Category: CS Professional

Foreign Funding – Instruments & Institutions – Corporate Funding and Listings in Stock Exchanges Important Questions

Question 1.
Write notes on: “Subscription Agreement”.
Answer:
“Subscription Agreement”:
Subscription Agreement provides that Lead Managers and other managers agree severally and not jointly with the company subject to the satisfaction of certain conditions to subscribe for GDRs at the offering price set forth.

Subscription agreement also provides an option to be exercisable with-in certain period after the date of offer circular to the lead manager and other managers to purchase up to a certain prescribed number of additional GDRs solely to cover over-allotments if any.

Subscription agreement may provide that for certain period from the date of the issuance of GDR, the issuing company will not:

• authorise the issuance of, or otherwise issue or publicly announce any intention to issue.
• issue offer, accept subscription for, sell, contract to sell or other-wise dispose of, whether within or outside India.
• deposit into any depository receipt facility any securities of the company of the same class as the GDRs or the shares or any securities in the company convertible or exchangeable for secu-rities in the company of the same class as the GDRs or the shares or other instruments representing interests in securities in the company of the same class as the GDRs or the shares.

Question 2.
Write notes on: “Road show in Euro issues”.
Or
Write notes on: “Road shows in Euro Issues.”
Or
“Road shows are in fact, a conference by the issuer company with the potential/future/prospective investors”. Elucidate.
Or
Answer:
Infact, the Statement “Road shows are conference by the issuer company with the potential or future or prospective investors” is absolutely correct. The concept of “Road show” is used in case of “Euro issue”, are as follows:

It is a pre-issue key action which ensure the successful launching of Euro-Issue. It can be defined as a meeting organized at different parts of world between’ the lead manager, Issuer Company and prospective investors.

Details & contents of Road show: Since road-show is a ‘information presentation meeting so the following details are included in such presentation:

• Historical background i.e. date of incorporation, promoters, first directors etc.
• Organizational structure i.e. centralized or decentralized.
• Main object as given in object clause of Memorandum of Association.
• Business line and product type.
• Market position of company at domestic & international level.
• Past years performance (if any).
• Future plans & strategies, the company wants to achieve.
• Challenges the company can face in future.
• Financial results & operating performance.
• Valuation of shares.

Question 3.
Write notes on the following: “External Commercial Borrowings.”
Answer:
“External Commercial Borrowings”: ECBs are commercial loans raised by eligible resident entities from recognized non-resident entities and should conform to parameters such as minimum maturity, permitted and non-permitted end-uses, maximum all-in-cost ceiling, etc. The parameters apply in totality and not on a standalone basis.

Tracks of ECBs: The framework for raising loans through ECB comprises the following three tracks:

• Track I: Medium term foreign currency denominated ECB with minimum average maturity of 3/5 years.
• Track II: Long term foreign currency denominated ECB with minimum average maturity of 10 years.
• Track III: Indian Rupee (INR) denominated ECB with minimum average maturity of 3/5 years.

The ECB Framework enables permitted resident entities to borrow from recognized non-resident entities in the following forms:

• Loans including bank loans.
• Securitized instruments (Example: floating rate notes and fixed rate bonds, non-convertible, optionally convertible or partially convertible preference shares/debentures).
• Buyers’ credit.
• Suppliers’ credit.
• Foreign Currency Convertible Bonds (FCCBs).
• Financial Lease.
• Foreign Currency Exchangeable Bonds (FCEBs).

Question 4.
State the conditions required to be fulfilled for conversion of external commercial borrowings (ECBs) into equity.
Answer:
In case of conversion of External Commercial Borrowings (ECBs) into Equity: ‘
Conditions: ECBs are converted into equity subject to following conditions:

• The activity of the company is covered under Automatic Route for Foreign Direct Investment or Government approval for foreign equity participation has been obtained by the company, wherever applicable.
• Foreign Equity holding after such conversion of debt into equity is within the sectoral cap if any.
• Pricing of shares is as per the SEBI guidelines/regulations in the case of listed and unlisted companies as the case may be.

Reporting: Conversion of ECBs into equity must be reported in the Form FC-GPR to the concerned Regional office of the Reserve Bank of India as well as to the RBI within 7 working days in Form ECB-2.

Question 5.
What is ‘parking’ of External Commercial Borrowings (ECB) proceeds?
Answer:
The parking of ECB proceeds can be of two types as per revised ECB framework:
Parking of ECB proceeds abroad: ECB proceeds meant only for foreign currency expenditure can be parked abroad pending utilization. Till utilisation, these funds can be invested in the following liquid assets:

• Deposits or Certificate of Deposit or other products offered by banks rated not less than AA (-) by Standard and Poor/Fitch IBCA or AA3 by Moody’s.
• Treasury bills and other monetary instruments of one year maturity having minimum rating as indicated above.
• Deposits with overseas branches/subsidiaries of Indian banks abroad.

Parking of ECB proceeds domestically:

• ECB proceeds meant for Rupee expenditure should be repatriated immediately for credit to their Rupee accounts with AD Category-I banks in India.
• ECB borrowers are also allowed to park ECB proceeds in term deposits with AD Category-I banks in India for a maximum period of 12 months.
• These term deposits should be kept in unencumbered position.

Question 6.
What do you understand by External Commercial Borrowings (ECBs)? Discuss the three tracks of ECBs.
Answer:
“External Commercial Borrowings”: ECBs are commercial loans raised by eligible resident entities from recognized non-resident entities and should conform to parameters such as minimum maturity, permitted and non-permitted end-uses, maximum all-in-cost ceiling, etc. The parameters apply in totality and not on a standalone basis.

Tracks of ECBs: The framework for raising loans through ECB comprises the following three tracks:

• Track I: Medium term foreign currency denominated ECB with minimum average maturity of 3/5 years.
• Track II: Long term foreign currency denominated ECB with minimum average maturity of 10 years.
• Track III: Indian Rupee (INR) denominated ECB with minimum average maturity of 3/5 years.

Question 7.
Explain the following statement: “External Commercial Borrowing (ECBs) refers to the commercial loans.”
Answer:
External Commercial Borrowings (ECBs) refer to commercial loans in the form of bank loans, buyers, credit, suppliers, credit, securitized instruments (example: floating rate notes and fixed rate bonds, non-convertible, optionally convertible or partially convertible debentures or any other financial instruments that could be converted into equity shares at a later) availed of from non-resident lenders with a minimum average maturity of 3 years, ECB for investment in real sector- industrial sector, infrastructure sector-in India and specified service are under – Automatic Route, i.e. do not require Reserve Bank/Government of India approval.

Question 8.
Describe the end use of External Commercial Borrowings (ECBs) through approval route.
Answer:
The permitted end use of proceeds of external commercial borrowings (ECBs) raised under revised ECB guideline, depends upon the tracks under which it was raised. The uses are as:

Track I:
(a) Capital expenditure in the form of:

• import of capital goods including for services technical know-how and license fee provided they are the part of these capital goods).
• local sourcing of capital goods.
• new projects.
• modernization/expansion of existing units.
• Investment in jointventures(JV)/wholly-owned subsidiaries (WOS) overseas.
• acquisition of shares of PSUs under the disinvestment pro-gramme of Government of India etc.

(b) SIDBI – Only for the purpose of lending to borrowers in the MSME sector.

(c) Units of SEZs – Only for their own requirements.

(d) Shipping and airlines companies – Only for import of vessels and aircrafts only.

(e) For general corporate purpose (including working capital) provided the ECB is raised from direct/indirect equity holder or from a group company; for a minimum average maturity of 5 years.

(f) ECBs under the approval route:

• For import of second-hand good; as per DGFT guidelines.
• For on-lending by Exim Bank.

Track II: Any end use other than following:
(a) Real estate activities.
(b) Investing in capital market.
(c) Using proceeds for equity investment domestically.
(d) On-lending to other entries with any of the above objective.
(e) Purchase of land.

Track III:
(a) All permitted use as per track n.
(b) SEZs/NMIZs Developers Only for providing infrastructure facilities within SEZ/NMIZ.
(c) NBFCs can use ECB proceeds for:

• On-lending for any activities including infrastructure sector as permitted by the concerned regulatory department of RBI.
• Hypothecated loans to domestic entities for acquisition of capital goods/equipment.
• Providing capital goods/equipment to domestic entities by way of lease/hire purchase.
• Entities in micro-finance sector – Only for on-lending to self-help, groups or for micro-credit or for bona fide micro-finance activity including capacity building.

Question 9.
What are “External Commercial Borrowings” (ECBs)? Explain various tracks and forms available under ECBs.
Answer:
Meaning of ECBs: ECBs are commercial loans raised by eligible resident entities from recognised non-resident entities and should conform to parameters such as minimum maturity, permitted and non-permitted end-uses, maximum all-in-cost ceiling, etc. The parameters apply in totality.

Tracks of ECBs: The framework for raising loans through ECB comprises the following three tracks:

• Track I: Medium term foreign currency denominated ECB with minimum average maturity of 3/5 years.
• Track II: Long term foreign currency denominated ECB with minimum average maturity of 10 years.
• Track III: Indian Rupee (INR) denominated ECB with minimum average maturity of 3/5 years.

Forms of ECBs: The ECB Framework enables permitted resident en-tities to borrow from recognized non-resident entities in the following forms:

• Loans including bank loans.
• Securitized instruments (e.g. floating rate notes and fixed rate bonds, non-convertible, optionally convertible or partially convertible preference shares/debentures).
• Buyers’ credit.
• Suppliers’ credit.
• Foreign Currency Convertible Bonds (FCCBs).
• Financial Lease.
• Foreign Currency Exchangeable Bonds (FCEBs).

Question 10.
What do you mean by ECB? Under what circumstances conversion of ECB’s into equity is possible?
Answer:
ECBs are commercial loans raised by eligible resident entities from recognized non-resident entties and should confirm to parameters such as minimum maturity, permitted and non-permitted end-uses, maximum all-in-cost ceiling, etc. The parameters apply in totality and not on a standalone basis.

Circumstances in which Conversion of ECBs into equity is permitted (including those which are matured but unpaid) subject to fulfilment of following conditions:

• The activity of the borrowing company is covered under the automatic route for FDI or approval route from the Foreign Investment Promotion Board (FIPB), wherever applicable for foreign equity participation has been obtained as per the extant FDI policy.
• Reporting requirements should be fulfilled.
• The conversion, which should be with the lender’s consent and without any additional cost will not result in breach of applicable sector cap on the foreign equity holding.
• Applicable pricing guidelines for shares are complied with.
• Consent of other lenders, if any.
• In case borrower concerned has availed of other credit facilities from the Indian banking system the applicable prudential guidelines issued by RBI are complied with.

