Category: CS Professional

General Insurance – Practices and Procedures – Insurance Law and Practice Important Questions

Question 1.
Define the concept and nature of a ‘cover note’ under a general insurance agreement.
Answer:
Cover note is the document which is issued immediately after insurance premium is received to prove that insurance cover exists. Cover note is valid for 60 days from the date of issue. Cover note is mostly used in motor insurance and transit insurance, particularly for import covers by sea. The cover note in marine insurance would be valid for duration of transit.

The cover note does not amount to a policy or an engagement to issue the policy and can be used only for compelling the delivery of the policy and cannot be used for any other purpose.

If a claim were to arise between the issue of the cover note and the regular policy, authorities have proceeded to decide claims. But often, difficulties arise in the case of special policies. But, the fact remains that a cover note evidences the payment of premium, assumption of the risk from the date mentioned therein and is for all purposes a policy.

Question 2.
Explain to what extent a valued policy modifies the principle of indemnity.
Answer:
Under a valued policy, in the event of a total loss, the insurers must pay the agreed value regardless of the actual value at the time of the loss, even if they can prove beyond doubt that the value of the property has declined since the insurance was opened. The insured may therefore receive more than a full indemnity.

They may also receive less than indemnity if the actual value has increased. If the initial valuation is grossly excessive, the policy might be voidable for fraud or misrepresentation or even void as a gaming policy under the Gaming Act 1845. The insured will normally be required to substantiate the value for which they seek to ensure by providing an expert valuation at inception and so problems rarely arise in practice.

Valued policies are those policies where the value of the property is agreed beforehand and which is made the sum insured under the policy. The condition of such a policy is that if there is a total loss than the full sum insured is to be paid even though the actual value is less than the sum insured. Here, the insured makes again. If the actual value is more than the sum insured then the insured sustain losses.

The following points should be noted in this regard:
Only in case of a total loss there is the possibility of making either over-payment or under-payment. From experience, it can be said that the possibility of total loss is very rare as mostly we experience partial losses.
In case of partial loss, which is more common, the loss is treated under normal indemnity basis.

• Undervalued policies, the value that is agreed upon at inception is not just an arbitrary value but a value having a very realistic bearing on the actual market value.
• Valued policies are usually given to those persons whose bona-fides are not in the knowledge of insurers. In other words, issuance of valued policies are very restricted.
• Valued policies are usually issued on articles of fairly stable value.
• If may be said that undervalued policy the measure of indemnity is decided at the inception as opposed to ordinary policies where the measure indemnity is decided at the time of claim.
• Valued policies actually considered as contracts of indemnity in law and considering the above points it can very well be said that valued policies are in fact modifications of the principle of indemnity and certainly not departures from the principle of indemnity.

Question 3.
A is a horse-owner and races his horses. He has been racing horses, all of which are insured comprehensively by a general insurance company.
One of the insured horses which has won many races for A in the past, had of late, due to various factors including age, been on a losing streak and had lost at the recent three races and A had lost large amount of money because of this. Suddenly, this horse, which was insured for ₹ 25 lakhs, fell sick and died soon thereafter, the cause of death was indicated to be colic, a common killer disease of horses.

A made a claim on the insurance company for 125 lakhs and incidental expenses. The insurer after due enquiry passed the claim and paid to A the amount of ₹ 25 lakhs as claim.

One year after such payment was made, due to persistent newspapers reporting and on the basis of police investigation conducted in similar cases, it was noticed that some racehorses which had become old and were losing races, were systematically killed by the owners through the help of a syndicate which had been retained by the owners. Y was arrested by the police in this regard as the main culprit who had poisoned the horses and enabled the owners to collect the insurance money.

On examination, Y revealed the names of the horses that he had killed through poisoning and their respective owners. A was also included in the list. It was ascertained that death by electrocution could be disguised as death caused by colic. On the basis of this investigation and report, the insurer who had paid ₹ 25 lakhs to A wants to reopen the claim.
Arising out of the above move, the following issues arise for consideration which you are required to deal with-
(i) Can the insurance company which had already taken due measures to ensure the acceptance of the claim, go back on its settlement and recall the case.
(ii) As a responsible underwriter how would the insurer evaluate the risk factors while accepting the proposal for a cover?
(iii) Is moral hazard present in this case?
(iv) Can you estimate the damage compensation liability of A?
Answer:
(i) The Insurance company has relied upon the facts and documents submitted by A and made the payment of the claim for death of the horse. Insurance is a contract of utmost good faith and the company relied on all the facts as given by the claimant. However on getting further information about the actual facts as reported in the press and police investigation in the matter the insurance company is entitled to go back to its settlement and recall the case. The insurance company can only recall the case by taking A in the court putting proper evidence against A then only the company gets back the payment given to A.

