(f) Call for any information and records from the Insolvency Professional Agencies, Insolvency Professionals and Information Utilities. Collect and maintain records relating to insolvency and bankruptcy cases and disseminate information relating to such cases.

(g) Promote transparency and best practices in its governance.

(h) Set a mechanism for redressal of grievances against Insolvency Professionals, Insolvency Professional Agencies and Information Utilities.

(i) Conduct periodic study, research and audit the functioning and performance of to the Insolvency Professional Agencies, Insolvency Professionals and Information Utilities.

(j) Make bye-laws for IPA which includes standards of professional competence of members, standards for professional and ethical conduct, fair enrollment criteria, examination, interned governing body, filing returns, grievance redressal, fees and penalties.

Question 11.
“Insolvency & Bankruptcy Code, 2016 as on date is an offshoot of reports by several committees established to make Indian economy free from industrial sickness resulting in loss of production and to boost the economy.” Explain the evolvement of Insolvency and Bankruptcy Code, 2016 through recommendations from various committees with consequent reforms made in India over a period of time.
Answer:

• Every country wants to avoid industrial sickness, so that there is continuous production, distribution with a growing economy.
• In order to achieve this objective, in India several committees were constituted, which are summarized below

Kapur Committee (1964)	Proposed amendment in the Provincial Insolvency Act, 1920
Tiwari Committee (1981)	Enactment of Sick Industrial Companies Act, 1986 (SICA)
Narsimhan Committee (1991)	Enactment of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993
Narsimhan Committee (1998)	Enactment of the Securitization and Reconstruction of Financial Assets & Enforcement of Security Interest Act, 2002 (SARFAESI)
Mitra Committee (2001)	To identify the deficiency in Indian laws in respect of cross border insolvency
Justice Eradi Committee	To examine existing laws relating to winding – up of companies and recommend measures to achieve transparency and fast dissolution
JJ Irani Committee (2005)	Changes for speedy restructuring and liquidation process
Vishwanathan Committee	Bankruptcy law reforms, leading to the origin of IBC, 2016

Question 12.
What were the reasons that prompted enactment of Insolvency & Bankruptcy Code, 2016? How does Corporate Insolvency Resolution Process differ with revival plans under repealed SICA or liquidation under Company Law?
Answer:

• Prior to the enactment of the Insolvency and Bankruptcy Code, 2016, there was no single law in India to deal with insolvency and bankruptcy in India.
• There were multiple overlapping laws and adjudicating forums dealing with financial failure and insolvency of companies and individuals.
• Further, the framework for insolvency and bankruptcy resolution was inadequate, ineffective and resulted in undue delays. The legal framework did not help lenders in effective and timely recovery of defaulted assets and causes undue pressure on the Indian credit system.
• There were multiple legislations such as
  • the Presidency Towns Insolvency Act, 1909,
  • the Provincial Insolvency Act, 1920,
  • the Sick Industrial Companies (Special Provisions) Act, 1985,
  • the Recovery of Debts and Bankruptcy Act, 1993,
  • the Companies Act, 2013.
• There were multiple authorities such as Board of Industrial & Financial Reconstruction (BIFR), Debt Recovery Tribunal (DRT) and National Company Law Tribunal (NCLT) and their respective Appellate Tribunals. Liquidation of companies was handled by the High Courts.
• The Sick Industrial Companies (Special Provisions) Act, 1985 (SICA) did not provide any viable solutions for resolving sickness in India. Further, SICA was not applicable to service industry, trading companies etc. as well as there were deficiencies in the approach of BIFR and AAIFR. There was not time-bound solution provided and finally companies were wound-up.

Corporate Restructuring, Insolvency, Liquidation & Winding-Up Notes

Drafting and Conveyancing Relating to Various Deeds and Agreements-IV – Drafting, Pleadings and Appearances Important Questions

Question 1.
Comment on the following; A debtor cannot claim or take advantage of non-payment of consideration for assignment.
Answer:
An assignment is a form of transfer of property and it is commonly used to refer the transfer of an actionable claim or a debt or any beneficial interest in movable property.

Transfer of actionable claim:
Section 130 of the Transfer of Property Act, 1882 states that a transfer of an actionable claim whether with or without consideration shall be effected only by the execution of an instrument in writing signed by the transferor or his duly authorised agent.

Completion of transfer of actionable claim:
It shall be complete and effectual upon the execution of such instruments and thereafter all the rights and remedies of the transferor shall vest in the transferee.

It is evident from the bare reading of above section that a debtor cannot claim or take advantage of non-payment of consideration for assignment as section 130 of TPA Act lays down that an assignment of an actionable claim may be with or without consideration. Passing of the property in the assigned property does not depend on the payment of consideration.

Question 2.
Write notes on the following; Mode of transfer of actionable claims.
OR
In light of the judicial pronouncements discuss the following; A transfer of an actionable claim is usually called an assignment.
Answer:
An assignment is a form of transfer of property and it is commonly used to refer the transfer of an actionable claim or a debt or any beneficial interest in movable property.

Section 3 of the Transfer of Property Act, 1882:
Actionable claim means a claim:-
a. To any debt, other than a debt secured by mortgage of immovable property or by hypothecation or pledge of movable property or
b. To any beneficial interest in movable property, whether such debt or beneficial interest be existent, accruing, conditional or contingent.

Section 130 in the Transfer of Property Act, 1882:
Transfer of actionable claim:
a. The transfer of an actionable claim whether with or without consideration shall be effected only by the execution of an instrument in writing signed by the transferor or his duly authorised agent.
b. Shall be complete and effectual upon the execution of such instruments.
c. Thereafter all the rights and remedies of the transferor shall vest in the transferee.
d. The transferee of an actionable claim upon execution of instrument, sue or institute proceedings for the same in his own name without obtaining the transferor’s consent.

Question 3.
Draft a specimen of deed of assignment of 1,000 equity shares of ₹ 100 each in Ultra Infotech Ltd., between assignor Rajan, S/o Mohan and assignee Yash, S/o Raja in consideration of ₹ 50,000 only.
OR
Draft the following as per the instructions; A specimen deed of assignment of shares in a company.
Answer:
THIS ASSIGNMENT is made on 3rd day of June 2013 between Rajan, S/o………… Mohan, R/o (hereinafter called “the Assignor”) of the one part,

And

Yash, S/o………. Raja, R/o………. (hereinafter called “the Assignee”) of the other part.

THE DEED WITNESSETH AS UNDER:
1. That in consideration of the sum of ₹ …………….. (Rupees…………..) paid by the assignee to the assignor, the receipt whereof the assignor hereby acknowledges, the said assignor hereby assigns, sells and transfers to the said assignee 1000 Equity Shares of ₹ 100 each, fully paid up, bearing consecutive Nos. 18 to 1018 (inclusive), which stand in the name of the assignor in the Register of Members of Ultra Infotech Co. Ltd.
2. TO HOLD the same to the assignee absolutely, subject nevertheless to the conditions on which the assignor held the same up to date.
3. The assignee hereby agrees to take the said Equity Shares subject to such conditions.

IN WITNESS WHEREOF the assignor and the assignee do hereto affix their respective signatures on the day, month and the year stated above:
Witness:                                                                                                                             Assignor
Witness:                                                                                                                             Assignee

Question 4.
Robin has availed a loan of ₹ 50000/- from Mohan against assignment of life insurance policy. Draft a deed of assignment of life insurance policy.
Answer:
THIS ASSIGNMENT OF LIFE INSURANCE POLICY made on 3rd day of July 2015 between Robin, S/o David, R/o (hereinafter known as the “assignor”) of the one part and Mohan son of Ghanshyam R/o (hereinafter known as the assignee) of the other part.

WHEREAS a policy of assurance being No ………….. for ₹ 50,000 (Rupees fifty thousand only) was issued by the Life Insurance Corporation of India on the life of the assignor on 3rd day of July 2000 to be paid to the assignor or to his executors, administrators or assigns after his death, subject to the annual premium of ₹ 2000/-.

AND WHEREAS the said assignor has agreed to transfer and assign to the said assignee the said policy of assurance of a sum of ₹ 50000/- (Rupees fifty thousand).

NOW THIS DEED WITNESSETH AS UNDER
1. That in consideration of the sum of ₹ 50,000/- (Rupees fifty thousand only) the receipt whereof the said assignor hereby acknowledges, the said assignor as beneficial owner, hereby transfers and assigns unto and to the use and for the benefit of assignee the policy and the sum of ₹ 50000 (Rupees fifty thousand) hereby assured and all the other moneys, benefits and advantages to be had, recovered or obtained under or by virtue of the said policy.

2. TO HOLD the same unto and to the use of the said assignee absolutely, subject to the conditions as to payment of future premiums and otherwise to be henceforth observed in receipt of the said policy.

3. The said assignor, shall not do, or knowingly suffer anything to be done, whereby the said policy may be rendered void or voidable or the said assignee or his heirs, executors, administrators or assigns may be prevented from receiving the said sum or any benefit thereunder.

IN WITNESS WHEREOF the assignor and the assignee do hereby affix their respective signatures on the day, month and the year stated above.
Witness:                                                                                                                              Assignor
Witness:                                                                                                                              Assignee

Question 5.
Explain and comment on the following; Patent refers to the right granted under the Patent’s Act, 1970 to the grantee providing exclusive privileges of making or selling his invention, innovation or process; so it has little value in pleadings.
Answer:
Patent is a right, granted by the government under the Patents Act, 1970 to the grantee, of exclusive privileges of making or selling a new invention or process protected under the patent.

The Act confers upon the patentee the right to safeguard his property in the patent and sue the person who infringes upon his patent right.

Value of patent in pleadings:
It will be incorrect to state that the patent has little value in pleadings. Law clearly states that an application for registration or an assignment of a patent will only be valid it is in writing, therefor, pleadings hold value in case of patents.

Question 6.
Comment on the following; Patents and their registration.
Answer:
Following are the key points on registration of patents:
Patent is a right, granted by the government under the Patents Act, 1970 to the grantee, of exclusive privileges of making or selling a new invention or process protected under the patent. The Act confers upon the patentee the right to safeguard his property in the patent and sue the person who infringes upon his patent right.

Seal of Patent:
After a complete specification in pursuance of an application for a patent has been accepted and on the request of the applicant, the Controller shall cause the patent to be sealed with the seal of the Patent j Office under Section 43 of the Patents Act, 1970.

Rights of patentee:
Where the subject matter of the patent is a product or a process: the j exclusive right to prevent third parties who do not have his consent from the act of making, using, offering for sale, selling or importing for those purposes in India.

Assignment:
Section 68 of the Patents Act provides that an assignment of a patent shall not be valid unless the same were in writing and an application for registration of such document is filed in the prescribed manner with the Controller within six months from the execution of the document or within such further period not exceeding six months in the aggregate as the Controller on application made in the prescribed manner allows.

Registration of assignments:
Section 69 of the Act provides that where any person becomes entitled g by assignment, he shall apply in writing in the prescribed manner to, the Controller for the registration of his title, or, as the case may be, [ of notice of his interest in the register.

Question 7.
Draft a specimen deed of Assignment of a patent. Assume data.
Answer:
THIS DEED OF ASSIGNMENT is made on 3rd day of July 2013 between AB, S/o…. R/o………… (hereinafter called the “assignor”) of the ONE PART.