Question 11.
Distinguish between the following: “FCCB and FCEB”.
Answer:
“FCCB and FCEB”:
Foreign Currency Convertible Bonds (FCCBs) are issued by a company to non-residents giving them the option to either convert them into shares of the same company at a pre-determined price or have the bonds redeemed. On the other hand, Foreign Currency Exchangeable Bonds (FCEBs) are issued by the investment or holding company of a group to non-residents which are exchangeable for the shares of the specified company at a predetermined price. The key difference, therefore, is while FCCB involves just one company, FCEB involves at least two companies where the bonds are issued by a company while the shares are of ‘offered company’ whose shares should be listed on stock exchange.

Question 12.
“Both Foreign Currency Exchangeable Bonds (FCEBs) and Foreign Currency Convertible Bonds (FCCBs) are convertible into equity shares.” Since both are convertible into equity shares you are required to highlight the advantages of FCEBs over FCCBs.
Answer:
Both Foreign Currency Exchangeable Bonds (FCEBs) and Foreign Currency Convertible Bonds (FCCBs) are convertible into equity shares, the advantages of FCEBs over FCCBs are:

• Foreign Currency Exchangeable Bonds (FCEBs) offers similar benefits of conversion as Foreign Currency Convertible Bond (FCCB).
• FCEBs offer one unique advantage over and above FCCB which is that FCEBs are convertible into shares of another company (offered company) that forms part of same promoter group as the issuer company. So it does not result in dilution of shareholding at the offered company level.
• FCEB scheme affords a unique opportunity for Indian promoters to unlock value in group companies. They can raise money overseas to fund their new projects and acquisitions, both Indian and global by leveraging a part of their shareholding in listed group entities.

Question 13.
Distinguish between the following: “Foreign Direct Investment (FDI) and Foreign Institutional Investment (FII).”
Answer:
Differences between “Foreign Direct Investment (FDI) and Foreign Institutional Investment (FII)”:

Basis of Distinction	Foreign Direct Investment (FDI)	Foreign Institutional Investor (FII)
Meaning	FDI is a direct investment into the production or business by a company in a country other than its domestic country.	FII is an investment made by an investor in the markets of a foreign nation.
Restriction on entry and exit	FDI cannot enter and exit easily.	FII can enter the stock market easily.
Target	FDI targets a specific enterprise.	FII targeted to increases capital availability.
Stability	FDI is considered more stable than FII.	FII is considered less stable than FDI.
Nature of Investment	FDI is “Strategic Investment” i.e. for long period.	FII is Portfolio investment.

Question 14.
Distinguish between the following: “Asian Development Bank and International Monetary Fund”.
Answer:
Asian Development Bank: Asian Development Bank (ADB) assists its member and partners, by providing loans, technical assistance, growth and other equity investments to promote social and economic development ADB is composed of 67 members 48 of which are from the Asia and the Pacific region. The ADB is committed to achieving a prosperous, inclusive resilient and sustainable Asia and the Pacific while sustaining its efforts to eradicate extreme poverty. It assists its members and partners by providing loans, technical assistance, grants, and equity investments to promote social and economic development.

International Monetary Fund (IMF): The IMF’s primary purpose is to ensure the stability of the international monetary system. The system of exchange rates and international payments that enables countries (and their citizens) to transact with each other. Funds mandate was updated in 2012 to include all macro-economic and financial sector issues that bear on global stability.

Question 15.
Briefly explain the principal documents involved in issuance of Global Depository Receipts (GDRs) and Foreign Currency Convertible Bonds (FCCBs).
Answer:
Following are principal documents involved in issuance of Global De-pository Receipts (GDRs) and Foreign Currency Convertible Bonds (FCCBs):

• Depository Agreement: Depository agreement outlines the detailed arrangements entered into by the company with the Depository, the forms and terms of the depository receipts, rights and duties of the depositor.
• Subscription Agreement: Subscription agreement provides that Lead Managers and other managers agree, severally and not jointly, with the company, subject to the satisfaction of certain conditions to subscribe for GDRs at the offering price set forth.
• Agency Agreement: In accordance of this agreement, conversion agents are required to make the principal and interest payments to the holders of FCCBs from the funds provided by the company.
• Trust Deed: For FCCBs, the company enters into a Covenant (known as Trust Deed) with the Trustee for the holders of FCCBs guaranteeing payment of principal and interest amount on such FCCBs and to comply with the obligations in respect of such FCCBs.
• Custodian Agreement: Custodian works in co-ordination with the depository and has to observe all imposed obligations on it including those mentioned in the depository agreement. The custodian is responsible solely to the depository.

Question 16.
What is ‘offering circular’? Explain the contents of offering circular for Euro Issue.
Answer:
Offering Circular: It is a document issued by the issuer company through which the prospective investors can access vital information regarding the company in order to form their investment strategies. It is to be prepared very carefully giving true and complete information regarding the financial strength of the company, its past performance, past and envisaged research and business promotion activities track record of promoters and the company, ability to trade the securities on Euro capital market.

Contents of Offering Circular for Euro issue:

• Background of the company and its promoters including date of incorporation and objects, past performance, production, sales and distribution network, future, plans etc.
• Capital structure of the company existing proposed and consolidated.
• Deployment of issue proceeds.
• Financial data indicating track record consistent profitability of the company.
• Group investments and their performance including subsidiaries, joint venture in India and abroad.
• Status of approvals required to be obtained from Government of India.
• Summary of significant differences in Indian GAAP, UK GAAP and US GAAP and expert’s opinion.
• Report of statutory auditor.
• Subscription and sale.
• Transfer restrictions in respect of instruments.
• Legal matters etc.
• Investment considerations.
• Description of shares.
• Terms and conditions of global depository receipt and any other instrument issued along with it.
• Economic and regulatory policies of the Government of India.
• Details of Indian securities market indicating stock exchange, listing requirements, foreign investments in Indian securities.
• Market price of securities.
• Dividend and capitalization.
• Securities regulations and exchange control.
• Tax aspects indicating analysis of tax consequences under Indian law of acquisition, membership and sale of shares, treatment of capital gains tax, etc.
• Other general information not forming part of any of the above.

Question 17.
“Offering circular is a mirror through which the prospective investors can access vital information of the company in order to form their investment strategies.” Explain the statement and list out the contents included in the offering circular.
Answer:

• The given statement i.e. “Offering Circular is a mirror through which the prospective investors can access vital information regarding the company in order to form their investment strategies” is correct.
• Offering Circular is used in case of “Euro Issue” which gives true and complete information regarding the financial strength of the company, its past performance, past and envisaged research and business pro-motion activities, track record of promoters and the company, ability to trade the securities on Euro capital market.

Contents of Offering Circular for Euro issue:

• Background of the company and its promoters including date of incorporation and objects, past performance, production, sales and distribution network, future, plans etc.
• Capital structure of the company existing proposed and consolidated.
• Deployment of issue proceeds.
• Financial data indicating track record consistent profitability of the company.
• Group investments and their performance including subsidiaries, joint venture in India and abroad.
• Status of approvals required to be obtained from Government of India.
• Summary of significant differences in Indian GAAP, UK GAAP and US GAAP and expert’s opinion.
• Report of statutory auditor.
• Subscription and sale.
• Transfer restrictions in respect of instruments.
• Legal matters etc.
• Investment considerations.
• Description of shares.
• Terms and conditions of global depository receipt and any other instrument issued along with it.
• Economic and regulatory policies of the Government of India.
• Details of Indian securities market indicating stock exchange, listing requirements, foreign investments in Indian securities.
• Market price of securities.
• Dividend and capitalization.
• Securities regulations and exchange control.
• Tax aspects indicating analysis of tax consequences under Indian law of acquisition, membership and sale of shares, treatment of capital gains tax, etc.
• Other general information not forming part of any of the above.

Question 18.
List the approvals required for resources mobilisation by a company in the international capital market.
Answer:
The following approvals are required for issue of GDRs/FCCBs:

• Approval of Board of Directors: A meeting of Board of Directors is required to be held for approving the proposal to raise money from Euro Capital market. A board resolution is to be passed to approve the raising of finance by issue of GDRs/FCCBs.
• Approval of Shareholders: Proposal for making Euro issue, as proposed by Board of Directors require approval of shareholders through a special resolution.
• Approval of Ministry of Finance: In case of FCCB issue exceeding US $ 100 million, the company needs to apply Ministry of Finance for approval. A Company need not obtain approval of Ministry of Finance before issuing depository receipts. However, approval if any required under FDI Policy would still be required.
• Approval of Reserve Bank of India: The issuer company has to obtain approvals from Reserve Bank of India under circumstances specified under the guidelines issued by the concerned authorities from time to time.
• In-principle consent of Stock Exchanges for listing of underlying shares: The issuing company has to make a request to the domestic stock exchange for in-principle consent for listing of underlying shares which shall be lying in the custody of domestic custodian. These shares, when released by the custodian after cancellation of GDR, are traded on Indian stock exchanges like any other equity shares.
• In-principle consent of Financial Institutions: Where term loans have been obtained by the company from the financial institutions, the agreement relating to the loan contains a stipulation that the consent of the financial institution has to be obtained. The company must obtain in-principle consent on the broad terms of the proposed issue.

Question 19.
Explain briefly the following statement: “FCCB and ECB are different modes for raising foreign capital”.
Answer:
FCCB and ECB are two different modes for raising capital foreign sources

• Foreign Currency Convertible Bonds (FCCBs) means bonds issued in accordance with the FCCBs and Ordinary Shares (Through Depository Receipt Mechanism) Scheme, 1993 and subscribed by a non-resident in foreign currency and convertible into ordinary shares of the issuing company in any manner, either in whole or in part of the basis of any equity related warrants attached to debt instruments.
• External Commercial Borrowings are one of the modes for sourcing of funds for corporate. External Commercial Borrowings (ECB) include commercial bank loans, buyer’s credit, suppliers credit, securitized instruments such as floating rate notes and fixed rate bonds. As per revised ECB guideline, ECB can be accessed as per three tracks i.e. Track-I, Track-II and Track-in.

Question 20.
What are the approvals required for issuance of Global Depository Receipts (GDRs)?
Answer:
Various approvals required for issuance of Global Depository Receipts (GDRs):

• Approval of the Board of Directors.
• Approval of shareholders;
• No need to obtain approval of Ministry of Finance. In case approval if any required under FDI Policy would still be required.
• Approved of Ministry of Corporate Affairs.
• Approval of Reserve Bank of India.
• In principal consent of
  • Stock Exchange for listing of underlying shares.
  • Financial Institutions.

Question 21.
Explain briefly: “Two-way Fungibility Scheme”.
Answer:
“Two-way Fungibility Scheme”:

• “Two-way Fungibility Scheme” means that the shares so released can be reconverted by the company into DRs for purchase by the overseas investors.
• Two-way Fungibility Scheme implies that the re-issuance of DRs would be permitted to the extent of Depository Receipts that have been redeemed and underlying shares are sold in domestic market.
• Limited two-way fungibility scheme has been put in place by the Government of India for ADRs/GDRs. Under this scheme, a stock broker in India registered with SEBI, can purchase shares of an Indian company from the market for conversion into ADRs/ GDRs based on instructions received from overseas investors. Re-issuance of ADRs/ GDRs would be permitted to the extent of ADRs/GDRs which have been redeemed into underlying shares and sold in the Indian market.