Moreover, A owns many horses and out of so many horses only one of those horses dies due to colic also puts a question mark on the intents. Besides the statement given by Y also indicates towards death of horses of other horse owners who planned the electrocution with Y and made claims to their insurance companies for such horses that were old and losing in the horse races.

All these facts point towards the malafide intentions of the insured and thus insurance company can now reopen the case.
(ii) As a responsible underwriter the insurer while accepting the proposal for a cover must look into the past practices of such horse owners. The company should:

• Get a track record of the races these horses have won or lost in the past.
• Character and past track record of the owner of the horses.
• Cost of the horse and market report of the horse if available.
• What does horse mortality insurance cover.
• How much claim to be given at the time of death of a horse.
• Proper Documents to be prepared.

The company can carry out thorough investigation on these and such other matters before accepting such proposals for cover.

(iii) Yes, moral hazard is present in this case. The owner of the horse Mr. A who owned a number of horses and was very regular participant in the horse races was losing on this horse in the horse races. Since the horses were insured with suitable amount of coverage he planned the death of the horse to make a claim for its death due to horse disease colic. Since these horses were no more remunerative, owners of such horses employed people like Y to kill these horses to make insurance claims.

These are all examples of fraud and misrepresentation and hence moral hazard. This case gives the clarity of fraud and cheating the insurance company to recover the loses indulge in losing the horse race, that is why moral hazard is present in this case.

(iv) Financially A will be liable to repay to the insurance company:

• Amount of claim paid: ₹ 25,00,000
• Incidental claims paid (if any)

Incidental expenses incurred by the insurance company for the investigation and other such matters
Besides these financial liabilities the company can also take A to the court for fraud and misrepresentation where he could be convicted for manipulating the death of the horse under the relevant provisions of the procedure code.

In spite of proper care and maintenance of machinery, mishaps may yet occur. Sometimes the extent of damage may be quite high and may also lead to fatal or non-fatal injuries to human beings nearby. The remedy for such losses is offered by means of the pecuniary protection given under Oriental’s engineering insurance policies.

The various engineering policies offered by us may be divided under the following three major heads:

1. Project Insurance
2. Operational Machineries Insurance
3. Business Interruption Insurance.

Question 4.
Explain engineering insurance in detail.
Answer:
Engineering Insurance:
The rapid industrialization of our country has lead to increasing use of machines in industry. Though use of machinery results in increased production capacities, in the event of accident and breakdowns, they can be potential sources of financial loss and could even result in the closure of business.

CS Professional Insurance Law and Practice Notes

Key Business Concerns In Commercializing Intellectual Property Rights – Intellectual Property Rights Laws and Practices Important Questions

Question 1.
How is the valuation of the intellectual property done?
Answer:
Acceptable methods for the valuation of identifiable intangible assets and intellectual property fall into three broad categories. They are market-based, cost-based, or based on estimates of past and future economic benefits.

In an ideal situation, an independent expert will always prefer to determine a market value by reference to comparable market transactions. This is difficult enough when valuing assets such as bricks and mortar because it is never possible to find a transaction that is exactly comparable. In valuing an item of intellectual property, the search for a comparable market transaction becomes almost futile. This is not only due to lack of compatibility, but also because intellectual property is generally not developed to be sold and many sales are usually only a small part of a larger transaction, and details are kept extremely confidential.

There are other impediments that limit the usefulness of this method, namely, special purchasers, different negotiating skills, and the distorting effects of the peaks and troughs of economic cycles. Cost-based methodologies, such as the “cost to create” or the “cost to replace” a given asset, assume that there is some relationship between cost and value and the approach has very little to commend itself other than ease of use. The method ignores changes in the time value of money and ignores maintenance. The methods of valuation flowing from an estimate of past and future economic benefits can be broken down into four limbs;

1. capitalization of historic profits,
2. gross profit differential methods,
3. excess profits methods, and
4. the relief from the royalty method.

Discounted Cash Flow (“DCF”) Analysis sits across the last three methodologies and is probably the most comprehensive of appraisal techniques.

Question 2.
Explain the usage of the ‘excess profits method’ for the valuation of intangibles.
Answer:
‘Excess Profits Method’ in reference to intangibles looks at the currents value of the net tangible assets employed as a benchmark for an estimated rate of return. This is used to calculate the profits that are required in order to induce investors to invest in those net tangible assets. Any return over and above those profits required in order to induce investment is considered to be the excess return attributable to Intellectual Property. While theoretically relying upon future economic benefits from the use of the asset, the method has difficulty in alternative usage of assets. But worldwide, future economic benefits are used to arrive at the current valuation of intangible assets. The excess operating profits method determines the value of the intellectual property by capitalizing the additional advantages generated by the business owning the property over and above those generated by similar businesses, which do not have the benefit of the property.