AND

CD, S/o……… R/o………… (hereinafter called the “assignee”) of the OTHER PART.
(The term “Assignor” and “Assignee” which term shall include his heirs, executors and assigns)

WHEREAS the assignor has invented a process for the manufacture of …………… which was duly registered and entered in the Register of Patents bearing No……. dated……….. and duly sealed in the Patent Office.

NOW THIS DEED OF ASSIGNMENT WITNESSES:
1. That on payment of the sum of ₹………… (Rupees……………. ) the assign or, as beneficial and sole owner, hereby assigns unto the assignee his title to the said patent and the rights and privileges attached thereto to hold unto the assignee absolutely.

2. The assignor covenants with the assignee that:

• The assignor has not assigned or otherwise dealt with the said patent.
• Title to the said patent subsists and that he has done nothing to prejudice the rights of the assignee.
• The assignor shall join the assignee in applying to the Central Government or other authority at the expenses of the assignee, for extension of the said patent.
• The assignor further covenants with the assignee that if the assignor shall discover, invent or make any improvements in respect of the said invention, he will disclose the same to the assignee and explain the new method of discovery to the assignee.
• The assignor shall do all other acts and execute all such deeds as may be requisite therefor to vest in the assignee all rights, title and interest in such new invention or improvement for the use and benefit of the assignee.

IN WITNESS WHEREOF the parties aforesaid have set their respective hands in the presence of the witnesses hereunder.
Witness:                                                                                                                              Assignor
Witness:                                                                                                                              Assignee

Question 8.
Explain the following; Objectives of trade mark law. Whether an unregistered trade mark can be assigned?
Answer:
Object of trade mark law:
Following are the objectives of Trade Marks Act, 1999:

• To deal with the precise nature of the right which a person can acquire in respect of trade marks.
• To provides for registration of trade marks applied for in the country.
• To provide for better protection of trade mark for goods and services.
• To prevent fraudulent use of the mark.
• The mode of acquisition of such rights.
• The method of transfer of those rights to others.
• The precise nature of infringement of such rights.
• The remedies available in respect thereof.

Assignment of unregistered trade mark:

• Section 39 of the Trade Marks Act, 1999 states that an unregistered trade mark may be assigned or transmitted with or without the goodwill of the business concerned.

Question 9.
Write notes on the following; Assignment of copyrights.
Answer:
Section 18 of the Copyright Act provides for assignment of copyrights.
It provides that:

• The owner of the copyright in an existing work or the prospective owner of the copyright in a future work may assign to any person the copyright either wholly or partially and either generally or subject to limitations and either for the whole term of the copyright or any part thereof.
• In the case of the assignment of copyright in any future work, the assignment shall take effect only when the work comes into existence.
• Where the assignee of a copyright becomes entitled to any right com-prised in the copyright, the assignee as respects the rights so assigned, and the assignor as respects the rights not assigned, shall be treated for the purposes of this Act as the owner of copyright and the provisions of this Act shall have effect accordingly.
• No assignment of the copyright in any work shall be valid unless it is in writing signed by the assignor or by his duly authorized agent.

Question 10.
In the light of judicial pronouncements, discuss the following; While drafting a deed of assignment of goodwill in the sale of business, goodwill ought to be specifically calculated in unassailable figures or arbitrarily fixed.
OR
In the light of judicial pronouncements, discuss the following; Goodwill of a business as an intangible asset.
OR
Explain the following; Concept of the Goodwill of the Company and the criteria from which goodwill arises.
Answer:

• Goodwill is
• An intangible asset. It represents the value to a business attaching to all the factors, internal and external, which enables it to earn a far better return of profit on the capital employed.
• A benefit of a good name, reputation and connections of a business, which is the one thing which distinguishes a well old-established business from a new business at its inception.

Goodwill arises mainly:

• By personal reputations of the owners
• By reputation of the goods dealt in
• By site monopoly or advantage
• By access to sources of supply for example large quotas
• For patent and trade mark protection
• Effectiveness of publicity

Khushall Khengar Shah v. Khorshedbanu AIR 1970 SC 1147, Supreme Court had opined

• “Goodwill of a business as an intangible asset being the whole advantage of the reputation and connections formed with the customers together with the circumstances which make the connections durable. It is that component of the total value of the undertaking which is attributable to the ability of the concern to earn profits over a course of years because of its reputation, location and other features.”

Sale and purchase of goodwill:

• Goodwill is intangible but not fictitious. However it is very difficult to measure or value and in practice a purchaser will be prepared to pay a sum representing a number of years’ purchase of recent annual average profits.
• The purchaser of goodwill acquires the trade marks, patents, copyrights etc. and all the benefits accruing from the location, reputation and other exceptional features of the business.

Question 11.
Draft a specimen deed of sale of a business and assignment of goodwill.
Answer:
THIS DEED made on 3rd day of 2010 between AB, S/o…….. R/o……… (hereinafter called as the “vendor”) of the ONE PART.

AND

CD, S/o……. R/o……. (hereinafter called as “purchaser”) of the OTHER PART.
WHEREAS the vendor has been carrying on the trade and business of _______ at premises _______ under the name and style of _________.

AND WHEREAS the vendor has contracted with the purchaser for the sale to him of all his stock-in-trade and other assets and goodwill of the said trade of his going concern business along with all debts, particulars whereof are contained in the books of the said business for a consideration of the sum of ₹_________ upon the terms hereinafter mentioned;

AND WHEREAS the vendor has delivered to the purchaser, books of account and other books relating to the said business containing full particulars of the debts, particulars of the contracts and engagements of the said business.

NOW THIS DEED OF SALE WITNESSETH AS UNDER:
1. That in pursuance of the said agreement and in consideration of the sum of Rupees……. paid by the purchaser to the vendor; hereunder grant, to the use of the purchaser all that the trade or business carried under the name and style of ……………….. at premises No ……………..

2. The vendor hereby convey, sell, transfer, assign and assure unto the purchaser all beneficial interest and goodwill of the vendor in the said trade and business.

3. That all the books and other debts now due and owing and all securities, all contracts and engagements, all the stock-in-trade goods, fixtures, articles and things, all the rights, title and interest which, at the date of this deed, belong to the vendor; TO HAVE AND TO HOLD the same to the purchaser absolutely.

4. The vendor does hereby covenant with seller that he, the vendor will not at any time hereafter, either by himself or in collaboration with any other person or persons, or as a partner or as a director of any limited company carry on the said trade and business of _________ within a radius of __________ miles of business.

5. The amount and particulars of the debts due and owing to and from the vendor and the particulars of the contracts of business are correctly stated in the books of account delivered by the vendor to the purchaser.

6. Vendor will pay in excess of the amount which by the said books appear to be so due and owing.

7. The purchaser hereby agrees with the vendor that the purchaser shall perform all outstanding contracts and orders and keep indemnified the vendor and his estate against all losses, claims, demands, costs, charges and expenses etc.

8. That the vendor do hereby irrevocably nominate the purchaser as his attorney for him to perform all acts, deeds, and things as necessary to carry on the said business, as his successor.

9. That the names of the parties hereto shall, unless inconsistent with the context; include as well the heirs, administrators or assigns of the respective parties as the parties themselves.

IN WITNESS WHEREOF the parties have signed this deed on the date above mentioned in the presence of:
Witness 1                                                                                                                             Vendor
Witness 2                                                                                                                             Purchaser

Question 12.
Explain the following; Assignment of Policies of Insurance.
Answer:
Following are the key points on assignment of policies of insurance:-
Types of Policies of insurance
Contract of insurance are principally of two types:

• Insuring risk to life of a person: A sum of money is secured to be paid on the death of the person whose life is insured.
• Covering various risks relating to goods: An insurer undertakes to indemnify the assured/heirs and legal representatives against the loss or damages to goods insured. ,

Completion of contract of insurance:

• A contract of insurance is complete when the proposal of the – assured is accepted by the insurer, whether the policy of insurance is issued or not.

Insurable interest in the subject-matter insured is a pre-requisite of a contract of insurance and the assured must be interested in the subject-matter insured at the time of the loss.

Assignment:

• An insurance policy may be transferred by assignment unless it contains terms expressly prohibiting assignment.
• It must be assigned before death in the case of a life insurance policy and it may be assigned either before or after loss in the case of a marine or good policy.
• The assignee can sue/defend on the policy of insurance in its own name.
• An assured who has no insurable interesting the subject-matter insured cannot assign.

Question 13.
A partnership firm, a HUF and a Minor wants to be partner of another partnership firm. Decide the possibility of the same.
OR
Comment on the following with reference to ratio in leading cases, if any; HUF can become a partner in a firm.
Answer:
HUF as a partner of a partnership firm:

• As per Section 4 of the Indian Partnership Act, 1932 only natural and legal persons can become partners in a partnership firm.
• Duli Chand v. C/FAIR 1956 SC 354
  Supreme Court held that such persons who are competent to contract can enter into partnership.
• BhagatRam v. Comm, of Excess Profits Tax AIR 1956 SC 374
  Supreme Court held that when the Karta of a Joint Hindu Family H enters into a partnership with strangers the other members of the family do not ipso facto become partners.

Since, Hindu Undivided Family is not a legal person, cannot enter z into partnership with any person.

Partnership firm as a partner of another partnership firm:

• Two partnership firms cannot enter into partnership as such but its partners can certainly form a new partnership.

Minor as a partner of a partnership firm:

• According to Section 30 of the Indian Partnership Act, 1932, a minor cannot be a partner in a firm but, with the consent of all the partners, he can be admitted to the benefits of partnership.
• He is entitled to share in the profits and his share is liable for the acts of the firm, but he is not personally liable.
• He cannot be made liable for the losses of the firm.
• Within six months of attaining majority or obtaining knowledge of his admission, whichever is later, the minor may elect to become or not to become a partner in the firm.

Question 14.
Distinguish between the following; Registration of partnership firm under the Income-tax Act, 1961 and Registration of partnership firm under the Indian Partnership Act, 1932. Answer:
Following are the differences between registration of partnership firm under the control the Income-tax Act, 1961 and Indian Partnership Act, 1932:

Registration of partnership firm under the Indian Partnership Act, 1932	Registration of partnership firm under the Income-tax Act, 1961
Section 58 of the Indian Partnership Act, 1932: Registration of partnership firm has been made optional.	Rule 22 of Income-tax Rules, 1962: An application for registration of partnership firm should be accompanied with an instrument of partnership specifying the apportionment of shares of profit and losses of the business amongst the partners of the firm. This registration is required to be renewed every year under the orders of the concerned Income-tax Officer.
Section 69 of the Partnership Act, 1932: Consequences of non-registration of a partnership firm. An unregistered firm cannot enforce a right or claim arising out of a contract against any third party. However, if the firm obtains registration on the date of institution of the claim against third person, the said claim or right would be perfectly maintainable. Since the blow of the consequences of non-registration is very severe, it is advisable to get the partnership registered under the Partnership Act, 1932 immediately on its incorporation.

Registration of partnership firm under the Indian Partnership Act, 1932 Registration of partnership firm under the Income-tax Act, 1961

Question 15.
‘X’ and ‘Y’ are partners. ‘Z’ a minor son of ‘Y’ was admitted to the ‘ benefits of the partnership. ‘Y’ dies and the business of the firm is carried j on. During this period ‘X’ incurs losses heavily. The creditors of the firm demand losses from ‘X’ and ‘Z’ The Lawyer has advised ‘Z’ that he is j liable upto ‘Z’s capital investment in such partnership firm. Advise ‘Z’
Answer:
According to Section 30 of the Indian Partnership Act, 1932 A minor cannot be a partner in a firm but, with the consent of all the partners, he can be admitted to the benefits of partnership.