Question 22.
“Not only Indian companies are going abroad to raise funds, foreign companies are also coming to India to raise funds.” Name the instrument(s) through which a foreign company can raise funds in India by issuing its own equity shares. Also, state the eligibility and conditions for the issue of such instrumcnt(s) in India.
Answer:
A foreign company can raise funds in India by issuing its own equity shares through Indian Depository Receipts (IDRs).

• According to Section 2(48) of the Companies Act, 2013 “Indian Depository Receipt” means any instrument in the form of a depository receipt created by a domestic depository in India and authorised by a company incorporated outside India making an issue of such depository receipts.
• Section 390 of the Companies Act, 2013 and Rule 13 of Companies (Registration of Foreign Companies) Rules, 2014 lays down the eligibility criteria and conditions for issue of Indian Depository Receipts.

Eligibility for Issue of IDRs:
As Rule 13(2) of the Companies (Registration of Foreign Companies) Rules, 2014 stipulates that the issuing company shall not issue IDRs unless:

• its pre-issue paid-up capital and free reserves are at least US$ 50 million and it has a minimum average market capitalization (during the last three years) in its parent country of at least US$ 100 million.
• it has been continuously trading on a stock exchange in its parent or home country (the country of incorporation of such company) for at least three immediately preceding years.
• it has a track record of distributable profits in terms of section 123 of the Act, for at least three out of immediately preceding five years.
• it fulfils such other eligibility criteria as may be laid down by the SEBI from time to time in this behalf.

Conditions:
Following conditions required to be fulfilled for issue of prospectus which is as under:
(a) No application form for the securities of the issuing company shall be issued unless the form is accompanied by a memorandum containing the salient features of prospectus in the specified form.

(b) An application form can be issued without the memorandum as specified in clause (a), if it is issued in connection with an invitation to enter into an underwriting agreement with respect to the IDRs.

(c) The prospectus for subscription of IDRs of the Issuing company which includes a statement purporting to be made by an expert shall not be circulated, issued or distributed in India or abroad unless a statement that the expert has given his written consent to the issue thereof and has not withdrawn such consent before the delivery of a copy of the prospectus to SEBI and the Registrar of Companies, New Delhi, appears on the prospectus.

(d) The provisions of the Act shall apply for all liabilities for mis-statements in prospectus or punishment for fraudulently inducing persons to invest money in IDRs.

(e) The person(s) responsible for issue of the prospectus shall not incur any liability by reason of any non-compliance with or contravention of any provision of this rule if:

• as regards any matter not disclosed, he proves that he had no knowledge thereof; or
• contravention arose in respect of such matters which in the opinion of the Central Government or SEBI were not material.

Question 23.
Indian companies are allowed to raise Equity Capital in the Inter-national Market through the issue of ADR/GDR/FCCB/FCEB. Briefly, discuss the regulatory framework of ADR & GDR in India.
Answer:
Indian companies are allowed to raise capital in the international market through issue of ADR/GDR which are regulated by the following legislations in India:

• The Foreign Currency Convertible Bonds and Ordinary Shares (Through Depository Receipt Mechanism) Scheme, 1993.
• Depository Receipts Scheme, 2014.
• Notifications/Circulars issued by Ministry of Finance (MoF), GOI. Consolidated FDI Policy.
• RBI Regulations/Circulars.
• Companies Act, 2013 and Rules there under.
• Listing Regulations.

Question 24.
Discuss the different modes of Euro Issue detail.
Answer:
Euro issue means modes of raising funds by an Indian company outside India in foreign currency. There are different modes of Euro issue which is as follows:
1. Depository Receipts:
a. American Depository Receipts
i Existing shares;
it Fresh shares.

b. Global Depository Receipts
i From Euro market.
ii From US market.

2. Foreign Currency Convertible Bonds/Foreign Currency exchangeable bonds.

Question 25.
States the procedure laid out for issuance of ADRs/GDRs. ;
Answer:
Following are the procedure for the issuance of ADRs/GDRs: The issue of ADRs/GDRs requires the approval of a Board of Directors, share holders, “In principle and Final” approval of Ministry of Finance, approval of Reserve Bank of India, In-principle consent of Stock Exchange for listing of underlying shares and In-principle consent of Financial institutions.
1. Approval of Board of Directors:
Meeting of Board of Directors is required to be held for approving the proposal to raise money from Euro Capital Market. Board Resolution is to be passed to approve the raising of finance by issue of GDRs/ FCCBs. The resolution should indicate therein specific purposes for which funds are required, quantum of the issue, country in which issue is to be launched, time of the issue etc.

2. Approval of Shareholders:
Proposal for making Euro issue, as proposed by Board of Directors requires approval of shareholders. A special resolution under section 62 of the Companies Act, 2013 is required to be passed at a duly convened general meeting of the shareholders of the company.

3. Approval of Ministry of Finance- “In-Principle and Final”:
With respect to ADR/GDR guidelines issued on the subject brought ADR/GDR under the automatic route and therefore the requirement of obtaining approval of Ministry of Finance, Department of Economic Affairs has been dispersed with.

Further, private placement of ADR/GDR will also not require prior approval provided the issue is managed by investment banker.

4. In-Principle Consent of Stock Exchanges for Listing of Underlying Shares:
The issuing company has to make a request to the domestic stock ex-change for in-principle consent for listing of underlying shares which shall be lying in the custody of domestic custodian. These shares, when released by the custodian after cancellation of GDR, are traded on Indian stock exchanges like any other equity shares.

5. In-Principle Consent of Financial Institutions:
Where term loans have been obtained by the company from the financial institutions, the agreement relating to the loan contains a stipulation that the consent of the financial institution has to be obtained. The company must obtain in-principle consent on the broad terms of the proposed issue.

Question 26.
“Achieving a prosperous, inclusive, resilient and sustainable Asia and the pacific, while sustaining its efforts to eradicate extreme poverty”- Justify the mission of Asia Development Bank in your own words.
Answer:

• Asian Development Bank (ADB) as a financial institution that would be Asian in character and foster economic growth and co-operation in one of the poorest regions in the world in early 1960s.
• Asian Development Bank is committed to achieving a prosperous, inclusive, resilient, and sustainable Asia and the Pacific while sustaining its efforts to eradicate extreme poverty. It assists its members and partners by providing loans, technical assistance, grants and equity investments to promote social and economic development.
• Asian Development Bank in partnership with member governments, independent specialists and other financial institutions is focused on delivering projects in developing member countries that create economic and developments impact.
• As a multilateral development finance institution, Asian Development Bank provides:
  • Loans.
  • Technical assistance.
  • Grants.
• Asian Development Bank maximizes the development impact of its assistance by:
  • Mobilizing financial resources through co-financing operations that top official, commercial and export credit sources.
  • Facilitating policy dialogues.
  • Providing advisory services.

Question 27.
What do you mean by “Foreign Currency Convertible Bonds” (FCCBs)? State the benefits of FCCBs to investors and the issuer.
Answer:
Foreign Currency Convertible Bonds (FCCBs) are unsecured carrying a fixed rate of interest and an option for conversion into a fixed number of equity shares of the issuer company. Interest and redemption price (if conversion option is not exercised) is payable in dollars. FCCBs shall be denominated in any freely convertible Foreign Currency. However, it must be kept in mind that FCCB issue proceeds need to conform to ECB end use requirements.

Benefits to the Issuer Company:

• Being Hybrid instrument, the coupon rate on FCCB is particularly lower than pure debt instrument thereby reducing the debt financing cost.
• FCCBs are book value accretive on conversion. It saves risks of immediate equity dilution as in the case of public shares. Unlike debt, FCCB does not require any rating nor any covenant like securities, cover etc.

Benefits to Investors:

• Has advantage of both equity and debt.
• Ability to take advantage of price appreciation in the stock by means of warrants attached to the bonds which are activated when price of a stock reaches a certain point.
•  It gives the investor
  • upside of investment in case equity and
  • debt portion protects the downside.
• Assured return on bond in the form of fixed coupon rate pay-ments.

Question 28.
Discuss five elements of framework for raising External Commercial Borrowings (ECBs) for Start-ups?
Answer:
1. Eligibility: An entity recognised as a Start-up by the Central Government as on date of raising ECB.

2. Maturity Minimum average maturity period will be 3 years.

3. Forms: The borrowing can be in form of loans or non-convertible, optionally convertible or partially convertible preference shares.

4. Currency: The borrowing should be denominated in any freely convertible currency or in Indian Rupees (INR) or a combination thereof.

In case of borrowing in INR, the non-resident lender, should mo­bilise INR through swaps/outright sale undertaken through an AD Category-I bank in India.

5. Amount: The borrowing per Start-up will be limited to USD 3 million or equivalent per financial year either in INR or any convertible foreign currency or a combination of both.

Question 29.
Discuss about four intermediaries’ agencies in Euro Issue?
Answer:
Four intermediaries’ agencies in Euro Issue are as follows:

1. Lead Manager: The company has to choose a competent lead manager to structure the issue and arrange for the marketing. Lead managers usually charge a lee as a per cent of the issue. The issues related to public or private placement, nature of investment, coupon rate on bonds and conversion price are to be decided in consultation with the lead manager.

2. Co-Lead/Co-Manager: In consultation with the lead manager, the company has to appoint co-lead/co-manager to coordinate with the issuing company/lead manager to make the smooth launching of the Euro issue.

3. Overseas Depository Bank: It is the bank which is authorised by the issuing company to issue Depository Receipts against issue of ordinary shares or Foreign Currency Convertible Bonds of issuing company.

4. Listing Agent: One of the conditions of Euro-issue is that it should be listed at one or more Overseas Stock Exchanges. The appointment of listing agent is necessary to coordinate with issuing company for listing the securities on Overseas Stock Exchanges.

Question 30.
What are the benefits of FCCBs to the Investor?
Answer:
Benefits of Foreign Currency Convertible Bonds to the Investor are as follows:

• It has advantage of both equity and debt.
• It gives the investor much of the upside of investment in equity and the debt portion protects the downside.
• Assured return on bond in the form of fixed coupon rate payments.
• Ability to take advantage of price appreciation in the stock by means of warrants attached to the bonds which are activated when price of a stock reaches a certain point.
• Significant Yield to maturity (YTM) is guaranteed at maturity.
• Lower tax liability as compared to pure debt instruments due to lower coupon rate.

Question 31.
Write short note on: “International Monetary Fund”.
Answer:
“International Monetary Fund”:

• IMF is governed by and accountable to the 189 countries that make up its near-global membership.
• IMF is working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world.
• The IMF’s fundamental mission is to ensure the stability of the international monetary system in three ways:
  • keeping track of the global economy and the economies of member countries;
  • lending to countries with balance of payments difficulties; and
  • giving practical help to members.