There are different ways in which the excess advantage may be calculated, for instance by reference to a margin differential or comparing the return on capital employed earned by the business owning the property with that earned by companies without such benefit. The calculated excess operating profits expected to be earned over the life of the asset in question are then discounted to the present day to arrive at a value for the asset. It is significant if using this method, to ensure that the excess advantages identified are particularly attributable to the intangible asset in question and not to some other factor like an efficient production facility or distribution network that relates to the business as a whole.

Question 3.
‘Unfair competition is going on ¡n relation to intellectual property.’ Discuss the safeguards and multilateral agreements in this regard.
Answer:
Multilateral Agreements:
A number of multilateral agreements in the field of intellectual property deal with unfair competition in intellectual property transactions. The laws dealing with restrictive trade practices in India are contained under the Patents Act and the Competition Act. The Paris Convention for Protection of Industrial Property provides for efficient protection against unfair competition. Article 17 of the Berne Convention for the Protection of Literary and Artistic Works makes clear that the Convention does not prohibit the application of national administrative control this formulation may apply to competition laws. The Paris Convention allows the grant of compulsory licenses to prevent abuses resulting from the exercise of the exclusive rights conferred by patents.

From the objective point of view, which provides intellectual property rights in order to prevent the conclusion of contract negotiations in the abuse of their exclusive right. For the restrictions of intellectual property rights, TRIPs agreement to be enough interest, TRIPs Agreement expressly provides for Article 8 the principle of prohibiting the abuse of intellectual property rights, Article 30 of the exceptions to patentability, Article 31 of the compulsory license system are the embodiment of intellectual property restrictions. WTO Agreement on Trade-Related Aspects of Intellectual Property Rights expressly recognizes the role of competition policy in ensuring that I PRs promote economic growth and innovation. Article 40.2 of the TRIPS Agreement provides that: “Nothing in this Agreement shall prevent Members from specifying in their legislation licensing practices or conditions that may in particular cases constitute an abuse of intellectual property rights having an adverse effect on competition in the relevant market”.

It allows member countries “to adopt, consistently with the other provisions of this Agreement, appropriate measures to prevent or control such practices in the light of the relevant laws and regulations”. The repression of anti-competitive practices associated with I PRs is therefore assigned to national competition laws and policies.

Safeguards against Unfair Competition under Multilateral Agreements
As a general rule, any act or practice carried out in the course of industrial or commercial activities contrary to honest practices constitutes an act of unfair competition; the decisive criterion being “contrary to honest practices. A number of multilateral agreements in the field of intellectual property deal with unfair competition in intellectual property transactions. In this context, the need for international cooperation has also been emphasized under the TRIPs agreement. In particular, consultations among member countries are envisaged, inter alia, through the supply of publicly available non-confidential information. In this regard, Article 8 stipulates that appropriate measures consistent with the provisions of the Agreement may be needed to prevent the abuse of I PRs or practices which unreasonably restrain trade or adversely affect the transfer of technology.

Article 40 affirms the right of member countries to specify in their legislation licensing practices or conditions that may in particular cases constitute an abuse of intellectual property rights having adverse effects on competition in the relevant market and to adopt, consistently with other provisions of the Agreement, appropriate measures to prevent or control such practices. For example, exclusive grant back conditions, conditions preventing challenges to validity, and coercive package licensing. Article 31 of the TRIPs agreement lays down conditions limiting the use of patents without authorization of the IPR holder, including both uses by Governments or by third parties i.e. through compulsory licenses.

The TRIPs Agreement also contains a number of provisions relating to the use of I PRs. First, there are general considerations in paragraph 1 of the Preamble that is accompanied by Article 8(2), allowing Members to take appropriate measures in order to prevent abusive practices. Second, there are some very precise provisions concerning competition law. They allow fair use and the possibility of compulsory licensing or the granting of dependent patents, i.e. the granting of a right by public authorities, and against the will of a patent owner, in order to make use of a patent to the extent necessary to develop a new product.

Compulsory licensing provisions can be included in both intellectual property and competition laws. Article 31 (k) of the TRIPS Agreement, explicitly provides for the granting of such licenses in the case of patents. Grounds for granting compulsory licenses under competition law have included in the US the use of patents as a basis for price-fixing or entry-restricting cartels, the conclusion of market-concentrating mergers in which patents played an important role, and practices that extend the scope of patent restrictions beyond the bounds of the patented subject matter. Compulsory licenses may also be issued when cross-licensing unduly limits competition, particularly in cases that involve substitute technologies, i.e. technologies that actually or potentially compete with each other, independently of their intrinsic characteristics.