Share in profit:
A minor is entitled to share in the profits and his share is liable for the acts of the firm, but he is not personally liable.
He cannot be made liable for the losses of the firm.

Judicial precedent:
Shri Ram v. Gaurishankar AIR 1961, Bombay 136
“Within six months of attaining majority or obtaining knowledge of his admission, whichever is later, the minor may elect to become or not to become a partner in the firm. ”

Conclusion:
Z will be liable only upto his capital investment in the firm is not a correct advice. Due to the death of Y the partnership between X and Y comes to an end. Z cannot be partner of X as he is minor and is not capable of entering into contract. The losses have arisen after the end of the partnership between X and Y. There is no liability upon Z and therefore he is not liable for the losses. The lawyer’s advice is incorrect.

Question 16.
What is the law relating to nomination of a successor to a partner of a firm in the event of death/retirement of the existing partner?
Answer:
Partners at the time of entering into partnership agreements insert a clause as to nomination of a successor who has the right to be declared and admitted as partner in the event of death or retirement of a partner.

In the case of Commissioner of Income Tax v. Govindram Sugar Mills AIR 1966 SC 24 Supreme Court held that:
“The nomination is not effective in case of partnership firm consisting of two partners only as it stands dissolved on the death of a partner; nevertheless, in view of the rights and obligations of a person to be nominated as under Section 31 of the Act, the same principle in case of agreement between two persons is applicable in case of partnership between two partners”.

Question 17.
Distinguish between ‘Partnership’ and ‘Limited Liability Partnership’.
Answer:
Following are the differences between partnership & Limited Liability Partnership:

Basis	Partnership	Limited Liability Partnership (LLP)
1. Registration under Act	Indian Partnership Act, 1932	Limited Liability Partnership Act, 2008
2. Registered to	Registration of Firms	Ministry of Corporate Affairs
3. Liability	The partner and the firm are not considered as a separate legal entity. For this reason, Partners are personally liable for the unlimited amount of liabilities of the partnership.	Liability of partners is limited to the amount invested in the company.
4. Number of partners and other requirements	A Minimum of 2 and maximum of 20 partners can be a member of the partnership firm. Minors can be a partner.	A Minimum of 2 and no upper limit for the maximum number of partners in LLP. And No minor can be a partner.
5. Rights and duties of partners	Partnership Deed governs the operation, management and decision making methodologies and other activities of the partnership.	LLP Agreement governs the operation, management and decision making methodologies and other activities of the LLP.
6. Legal proceedings	Only registered partnerships can sue any partner or any other person.	An LLP is a legal entity that pan sue or be sued.

Question 18.
Distinguish between the following; ‘Partner’ and ‘Designated Partners’.
Answer:
Partner:

• As per section 2(q) of the Limited Liability Partnership Act, 2008,
  partner means any person who becomes a partner in LLP in accordance with LLP agreement.
• As per section 5 of LLP Act, 2008, any individual or body corporate may be a partner in a LLP, except person of unsound mind, an undischarged insolvent or has applied for insolvency.

Designated partners:

• Designated partners means any partner designated as such pursuant to section 7 of the Limited Liability Partnership Act, 2008.
• Every limited liability partnership shall have at least two designated partners who are individuals and at least one of them shall be a resident in India:
• Responsibilities of Designated Partners

Designated Partners have specific responsibilities. They shall be responsible for the doing of all acts, matters and things as are required to be done by the limited liability partnership (LLP) in respect of compliance of the provisions of the LLP Act including filing of any Document, Return, Statement and the like Report pursuant to the provisions of Limited Liability Partnership Act, 2008.

The Designated Partners shall be responsible for the doing of all acts and deeds arising out of LLP Agreement.

Question 19.
Distinguish between the following; Agreement among partners of Partnership Firm and Agreement among the members of a Co-operative Society.
Answer:
Partnership:

• A partnership deed is a document that outlines in detail the rights and responsibilities of all parties to a business. It has the force of law and is designed to guide the partners in conducting the business.
  This contract may be made:
  • Orally or
  • Writing or
  • May be inferred from the course of dealing between the partners.
• The deed of partnership is executed by all the partners and is drafted as an agreement to carry on certain business in partnership on certain terms and conditions.
• While drafting partnership deed we should incorporate all terms and conditions that govern a particular partnership business.

Co-operative Society:

• A Co-operative Society comes into being when several like-minded persons come together to form an association for mutual benefit.
• Decision making in a Co-operative Society:
  The number of members in a co-operative society is quite large making it impossible for each and every member to take active participation in the management of the affairs of the co-operative society. Therefore, decisions in a co-operative society are taken by following a democratic process.
• Agreement among the members of a co-operative society:
  The agreement provides for the eligibility criteria for becoming members of the co-operative society, payment of contribution, categories of membership of the co-operative society, their voting rights and the manner of exercising their votes. The agreement also provides for restrictions on transfer of shares and the transfer of interest on death of a member.

Question 20.
In the light of judicial pronouncements, discuss the following; HUF is not a legal person.
Answer:
In the case of Firm Bhagat Ram v. Comm, of Excess Profits Tax AIR 1956 SC 374 Supreme Court held:

“When the Karta of a HUF enters into a partnership with strangers the other members of the family do not ipso facto become partners. ”

Therefore, HUF cannot enter into partnership with any person. A firm or a Hindu Undivided Family is not a legal person and cannot therefore enter into agreements or sue in its own name.

Question 21.
In the light of judicial pronouncements, discuss the following; A firm is not a legal person.
Answer:
In the case of Malabar Fisheries Co. v. CIT [1979] 120 ITR 49 Supreme Court held:
“A partnership firm under the Indian Partnership Act, 1932, is not a distinct legal entity apart from the partners constituting it and equally in law the firm as such has no separate rights of its own in the partnership assets and when one talks of the firm s property or firm’s assets all that is meant is property or assets in which all partners have a joint or common interest’’

In light of the aforesaid case law it is evident that:

• A firm is not a legal person.
• The firm has no separate rights of its own in the partnership assets but it is the partners who own jointly or in common the assets of the partnership.

Question 22.
Anuradha and Sudha are partners running a fashion designing boutique. They now propose to induct Seema as another partner in their firm w.e.f. 1st September, 2015. Draft a deed of agreement of admission of Seema into the firm. Assume data.
OR
Draft a deed of Agreement of Admission of Sushma as a third partner w.e.f. 1st September, 2018, into the already established firm of Seema and Reshma running a sweet shop. Assume data.
Answer:
Deed of Agreement of Admission into Firm of a New Partner Sushma THIS DEED OF AGREEMENT is made on 3rd day of June 2018 between Seema, D/o ………… aged ………… R/o

AND

Reshma D/o …………. aged …………… R/o …………… partners in the firm Sweet & Co. of the one part,

AND

Sushma …………………. daughter of ……………………… aged ……………………. years resident of ……………………… of the other part.

WHEREAS the said Seema and Reshma are partners in the firm Sweet & Co. situated in ………………….. and are bound as such under a deed of partnership executed by them on the ……………….. day of …………… 2018 hereinafter referred to as the “partnership deed”.

AND WHEREAS the said Sushma is desirous of being admitted as a member in the aforesaid firm of SWEET & Co. and invest a sum of ₹ ……………… and the said Seema and Reshma are willing to admit her as an additional partner.

NOW THEREFORE THE DEED WITNESSETH AS UNDER that in pursuance of the said agreement and in consideration of the said Sushma bringing in and contributing the sum of ₹ …………… (Rupees ………………………………. only) as additional capital of the above partnership firm, it is mutually agreed as follows:

1. The parties hereto shall, as from the date hereof be and continue P partners for the unexpired residue of the terms mentioned in para ……………… of the partnership deed subject in all respects to the conditions, stipulations, and provisions of the aforesaid partner- % ship deed, so far as applicable, and except as varied by this deed of agreement.

2. The capital mentioned in the partnership deed shall-here after be changed to the sum of Rupees ……………………… only and the partners shall hereafter have the undernoted shares in the capital.
Seema shall have ₹ …………………… in the said capital
Reshma shall have ₹ ………………….. in the said capital
Sushma shall have ₹ ……………………. in the said capital

3. The profits and losses of the partnership shall continue to be borne by the partners hereto in proportion to their above named respective shares.

IN WITNESS WHEREOF the said Seema, Reshma and Sushma have hereto at ………………….. signed the day and the year first abovementioned.
WITNESSES:
1.
2.

Sd/- Seema
Sd/- Reshma
Sd/- Sushma

Question 23.
Draft a specimen notice to dissolve a partnership.
Answer:

Letter head of Advocate

To,
Mr. B                                                                                                                                                     Date
Partner at AB Firm
S/o………
R/o………

NOTICE TO DISSOLVE PARTNERSHIP

Dear Sir,
1. Under instructions from my client, Mr. A, partner in firm AB, Thereby give you notice that in lieu of the disputes that have arisen between you the addressee and my client, my client does not wish to continue with the said partnership.
2. I hereby intimate you that in pursuance of the clause… of the partner ship deed dated….., my client hereby terminates the said partnership with effect from……..
3. I call upon you to reconcile accounts of partnership with my client within 15 days of the receipt of this notice, failing which necessary actions will be taken.

S/d
Advocate
details

Question 24.
A partnership firm was constituted by A, B and C partners for carrying on the business of steel manufacturing. Later on, a company Desire Ltd. proposed to purchase the business of the said partnership firm. The partners agreed to it and decided to dissolve the firm unanimously. Draw a partnership dissolution deed assuming data like date, place, etc. wherever necessary.
Answer:
THIS DEED OF DISSOLUTION OF PARTNERSHIP is made on 3^rd July 2013 between Mr. A, S/o…………, R/o…………. (hereinafter known as “First Partner”)

AND

Mr. B, S/o…, R/o….(hereinafter known as “Second Partner”) AND Mr. C, S/o…, R/o….(hereinafter known as “Third Partner”)

WHEREAS the partners hereto under a deed of partnership dated………….. made between them formed themselves into a business firm and carried on business of steel manufacturing under the name and style of ………………..

AND WHEREAS a company named XYZ Ltd. wishes to purchase the business carried out by the first, second and third partner.

AND WHEREAS it has been mutually decided between the partners to sell off the said business to XYZ Ltd.

AND WHERAS the partners have agreed to dissolve their partnership and divide the proceeds of such sale among themselves in the ratio of the capital invested.