Question 32.
Write short note on: “Custodian Agreement”.
Answer:

• Custodian works in coordination with the depository and has to observe all obligations imposed on it including those mentioned in the depository agreement. In nutshell, the custodian is responsible solely to the depository.
• In the case of the depository and the custodian being same legal entity references to them separately in the depository agreement or otherwise may be made for convenience and the legal entity will be responsible for discharging both functions directly to the holders and the company.
• The depository in its discretion determines that it is in the best interests of the holders to do so it may after prior consultation with the company terminate.
• The depository shall notify holders of such change promptly and any successor custodian appointed shall agree to observe all imposed obligations.
• The appointment of the custodian and in such an event the depository shall promptly appoint a successor custodian which shall upon acceptance of such appointment become the custodian under the depository agreement.

Corporate Funding and Listings in Stock Exchanges Notes

Other Borrowings Tools – Corporate Funding and Listings in Stock Exchanges Important Questions

Question 1.
Explain “Commercial Paper”.
Answer:
“Commercial Paper”: Commercial Paper (CP) is an unsecured money market instrument issued in the form a promissory note. CP is a private placed instrument. It enables highly rated corporate borrowers to diversify their sources of short-term borrowings and provides an additional instrument to investors.

Question 2.
Comment on the following: Issue of unsecured debentures by a company to another company, where the debenture have an option for compulsory conversion into equity shares within seven years, cannot be termed as deposits.
Answer:
As per section 73 of Companies Act, 2013 read with Rule 2(l)(c) of Companies (Acceptance of Deposits) Rules, 2014 define the term ‘deposit’.

As per Rule 2(1)(c)(ix), deposit shall not include any amount raised by issue of bonds or debentures secured by first charge or a charge ranking pari passu with the first charge on any assets referred to in Schedule m of the Companies Act, 2013 excluding intangible assets of the company or the bonds or debentures compulsorily convertible into shares of the company within 10 years.

Since comprehensive reading of the above clause the unsecured debenture issued having option of compulsory conversion into shares of the company within ten years shall not be treated as deposits.

In the given case, the unsecured debentures issued by the company having option of compulsory conversion into shares of the company within seven years cannot be treated as deposits.

Question 3.
Define the term ‘deposits’ and list out the receipts of money which are not considered as deposits.
Answer:
According to the section 2(31) of the Act read with Rule 2(c) of Companies (Acceptance of Deposits) Rules, 2014, “deposit” includes any receipt of money by way of deposit or loan or in any other form by a company, but does not include
→ any amount received from the Central Government or a State Government, or any amount received from any other source whose repayment is guaranteed by the Central Government or a State Government, or any amount received from a local authority, or any amount received from a statutory authority constituted under an Act of Parliament or a State Legislature.

→ any amount received from foreign Governments, foreign or international banks, multilateral financial institutions (including, but not limited to, International Finance Corporation, Asian Development Bank, Commonwealth Development Corporation and International Bank for Industrial and Financial Reconstruction), foreign Governments owned development financial institutions, foreign export credit agencies, foreign collaborators, foreign bodies corporate and foreign citizens, foreign authorities or persons resident outside India subject to the provisions of Foreign Exchange Management Act, 1999 and rules and regulations made there under.

→ any amount received as a loan or facility from any banking company or from the State Bank of India or any of its subsidiary banks or from a banking institution notified by the Central Government under section 51 of the Banking Regulation Act, 1949, or a corresponding new bank as defined in clause (d) of section 2 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 or in clause (b) of section 2 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980, or from a co-operative bank as defined in Section 2(bii) of the Reserve Bank of India Act, 1934.

→ any amount received as a loan or financial assistance from Public Financial Institutions notified by the Central Government in this be-half in consultation with the Reserve Bank of India or any regional financial institutions or Insurance Companies or Scheduled Banks as defined in the Reserve Bank of India Act, 1934.

→ any amount received against issue of commercial paper or any other instruments issued in accordance with the guidelines or notification issued by the Reserve Bank of India.

→ any amount received by a company from any other company.

→ any amount received and held pursuant to an offer made in accordance with the provisions of the Act towards subscription to any securities, including share application money or advance towards allotment of securities pending allotment, so long as such amount is appropriated only against the amount due on allotment of the securities applied for.

→ any amount received from a person who, at the time of the receipt of the amount, was a director of the company or a relative of the director of the Private company.

However, the director of the company or relative of the director of the private company, as the case may be, from whom money is received, furnishes to the company at the time of giving the money, a declaration in writing to the effect that the amount is not being given out of funds acquired by him by borrowing or accepting loans or deposits from others and the company shall disclose the details of money so accepted in the Board’s Report.

→ any amount raised by the issue of bonds or debentures secured by a first charge or a charge ranking pari passu with the first charge on any assets referred to in Schedule m of the Act excluding intangible assets of the company or bonds or debentures compulsorily convertible into shares of the company within Ten years.

However, if such bonds or debentures are secured by the charge of any assets referred to in Schedule HI of the Act, excluding intangible assets, the amount of such bonds or debentures shall not exceed the market value of such assets as assessed by a registered valuer.

→ any amount raised by issue of non-convertible debenture not constituting a charge on the assets of the company and listed on a recognised stock exchange as per applicable regulations made by Securities and Exchange Board of India.

→ any amount received from an employee of the company not exceeding his annual salary under a contract of employment with the company in the nature of non-interest bearing security deposit.

→ any non-interest bearing amount received and held in trust.

→ any amount accepted by a Nidhi company in accordance with the rules made under section 406 of the Act.

→ any amount received by way of subscription in respect of a chit under the Chit Fund Act, 1982.

→ any amount received by the company under any collective investment scheme in compliance with regulations framed by the Securities and Exchange Board of India.

→ an amount of twenty five lakh rupees or more received by a start-up company, by way of a convertible note (convertible into equity shares or repayable within a period not exceeding five years from the date of issue) in a single tranche, from a person.

Question 4.
Tree Reserves’ and ‘Net Worth’ under the provisions of Companies Act, 2013.
Answer:
As per section 2(43) of Companies Act, 2013: Tree Reserves’ mean such reserves which, as per the latest audited Balance Sheet of a company, are available for distribution as dividend. Provided that any amount representing unrealized gains, notional gains or revaluation of assets whether as a reserve or otherwise or any change in carrying amount of an asset or a liability recognized in equity, including profit and loss account on measurement of the asset or the liability at fair value, shall not be treated as free reserves.

As per section 2(57) of Companies Act, 2013: ‘Net worth’ means the aggregate value of the paid up share capital and all reserves created out of the profits and securities premium account, after deducting the aggregate value of the accumulated losses, deferred expenditure and miscellaneous expenditure not written off, as per the audited Balance Sheet, but does not include reserves created out of revaluation of assets, write-back of depreciation and amalgamation.

Question 5.
What is the difference between a Fixed Deposit and Inter-Corporate Deposit? In case of default by a company, explain the role of regulator.
Answer:
Fixed Deposit and Inter-Corporate Deposit:
Corporate also have access to another market called the Inter Corporate Deposits (ICD) market. An ICD is an unsecured loan extended by one corporate to another. Existing mainly as a refuge for low rated corporate, this market allows corporate with surplus funds to lend to other corporate facing shortage of funds. Another aspect of this market is that the better-rated corporate can borrow from the banking system and lend in this market to make speculative profits. As the cost of funds for a corporate in much higher than that of a bank, thus, the rates in this market are higher than those in the other markets. ICDs are unsecured, and hence the risk inherent is high.

Role of Regulator in case of default by a company:

If company fails to repay the depositor may apply to Tribunal and tribunal may direct that:
→ the company shall, in addition to the payment of the amount of deposit or part thereof and the interest due, be punishable with fine which shall not be less than one crore rupees but which may extend to ten crore rupees; and

→ every officer of the company who is in default shall be punishable with imprisonment which may extend to seven years or with fine which shall not be less than twenty-five lakh rupees but which may extend to two crore rupees, or with both.
However, if it is proved that the officer of the company who is in default, has contravened such provisions knowingly or wilfully with the intention to deceive the company or its shareholders or depositors or creditors or tax authorities, he shall be liable for action under section 447 of Companies Act, 2013.

→ Any suit, proceedings or other action may be taken by any person, group of persons or any association of persons who had incurred any loss as a result of the failure of the company to repay the deposits or part thereof or any interest thereon.

→ Where a company fails to repay the deposit or part thereof or any interest thereon referred to in section 74 of the Companies Act, 2013 within the time specified in sub-section (1) of that section or such further time as may be allowed by the Tribunal under sub-section (2) of that section and it is proved that the deposits had been accepted with intent to defraud the depositors or for any fraudulent purpose, every officer of the company who was responsible for the acceptance of such deposit shall, without prejudice to the provisions contained in sub-section (3) of that section and liability under section 447 of the Companies Act, 2013, be personally responsible, without any limitation of liability, for all or any of the losses or damages that may have been incurred by the depositors.

Question 6.
Distinguish between the following: Commercial Paper and Inter Corporate Deposit.
Answer:
Following are the differences between Commercial Paper and Inter Corporate Deposits:
Commercial Paper (CP):
It is an unsecured money market instrument issued in the form of a promissory note to enable highly rated corporate borrowers to diversify their sources of short-term borrowings and to provide an additional instrument to investors.

Companies, Primary Dealers and financial institutions (FIs) are permitted to raise short-term resources under the umbrella limit fixed by the Reserve Bank of India (RBI) are eligible to issue Commercial Paper.

A company would be eligible to issue Commercial Paper provided:

• the tangible net worth of the company, as per the latest audited balance sheet, is not less than ₹ 4 crores.
• the company has been sanctioned working capital limit by bank/s or FIs and
• the borrowal account of the company is classified as a Standard Asset by the financing bank/institution.

Inter Corporate Deposits (ICD):

• Corporate also have access to another market called the Inter Corporate Deposits (ICD) market.
• An ICD is an unsecured loan extended by one corporate to another. Existing mainly as a refuge for low rated corporate, this market allows corporate with surplus funds to lend to other corporate facing shortage of funds.
• Another aspect of this market is that the better-rated corporate can borrow from the banking system and lend in this market to make speculative profits. As the cost of funds for a corporate in much higher than that of a bank. Thus, the rates in this market are higher than those in the other markets.
• ICDs are unsecured. Thus, the risk inherent is high.
• ICD market is an unorganised market with very less information available publicly about transaction details.

Question 7.
Comment on the following: A private company incorporated under the Companies Act, 2013 may issue debentures to any number of persons and can accept deposits from the public.
Answer:

• According to section 2(68) of Companies Act, 2013: A private limited company may not make an invitation to the public to subscribe for any securities of the company.
• However, under section 42 read with section 2(68), it may issue such security to any person (number of persons not exceeding 200).
• As per provisions of section 73(2) read with Exemption Notification dated 5th June, 2015:

A private company may accept from its member’s monies not exceeding one hundred percent of aggregate of the paid-up share capital and free reserves

• subject to the passing of a resolution in general meeting, and
• subject to such rules as may be prescribed in consultation with the Reserve Bank of India

accept deposits from its members on such terms and conditions as may be agreed upon between the company and its members, subject to the fulfilment of certain conditions as provided under the Act.