However, certain exceptions from these conditions are made if the unauthorized use is permitted in order to remedy a practice determined to be anti-competitive after the judicial or administrative process.

Question 4.
What is the difference between Intellectual Property Law and Technology Transfer? Please analyze.
Answer:
Intellectual Property (IP) refers to the creations of the human mind like inventions, literary and artistic works, and symbols, names, images, and designs used in commerce. Intellectual property is divided into two categories: Industrial property, which includes inventions (patents), trademarks, industrial designs, and geographic indications of source; and Copyright, which includes literary and artistic works such as novels, poems, and plays, films, musical works, artistic works such as drawings, paintings, photographs and sculptures, and architectural designs. Rights related to copyright include those of performing artists in their performances, producers of phonograms in their recordings, and those of broadcasters in their radio and television programs. Intellectual property rights protect the interests of creators by giving them property rights over their creations. The TRIPS Agreement encompasses, in principle, all forms of intellectual property and aims at harmonizing and strengthening standards of protection and providing for effective enforcement at both national and international levels.

Technology Transfer:
As per Oxford Dictionary, ‘Technology Transfer’ is the transfer of new technology from the Originator to a Secondary User, especially from developed to developing countries in an attempt to boost their economies. As per Business Dictionary, Technology Transfer refers to (1) Assignment of technological intellectual property, developed and generated in one place, to another through legal means, such as technology licensing or franchising. Or (2) Process of converting scientific and technological advances into marketable goods or services.

In general, it denotes the sum of knowledge, experience, and skills necessary for manufacturing a product or products and for establishing an enterprise for this purpose. Transfer of Technology is a complex phenomenon necessarily involving rights, obligations, privileges, and commitments of the parties to the transactions. The basic legal document is the license agreement for the transfer of technology. If technology is transferred through licensing, stronger IPR protection results in greater innovation, and increased licensing. Licensing has the advantage to firms of higher profits due to lower production costs, but involves other costs in terms of contract negotiations, transferring the necessary technology, and in the rents that the innovator must give to the licensee to discourage imitation. By reducing the risk of imitation, stronger IPR protection also reduces the costs of licensing, thus encouraging licensing and freeing up resources in innovation.

Transfer of technology takes place through formal and informal channels. Some of the formals channels include trade, licensing, joint ventures, franchising, foreign patenting, and Foreign Direct Investment (FDI) while the informal channel include imitation and technology spillover. The technology transfer relates to voluntary or non-market transactions by which a firm gains access to technology developed in another country. Therefore, policies made to develop a strong I PR regime can help developing countries gain access to foreign technology.

The impact of stronger IPR protection on technology diffusion is ambiguous in theory and depends on a country’s circumstances. On the one hand, stronger IPR protection could restrict the diffusion of technology, with patents preventing others from using proprietary knowledge and the increased market power of IPR holders potentially reducing the dissemination of knowledge due to lower output and higher prices. On the other hand, IPRs could play a positive role in knowledge diffusion, since the information available in patent claims is available to other potential inventors.

Moreover, strong IPR protection may encourage technology transfer through increased trade in goods and services, FDI, technology licensing, and joint ventures. Despite this theoretical ambiguity, the diffusion of technology from countries at the technological frontier to other countries is considered the main potential benefit of the TRIPS Agreement, particularly for developing countries that tend not to innovate significantly.

The other commonly used models of technology transfer are the technical assistance agreement, patent and patent agreement, know-how agreement, engineering service agreement, trademark agreement, and other franchisee agreements. This all requires a huge involvement of IP rights for the best implementation of technology transfer.

Question 5.
An Indian automobile company is interested in a joint venture arrangement with a foreign company. It has, however, little knowledge about the Due-diligence of intellectual property rights in a corporate transaction. Advise the company regarding :

• The purpose IP due diligence serves, and
• The scope of IP due diligence.

Answer:
Purpose of IP Due Diligence
1. IP due diligence is a part of a comprehensive due diligence audit that is carried out to assess the financial, commercial, and legal benefits and risks linked to a target company’s IP portfolio, typically before it is bought or. invested in.
2. It provides detailed information that may affect the price or other key elements of a proposed transaction or even aborting the further consideration of the proposed transaction.
3. It provides a basis for assessing the risk and value of relevant IP assets in a proposed acquisition or sale of intellectual property

Scope
IP due diligence generally seeks to:
1. Identify and locate IP assets, and then assess the nature and scope of the IP to evaluate their benefits and allocate risks associated with the ownership or use of the relevant IP assets; in particular, it seeks to determine whether the relevant IP is free of encumbrances for its intended business use(s).
2. Identify problems in and barriers to the transfer, hypothecation, or securitization of the IP assets under consideration.
3. Identify and apportion between the two parties the expenses incident to the transfer of IP assets under consideration.