NOW THIS DEED WITNESSES that in pursuance of the said agreement it is hereby declared and agreed by and between the parties hereto as follows, that is to say:
1. The said partnership between the partners hereto under the deed, dated ……………. shall be determined and stand dissolved as from ……………. 2013.
2. The partners hereto singly or jointly shall not carry on the business of the said firm of steel manufacturing under the said name and style for a period of ………………. years hence.
3. The parties hereto shall on the aforesaid date of ……………………. sign notices of the dissolution and forthwith advertise in the local Official Gazette the fact of dissolution as required by Section 45 of the Indian Partnership g Act and shall also intimate the fact of dissolution to the Registrar of z Firms under the provision of Section 63 of die said Act.
4. Particular inventory and valuation of all the machinery, plants, tools, utensils, stock in hand, office equipment, materials and effects belonging to the firm shall be made by the partners collectively.
5. That all the assets whereof shall be sold to XYZ Ltd. at the agreed consideration.
6. Upon sale, the proceeds of sale shall be divided and apportioned in the proportion of the contribution of the partners towards the capital
7. That the cost of liquidation proceedings shall also be deemed to be a liability of the partnership and paid from the funds of the partnership.
IN WITNESS WHEREOF the parties aforesaid have signed this deed on the date above mentioned in the presence of:
Witness                                                                                                                                          Mr. A
1                                                                                                                                                     Mr. B
2                                                                                                                                                     Mr. C

Question 25.
A group of fashion designers, Akshita, Haritha and Hemalalha proposes to form a Limited Liability Partnership(LLP). They seek your professional guidance on the drafting of the following clauses in the LLP Agreement:
i. Admission of new partner.
ii. Extent of Liability of the LLP.
iii. Arbitration
Answer:
The model Clauses in the LLP agreement are as follows:
Admission of new partner:

1. No Person may be introduced as a new partner without the consent of all the existing partners. Such incoming partner shall give his prior consent to act as Partner of the LLP.
2. Capital contribution of the new partner may be tangible, intangible, movable or immovable property and the incoming partner shall bring minimum Contribution of ₹ …………………. (Rupees ……………………… only).
3. Profit Sharing Ratio (PSR) of the incoming partner will be in proportion to his capital contribution in the LLP

Extent of Liability of the LLP:
The LLP is not bound by anything done by a partner in dealing with a person if

• The partner has not been authorised to act for the LLP in doing a particular act.
• The person knows that he has no authority or does not know or believe him to be a partner of the LLP.

Arbitration:
All disputes between the partners or between the partners and the LLP arising out of the LLP Agreement which cannot be resolved in terms of this LLP Agreement shall be referred for arbitration as per the provisions of the Arbitration and Conciliation Act, 1996.

Question 26.
Explain the following: Author of the trust.
Answer:
According to Section 3 of the Indian Trusts Act, 1882, Trust is an obligation annexed to the ownership of property, and arising out of a confidence reposed in and accepted by the owner, or declared and accepted by him for the benefit of another.

The person who reposes or declares the confidence is called the ‘author of the trust’. An author is also called as a ‘settler’.

Question 27.
Write note on the following; ‘Creation of trust’ in respect of immovable property.
Answer:
According to Section 3 of the Indian Trusts Act, 1882
“Trust” is an obligation annexed to the ownership of property, and arising out of a confidence reposed in and accepted by the owner, or declared and accepted by him for the benefit of another.

A trust for immovable property can be declared only by non-testamentary instrument in writing signed by the author of trust or trustee and registered or by the Will of the author of the trust or of the trustee.

A trust for movable property can be declared as above or by the transfer of the ownership of the property to the trustee.

Question 27.
Discuss the contents of a trust deed.
Answer:
Following are the contents of a trust deed
The instrument by which the trust is declared is called the ‘instrument of trust’. Following are the contents of a trust deed:

• Person: The person who reposes or declares the confidence is called the ‘author of the trust’. The person who accepts the confidence is called the ‘beneficiary’.
• Subject Matter: The subject matter of the trust is called the ‘trust property’ or the ‘trust money’.
• Names of the trustees: The person or persons who manages the trust property is called the ‘trustee’ of the trust. The trust property vests in the trustee and he holds it for the benefit of the beneficiary and cannot use it for his own benefit.
• An intention to create a trust
• The purpose of the trust
• The beneficiaries
• Unless the author is himself a trustee, transfer of the legal ownership of the property to the trustee
• Duties, rights and liability of the settler, trustee and the beneficiary
• The deed may also provide for reimbursement of expenses incurred by the trustee.

Question 28.
Explain the following; Elements of Debenture Trust Deed.
Answer:
“Debenture” is an instrument of debt executed by the company acknowledging its obligation to repay the sum at a specified rate and also carrying an interest. It is one of the methods of raising the loan capital of the company.

Debenture trust deed:
An issue of debentures is usually secured by a trust deed, where under movable and immovable properties of the company are mortgaged in favour of the trustees for the benefit of the debenture holders.

Elements of debenture trust deed:
The elements of debenture trust deeds are as follows:
1. The trust deed usually gives a legal mortgage on block capital and a floating security on the other assets of the company in favour of the trustee on behalf of the debenture holders.

2. The trust deed gives in detail the conditions under which the loan is advanced.

3. The trust deed should specify in some detail the remuneration payable to the trustee, their duties and responsibilities in relation to the trust property.

4. It also gives in detail, rights of debenture holders to be exercised through the trustees in case of default by the company in payment – of interest and principal as agreed upon.

Question 29.
Distinguish between the following; ‘Public trust’ and ‘private trust’.
Answer:
Following are the differences between ‘Public trust’ & ‘Private trust’:

Public Trust	Private Trust
1. A Public Trust is created for the benefit of society at large.	Private trust is an effective and efficient mode of managing and passing of family assets.
2. In a public trust the beneficiary is the general public or a specified section of it.	In a private trust the beneficiaries are defined and ascertained individuals.
3. In a public trust the beneficial interest is vested in an uncertain and fluctuating body of persons.	Where a trust is created for the benefit of the members of the settlor’s family, it is a private trust and not a public trust.
4. Every charitable trust is a public trust.	A religious trust may be a public or a private trust.

Question 30.
Write notes on the following; Revocation and Extinction of trusts.
OR
Distinguish between the following; Revocation and extinction of trusts.
Answer:
Revocation of trust
A trust cannot be revoked unless:

• All the beneficiaries consent.
• A power of revocation has been reserved in the deed.
• In case of a trust for payment of debts, it has not been communicated to the creditors.
• If the trust property is to be applied for the author’s own benefit the trust can be revoked. A power of revocation may with advantage always be reserved in the deed.

Extinction of trusts
A trust is extinguished:

• When its purpose is completely fulfilled.
• When its purpose becomes unlawful.
• When the fulfilment of its purpose becomes impossible by destruction of the trust property or otherwise.
• When the trust, being revocable, is expressly revoked.

Question 31.
Comment on the following; ‘Wakfs are trusts’. Explain? Advise on applicability of Indian Trust Act on Wakfs.
Answer:
Wakf: Wakf properties are dedicated to God and the “Wakif” or dedicator, does not retain any title over the Wakf properties.

As far as Trusts are concerned, the properties are not vested in God. Some of the objects of such Trusts are for running charitable organisations such as hospitals, shelter homes, orphanages and charitable dispensaries, which acts, though recognized as pious, do not divest the author of the Trust from the title of the properties in the trust.

Difference between Muslim Wakfs and Trusts:
Difference between Muslim Wakfs and Trusts is that while Wakf properties vest in God Almighty, the Trust properties do not vest in God and the trustees in terms of Deed of Trust are entitled to deal with the same for the benefit of the Trust and its beneficiaries.

Applicability of Indian Trusts Act:
Though wakfs are trusts, the Indian Trusts Act does not apply to wakfs under the Muslim Law. However, it is open to a Muslim to create a secular trust of a public of religious character. Such a trust would be governed by the Indian Trusts Act, 1882.

Drafting, Pleadings and Appearances Notes

Indian Equity – Private Funding – Corporate Funding and Listings in Stock Exchanges Important Questions

Question 1.
Explain the investment criteria for a foreign venture capital fund in India.
Or
Comment on the following: “The investment criteria for a foreign venture capital investor.”
Answer:
Following are the investment criteria for a foreign venture capital fund as per SEBI (Foreign Venture Capital Investors) Regulations, 2000:

• It should disclose to SEBI its investment strategy.
• It can invest its total funds committed in one venture capital fund or alternative investment fund.

It should make investment in venture capital undertaking as mentioned below:

• at least 66.6796 of the investible funds should be invested in unlisted equity shares or equity linked instruments of venture capital undertaking or investee company.

Not more than 33.3396 of the investible funds may be invested by way of:

• subscription to initial public offer of a venture capital undertaking whose shares are proposed to be listed
• debt or debt instrument of a venture capital undertaking in which the foreign venture capital investor has already made an investment by way of equity.
• preferential allotment of equity shares of a listed company subj ect to lock-in period of one year.
• It shall disclose the duration of life cycle of the fund.
• special purpose vehicles which are created for facilitating or promoting investment.

Note: The investment conditions and restrictions stipulated above shall be achieved by the Foreign Venture Capital Investor by the end of its life cycle.

Question 2.
What are the obligations of foreign venture capital investor?
Answer:
Following are the obligations of foreign venture capital investor:

• Foreign Venture Capital Investor or a global custodian acting on behalf of the foreign venture capital investor should enter into an agreement with the domestic custodian to act as a custodian of securities for Foreign Venture Capital Investor.
• Foreign Venture Capital Investor is required to appoint a branch of a bank approved by Reserve Bank of India as designated bank for opening of foreign currency denominated accounts or special non-resident rupee account.

Foreign Venture Capital Investor should ensure that domestic custodian takes steps for:

• monitoring of investment of Foreign Venture Capital Investors in India.
• furnishing of periodic reports to SEBI.
• furnishing such information as may be called for by SEBI.

Question 3.
Comment briefly on the following statement: “Venture capital fund invest in all type of securities”.
Or
Explain the following: “Venture capital funds invest in all type of securities”.
Answer:
“Venture Capital Fund invest in all type of securities”: Different venture groups prefer different types of investments. Some specialize in seed capital and early expansion while others focus on exit financing. Venture capital firms finance both early and later stage investments to maintain a balance between risk and profitability. A venture capitalist is a person or investment firm that makes venture investments, and these venture capitalists are expected to bring managerial and technical expertise as well as capital to their investments.

Venture Capital shall not invest more than 25% corpus of the fund in one venture capital undertaking. Venture Capital Fund may invest in securities of foreign companies subject to such conditions or guidelines that may be stipulated or issued by the Reserve Bank of India and the Board from time to time. Venture Capital Fund regulations also provide that funds shall not be invested in the associated companies.

Question 4.
Write a short note on the following: “Venture Capital Funds”.
Answer:
“Venture Capital Funds”: ‘Venture capital fund’ under SEBI (Venture Capital Funds) Regulations, 1996, means a fund established in the form of a trust or a company including a body corporate and registered under these regulations which:

• Has a dedicated pool of capital.
• Raised in a manner specified in the regulations and
• Invests in venture capital undertaking in accordance with the regulations.

Question 5.
Comment briefly on the following: “Social Venture Funds”.
Answer:
“Social Venture Funds”: 2
Meaning:

• “Social Venture Funds” means those funds which will invest in securities or units of social ventures and which satisfy social performance norms laid by the fund and whose investors may agree to receive restricted or muted returns.
• “Social Venture Fund” means an Alternative Investment Fund which invests primarily in securities or units of social ventures and which satisfies social performance norms laid down by the fund and whose investors may agree to receive restricted or muted returns.

Features:
Following are some features of “Social Venture Funds”:

• primary investment of corpus in the securities or units of social ventures.
• investors who give money to ‘Social Venture Funds’ are not much interested in return or they are happy with limited return.