Question 8.
Comment on the following: A private limited company can accept deposit from its members under the provisions of the companies Act, 2013.
Answer:
A private limited company can accept deposit from its members in accordance with Section 73 of the Companies Act, 2013 and rules made there under. Moreover, the Government has exempted the private companies vide notification dated 13th June, 2017, from applicability of section 73(1 )(a) to (e).

Accordingly, a private company may accept deposit from its members:
A. not exceeding one hundred per cent of aggregate of the paid up share capital, free reserves and securities premium account; or

B. is a start-up, for five years from the date of its incorporation; or

C. if it fulfils all of the following conditions, namely:
(a) is not an associate or a subsidiary company of any other company;
(b) if the borrowings of such a company from banks or financial institutions or anybody corporate is less than twice of its paid up share capital or fifty crore rupees, whichever is lower; and
(c) such a company has not defaulted in the repayment of such borrowings subsisting at the time of accepting deposits under this section:

However, the company referred to in clause A, B or C shall file the details of monies accepted to the Registrar in such manner as may be specified.

Question 9.
What are the merits and demerits of customer advance? Explain.
Answer:
Merits of Customer Advance:
(i) Interest free: Amount offered as advance is interest free. Hence funds are available without involving financial burden.
(ii) No tangible security: The seller is not required to deposit any tangible security while seeking advance from the customer. Thus assets remain free of charge.
(iii) No repayment obligation: Money received as advance is not to be refunded. Hence there are no repayment obligations.

Demerits of Customer Advance:
(i) Limited amount: The amount advanced by the customer is subject to the value of the order. Borrowers’ need may be more than the amount of advance.
(ii) Limited period: The period of customers’ advance is only up to the delivery goods. It cannot be reviewed or renewed.
(iii) Penalty in case of non-delivery of goods: Advances are subject to the condition that in case goods are not delivered on time the order would be cancelled and the advance would have to be refunded along with interest.

Question 10.
Sunbeam Ltd. failed to pay interest on repayment of deposits. One depositor approached the consumer forum with the request to issue order against the company for payment of interest on deposits. The company contended that the consumer forum was not a proper authority to issue such directions. Advice the company suitably.
Answer:
Facts of the case: The given facts are similar to a decided case law. Sun-beam Ltd. failed to pay interest on repayment of deposits. One depositor approached the consumer forum with the request to issue order against the company for payment of interest on deposits. The company contended that the consumer forum was not a proper authority to issue such directions.

Applicable provisions: The National Consumer Dispute Redressal Commission pointed out that after the Amendment Act, 1993, a consumer forum can direct payment of amounts due to a depositor under the provisions of Section 18 of the Consumer Protection Act, 1986. An order directing payment of the outstanding amount to the depositors can now be made under the provisions of the Section 14.

Conclusion: In nutshell, the contention of Sun-beam Ltd. is not valid. The payment of interest to the deposit holder should be made as per the order of the consumer forum.

Question 11.
Board of Directors of Joy Ltd., by a resolution passed at its meeting, decided to provide a loan of ₹ 50 crore to Happy Ltd. The paid-up share capital of Joy Ltd. on the date of resolution was ₹ 100 crore and the aggregate balance in the free reserve and securities premium account stood at ₹ 40 crore. Examining the provisions of the Companies Act, 2013, decide whether the Board’s resolution to provide a loan of ₹ 50 crore to Happy Ltd. is valid?
Answer:
Applicable provisions: In accordance with the section 186 of the Companies Act, 2013 no company shall, directly or indirectly:

1. Give any loan to any person or other body corporate;

2. Give any guarantee, or provide security, connection with a loan to any other person body corporate or person; and

3. Acquire, by way of subscription, purchase or otherwise the Securities of any other body corporate; Exceeding 60% of its paid up share capital, free reserves and securities premium account or 100% of its free reserves and securities premium account, whichever is more unless the same is previously authorised by a special resolution passed in the company’s general meeting. No loan or investment shall be made or guarantee or security given by the company unless the resolution sanctioning it is passed at a meeting of the Board with the consent of all directors present at the meeting.

Facts of the case: Accordingly, in the given case, the company can grant a loan of ₹ 50 crore.
Since the company can grant a loan up to ₹ 84 crore (i.e. 60% of ₹ 100 crore + ₹ 40 crore i.e. = ₹ 84 or ₹ 40 crore whichever is more) without the approval of the general meeting by a special resolution and the Board meeting with the consent of all the directors present.

Conclusion: Only Board’s resolution to provide a loan of ₹ 50 crore to Happy limited without the approval of general meeting by a special resolution is valid.

Question 12.
Prism Ltd. has accepted ₹ 10 Lakh as advance towards the supply of goods to certain parties. As per the agreement, the company will supply the goods after two years from the date of deposit. Later on, internal auditors qualified their report on the ground that the company has violate the provisions of the Companies Act, 2013. Directors explained that this is required to complete the order. Examining the relevant provisions of the Companies Act, 2013, state whether the explanation given by the directors is justified.
Answer:
Applicable provisions: According to the section 2(31) of the Act read with Rule 2(c) of Companies (Acceptance of Deposits) Rules, 2014 “deposit” includes any receipt of money by way of deposit or loan or in any other form by a company, but does not include any amount received in the course of or for the purposes of the business of the company as an advance for the supply of goods or provision of services provided that such advance is appropriated against supply of goods or provision of services within a period of three hundred and sixty five days from acceptance of such advance.

Facts of the Case: In case of any advance which is subject matter of any legal proceedings before any Tribunal of law, the said time limit of three hundred and sixty five days shall not apply. In the present case Prism Ltd. has accepted INR 10 lakhs as advance towards the supply of goods to certain parties on an agreement to supply goods after two years from date of deposit.

Conclusion: As per applicable provision, the amount so accepted by the company is “deposit”.

Question 13.
Virat, a person of 21 years of age is pursuing MBA (Finance) course at a reputed recognised business school. He is not a shareholder of Grow (Pvt.) Ltd. He wishes to inspect the registrar of investments in securities not held in company’s name and annual return of Grow (Pvt.) Ltd. He also want to take copies thereof. Examining the relevant provisions of the Companies Act, 2013, advise Virat whether he would be successful in this regard.
Answer:
Applicable provision(s):
Section 187 read with rule 14 of Companies (Meetings of Board and its Powers), Rules, 2014 provides that every company shall maintain Register of Investment in securities not held in company’s name in Form MI3P-3. Sub-section 3 of the section provides that such register shall be open to inspection by any member or debenture-holder of the company without any charge during business hours subject to such reasonable restrictions as the company may by its articles or in general meeting impose.

Section 94 provides that copies of annual return filed under section 92 shall be kept at registered office of the company. Further the copies of all the returns shall be open for inspection by any member, debenture-holder, other security holder or beneficial owner during business hours without payment of fees and by any other person on payment of such fees as may be prescribed under Companies (Registration office & fee) Rules, 2014. Further he may take a copy of the return on payment of such fees as may be prescribed in above said rules.

Facts of the Case: In the given case, Virat (a person of 21 years of age) is pursuing MBA (Finance) course at a reputed recognised business school. He is not a shareholder of Grow (Pvt.) Ltd. He wishes to inspect the registrar of investments in securities not held in company’s name and annual return of Grow (Pvt.) Ltd. Also he wants to take copies.

Conclusion(s):

• In the given case, Virat who is not a member of the company is not eligible to inspect the Register of Investment in securities not held in company’s name.
• In the given case, Virat may inspect and take copy of Annual Return and not the Register of Investment in securities not held in company’s name.

Question 14.
Board of Directors of Green Field Ltd. decides to accept deposits from the public at a compound interest rate of 12% per annum. Examining the provisions of the Companies Act, 2013, advise whether the Board can go ahead with its proposal.
Answer:

• Facts of the case: Board of Directors of Green Field Ltd. decides to accept deposits from the public at a compound interest rate of 12% per annum.
• Question Arises: Whether the Board can go ahead with its proposal or not?

Applicable Provisions:
As per Rule 3(6) of the Companies (Acceptance of Deposits) Rules, 2016: No company under section 73 (2) or any “Eligible Company” shall invite or accept or renew any deposits in any form carrying a rate of interest or pay brokerage thereon at a rate exceeding the maximum rate of interest or brokerage prescribed by the Reserve Bank of India for acceptance of deposits by non-banking financial companies.

Conclusion: Green Field Ltd. is advised to go ahead with the proposal carrying a rate of interest not exceeding the maximum rate of interest or brokerage prescribed by the Reserve Bank of India for acceptance of deposits by non-banking financial companies.

Question 15.
Suresh, a member of Rtichi Ltd., wants to inspect the register of deposits maintained by the Company as required under the provisions of the Companies Act, 2013. The company refused to provide the register for inspection without assigning any reason. Referring to the provisions of the Act, examine the validity of the company’s refusal. What shall be your answer if the same Register is demanded by the statutory auditors of the company for inspection and for their audit?
Answer:
Facts of the Case: Suresh, a member of Ruchi Ltd. wants to inspect the register of deposits maintained by the Company as required under the provisions of the Companies Act, 2013.
In the given case, company refused to provide the register for inspec-tion without assigning any reason.

Applicable provisions: According to Rule 14 of Companies (Acceptance of deposits) Rules, 2014, every company accepting deposits shall, from the date of such acceptance, keep at its registered office one or more separate registers for deposits accepted/renewed. In absence of any enabling provision, this register is not open for inspection by members and company may refuse to open it for inspection.

Conclusion: In the given case, Ruchi Limited can refuse to provide the register for inspection without giving any reason because it is not open for inspection but in case of statutory auditors, the company cannot to do so. The Statutory Auditors have a right to inspect and check every register maintained by the company.

Question 16.
RR Limited has decided to make investment in other companies for ? 50 lakhs, which is in excess of 60% of the company’s paid-up share capital, free reserve and securities premium account. Company has 5 directors. Four directors were present in the Board meeting, three directors have given their consent but one director abstained from voting. The decision of the Board was noted in the minutes of Board meeting and decided to make such investment by passing of Board resolution with majority. Referring to the provisions of Companies Act, 2013, examine the validity of the Board’s decision. [(June 2017) (4 Marks))
Answer:
Applicable provisions:
As per the provisions of the Companies Act, 2013 as contained in section 186(5), no investment shall be made or loan or guarantee or security given by the company unless the resolution sanctioning it is passed at a meeting of the Board with the consent of all the directors present at the meeting and the prior approval of the public financial institution concerned where any term loan is subsisting, is obtained. Further under the provisions of section 186(2) and 186(3) of the Companies Act, 2013, the loan amount must not exceed 6096 of its paid-up capital, free reserves and securities premium account or 10096 of free reserves and securities premium account, whichever is more. In case, the company wishes to exceed the said limit prior approval of company through special resolution would be acquired.