Question 6.
Companies are investing huge amounts of money in research and development for the creation of intellectual properties may be in the form of new. technology, drug discovery, trade secret, etc. The major concern for the companies is how to protect the IPR. Suggest the strategies for maintenance and protection of confidential information.
Answer:
Intellectual Property Rights are the key elements needed to maintain a competitive edge in the market in today’s dynamic and competitive business environment. Intellectual property is undoubtedly a business asset and an integral part of the business process. Effective acquisition, management, and protection of intellectual property can mean the difference between success and failure in businesses today. Thus, it is important that companies take appropriate steps to protect such a valuable asset so as to get the possible •commercial results from its ownership.

The various statutes that have been enacted provide an adequate mechanism of protection to intellectual property rights. In the case of Patents, a patent can provide an inventor/corporates with a 20-year government-approved monopoly and once his 20 years of protection gets exhausted, the invention can be freely accessed and commercially exploited for the larger good of society by any player who is capable of doing it. However, it is equally true that some ideas cannot be patented, and indeed, some innovators do not want to patent their ideas/inventions, as for instance, trade secret or confidential information. Today more than ever, intellectual property also includes confidential business information, trade secrets, and know-how, and key business relationships.

If a trade secret is really kept a secret, the monopoly on an idea or product may never end. But once the Jinny is out of the bottle, you won’t get it back in, if it is lost it is lost forever and the companies are unlikely to extract sufficient damages from whoever breaches their confidentiality. Trade secrets need to be prevented from being disclosed. Though it is difficult indeed, not an impossible task. The textbook examples included the recipe for Coca-Cola and the formulation of the alcoholic beverage Chartreuse, which was only known by two monks.

The need to protect these vital assets is more critical than ever. Knowledge has become the key strategic differentiator. If it is valuable to the company, it is valuable to its competitors as well. Most sophisticated business enterprises (whether small, medium, or large) recognize the need to protect this vital Intellectual Property. But little real attention is paid to protecting. or securing these less formal types of intellectual property. It has been observed that many companies surprisingly are oblivious to the fact that these vital intellectual property assets are walking out their front door on a daily, weekly, or monthly basis, and heading across the street to rival competitors.

disclosed.
The business purpose of the disclosure or exchange of information might be quite legitimate, but the legal effect of disclosing confidential information without the benefit of a confidentiality or non-disclosure agreement could be disastrous. Corporate must make it both a corporate policy and business practice not to engage in commercial negotiations with third parties (whether direct competitors or not) without first ensuring that they have a signed Confidentiality or Non-Disclosure Agreement in place.

Departure — The other source of leakage of confidential business information is the exit of Executive(s) or key employees from the Organization. After their employment ceases, the Employee retains the right to use any general skill, experience, and knowledge that he has acquired in the course of performing his normal duties, in order that he can continue to earn a living. This has to be balanced against the employer’s right to protect its confidential information from any disclosure by such an employee. If the employee retains any confidential information pertaining to the employer or its business, then such an employee is not entitled to use or convey that information without the employer’s authority/consent.

Question 7.
Write short notes on the following:

1. Tie-in arrangements
2. Employee agreement
3. Preparing an IP audit

Answer:
(i) Tie-in Arrangements:
Tie-in clauses is an intellectual property licensing the licensee to obtain raw materials, spare parts, intermediate products for use with licensed technology, only from the licensor or its nominees. These clauses also oblige the licensee to use personnel designated by the licensor. The tie-in clauses generally result in monopoly control of the supply of equipment and other inputs by supplying enterprises, leading to “transfer pricing”, “transfer accounting” or “uneconomic output”. The licensor charges a higher price than for comparable equipment and other input that could otherwise be obtained elsewhere. The use of tying clauses not only affects production costs through the overpricing of inputs but may have an important indirect effect on the import substitution, export diversification, and growth efforts of the licensee.

(2) Employee agreement:
In the Employees or Confidentiality agreement, employees should sign Employment agreements to generally detail the terms of their employment. The agreement should be signed before the employee commences. Existing employees should be encouraged to sign confidentiality agreements. However, usually, they cannot be forced to do so. When employees cease employment, the employer gives them a letter confirming this, any monies being paid to them, and reminding them of their confidentiality obligations. If confidential information is to be divulged, a confidential agreement should be signed before the disclosure is made. The type of agreement will vary depending upon the nature and context of the disclosure. In some cases, a confidentiality agreement must be made as a deed in order to be legally enforceable.

A confidentiality agreement should include the following acknowledgments:

• the information is secret;
• the disclosure is made to the recipient in confidence;
• the recipient will not disclose the information to others or use the information for their own advantage, without the prior authorization of the owner of the information; and
• the unauthorized disclosure of the information could cause loss and damage to the owner of the information and the recipient will be liable for this.