Question 6.
An individual cannot start a venture capital fund but a trust or company can. In the light of this statement, list down the eligibility criteria for getting registered with SEBI as venture capital fund.
Answer:
Eligibility criteria for getting registered with SEBI as venture capital fund: SEBI (Alternative Investment Funds) Regulations, 2012, lays down the following eligibility criteria to be registered as Venture Capital Fund under Category I Alternative Investment Fund (AIF), namely

• The memorandum of association in case of a company; or the Trust Deed in case of a Trust or the Partnership deed in case of a limited liability partnership permits it to carry on the activity of an Alternative Investment Fund.
• The applicant is prohibited by its memorandum and articles of association or trust deed or partnership deed from making an invitation to the public to subscribe to its securities.
• In case the applicant is a Trust, the instrument of trust is in the form of a deed and has been duly registered under the provisions of the Registration Act, 1908.
• In case the applicant is a limited liability partnership, the partnership is duly incorporated and the partnership deed has been duly filed with the Registrar under the provisions of the Limited Liability Partnership Act, 2008.
• In case the applicant is a body corporate, it is set up or established under the laws of the Central or State Legislature and is permitted to carry on the activities of an Alternative Investment Fund.
• The applicant, sponsor and manager are fit and proper persons based on the criteria specified in Schedule II of the Securities and Exchange Board of India (Intermediaries) Regulations, 2008.
• The key investment team of the Manager of Alternative Investment Fund has adequate experience, with at least one key personnel having not less than five years experience in advising or managing pools of capital or in fund or asset or wealth or portfolio management or in the business of buying, selling and dealing of securities or other financial assets and has relevant professional qualification.
• The Manager or Sponsor has the necessary infrastructure and manpower to effectively discharge its activities.
• The applicant has clearly described at the time of registration the investment objective, the targeted investors, proposed corpus, investment style or strategy and proposed tenure of the fund or scheme.
• Whether the applicant or any entity established by the Sponsor or Manager has earlier been refused registration by the Board.

As per SEBI (Alternative Investment Funds) Regulations, 2012 it can be concluded that it is only a Company, Trust or a Partnership Firm which can be registered as a Venture Capital Fund and not an Individual.

Question 7.
Explain the following: “Venture Capital Undertaking”.
Answer:
“Venture Capital Undertaking”: It means a domestic company:
which is not listed on a recognised stock exchange in India at the time of making investment;

which is engaged in the business of providing services, production or manufacture of article or things and does not include following activities or sectors:

• Non-banking financial companies.
• Gold financing.
• Activities not permitted under industrial policy of Government of India.
• Any other activity which may be specified by SEBI in consultation
• with Government of India from time to time.

Question 8.
Write a short note on the following: “Private equity funds.”
Answer:
“Private equity funds”:

• A private equity fund, like a hedge fund, is an unregistered investment vehicle in which investors’ pool money to invest. Private equity funds concentrate their investments in unregistered (and typically illiquid) securities. Like hedge funds, private equity funds also rely on the exemption from registration of the offer and sale of their securities.
• The investors in private equity funds and hedge funds typically include high net worth individuals and families, pension funds, endowments, banks and insurance companies. However, private equity funds differ from hedge funds in terms of the manner in which contribution to the investment pool is made by the investors.
• Private equity investors typically commit to invest a certain amount of money with the fund over the life of the fund, and make their contributions in response to “capital calls” from the fund’s general partner.
• Private equity funds are long term investments, provide for liquidation at the end of the term specified in the fund’s governing documents and offer little, if any, opportunities for investors to redeem their investments.
• Private equity fund may distribute cash to its investors when it sells its portfolio investment or it may distribute the securities of a portfolio company.

Question 9.
Private equity fund is an unregistered investment vehicle in which investor’s pool money to invest. Explain the concept of private equity fund and distinguish it from hedge fund. [(June 2015) (5 Marks)]
Answer:
Concept of Private Equity:

• Private Equity Fund is an unregistered investment vehicle in which investor’s pool money to invest.
• Private Equity Funds concentrate their investments in unregistered (and typically illiquid) securities.
• Private Equity Fund may distribute cash to its investors when it sells its portfolio investment, or it may distribute the securities of a portfolio company.

Distinguish private equity fund from hedge fund:

• Private Equity Funds differ from hedge funds in terms of the manner in which contribution to the investment pool is made by the investors. Private Equity investors typically commit to invest a certain amount of money with the fund over the life of the fund, and make their contributions in response to “capital calls” from the fund’s general partner.
• Hedge funds focused on short-term profits whereas private equity funds are long term investments provide for liquidation at the end of the term specified in the fund’s governing documents and offer little, if any opportunities for investors to redeem their investments.
• Also, a substantial difference in risk level between hedge funds and private equity funds while both practice risk management by combining higher-risk investments with safer investments, the focus of hedge funds on achieving maximum short-term profits necessarily involves accepting a higher level of risk.

Question 10.
Explain the categories of Private Equity Investment.
Answer:
Categories of “Private Equity Investment”:
The private equity investments can be divided into the following categories:
Leveraged Buyout (LBO): This refers to a strategy of making equity* investments as part of a transaction in which a company, business unit or business assets is acquired from the current shareholders typically with the use of financial leverage. The companies involved in these type of transactions that are typically more mature and generate operating cash flows.

Venture Capital: It is a broad sub-category of private equity that refers to equity investments made, typically in less mature companies, for the launch, early development, or expansion of a business.

Growth Capital: This refers to equity investments, mostly minority investments, in the companies that are looking for capital to expand or restructure operations, enter new markets or finance a major acquisition without a change of control of the business.

Question 11.
Write a short note on the following: “Alternative Investment Fund.” [(June 2013) (4 Marks)]
Answer:
“Alternative Investment Fund”:
SEBI (Alternative Investment Funds) Regulations, 2012 provides that an Alternative investment fund (AIF) means any fund established in India in the form of a trust, company, limited liability partnership or a body corporate which:

• is a privately pooled investment vehicle that collects funds from investors, whether Indian or foreign, for investing it in accordance with a defined investment policy for the benefit of its investors.
• is not covered under the SEBI (Mutual Funds) Regulations, 1996, SEBI (Collective Investment Schemes) Regulations, 1999 or any other regulations of SEBI, which aims to regulate fund management activities.

However, SEBI (Alternative Investment Funds) Regulations, 2012, provides the list of funds which are excluded from the definition subject to certain conditions.

Question 12.
Discuss briefly the various categories of Alternative Investment Fund (AIF). [(Dec. 2013) (5 Marks)]
Or
SEBI has classified Alternative Investment Fund (AIF) into three broad , categories i.e. Category I, Category II and Category III. Discuss key features of AIF categories.
Answer:
Various categories of Alternative Investment Fund (AIF):
Securities and Exchange Board of India has classified Alternative Invest-ment Fund (AIF) into three broad categories as follows:
Category I: Funds that invest in start – up or early stage ventures or social ventures or Small Medium Enterprises (SMEs) or infrastructure or other sectors which the government or regulators consider as socially or economically desirable which Include VCF, SME Funds, Social Venture Funds (SVFs), Infra Funds as such other AIFs as may be specified in the AIF Regulations.

Category II: Funds that do not fall in Category I and III AIF and those do not undertake leverage or borrowing other than to meet the permitted day to day operational requirement including Private Equity Funds or Debt Funds.

Category III: Funds that may employ diverse or complex trading strategies and may employ leverage including through investment in listed or unlisted derivatives. Example: Hedge Funds.

Question 13.
“Investment in all categories of Alternative Investment Funds shall be subject to certain conditions.” Comment.
Answer:
Investments by all categories of Alternative Investment Funds shall be subject to the following conditions:

• Alternative Investment Fund (AIF) may invest in securities of companies incorporated outside India subject to such conditions or guidelines that may be stipulated or issued by the Reserve Bank of India and the SEBI from time to time.
• Alternative Investment Fund may act as Nominated Investor to SME IPOs.
• Co-investment in an investee company by a Manager or Sponsor shall not be on terms more favourable than those offered to the Alternative Investment Fund.
• Category I and II Alternative Investment Funds shall invest not more than twenty-five percent of the investable funds in one Investee Company. Category III Alternative Investment Fund shall invest not more than ten percent of the investable funds in one Investee Company.
• Alternative Investment Fund (AIF) shall not invest in associates except with the approval of seventy five percent of investors by value of their investment in the Alternative Investment Fund.
• Un-invested portion of the investable funds may be invested in liquid mutual funds or bank deposits or other liquid assets of higher quality such as Treasury bills, CBLOs, Commercial Papers, Certificates of Deposits, etc. till deployment of funds as per the investment objective.
• Investment by Category I and Category II Alternative Investment Funds in the shares of entities listed on institutional trading platform after the commencement of SEBI (Issue of Capital and Disclosure Requirements) (Fourth Amendment) Regulations, 2015 shall be deemed to be investment in unlisted securities for the purpose of the AIF Regulations.

Question 14.
“All Alternative Investment Funds shall ensure transparency and disclosure of information to investors.” Comment
Answer:
All alternative investment funds shall ensure transparency and disclo-sure of information to the investors as per the following details:

• Financial, risk management, operational portfolio, transactional infor-mation regarding fund investments shall be disclosed periodically.
• Any fees prescribed to the Manager or Sponsor; and any fees charged to the Alternative Investment Fund or any Investor Company by an associate of the Manager or Sponsor shall be disclosed periodically.
• Any enquiries, legal actions by legal or regulatory bodies in any juris-diction, as and when occurred shall be disclosed.
• Any material liability arising during the Alternative Investment Fund’s tenure shall be disclosed, as and when occurred.
• Any breach of a provision of the placement memorandum or agree-ment made with the investor or any other fund documents, if any as and when occurred shall be disclosed.

Category EH Alternative Investment Fund shall provide quarterly reports to investors within 60 days of end of quarter. Alternative Investment Fund (AIF) shall provide at least on an annual basis, within 180 days from the year end, reports to investors including the following information as may be applicable to the Alternative Investment Fund:

• Financial information of investee companies.
• Material risks and how they are managed.

Question 15.
Distinguish between the following: ‘Venture capital fund’ and ‘Social Venture Fund’.
Answer:
Difference between ‘Venture Capital Fund’ and ‘Social Venture Fund’ are as follows:

‘Venture Capital Fund’ means an Alternative Investment Fund which invests primarily in unlisted securities of start-ups, emerging or early-stage venture capital undertakings mainly involved in new products, new services, technology or intellectual property right based activities or a new business model and shall include an angel fund.

‘Social Venture Fund’: Social Venture Fund will invest in securities or units of social ventures and which satisfy social performance norms laid down by the fund and whose investors may agree to receive restricted or muted returns.

In case of Social Venture Fund, the following additional conditions shall apply:

• At least seventy -five percent of the investable funds shall be invested in unlisted securities or partnership interest of social ventures.
• Such funds may accept grants, provided that such utilization of such grants shall be restricted to investing in unlisted securities or partnership interest of social ventures. However, the amount of grant that may be accepted by the fund from any person shall not be less than twenty-five lakh rupees.
• No profits or gains shall accrue to the provider of such grants.
• Such funds may give grants to social ventures, provided that appropriate disclosure is made in the placement memorandum.
• Such funds may accept muted returns for their investors i.e. they may accept returns on their investments which may be lower than prevailing returns for similar investments

Question 16.
Explain briefly the following: “Investible Fund”.
Answer:

• As per SEBI (Alternative Investment Funds) Regulations, 2012: “Investible Fund” means “corpus of the Alternative Investment Fund net of estimated expenditure for administration and management of the fund”.
• General conditions and restrictions on investment of “Investible Funds”:
  An Alternative Investment Fund can invest its investible fund subject to following conditions:
• It can invest in securities of companies incorporated outside India, subject to such conditions or guidelines specified by the RBI and SEBI from time to time.
• Co-investment in an investee company by a manager or sponsor shall not be on terms more favourable than those offered to the AIF.
• Category I and II AIF shall not invest more than 20% of the investible funds in one Investee Company.
• Category IH AIF shall not invest more than 10% of the investible funds in one Investee Company.