Facts of the case:
As per the facts of the given case, RR Limited has decided to make investment in other companies for ? 50 lakhs which is in excess of 60% of the company’s paid-up share capital, free reserve and securities premium account. Company has 5 directors. Four directors were present in the Board meeting, three directors have given their consent but one director abstained from voting. The decision of the Board was noted in the minutes of Board meeting and decided to make such investment by passing of Board resolution with majority.

In absence of adequate information, even if we assume that INR 50 lakh does not exceed the 100% of free reserves and securities premium account. RR limited has not complied with the provisions of section 186 (5) of the Companies Act, 2013 where consent of all the directors present is required.

Conclusion: The resolution of the Board of Directors therefore, is not 4 valid and has no legal effect.

Question 17.
XYZ Ltd., a company, has a paid up share capital of ₹ 60 crores and free reserves of ₹ 25 crores. It desires to make a loan of ₹ 20 crores to M Ltd. The company XYZ Ltd. has already made investments in many other companies including loans to the extent of ₹ 35 crores. Can the company go ahead with loan to M Ltd.? Please advise the company about the procedure to be followed by it.
Answer:
Applicable provisions: As per section 186 of the Companies Act, 2013 a company shall make investments upto 60 per cent of paid up share capital and free reserves or 100 per cent of free reserves and securities premium account whichever is more.

Facts of the Case: In the given case, XYZ Ltd., a company has a paid up share capital of ₹ 60 crores and free reserves of ₹ 25 crores desires to make a loan of ₹ 20 crores to M Ltd. XYZ Ltd. has already made investments in many other companies including loans to the extent of ₹ 35 crores.

Conclusion:

• In this case, company can make maximum investment of 60% (60+25) = INR 51 crores.
• In the given case as per facts of the case, XYZ Ltd. has already invested INR 35 crores, thus it can further invest 16 crores only.
  To invest up to 20 crores approval of shareholders through a special resolution required.

Question 18.
Commercial paper is sold at a discount from its face value and re-deemed at its face value. Calculate the pre-tax cost on annualised basis of Commercial paper, if face value is ₹ 5,00,000 maturity period is 180 days and net amount realized is ₹ 4,80,000. (Assume 360 days in a year.)
Answer:

= \(\frac{(5,00,000-4,80,000) \times 360 / 180}{4,80,000}\)
= 8.33%

Question 19.
Discuss merits of Commercial Paper?
Answer:
Merits of Commercial Paper:

• It provides more funds compared to other sources.
• It is freely transferable in nature therefore it has high liquidity also.
• It produces a continuing source of funds. This is because their maturity can be tailored to suit the needs of issuing firm. It is highly secure and does not contain any restrictive condition.

Question 20.
Discuss demerits of Commercial Paper?
Answer:
Demerits of Commercial Paper:

• The amount of money that can be raised through commercial paper is limited to the deductible liquidity available with the suppliers of funds at a particular point.
• The duration of commercial paper cannot be extended.
• New and moderately rated organizations are not in a position to raise funds by this method. Only financially secure and highly rated organizations can raise money through commercial paper.

Question 21.
In short, discuss the guidelines for issue of commercial paper.
Answer:
The RBI has issued guideline for issuance of commercial papers which is explained as:
Companies, Primary Dealer(s) and Financial Institutions (FIs) are per-mitted to raise short-term resources under the umbrella limit fixed by the Reserve Bank of India (RBI) are eligible to issue Commercial Paper (CP).

A company would be eligible to issue CP provided:

• Tangible net worth of the company, as per the latest audited balance sheet, is not less than INR 4 crores.
• Company has been sanctioned working capital limit by bank(5) or FIs.
• Borrowers’ account of the company is classified as a Standard Asset by the financing bank/institution.

Corporate Funding and Listings in Stock Exchanges Notes

Gst (Compensation To States) Act, 2017 – Advanced Tax Laws and Practice Important Questions

Question 1.
Why is the Goods and Services Tax (Compensation to States) Act, 2017 enacted?
Answer:
One of the biggest challenges while introducing GST in India was that states were opposing GST, because of their fear of losing revenue after the introduction of GST. The fear was more pronounced in the case of manufacturing/supplier states since the GST was to accrue to the state(s) where the actual consumption of goods takes place as GST is a destination-based tax.

In order to assure a steady flow of revenues to the states by way of compensating the loss, if it arises, Clause 18 of the Constitution (One Hundred and First Amendment) Act, 2016 specifically provided that the Parliament shall, by law, on the recommendation of the Goods and Services Tax Council, provide for compensation to the States for loss of revenue arising on account of implementation of the goods and services tax for a period of five years.

In line with the Constitutional amendment, the Government enacted the legislation known as, the Goods and Services Tax (Compensation to States) Act, 2017 for providing compensation to the States for the loss of revenue arising on account of implementation of the goods and services tax with effect from the date from which the provisions of the Central Goods and Services Tax Act is brought into force (01/07/2017), for a period of five years or for such period as may be prescribed on the recommendations of the GST Council.

Question 2.
Briefly discuss the provisions related to the levy of compensation cess.
Answer:
Compensation Cess is levied as per section 8( 1) of the Goods and Service Tax (Compensation to States) Act, 2017. As per this section, Compensation 1 Cess is levied on the notified supply of goods or services or both for the purpose of providing compensation to the States for loss of revenue for 5 years or I for such period as may be prescribed on the recommendation of Council, from I enactment of GST law, which may arise due to implementation of GST.

Question 3.
Will refund of Compensation Cess be admissible under GST?
Answer:
Yes. Circular No. 1/1/2017-Compensation Cess issued by Board clarifies that provisions of section 16 of the IGST Act, 2017, relating to zero-rated supply will apply mutatis mutandis for the purpose of Compensation Cess (wherever applicable), that is to say, that: Exporter will be eligible for a refund of Compensation Cess paid on goods exported by him [on similar lines as a refund of IGST under section 16(3)(a) of the IGST, 2017]; or

(a) No Compensation Cess will be charged on goods exported by an exporter under bond and he will be eligible for a refund of an input tax credit of Compensation Cess relating to goods exported [on similar lines as a refund of input taxes under section 16(3)(a) of the IGST, 2017],

Thus, refund of compensation Cess (if it’s on account of zero-rated supplies) will be admissible to the claimant. The process and procedure for a claim of such refund will be the same as for refund of IGST (on both goods and services) and in respect of accumulated ITC of compensation cess.

Further, in cases of unutilized ITC of compensation cess availed on inputs in cases where the final product is not subject to the levy of compensation cess, it has been clarified vide Circular No. 45/19/2018- GST dated 30th May 2018, that refund of accumulated ITC can be claimed in such situations, however the rebate route ie. payment of IGST and claiming refund of compensation cess of IGST paid will not be permissible in such cases. In such cases, they cannot utilize the compensation cess paid on inputs for payment of IGST in view of the proviso to section 11(2) of the Cess Act, which allows the utilization of the input tax credit of cess, only for the payment of cess on the outward supplies. Accordingly, they cannot claim a refund of compensation cess in case of zero-rated supply on payment of integrated tax.

Question 4.
Answer the following with reference to GST (Compensation to States) Act, 2017:

1. Projected Growth Rate
2. Base year
3. Projected Revenue for any year
4. Calculation and release of compensation
5. The objective of GST (Compensation to States) Act, 2017

Answer:
(1) Projected Growth Rate
The projected nominal growth rate of revenue subsumed for a State during the transition period shall be fourteen percent (1496) per annum.

(2) Base Year
For the purpose of calculating the compensation amount payable in any financial year during the transition period, the financial year ending 31st March 2016 shall be taken as the base year.

(3) Projected Revenue for any year
The projected revenue for any year in a State shall be calculated by applying the projected growth rate over the base year revenue of that State.

Illustration: If the base year revenue for 2015-16 for a concerned State, calculated as per section 5 is one hundred rupees, then the projected revenue for the financial year 2018-19 shall be as follows:

Projected Revenue for 2018-19 = 100 \(\left(1+\frac{14}{100}\right)^{3}\)

(4) Calculation and release of compensation
The compensation payable to a state has to be provisionally calculated and released at the end of every two months, which shall be finally calculated for every financial year after the receipt of final revenue figures, as audited by the Comptroller and Auditor General of India.

(5) Objective
The objective behind providing compensation to the states is for the loss of 1 revenue arising on account of implementation of the Goods and Services Tax (GST) in pursuance of the provisions of the Constitution (One Hundred and First Amendment) Act, 2016.

Question 5.
What valuation is to be adopted for levying compensation cess? The assessable value of an article imported into India is 1100. Basic Customs Duty is 10% ad valorem; Social Welfare Surcharge – 10%; Integrated tax rate is 18% and compensation cess is 15%.
Compute the value for compensation cess and amount of compensation cess.
Answer:
The value of the goods for the purpose of levying compensation cess shall be assessable value plus Customs Duty levied under the Act, and any other duty chargeable on the said goods under any law for the time being in force as an addition to, and in the same manner as, a duty of customs.

Particulars	Amount (₹)
Assessable Value	100
Basic Customs Duty at 10%	10
Social Welfare Surcharge @ 10% of basic customs duty	1
Value for purpose of levy of IGST and Compensation Cess	111
Integrated Tax @ 18% (Rounded off)	20
Compensation Cess @ 15% of ? 111	16.65

Gst (Compensation To States) Act, 2017 Notes

• There are a total of 14 sections in the Act and 1 Schedule.
• The objective of the GST (Compensation to States) Act, 2017.
• Meaning of following terms: Base year, Base year revenue, Projected Growth rate, Projected Revenue.
• Goods and Services on which such compensation cess is leviable (Given in Schedule to the Act).
• Computation of compensation payable for any financial year.
• Calculation and bi-monthly release of compensation.
• Input Tax Credit (ITC) of cess to be utilized for payment of cess only.
• CGST Act provisions are applicable for returns and refunds.

CS Professional Advance Tax Law Notes

Industrial Designs – Intellectual Property Rights Laws and Practices Important Questions

Question 1.
Industrial design plays an important role in the trading of consumer goods or products as well as helps economic development by encouraging creativity in the industrial and manufacturing sectors. Discuss the salient features of the Designs Act, 2000.
Answer:
Salient Features of Design Act, 2000 Objectives and Justification for Design Protection The process of acquiring design rights is of importance from the perspective of the creator of the design. Basically, the evolution of design rights was based on the keen interest to encourage and protect those who produce new and original designs, thereby facilitating competitive development and industrial progress.
Being a creation of the intellectual mind, the designs also need to be protected. Designs protection through registration has been a source of tremendous progress in the field of science and technology which has revolutionized manufacturing during the process.