(3) Preparing an IP audit:
(1) Clarity about the Purpose
Before the actual conduct of an IP audit, it is a necessary pre¬condition that it is clearly understood by all concerned why the audit is being conducted:
(a) The situations that prompt an audit and the nature and scope of the audit will to some extent depend on why it is being conducted.
(b) In addition, the amount of time and money available for conducting an audit will have a bearing on the manner in which the audit is conducted and its eventual outcome.

(2) Background Research for Preparing an Audit Plan:
Once the purpose of the audit and the available resources for its performance are clear, a major preparatory step for conducting the audit is to understand the company. It is an essential pre-condition for preparing an audit plan, which will be the basis of the audit.

(a) What is done in background research?
(i) Gathering as much information as possible on the company and its way of doing business.
(ii) Background research will be the basis of the audit and will provide the auditor(s) with the required background information for preparing a plan for conducting an audit that is comprehensive, focused, timely and cost-effective.

(b) Major issues in a background research
(1) Internal and external relations and interactions:
How does the company regularly interact or intend to interact with such as its

• employees;
• vendors;
• customers;
• consultants;
• independent contractors;
• joint venture partners;
• competitions etc.

(2) Business strategy:

• How does the company do its business
• Does it have written policies in place concerning key aspects of the business?
• Does it follow a certain business model?
• Does it, for example, engage in e-commerce and, if so, how does it fit in with its overall business strategy?

(3) Importance of IP Assets

• where IP assets are relatively unimportant to the nature of the business as a whole, it might be sufficient merely to confirm that registered IP rights are in good standing and are held in the name of the company.
• where the company’s principal assets are IP, it may be necessary to conduct a more thorough assessment of the company’s IP portfolio and IP-based activities.

(4) Status of IP Management

• Does it have an IP policy or strategy?
• What is the company’s overall approach to IP management?
• How well informed are its. staffs on IP matters?

(5) IP disputes

• Has the company been involved in infringement suits, whether as plaintiffs or defendants?
• Is the company involved in disputes or potential disputes that involve IP rights?

(3) Preparing an IP Audit Plan
The last step is to prepare an IP Audit plan.

(1) This will set out the purpose, the scope, how long it is expected to take, the budget, and who will be responsible for which area of the audit plan.
(2) It will deal with the following:
• The scope of the audit;
• The time table for the audit;
• The responsible person for each part of the audit;
• The form of the final audit report to be produced.

Question 8.
What is the significance of intellectual property management?
Answer:
The importance of intellectual property management are as follows:
(1) Effective management of intellectual property enables companies to use their intellectual property to improve their competitiveness and strategic advantage.

(2) Acquiring intellectual property protection no doubt is crucial but its effective management provides much more than just protection to an enterprise’s inventions, trademarks, designs, copyright, or other allied rights.

(3) Effective intellectual property management requires a company to commercialize its inventions and effectively monitor and enforce its intellectual property rights. Indeed, a company portfolio of intellectual property must be viewed as a collection of key assets that add significant value to the enterprise.

(4) Effective management of intellectual property may be a critical business strategy to maintain sustainable corporate growth and maximization of shareholder value resulting in economic growth.

Question 9.
Explain the strategies for effective I PR Management.
Answer:
The strategies for effective management of intellectual property assets require the implementation of a comprehensive asset management plan. In this, the most important step is to reviews the existing intellectual property assets so as to identify and locate the company’s key intellectual property assets such as:

1. patents;
2. patentable subject matter;
3. copyrights;
4. trademarks;
5. designs;
6. trade secrets;
7. domain names;
8. mask works;
9. inventions;
10. works of authorship;
11. hardware and
12. devices depending upon the nature of business.

Once the intellectual property assets are identified, it becomes important to determine the nature and scope of the company’s fights in intellectual property assets, which may range from outright ownership to a license including contingent rights in intellectual property to be developed in the future. Capitalizing on intellectual property assets so identified require a most constructive approach keeping in view, among others, type of intellectual property assets, the type of business claiming ownership of intellectual property assets, long term and short term goals of the business organization including intended/possible use of intellectual property assets.

The ownership and control of intellectual property also attract certain risks and this requires strategies and plans to mitigate those risks. The most important among others being the infringement of rights in intellectual property, the risk management strategy should take into consideration the situations where company’s own Intellectual Property Rights may infringe the IPRs of a third party, the company has a valid claim of infringement against a third party.

Question 10.
What is valuation? Illustrate the methods for the valuation of intangibles.
Answer:
Valuation is essentially a bringing together of the economic concept of the value and the legal concept of property. There are four main value concepts:

• owner value;
• market value;
• fair value and
• tax value.