Question 17.
Write short note on: “Angel Investor”.
Answer:
“Angel Investor”: ‘Angel Investor’ means any person who proposes to invest in an angel fund and satisfies one of the following conditions, namely:

• An individual investor who has net tangible assets of at least two crore rupees excluding value of his principal residence, and who:
  • has early stage investment experience, or
  • has experience as a serial entrepreneur, or
  • Is a senior management professional with at least ten years of experience.
• A body corporate with a net worth of at least ten crore rupees or
• An Alternative Investment Fund registered under SEBI AIF Regulations or a Venture Capital Fund registered under the SEBI (Venture Capital Funds) Regulations, 1996.

Question 18.
Write short note on: “Seed Funding”.
Answer:

• Seed funding is taken from the word “seed” is the capital needed to start or expand your business.
• Seed funding is obtained in exchange for an equity stake in the enterprise although with less formal contractual overhead than standard equity financing.
• Seed capital is a risky investment by the promoters of a new venture which represents a meaningful and tangible commitment on their part to making the business a success.
• Amount of money involved in seed funding is relatively small because the business is still in the idea/conceptual stage.

Corporate Funding and Listings in Stock Exchanges Notes

CS Professional Corporate Funding and Listings in Stock Exchanges Question Paper

Question 1(a)
Define and discuss the conditions for Preferentiai Issue. When on issuer becomes ineligible to make a such issue ? (5 Marks)
Answer:
Definition: “Preferential issue” means an issue of specified securities by a listed issuer to any select person or group of persons on a private placement basis in accordance with Chapter V of SEBI (ICDR) Regulations, 2018 and does not include an offer of specified securities made through employee stock option scheme, employee stock purchase scheme or an issue of sweat equity shares or depository receipts issued in a country outside India or foreign securities.

Conditions: A listed issuer may make a preferential issue of specified securities, if:

• all equity shares allotted by way of preferential issue shall be made fully paid up at the time of the allotment.
• a special resolution has been passed by its shareholders.
• all the equity shares, if any, held by the proposed allottees in the issuer are in dematerialised form.
• the issuer is in compliance with the conditions for continuous listing of equity shares as specified in the listing agreement with the recognised stock exchange where the equity shares of the issuer are listed, SEBI Listing Regulations, 2015 as amended, and any circular or notifications issued by SEBI thereunder;
• the issuer has obtained the Permanent Account Number of the proposed allottees.

Issuers Ineligible to make a Preferential Issue [Regulation 159]:

• An issuer shall not be eligible to make a preferential issue if any of its promoters or directors is a fugitive economic offender.
• Preferential issue of specified securities shall not be made to any person who has sold or transferred any equity shares of the issuer during the six months preceding the relevant date.
• Where any person belonging to promoter(s) or the promoter group has previously subscribed to warrants of an issuer but failed to exercise the warrants, the promoter(s) and promoter group shall be ineligible for issue of specified securities of such issuer on preferential basis for a period of one year from:
  • the date of expiry of the tenure of the warrants due to non-ex-ercise of the option to convert; or
  • the date of cancellation of the warrants, as the case may be.

Question 1(b)
State the guidelines issued by RBI (Reserve Bank of India) for large borrowers under the cash credit facility. (5 Marks)
Answer:

• In respect of borrowers having aggregate fund based working capital limit of ₹ 1500 million and above from the banking system, a minimum level of ‘loan component’ of 40 percent shall be effective from April 1,2019.
• Accordingly, for such borrowers, the outstanding ‘loan component’ (Working Capital Loan) must be equal to at least 40 per cent of the sanctioned fund based working capital limit, including ad hoc limits and TODs. Hence, for such borrowers, drawings up to 40 percent of the total fund based working capital limits shall only be allowed from the ‘loan component’.
• Drawings in excess of the minimum ‘loan component’ threshold may be allowed in the form of cash credit facility.
• The bifurcation of the working capital limit into loan and cash credit components shall be effected after excluding the export credit limits (pre-shipment and post-shipment) and bills limit for inland sales from the working capital limit.
• Investment by the bank in the commercial papers issued by the borrower shall form part of the loan component provided the investment is sanctioned as part of the working capital limit.

Question 1(c)
Balance Sheet of X company as at 31st March, 2018 and its statement of changes in financial position for the year ending on 31 st March, 2019 are presented below :

Calculate the working capital as on 31st March, 2019. (5 Marks)
Answer:
1(c) Calculation of Working Capital as on 31st March, 2019:
As per Balance Sheet of 31st March, 2018:
Working capital = Current Assets – Current Liabilities
Current Assets = Inventory + Amount Receivable + Cash = INR (2,370 + 1,300 + 530) = INR 4,400
Current Liabilities = Account payable = INR 2,140
Therefore, Working Capital = INR 4,400 – 2,140 = INR 2,260.

Particulars	Amount (INR)
Working Capital as on 31st March, 2018	2,260
Add: Increase in Working Capital (Changes in Financial Position for the year ended 31st March, 2019)	340
Working Capital as on 31st March, 2019	2,600

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

Question 2(a)
Explain guidelines issued by SEBI on participation by the strategic investors in InvITs and REITs vide its circular dated 18th January, 2018. (5 Marks)
Answer:

• SEBI vide its circular dated 18th January 2018 issued guidelines on participation by the strategic investors in InvITs and REIT’s.
• This circular seeks to give clarifications on the participation by the ‘strategic investors’ in the public issue of the REITs and the InVITs.

‘Strategic investor’ means:

• An infrastructure finance company registered with RBI as a NBFC;
• A Scheduled Commercial Bank;
• An international multilateral financial institution;
• A systemically important NBFC with RBI;
• A foreign portfolio investors;

who invest either jointly or severally not less than 5% of the total offer size of the InvIT or such amount as may be specified by SEBI with applicable provisions of the FEMA Act, 1999 and the rules or regulations or guidelines made there under.

Question 2(b)
Explain the provisions relating to maintenance of records by an investment manager pertaining to the activity of the InvIT. (5 Marks)
Answer:
The investment manager shall maintain records pertaining to the activity of the InvIT, wherever applicable, including:

• all investments or divestments of the InvIT and documents supporting the same including rationale for such investments or divestments;
• agreements entered into by the InvIT or on behalf of the InvIT;
• documents relating to appointment of persons;
• insurance policies for infrastructure assets;
• investment management agreement;
• documents pertaining to issue and listing of units including placement memorandum, draft and final offer document, in- principle approval by designated stock exchanges, listing agreement with the designated stock exchanges, details of subscriptions, allotment of units, etc.;
• distributions declared and made to the unit holders;
• disclosures and periodical reporting made to the trustee, SEBI, unit holders and the designated stock exchanges including annual reports, half yearly reports, etc.;
• valuation reports including methodology of valuation;
• books of account and financial statements;
• audit reports;
• reports relating to activities of the InvIT placed before the board of directors of the investment manager;
• unit holders’ grievances and actions taken thereon including copies of correspondences made with the unit holder and SEBI, if any;
• any other material documents.

Question 2(c)
Define briefly the following in context of Indian equity private funding: (5 Marks)
(1) Alternative Investment Fund
(2) infrastructure Fund
(3) Social Venture Fund
(4) Sponsor
(5) Venture Capital Fund
Answer:
1. “Alternative Investment Fund “means any fund established or incorporated in India in the form of a trust or a company or a limited liability partnership or a body corporate which:

• is a privately pooled investment vehicle which collects funds from investors, whether Indian or foreign, for investing it in accordance with a defined investment policy for the benefit of its investors; and
• is not covered under the SEBI (Mutual Funds) Regulations, 1996, SEBI (Collective Investment Schemes) Regulations, 1999 or any other regulations of the SEBI’to regulate fund management activities.

2. “Infrastructure fund” means an Alternative Investment Fund which invests primarily in unlisted securities or partnership interest or listed debt or securitized debt instruments of investee companies or special purpose vehicles engaged in or formed for the purpose of operating, developing or holding infrastructure projects. “Infrastructure” shall be as defined by the Government of India from time to time.

3. “Social Venture Fund” means an Alternative Investment Fund which invests primarily in securities or units of social ventures and which satisfies social performance norms laid down by the fund and whose investors may agree to receive restricted or muted returns.

4. “Sponsor” means any person or persons who set up the Alternative Investment Fund and includes promoter in case of a company and designated partner in case of a limited liability partnership.

5. “Venture Capital Fund” means an Alternative Investment Fund which invests primarily in unlisted securities of start-ups, emerging or early-stage venture capital undertakings mainly involved in new products, new services, technology or intellectual property right based activities or a new business model and shall include an angel fund as defined under Chapter III-A of the SEBI (AIF) Regulations, 2012.

OR (Alternate question to Q. No. 2)

Question 2A(i)
Explain the conditions to become an Angle investor under SEBI (Venture Capital Fund) Regulations, 1996. (5 Marks)
Answer:
‘Angel Investor’ means any person who proposes to invest in an angel fund and satisfies one of the following conditions namely:

(a) an individual investor who has net tangible assets of at least two crore rupees excluding value of his principal residence, and who:

• has early stage investment experience, or
• has experience as a serial entrepreneur, or
• is a senior management professional with at least ten years of experience.

(b) a body corporate with a net worth of at least ten crore rupees; or
(c) an Alternative Investment Fund registered under SEBI (AIF) Regulations or a Venture Capital Fund registered under the SEBI (Venture Capital Funds) Regulations, 1996.

Note: Early stage investment experience shall mean prior experience in investing in start-up or emerging or early-stage ventures and ‘serial entrepreneur’ shall mean a person who has promoted or co-promoted more than one start-up venture.

Question 2A(ii)
On 30th May, 2017 SEBI came out with a circular stating the disclosure requirements for issuance and listing of Green Debt Securities in India. Explain the Disclosure Document and other requirements in this context. (5 Marks)
Answer:
SEBI on 30th May, 2017 came out with a circular stating the disclosure requirements for issuance and listing of Green Debt Securities in India. The issuer of a Green Debt Securities shall make following disclosures:

(a) A statement on environmental objectives of the issue of Green Debt, Securities;

(b) Brief details of decision-making process issuer have followed/would follow for determining the eligibility of project(s) and/or asset(s) for which the proceeds are been raised through issuance of Green Debt Securities. An indicative guideline of the details to be provided is as under:

• process followed/to be followed for determining how the project(s) and/or asset(s) fit within the eligible green projects categories;
• the criteria making the project(s) and/or asset(s) eligible for using the Green Debt Securities proceeds; an
• environmental sustainability objectives of the proposed green investment.

(c) Issuer shall provide the details of the system/procedures to be employed for tracking the deployment of the proceeds of the issue.

(d) Details of the project(s) and/or asset(s) or areas where the issuer, proposes to utilise the proceeds of the issue of Green Debt Securities, including towards refinancing of existing green project(s) and/or asset(s), if any.

(e) The issuer may appoint an independent third party reviewer/certifier, for reviewing/certifying the processes including project evaluation and selection criteria, project categories eligible for financing by Green Debt Securities, etc. Such appointment is optional and shall be disclosed in the offer document.