Subject Matter of Design Law
The subject matter which is protected by the design system is the application of the design to an article. The two fundamental characteristics of the design law are – firstly, it is concerned with the visual aspects of the articles and secondly, it concerns designs applied to an article, which means concepts like garden designing, the architectural drawings and designs, book jackets, labels, tokens, medals, buildings and structures have been excluded from design protection.

The term Design as per the Design Act, 2000
A design refers to the features of shape, configuration, pattern, ornamentation or composition of lines or colours applied to any article, in two or three dimensional (or both) forms. This may be applied by any industrial process or means (manual, mechanical or chemical) separately or by a combined process, which in the finished article appeals to and is judged solely by the eye.

Who can apply for Registration
Any person or the legal representative or the assignee can apply separately or jointly for the registration of a design. The term “person” includes firm, partnership and a body corporate. An application may also be filed through an agent in which case a power of attorney shall be filed.

What is excluded from Design Protection?
Designs that are primarily, literally or artistic in character are not protected under the Design Act. These will include:

• Book jackets, calendars, certificates, forms and other documents, dressmaking patterns, greeting cards, leaflets, maps and plan cards, postcards, stamps, transfers, medals.
• Labels, tokens, cards, cartoons
• Any principle or mode of construction of an article
• Mere mechanical contrivance
• Buildings and structures
• Parts of the article not manufactured and sold separately
• Variations commonly used in the trade
• Mere workshop alterations of components of an assembly
• Mere change in the size of the article
• Flags, emblems or signs of any country
• Layout designs of integrated circuits

What do you mean by new/original design
A design must have something new before the law will allow it to be registered. The design should be new or original; this is evident from Section 5(1) of the Act, which provides that the application for registration should be for “any new or original design”.

The words new or original, involve the idea of novelty, either in the pattern, shape or ornament itself or in the way an old pattern, shape or ornament is to be applied to an article. Novelty may consist not in the idea itself but the way in which the idea is to be rendered applicable to an article.

Question 2.
What do you understand by ‘design’? How is it different from ‘copyright’? What is the Act covering design?
Answer:
Design as per Section s (d) of the Designs Act, 2000 means only the features of shape, configuration, pattern or ornament or composition of lines or colour or a combination thereof applied to any article whether two dimensional or three dimensional or in both forms, by any industrial process or means, whether manual, mechanical or chemical, separate or combined, which in the finished article appeal to and are judged solely by the eye.

But does not include any mode or principle of construction or anything which is in substance a mere mechanical device and does not include any trade .mark, as defined in clause (v) of sub-section of Section 2 of the Trade and Merchandise Marks Act, 1958, property mark or artistic works as defined under Section 2 (c) of the Copyright Act, 1957. Meaning of copyright specified under section 14 of the Copyright Act, 1957.

Design is with reference to the shape and aesthetic aspect of an article. It is different from copyright in the sense that a form of reference to a “hard” and “tangible” creation such as the shape of a cup. Copyright is “soft” defined creative work on paper and other media dealing with knowledge or information. The design does not include any artistic work, as defined in Section 2 (c) of the Copyright Act, 1957. The Design Act, 2000 covering design. Space, to write important points for revision

Question 3.
What is the meaning of ‘appeal to the eye’ in the definition of a design? A book designer prepares a jacket of a hard copybook. Will, his work be covered under the Designs Act, 2000 or will it be a subject matter of the Copyright Act, 1957? Discuss.
Answer:
As per Section 2 (d) of the Designs Act, 2000 design means only the features of shape, configuration, pattern, ornament or composition of lines or colours applied to any article whether in two dimensional or three dimensional or in both forms, by any industrial process or means, whether manual, mechanical or chemical, separate or combined, which in the finished article appeal to and are judged solely by the eye; but does not include any mode or principle of construction or anything which is in substance a mere mechanical device, and does not include any trademark or property mark (as defined in Section 479 of the Indian Penal Code) or artistic work ( as defined in clause (c) of Section 2 of the Copyright Act, 1957).

The design will therefore be calculated to attract the attention of the beholder regardless of whether or not it makes a favourable appeal to him. The requirement of appealing to the eye is therefore really a preliminary test of novelty, as compared to the fundamental form of the article. (Amp. V. Utilux (1972) RPC 103, pp 107). In the given case, Jacket will be covered under Copyright Act, 1957 not under the Designs Act, 2000 which is usually a three-dimensional structure or object with “appeal to the eye”.

Question 5.
What are the essential requirements for the registration of a design?
Answer:
The essential requirements for the registration of a design are as under:

1. The design should be new or original, not previously published or used in any country before the date of application for registration. The novelty may reside in the application of a known shape or pattern to a new subject matter.
2. The design should relate to features of shape, configuration, pattern or ornamentation applied or applicable to an article.
3. The design should be applied or applicable to any article by any industrial process.
4. The features of the design in the finished article should appeal to and are judged solely by the eye.
5. Any mode or principle of construction or operation or anything which is in substance a mere mechanical device, would not be a registrable design.
6. The design should not include any Trade Mark or. property mark or artistic works as define under the Copyright Act, 1957.

Question 6.
What is not a design under the Designs Act, 2000? Explain with illustrations.
Answer:
The design does not include:

• any trademark, as defined in Section 2(zb) of the Trademarks Act, 1999 or
• any property mark, as defined in Section 479 of the Indian Penal Code, 1860, or
• any artistic work, as defined in Section 2(c) of the Copyright Act, 1957.

Artistic Work means:
(1) A painting, sculpture, drawing (including a diagram, map, chart or plan), an engraving or a Photograph, whether or not any such work possesses artistic quality.

(2) Any work of architecture i.e. any building or structure having an artistic character or design or any mode for such building or structure.

(3) Any work of artistic craftsmanship. Illustrative of non-registrable designs are:

• book jackets, calendars, certificates, forms and other documents;
• dressmaking patterns, greeting cards, leaflets, maps and plan cards;
• postcards, stamps and medals;
• labels, tokens, cards and cartoons;
• any principle or mode of construction of an article;
• mere workshop alterations of components of an assembly;
• a mere change in the size of the article;
• flags, emblems or signs of any country;
• layout designs of integrated circuits.

Question 7.
Define ‘design’ and analyse non-registrable designs with examples.
Answer:
Design as per Section 2(d) of the Designs Act, 2000 means only the features of shape, configuration, pattern or ornament or composition of lines or colours or a combination thereof applied to any article whether two dimensional or three dimensional or in both forms, by any industrial process or means, whether manual, mechanical or chemical, separate or combined, which in the finished article appeal to and are judged solely by the eye. Exceptions: Design does not include any mode or principle of construction or anything which is in substance a mere mechanical device, and does not include any trademark, as defined in clause (v) of sub-section of section 2 of the Trade and Merchandise Marks Act, 1958, property mark or artistic works as defined under section 2(c) of the Copyright Act, 1957.
As per section 4 of the Design Act, 2000, Design is not registrable in India, if it

• is not new or original;
• has been disclosed to the public anywhere in India or in any other country by publication in tangible form or.by use in any other way prior to the filing date or priority date of the application;
• is not significantly distinguishable from known designs or combination of known designs;
• Comprises or contains scandalous or obscene matter.

Question 8.
Sonar Industries, the proprietor of a registered design, obtained an ad interim injunction restraining TRISHA International from manufacturing portable table fans with a design that was allegedly an obvious or colourable imitation of Sonar’s registered design for such fans. Sonar Industries also alleged that TRISHA International was guilty of piracy of its registered design.

TRISHA International contended striking features of the registered design could not be viewed in isolation. It added that the configuration and ornamentation of its table fan design were dissimilar. Will TRISHA International succeed in getting the ad-interim injunction vacated ?. Give, reasons in support of your answer.
Answer:
‘Design’ refers to the features of shape, configuration, pattern or ., ornamentation which can be judged by the eye in the finished products. Section 22 of the Design Act, 2000 provides the legal proceedings to be followed in the case of Piracy of Registered Design.

One of the below remedies can be sought against the accused:
(1) Paying to the registered proprietor of the design a sum not exceeding twenty-five thousand rupees recoverable as a contract debt provided that the total sum recoverable in respect of any one design shall not ‘ exceed fifty thousand rupees; and

(2) Recovery of damages for any such contravention, and an injunction •against the repetition thereof, to pay such damages as may be awarded and to be restrained by injunction accordingly. Not every resemblance is actionable and imitation does not mean duplication. An obvious limitation is one that immediately strikes one as being so like the original registered design as to be almost indistinguishable. In contrast, the word ‘fraudulent’ presupposes knowledge .of the registered design. To ascertain infringement, the two products need not be placed side by side, but rather examined from the point of view of a customer with average knowledge and imperfect recollection. The main consideration is whether the broad features of shape, configuration and pattern are similar to one another ( Veeplast vs. Bonjour, 2011).

The Designs Act, 2000 grants protection only for the appearance of the article which appeals to and is judged by the eye. In a case, the Calcutta High Court held as below: “Novelty resided in the design as a whole and not in its component parts. The striking features of the registered design could not be viewed in isolation. Components such as mounting brackets being mechanical devices could not be considered as a part of the design as registered in the Certificate of Registration.”

Thus, the question of whether TRISHA International’s portable table fan is an obvious imitation of Sonar’s registered design has to be determined solely by the test of an eye. Like the shape, configuration and ornamentation of TRISHA’s portable table fan design were clearly dissimilar to those of Sonar’s registered design, no prima facie case of piracy has been made out by Sonar.

Question 9.
Can stamps, Labels, tokens, cards be considered an article for the purpose of registration of Design? If yes, why and if no, why not?
Answer:
The answer to the question is ‘No’ since, once the Design i.e., the ornamentation is removed only a piece of paper, metal or like material remains and the article referred to ceases to exist. For Design protection, the article must have its existence independent of the Designs applied to it. [Design with respect to the label was held not registrable, by an Order on civil case No. 9-D of 1963, Punjab, High Court], So, the Design applied to an article should be integral with the article itself.

Question 10.
What is design under the Designs Act,2000? What is the design not registrable under the Act?
Answer:
Designs speak of drawings. However, when a design is applied to commercial goods by the enterprise concerned, it is termed as an industrial design.
According to Section 2(d)of the Designs Act, 2000, Design means only the features of shape, configuration, pattern or ornament or composition of line or colour or combination thereof applied to any article whether two dimensional or three dimensional or in both forms, by and industrial process or means, whether manual mechanical or chemical, separate or combined, which in the finished article appeal to and are judged solely by the eye, but does not include any mode or principle of construction or anything which is in substance a mere mechanical device, and does not include any trademark, as defined in clause (v) of sub-section of section 2 of the Trade and Merchandise Marks Act,1958, property mark or artistic works as defined under section 2 (c) of the Copyright Act,1957.