There are quasi-concepts of value that impinge upon each of these main areas are:

• investment value;
• liquidation value and
• going concern value.

Methods for the valuation of identifiable intangible assets and intellectual property fall into three categories. They are: –

• market-based;
• cost-based or
• based on estimates of past and future economic benefits.

The methods of valuation flowing from an estimate of past and future economic benefits can be divided into four limbs:
(a) Capitalization of historic profits:
It arrives at the value of IPR’s by multiplying the maintainable historic profitability of the assets by a multiple that has been assessed after scoring the relative strength of the IPR.
For example – a multiple is arrived at after assessing a brand in the light of factors such as leadership, stability, market share, internationality, the trend of profitability, marketing, and advertising support, and protection.

(b) Gross profit differential methods:
This method is often associated with the trademark and brand valuation. These methods look at the differences in sale prices, adjusted for differences in marketing costs. That is the difference between the margin of the branded and/or patented product and an unbranded or generic product.

(c) Excess profits methods:
This method looks at the current value of the net tangible assets employed as the benchmark for an estimated rate of return. This is used to calculate the profits that are required in order to induce investors to invest in those net tangible assets. Any return over and above those profits required in order to induce investment is considered to be the excess return attributable to the IPRs.

(d) The relief from royalty method:
It considers what the purchaser could afford, or would be willing to pay, for a license of similar IPR. The royalty stream is then capitalized reflecting the risk and return relationship of investing in the asset.

Question 11.
What is Discounted Cash Flow (“DCF”) Analysis?
Answer:
DCF Analysis site across the last three methodologies and is probably the most comprehensive of appraisal techniques. Potential profits and cash flow need to be assessed carefully and then restated to present value through the use of discount rates or rates. DCF mathematical modeling allows for the fact that 1 Euro in your pocket today is worth more than 1 Euro next year or 1 Euro the year after. The time value of money is calculated by adjusting expected future returns to today’s monetary values using a discount rate. The discount rate to be applied to the cashflows can be derived from a number of different models including:

• common sense,
• build-up method,
• dividend growth models, and
• the capital asset pricing model utilizing a weighted average cost of capital.

Example:
In discounted cash flow model, it would not be correct to drive out cash flows for the entire legal length of copyright protection, which may be 70 plus years, when a valuation concerns computer software with only a short economic life span of 1 to 2 years. In short, when undertaking a valuation using the discounted cash flow modeling, the value should never project longer than what is realistic by testing against the major lives i.e. physical functional, technological, economic, and legal.

Question 12.
What does the term ‘technology’ mean? What are the factors to be considered while defining the technology in the licensing agreement?
Answer:
Technology is a complex concept. As per the UNIDO Guidelines paper, “Technology or know-how denotes the sum knowledge, experience, and skills necessary for manufacturing a product or products and for establishing an enterprise for this purpose”.Technology is viewed as any systematic or practical knowledge or skills used for:

• manufacture of products or application of processes;
• commercial or management purpose in the industry; and
• the achievement of any desired result, be it industry or social areas of life.

Transfer of technology is a complex phenomenon necessarily involving rights, obligations, privileges, and commitments of the parties to the transaction. The basic legal document is the Licence Agreement for the transfer of technology. A License Agreement is a formal instrument that serves several purposes. The license may be granted for IP that is necessary to further develop, reproduce, make, use, market, and sell products based on the technology to be transferred. The terms and conditions of a licensing agreement determine the success of the technology transfer. Therefore, while formulating the licensing agreement, the parties involved should define the technology to be transferred without any ambiguity. The factors to be considered while defining the technology in the licensing agreement include:

• Type of the technology i.e. product, process, facility, software, formula, etc;
• need for additional license for practicing the technology;
• industrial standards or specifications associated with the technology; and
• details required to practice techniques. Other factors that need to be considered for a successful technology licensing are:

1. owner/s of the technology;
2. nature of ownership;
3. other IPRs such as trademark, copyright, trade secret, etc. associated with the technology;
4. nature of technology;
5. scope of rights expected from the technology license;
6. technology and industry in which the technology can be utilized; and
7. terms and value of royalty etc.

Question 13.
What does intellectual property audit mean? What are the types of intellectual property audits?
Answer:
(1) IP audit is a systematic review of the IP owned, used, or acquired by a business so as to assess and manage risk, remedy problems and implement best practices of IP asset management.

(2) IP audit involves undertaking a comprehensive review of a company’s IP assets, related agreement, relevant policies, and compliance procedures.