Question 2A(iii)
Differentiate between Hire Purchase and Hypothecation. (5 Marks)
Answer:
Difference between Hire-Purchase and Hypothecation

Hypothecation: It was not defined legally in India until it was defined by SARFAESI Act in 2002. It is a charge on any movable asset/property of a borrower for which bank has extended its finance. It is an equitable charge on the assets in favour of the financing bank where the asset is owned by the borrower as well as possession is with him on behalf of the bank. If a borrower fails to repay the finance extended for the movable asset the bank can repossess the asset with the consent of the borrower. If the borrower surrenders the asset to the bank, bank has a legal right to sell the asset without the intervention of the court and adjust the proceeds towards the loan dues. Under SARFAESI Act bank also has got the right to sell the movable asset of a defaulted borrower without the intervention of a court subject to following rules laid down in this regard.

Hire-Purchase: Under Hire Purchase Agreement, as explained above the ownership of the financed assets remains with the lender till it is purchased by the borrower at the end of the hire purchase period as per agreed terms between the financing agency and the borrower. Under Hire Purchase the financing entity may get the benefit of depreciation as well as ownership of the asset financed.

Question 3(a)
State the conditions pertaining to conversion of External Commercial Borrowings (ECBs) into Equity. (5 Marks)
Answer:
Conversion of ECBs including those which are matured but unpaid, into equity is permitted subject to the following conditions:

• The activity of the borrowing company is covered under the automatic route for FDI or Government approval is received wherever applicable for foreign equity participation as per extant FDI policy.
• The conversion, which should be with the lender’s consent and without any additional cost should not result in contravention of eligibility and breach of applicable sector cap on the foreign equity holding under FDI policy.
• Applicable pricing guidelines for shares are complied with.
• If the borrower concerned has availed of other credit facilities from the Indian banking system, including foreign branches/subsidiaries of Indian banks, the applicable prudential guidelines issued by the Department of Banking Regulation of Reserve Bank, including guidelines on restructuring are complied with.
• Consent of other lenders, if any, to the same borrower is available or atleast information regarding conversions is exchanged with other lenders of the borrower.
• For conversion of ECB dues into equity, the exchange rate prevailing on the date of the agreement between the parties concerned for such conversion or any lesser rate can be applied with a mutual agreement with the ECB lender. It may be noted that the fair value of the equity shares to be issued shall be worked out with reference to the date of conversion only.
• In case of partial or full conversion of ECB into equity, the reporting to the Reserve Bank will be as under:
  • For partial conversion, the converted portion is to be reported in Form FC-GPR prescribed for reporting of FDI flows, while monthly reporting to RBI in Form ECB 2 Return will be with suitable remarks, viz, “ECB partially converted to equity”.
  • For full conversion, the entire portion is to be reported in Form FC-GPR, while reporting to RBI in Form ECB 2 Return should be done with remarks “ECB fully converted to equity”. Subsequent filing of Form ECB 2 Return is not required.
  • For conversion of ECB into equity in phases, reporting through Form FC-GPR and Form ECB 2 Return will also be in phases.

Question 3(b)
From the following particulars, calculate the effective interest cost per annum to ABC Ltd., which is planning a CP (Commercial Paper) issue:

Issue price of a CP	₹ 97,350
Face Value	₹ 1,00,000
Maturity period	3 Months

Answer:
Effective Interest Cost Per Annum to ABC Ltd:
Given: Face Value = INR 1,00,000.
Issue Price of CP = INR 97,350.
Maturity Period = 3 months.
Yield = \(=\frac{\text { Face Value }-\text { Issue price of } \mathrm{CP}}{\text { Issue Price of CP }}^{*} \frac{12 \text { Months }}{3 \mathrm{Months}}\)

= INR (1,00,000 – 97350)/INR 97350 * 4 Months = 0.1089 = 10.8996

Question 3(c)
Advantages and disadvantages of taking loans against shares by promoters in a listed company. (5 Marks)
Answer:
Specified securities held by the promoters and locked in may be pledged as collateral security for a loan granted by a scheduled commercial bank or a public financial institution or a systemically important non-banking finance company or a housing finance company, subject to the following:

(a) if the specified securities.are locked-in in terms of clause (a) of Lock-in of specified securities held by the promoters, the loan has been granted to the issuer company or its subsidiary/subsidiaries for the purpose of financing one or more of the objects of the issue and pledge of specified securities is one of the terms of sanction of the loan.

(b) if the specified securities are locked-in in terms of clause (b) of Lock-in of specified securities held by the promoters and the pledge of specified securities is one of the terms of sanction of the loan.

However, in case of an IPO the provision as mentioned in point (b) regarding lock-in such lock-in shall continue pursuant to the invocation of the pledge and such transferee shall not be eligible to transfer, the specified securities till the lock-in period stipulated in these regulations has expired.

Question 4(a)
What do you mean by Foreign Currency Exchangeable Bonds (FCEB) ? Explain the pricing norms for issuing of FCEB under the Foreign Currency Exchangeable Bonds Scheme, 2008. (3 Marks)
Answer:
FCEB:
According to the “Issue of Foreign Currency Exchangeable Bonds (FCEBs) Scheme, 2018, FCEB means:

• a bond expressed in foreign currency.
• the principal and the interest in respect of which is payable in foreign currency.
• issued by an issuing company, being an Indian company.
• subscribed to by a person resident outside India.
• exchangeable into equity shares of another company, being Offered company in any manner.
• either wholly or partly or on the basis of any equity related warrants attached to debt instruments.
• may be denominated.

Pricing of FCEB:
At the time of issuance of FCEB the exchange price of the offered listed equity shares shall not be less than the higher of the following two:

• The average of the weekly high and low of the closing prices of the shares of the offered company quoted on the stock exchange during the six months preceding the relevant date; and
• The average of the weekly high and low of the closing prices of the shares of the offered company quoted on a stock exchange during the two week preceding the relevant date.

Question 4(b)
Explain Continuous Listing in context of corporate debts. (3 Marks)
Answer:

• All the issuer shall comply with the conditions of listing specified in the respective listing agreement for debt securities while making public issues of debt securities or seeking listing of debt securities issued on private placement basis.
• Each rating obtained by the issuer shall be periodically reviewed by the registered credit rating agency and any revision in the rating shall be promptly disclosed by the issuer to the stock exchange(s) where the debt securities are listed.
• Any change in rating shall be promptly disseminated to investors and prospective investors in such manner as the stock exchange may determine from time to time.
• Debenture trustee must disclose the information to the investors and the general public by issuing a press release in any of the following events:
  (a) default by the issuer to pay interest on debt securities or redemption amount;
  (b) failure to create a charge on the assets;
  (c) revision of rating assigned to the debt securities.

Question 4(c)
Explain briefly the documents handled under Letter of Credit. (3 Marks)
Answer:
Documents handled under LCs are classified as:
Bill of Exchange: Bill of exchange is drawn by the beneficiary (exporter) on the LC issuing bank. When the bill of exchange is not drawn under a LC, the drawer of the bill of exchange (exporter), draws the bill of exchange on the drawee (importer).

Commercial Invoice: Commercial invoice is prepared by the benefi-ciary, which contains relevant details about goods in terms of value, quantity, weights (gross/net), importer’s name and address, LC number. Commercial invoice should exactly reflect the description of the goods as mentioned in LC. Other required details like shipping marks, and any specific detail as per the LC terms should also be covered.

Transport Documents: (Documents of title to the goods): When goods are shipped from one port to another port the transport document issued is called the bill of lading. Goods can be transported by means of airways, waterways, roadways and railways depending upon the situations.

Bill of Lading (B/L): B/L are the shipment document evidencing the movement of goods from the port of acceptance (in exporter’s country) to the port of destination (in importer’s country). It is a receipt signed and issued by the shipping company or authorized agent. It should be issued in sets (as per the terms of credit).

Question 4(d)
Write a note on Rupee Deemed Export Credit. (3 Marks)
Answer:

• A deemed export transaction is one in which goods are supplied to a project in India itself which are funded by International/Multilateral agencies or where goods are supplied to units in SEZs or foreign shipping companies calling on Indian ports, supply of goods to foreign tourists etc. such that the proceeds of such goods supplied will be paid in foreign currencies.
• Such transactions are treated as prima facie export transactions and enjoy incentives and other concessions given to normal export transactions
• Pre-shipment and Post-shipment credit facilities granted to Rupee Deemed Export Credit transactions are similar to finance/credit extended under Rupee Export credit – Pre-shipment as well as Post-shipment as described herein.

Question 4(e)
“In a growing company, ESOPs are being used to retain talent.” Discuss. (3 Marks)
Answer:

• Listed Companies can offer attractive Employee Stock Option (ESOP) or Employee Share Purchase Schemes (ESPS) to attract required talent pool and also to retain them. Being listed, the ESOP/ESPS may command good price gain and attraction to the employees.
• ESOP & ESPS are used to attract talent as well as to retain the key employees and managerial personnel which is an important human capital for business.
• In many Companies employee reservation in the IPO is considered as one of the incentive where employees will be able to acquire shares at a discount to the IPO price.
• SEBI Regulation allows keeping specific reservation for employees. These initiatives encourage commitment and long-term motivation amongst the talent pool.

Part B

Question 5(a)
Explain the grievance redressal mechanism under Regulation 13 of SEBI (LODR) Regulations, 2015 for listed entities. (5 Marks)
Answer:
Regulation 13: Grievance Redressal Mechanism:

• Adequate steps are taken for expeditious redressal of investors complaints.
• Ensure that it is registered with SCORES platform or any other platform of SEBI for handing investors complaints electronically as specified by SEBI.
• Statement on Investor complaints.
• Submit statement to stock Exchange within 21 days from the end of quarter.
• Statement should contain:
• number of complaints pending at the beginning of the quarter;
• received during the quarter;
• resolved/disposed of during the quarter;
• remaining unsolved at the end of the quarter;
• to be placed before the Board of Directors on quarterly basis.

Question 5(b)
Explain ‘Designated Securities’ as per the SEBI Listing Regulations 2015. (5 Marks)
Answer:
These regulations shall apply to the listed entity who has listed any of the following designated securities on recognised stock exchange(s):

• Securitised debt instruments.
• Security receipts.
• Units issued by mutual funds.
• Indian depository receipts.
• NCDs, NCRPs, Perpetual Debt, Perpetual NCRPs.
• Specified securities listed on main board or SME Exchange or institutional trading platform.
• Any other securities as may be specified by SEBI.

Question 5(c)
Discuss the role of US Securities and Exchange Commission in regulating Securities Market. (5 Marks)
Answer:

• The mission of the U.S. Securities and Exchange Commission is to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.
• The laws and rules that govern the securities industry in the United States derive from a simple and straightforward concept: all investors, whether large institutions or private individuals, should have access to certain basic facts about an investment prior to buying it, and so long as they hold it.
• The SEC oversees the key participants in the securities world, including securities exchanges, securities brokers and dealers, investment advisors and mutual funds.
• SEC is concerned primarily with promoting the disclosure of important market-related information, maintaining fair dealing, and protecting against fraud.

Question 5(d)
ABC Ltd. is considering a right issue by issuing one share against two shares to raise funds to finance a new project requiring ₹ 4.5 Crore. The Floatation cost will be 10% of funds raised. The Company currently has 18 Lakh shares outstanding and the current price of its share is ₹ 100. The subscription price has been fixed at ₹ 50 per share. Calculated the value of a right. (5 Marks)
Answer:
Value of Right:

Value of Right = Number of New Shares/Total Number of all shares (Market Price – Issue Price of new share)
= INR 9,00,000/27,00,000 (110 – 50)
= INR 20.