The design which is not registrable under the Act are:

• any trademark as defined in Section 2 (zb) of the Trademarks Act,1999;
• any property mark, as defined in Section 479 of the Indian Penal Code,1860 or
• any artistic work, as defined in section 2(c)of the Copyright Act, 1957.

Examples of non-registrable designs are:

• book jackets, calendars, forms, certificates and other documents;
• dressmaking patterns, greeting cards, leaflets, maps and plan cards;
• postcards, stamps and medals;
• labels, tokens, cards and cartoons;
• any principle or mode of construction of articles;
• a mere change in the size of the article;
• flags, emblems or signs of any country;
• the layout of designs of integrated circuits.

Question 11.
What is the object of registration of designs? What is the duration of a design registration? Can it be extended?
Answer:
The object of registration of design are as follows:

• It must be a design i.e. it must belong to the subject matter of a design which the Design Act, 2000, aims to protect;
• It must be new or original;
• It must not be one that is excluded from registration.

The duration of a design registration is initially ten years from the date of registration but in cases where the claim to priority has been allowed, the duration is ten years from the priority date. Yes, the initial period of ten years may be extended by a further period of five years, if the registered proprietor applies for extension in the prescribed manner.

Question 12.
What constitutes piracy of a registered design? What penalties have, been provided for piracy of a registered design under the Designs Act, 2000?
Answer:
Piracy of a design means the application of a design or its imitation to any article belonging to the class of articles in which the design has been registered for the purpose of sale or importation of such articles without the written consent of the registered proprietor. Publishing such articles or exposing terms for sale with knowledge of the unauthorized application of the design to them also involves piracy of the design. The piracy of registered design constitutes the following:

(1) for the purpose of sale to apply or cause to be applied to any article in any article in any class of articles in which the design is registered, the design or any fraudulent or obvious imitation thereof, except with the licence or written consent of the registered proprietor, or to do anything with a view to enabling the design to be so applied; or

(2) to import for the purpose of sale, without the consent of the registered proprietor, any article belonging to the class in which the design has been registered, and have applied to it the design or any fraudulent or obvious imitation thereof; or

(3) knowing that the design or any fraudulent imitation thereof has been applied to any articles in any class of articles in which the design is registered without the consent of the registered proprietor, to publish or expose or cause to be published or exposed for sale that article.

PENALTIES:
As per Section 22, if any person commits piracy of a registered design, he shall be liable to pay for payment of a sum not exceeding ₹ 25,000/ recoverable as a contract debt. However, the total sum recoverable in respect of any one design shall not exceed ₹ 50,000/

Question
Enumerate the general procedure for registering a design.
Answer:
The procedure for registration of designs are as follows:

1. WHERE To APPLY:
Any person claiming to be the proprietor of any new or original design. may apply for registration. An application for registration of a design shall be addressed to the controller of design. The Patent Office at Kolkata, or at any of its branch offices at New Delhi, Mumbai and Chennai. A proprietor may be from India or fpm a Convention Country.

2. TYPE OF APPLICATIONS:
There are two types of applications:

• Ordinary application: It does not claim priority.
• Reciprocity application: It claims the priority of an application filed previously in a conventional country. Such an application shall be filed in India within six months from the date of filing in a convention country. This period of six months is not extendable.

3. Substitution of Application or Joint Claiming:
The name of an applicant can be substituted or a joint claim can be made for an applied design if the following requirements are met:
(1) The claim for substitution is made before the design has been registered; and
(2) Right of the claimant shall be created only by:

• an assignment;
• agreement in writing made by the applicant or one of the applicants; or
• operation of law; and

(3) The design under consideration shall be identified in the assignment or. the agreement specifically by reference to the number of applications for registration; or
(4) The rights of the claimant in respect of the design have been finally established by a Court.

A request for substitution of the applicant shall be filed in Form-2 along with the required fee as per Section 8. However, in the case of joint applicants, the controller shall not pass such direction without the consent of the other joint applicant(s).

CS Professional Intellectual Property Rights Laws and Practices Notes

Patent Databases And Patent Information System – Intellectual Property Rights Laws and Practices Important Questions

Question 1.
A patent search is a search conducted in the patent database to check whether any invention similar to the invention in respect of which patent is obtained, already exists. Discuss the patent search, patent database and various types of searches used in patent documentation.
Answer:
The object of the Patent search is to evaluate the subject matter invention in comparison to the prior art.
Prior art refers to scientific and technical information that exists before the effective date of a given patent application. Prior art may be found in any public documents such as patents, technical publications, conference papers, marketing brochures, products, devices, equipment, processes, and materials.

A prior art search refers to an organized review of prior art contained in public documents, prior art searches can be of various kinds: patentability searches conducted by an inventor before filing a patent application. Searches are conducted using different kinds of databases, from public databases of issued patents on the internet to exhaustive databases including technical literature. Searches can be done by legal professionals, by scientists, or by researchers, sometimes, defendants in patent litigation even offer bounties for invalidating prior art.

A patentability search may be conducted before the filing of a patent application to gauge the prospects of obtaining broad claim coverage. The purpose of conducting such a search is to find references related to the claimed invention in order to make an assessment of its patentability. Searches are typically fast and inexpensive since the patent agent’s clients often do not want to pay for an expensive, thorough search. Also, it is often presumed that the inventor himself will have a good sense of novelty based on his reading of the literature in his field and by communication with his peers.

Searches are a good way to get information on developments in the field of invention. Prior art searches may sometimes reveal what competitors consider worth protecting. Search results may be a critical factor in deciding whether to file a patent application. If a prior art search reveals references that anticipate the claimed invention, the inventor and the patent agent should consider how they can “avoid the prior art” by drafting the claims to overcome. In some cases, a prior art search may reveal patent references that are problematic. Just because you see a reference that seems similar to the invention does not mean the proposed application should be abandoned.

Question 2.
Explain the functions of The Patent Information System (PIS) and the National Institute for Intellectual Property Management (NIIPM).
Answer:
The functions of The Patent Information System (PIS) and National Institute for Intellectual Property Management (NIIPM) are as follows: PIS
(1) To obtain and maintain a comprehensive collection of the patent specification and patent-related literature on a worldwide basis;
(2) To provide technological information in patent or patent-related literature through publication services, search services, and patent copy supply service;
(3) To meet statutory obligation regarding novelty search under the Patent Act, 1970.
(4) Patent related literature on a worldwide basis to meet the need for technological information of various users in:

• R&D establishments
• Government Organizations
• industries
• Business, and
• Inventors.

(5) Other users enabling them to make informed business decisions.

NIIPM

• It is a national center of excellence for training, management, research, education in the field of Intellectual Property Rights related issues
• Caters to the training of Examiners of Patents and Designs
• Examiners of Trademarks & Geographical Indications
• IP professionals
• IP Managers in the Country
• Imparting basic education to the user community
• Government functionaries and stakeholders involved in the creation
• Commercialization and management of intellectual property rights
• It also facilitates research on IP-related issues including preparation of study reports and policy analysis of relevance to the Government.

Question 3.
List out the individual types of searches in patent documentation.
Answer:
The various types of searches are:
1. Pre-Application Searches (PAS)
Years ago, an invention is just an idea. The patent application process is difficult, time-consuming, and expensive. Therefore, the inventor should conduct “Pre- Application Searches” (PAS) before filing a patent application. In this search the inventor should look for:

• Printed publications
• Public knowledge or
• Patent already issued in his country or a foreign country that may relate to the particular invention.

2. State-of-the-Art Searches
It is also known as “Informative Search”. This search is made to determine the general state-of-the-art for the solution of a given technical problem as background information for R&D activities and in order to know what patent publications already exist in the field of the technology or research. This kind of search is especially useful for technology development or technology transfer purpose.

3. Novelty Searches
The objective of this search is to determine the novelty or lack of novelty of the invention claimed in a patent application or a patent already granted, or of an invention for which no application has yet been filed. The aim of this search is to discover relevant prior art. The basic inventive ideas are formulated in such an unspecified way that many publications will apply to this broad description. Dependent on the outcome of the novelty search, the vent decision will be whether to stop or to go ahead in developing the invention. If nothing of relevance was found, it is easy and you should go ahead. The decision becomes difficult if one or more pertinent documents have been found. But important is to restrict the search to the appropriate area. This may be done by identifying a proper place or place for the subject of the searches in the I PC.

4. Patentability or Validity Searches
It is made to locate documents relevant to the determination not only of novelty but also of other criteria of patentability. This type of search should cover all the technical fields, which may contain material pertinent to the invention.

5. Name Searches
These are searches for locating information about published patent documents involving specific companies or individuals, as applicants, assignees, patentees, or inventors.

6. Technological Activity Searches
These searches are for identifying companies and/or inventors who are active in a specific field of technology. These searches are also suitable for identifying countries in which a certain technology is being patented, so as to know where to turn for obtaining particular information in a given field of technology.

7. Infringement Searches
The objective of this search is to locate patent and published patent applications, which might be infringed on by a given industrial activity. The aim of this search is to determine whether an existing patent gives exclusive rights covering that industrial activity or any part of it.

8. Legal Status Searches
A search for this type of investigation is made to obtain information on the validity (status) of a patent or a published patent application, on a given date, under the applicable patent legislation in one or more countries. Such information can assist in making decisions. For example:

• exporting, or
• negotiation of the license agreement.

It can also give guidance on the value attached to a particular patent by the patentee.

Question 4.
Why is a patent search done? What are the various online databases available that provide access to patent documents while conducting patent searches?
Answer:
A patent search is an important step before filing a patent application. A patent search is a search conducted in patent databases as well as in the literature available, to check whether any invention similar to the invention in respect of which patent is to be obtained already exists. Therefore, instead of going forth with the filing, if one conducts the patentability search, one can get a clear idea about the patentability of the invention whether the application should be filed and the strengths and weaknesses of his invention.

Patent information is made available to the public through a variety of databases. Each database covers a particular set of patent documents. Thus, it may be necessary to consult multiple databases in order to find and then access patent documents relevant to your interests. Internet-based databases are online databases. Anyone who has access to the Internet may be able to browse the full text of published patent documents via free-charge databases or commercial databases.

Many national and regional patent offices provide free online access to their own patent collections as well as to select patent documents from other offices.

For example, The Full-Tent and Full Page Image Database Of the United States Patent and Trademark Office (USPTO) is one of the earliest and free online patent information systems.

International Patent Classification (IPC) is a hierarchical classification system used primarily to classify and search patent documents according to the technical fields they pertain to. IBM Intellectual Property Network, Intellectual Property Network (IPN) is a free IBM patent site provided by IBM. The database contains:

• United States Patents (US):1971-present & updated weekly (full text/ full image)
• European Patents – Applications (EP-A): 1979-present, updated weekly (Frontpage & claims/ full image)
• European Patents – Issued (EP-B): 1980- present, updated weekly (front page & claims/ full image)
• Patent Abstracts of Japan (JP): 1976- present, updated weekly (front page & claims/ representative image).

CS Professional Intellectual Property Rights Laws and Practices Notes