Working:
Number of New Shares: 1 share for every two shares = INR 18,00,000/2 = 9,00,000.
Total Number of All Shares = 18,00,000 (existing shares) + 9,00,000 = 27,00,000 shares
Market price= Current Price (1 + floating cost) = INR 110
Subscription Price (Issue Price) = INR 50.

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

Question 6(a)
State the principles governing Corporate Governance in protecting the interest of Minority Shareholders. (5 Marks)
Answer:
Principles Governing Corporate Governance and Protection of Minority Shareholders [Regulation 4(2) of SEBI (LISTING OBLIGATIONS AND DISCLOSURE REQUIREMENTS) REGULATIONS, 2015]:

Rights of shareholders: The listed entity shall seek to protect and facilitate the exercise of the following rights of shareholders:

• right to participate in and to be sufficiently informed of, decisions concerning fundamental corporate changes.
• opportunity to participate effectively and vote in general shareholder meetings.
• opportunity to ask questions to the board of directors, to place items on the agenda of general meetings, and to propose resolutions, subject to reasonable limitations.
• effective shareholder participation in key corporate governance decisions such as the nomination and election of members of board of directors.
• exercise of ownership rights by all shareholders, including institutional investors.
• adequate mechanism to address the grievances of the shareholders.

Timely information: The listed entity shall provide adequate and timely information to shareholders including but not limited to the following:

• sufficient and timely information concerning the date, location and agenda of general meetings as well as full and timely information regarding the issues to be discussed at the meeting.
• capital structures and arrangements that enable certain shareholders to obtain a degree of control disproportionate to their equity ownership.

Equitable treatment: The listed entity shall ensure equitable treatment of all shareholders including minority and foreign shareholders, in the following manner:

• All shareholders of the same series of a class shall be treated equally.
• Effective shareholder participation in key corporate governance decisions, such as the nomination and election of members of board of directors, shall be facilitated.
• The listed entity shall devise a framework to avoid insider trading and abusive self-dealing.
• Processes and procedures for general shareholder meetings shall allow for equitable treatment of all shareholders.

Disclosure and transparency1 The listed entity shall ensure timely and accurate disclosure on all material matters including the financial situation, performance ownership, and governance of the listed entity, in the following manner:

• Information shall be prepared and disclosed in accordance with the prescribed standards of accounting, financial and non-financial disclosure.
• Channels for disseminating information shall provide for equal, timely and cost efficient access to relevant information by users.

Role of stakeholders in corporate governance: The listed entity shall recognise the rights of its stakeholders and encourage co-operation between listed entity and the stakeholders, in the following manner:

• Stakeholders shall have the opportunity to obtain effective redress for violation of their rights.
• Stakeholders shall have access to relevant, sufficient and reliable information on a timely and regular basis to enable them to participate in corporate governance process.
• The listed entity shall devise an effective whistle blower mechanism enabling stakeholders including individual employees and their representative bodies to freely communicate their concerns about illegal or unethical practices.

Question 6(b)
Discuss the benefits of listing on international Stock Exchange. (5 Marks)
Answer:
Benefits of Listing on International Stock Exchange:
1. Increased Market Liquidity: International listing enables companies to trade its shares in numerous time zones and multiple currencies. This increases the issuing company’s liquidity and gives it more ability to raise capital.

2. Market Segmentation: Market segmentation is the practice of dividing a large market into clear segments with similar needs. International listing enables firms to divide foreign investor markets into segments which are easy to access. Companies seek to list internationally because they anticipate gaining from a lesser cost of capital. This arises because their stocks become more available to foreign investors. Their access to these stocks may otherwise be restricted due to international investment barrier.

3. Capital needs and growth opportunities: Companies in emerging markets need to use international listing to raise capital to continue to grow beyond their home market.

4. Wider shareholder base: International listing provides access to a larger pool of potential investors (both retail and institutional). Wider shareholder base are less risky.

5. Better Investor Protection: Companies need to comply with the provisions of all the regulatory aspects of the listing of those^countries where sought to be listed. Investors will therefore find themselves more protected and comfortable to invest in these companies.

6. Secure Clearing: A stock exchange provides a reliable and secure clearing mechanism. Listing on a foreign stock exchange is possible only after creating robust and advance clearing system.

7. Other benefits: Higher visibility/brand awareness, increased opportunities for mergers and acquisitions, entering markets with better investment protection reduces costs and creates bonding (a signal of corporate governance).

Question 6(c)
List out the event based compliance calendar under Regulation 29 as per SEBI Listing Regulations, 2015. (5 Marks)
Answer:
Event based compliance calendar under Regulation 29 of SEBI Listing Regulations, 2015:

• Regulation 28( 1): In-principle approval of recognized stock exchange(s) before issuing securities.
• Regulation 29(2)(b) to (f): Prior intimation of Board meeting for Buy-back, Dividend, Raising of Funds, Voluntary Delisting etc. at least two working days in advance, excluding the date of the intimation and date of the meeting.
• Regulation 29(2)(a): Prior intimation of Board meeting for Financial Results at least five days in advance (excluding the date of the intimation and date of the meeting).
• Regulation 29(3): Prior intimation of Board Meeting for alteration in nature of securities etc. at least eleven working days in advance.

Question 6(d)
State the principles Governing disclosures under the Listing Obligations and Disclosure Requirements, 2015.
Answer:
Principles Governing Disclosures [Regulation 4(1) of SEBI \(LODR) Regulations, 2015]: The listed entity shall abide by the following principles, while making disclosures to the stock exchanges or its website or through any other medium:

• Information shall be prepared and disclosed in accordance with applicable standards of accounting and financial disclosure.
• The listed entity shall implement the prescribed accounting standards in letter and spirit in the preparation of financial statements taking into consideration the interest of all stakeholders and shall also ensure that the annual audit is conducted by an independent, competent and qualified auditor.
• The listed entity shall refrain from misrepresentation and ensure that the information provided to recognised stock exchange(s) and investors is not misleading.
• The listed entity shall provide adequate and timely information to recognised stock exchange(s) and investors.
• The listed entity shall ensure that disseminations made under provisions of these regulations and circulars made thereunder are adequate, accurate, explicit, timely and presented in a simple language.
• The listed entity shall abide by all the provisions of the applicable laws including the securities laws and also such other guidelines as may be issued from time to time by the Board and the recognised stock exchange(s) in this regard and as may be applicable.
• The listed entity shall make the specified disclosures and follow its obligations in letter and spirit taking into consideration the interest of all stakeholders.
• Channels for disseminating information shall provide for equal, timely and cost efficient access to relevant information by investors.
• Filings, reports, statements, documents and information which are event based or are filed periodically shall contain relevant information.

OR (.Alternate question to Q. No. 6)

Question 6A.
Explain the following :
(i) Advertisement in Newspapers by a listed company in terms of Regu-lation 47 under SEBI (LODR) Regulations, 2015. (5 Marks)
Answer:
Regulation 47: Advertisements in Newspapers:

→ To publish the following information in the newspaper:
(a) notice of meeting of the board of directors where financial results shall be discussed;

(b) financial results, along-with the modified opinion(s) or reservation(s), if any, expressed by the auditor;

(c) if the listed entity has submitted both standalone and consolidated financial results, publish consolidated financial results along-with

• Turnover,
• Profit before tax and
• Profit after tax, on a stand-alone basis, as a foot note and a reference to the places, such as the website of listed entity and stock exchange(s), where the standalone results are available;

(d) statements of deviation(s) or variation(s) on quarterly basis, after review by audit committee and its explanation in directors report in annual report;

(e) notices given to shareholders by advertisement.

• Reference to be given in the newspaper publication, to link of the website of listed entity and stock exchange(s), where further details are available.
• Publish the information in the newspaper simultaneously with the submission of the same to the stock exchange(s).
• Financial results shall be published within 48 hours of conclusion of the meeting of board of directors at which the financial results were approved.
• The information shall be published in at least one English language national daily newspaper circulating in the whole or substantially the whole of India and in one daily newspaper published in the language of the region, where the registered office of the listed entity is situated.

Question 6A(ii)
Continual disclosures under Regulation 7(2) of (Prohibition of Insider Trading) Regulations, 2015. (5 Marks)
Answer:
Continual Disclosures under Regulation 7(2) of SEBI (Prohibition of Insider Trading) Regulations, 2015:

• Every promoter, employee and director of every company shall disclose to the company the number of such securities acquired or disposed of within two trading days of such transaction if the value of the
  securities traded, whether in one transaction or a series of transactions over any calendar quarter, aggregates to a traded value in excess of ten lakh rupees or such other value as may be specified.
• Every company shall notify the particulars of such trading to the stock exchange on which the securities are listed within two trading days of receipt of the disclosure or from becoming aware of such information. (Transaction type include buy/sales/pledge/revoke/Invoke).
  Timeline: Within 2 trading days of such transaction.

Question 6A(iii)
Statutory disclosures on a company website in terms of Listing Regulations. (5 Marks)
Answer:
Every website of a listed Company must contain statutory disclosures in terms of listing regulations which are enumerated as follows:

Financial Information: Each Company shall upload unaudited financial results for each quarter of the financial year and also the audited financial results for the financial year for past 3 years. Annual accounts of the subsidiary companies are also required to be uploaded. Annual reports of the Company for past 3 financial years also are required to be uploaded.

Policies: Listed Companies shall disclose certain management policies on the website of the Company such as:

• Code of conduct for Board of Directors & Senior Management.
• Code of conduct in terms of Insider Trading Regulations.
• Code of practices & procedures for fair disclosures of unpublished price sensitive information.
• Appointment letters to Independent Directors.
• Familiarization programme for Independent Directors.
• Whistle Blower Policy.
• Policy related to disclosure of material events to the stock exchanges. (Materiality Policy).
• Policy of Related Party Transaction.
• Material subsidiary policy.
• Risk Management Policy.
• Archival Policy.
• Policy for disclosure of material information.
• Internal Financial Control.
• Dividend Policy (Top 500 Companies with reference to Market Capitalisation).
• Policy against sexual harassment.

Other disclosure requirements: Details of unclaimed dividend Scrutinizers Report for the latest financial year Details of compulsory transfer of shares to IEPF Suspense Account Board Committees Board Meeting Notice.

Question 6A(iv)
Regulation 43A regarding Dividend Distribution Policy. (5 Marks)
Answer:
Regulation 4 3A: Dividend Distribution Policy:
→ Top 500 Listed entities based on market capitalization shall formulate a dividend distribution policy.

→ Dividend Distribution Policy shall be disclosed in their annual reports and on their websites.

→ The dividend distribution policy shall include the following parameters:
(a) the circumstances under which the shareholders of the listed entities may or may not expect dividend;
(b) the financial parameters that shall be considered while declaring dividend;
(c) internal and external factors that shall be considered for declaration of dividend;
(d) policy as to how the retained earnings shall be utilized;
(e) parameters that shall be adopted with regard to various classes of shares.

→ If the listed entity proposes to declare dividend on the basis of parameters in addition to clauses (a) to (e) or proposes to change such additional parameters or the dividend distribution policy contained in any of the parameters, it shall disclose such changes along with the rationale for the same in its annual report and on its website.

→ Listed entities other than top 500 may disclose their dividend distribution policies on a voluntary basis in their annual reports and on their websites.

Corporate Funding and Listings in Stock Exchanges Notes