(3) An IP audit helps a business to make an inventory of its IP assets or update it and analyze:

• How the IP assets are used or unused.
• Whether the IP assets used by the business are owned by the company or by others.
• Whether these IP assets are infringing the rights of others or others are infringing on these rights.
• Determine in the light of all this information, what actions are required to be taken with respect to each IP asset, or a portfolio of such assets, to serve the relevant business goals of the company.

(4) An IP audit seeks to uncover unused or underutilized assets, to identify any threats to a company’s bottom line, and to enable business managers to devise informed business and IP strategies that help maintain and improve its competitive position in the relevant market(s).

TYPES OF IP AUDIT There are 3 types of IP Audit:
(1) General purpose IP Audit:
(a) A general or broad IP audit is done in the following types of contexts:
(i) Before establishing a new company it is always important to a start-up company to be aware of intangible assets it owns or needs to protect.
(ii) When a business is considering implementing new policies, standards, or procedures relating to IP.
(iii) When a business is considering implementing a new marketing approach or direction or is planning a major reorganization of the company.
(iv) When a new person becomes responsible for IP management,

(b) Once a comprehensive IP audit has been undertaken, a smaller effort and expense is needed at regular intervals, such as on an annual basis so that IP assets are reviewed and appropriate decisions taken, depending on the current and emerging needs of a company.

(2) Event driver IP Audit:
It is generally much narrower in scope than a broad or general-purpose IP audit. Further, the nature and scope of such an audit is determined by the event in question, and the time and resources available for doing it. Event-driven IP audit is often called “IP due diligence” when done to assets, as objectively as possible, the value and risk of all or a part of a target company’s IP assets.

(3) Limited Purpose Focused Audits:

(a) A limited purpose audit is typically much narrower in scope than the other two types and is performed under much constrained time schedules. These audits tend to be situational in nature. They are typically used to justify a certain legal position or the valuation of a particular IP.

(b) A limited purpose-focused audit is done in the following types of contexts:

• Personnel turnover;
• Foreign IP filings;
• Using the Internet for business purposes;
• Significant changes in |P law and practice;
• Cleanroom procedures;
• Preparing for litigation.

Question 14.
Briefly list out the restrictive practices used in the intellectual property licensing agreements.
Answer:
Restrictive trade practices under the guise of intellectual property licensing can always be corrected by competition authorities. The restrictive practices mainly used in the intellectual property licensing agreements are as follows:

1. Restrictions after expiration of Industrial Property Rights or loss of secrecy of Technical know-how:
The expiration of the term of patent in an intellectual property licensing agreement signifies that the knowledge and invention are covered by such patent without any obligation. Where the supplier of the technology imposes any restriction after the expiration of the term of intellectual property rights. The problem may also arise when the secret know-how loses its secret character before the expiration of the agreement.

2. Restrictions after Expiration of arrangements:
This will generally oblige licenses to pay royalties, during the entire duration of the manufacture of a product or the application of the process involved, without specifying any time limit.

3. Restrictions on Research and Development:
Such restrictions generally involve limitations on the research and development policies and activities of the licensee. The restriction on research and development activities of licensee company has also been declared as restrictive practice under the UNGTAD Code.

4. Non-Competition Clauses:
It includes the restriction on freedom of licensee company to enter into arrangements to use or purchase the competing technologies or products not furnished or designated by the company supplying technology. Non-competition clauses which may have an indirect effect, oblige the licensee not to cooperate with competing enterprises or to pay higher royalties if it sells or manufactures competing products.

5. Export Restrictions:
It may include conditions restricting or prohibiting the export of products manufactured by the transferred technology. These conditions restrict the export of such products to certain markets or permission to export to certain markets and the requirement of previous permission for exports.

6. Price-Fining:
It involves the practices where the licensor reserves the right to fix the sale or resale price of the product manufactured by the imported. technology. This clause covers the price determined by the licensor on goods produced with the help of transferred technology.

7. Exclusive sales and representation arrangements:
Such practices prohibit the freedom of the licensee company not only to organize its own distribution system but also to prohibit the licensee company from entering into exclusive sales or representative contract with any third party, other than the licensor or a party designated by the licensor.

CS Professional Intellectual Property Rights Laws and Practices Notes

Health Insurance – Insurance Law and Practice Important Questions

Question 1.
Life insurance business is a long-term business and to ensure that resources are available to an insurer for meeting the claims, there must be an efficient system of investment of the funds. State how the IRDAI has ensured that this happens in the Indian market.
Answer:
Life insurance is a long term contract and hence, it is essential that the Life Insurance Company should be able to meet its future obligations and commitments in the form of claims that may arise.
In other words, it means that the company should have resources available anytime and hence, must have a strong Investment policy so that all the premiums received are amicably invested in safe investments so that the company remains solvent and sustainable at the same time.

Hence, in a bid to direct long term savings, the recently amended investment regulations of the Insurance Regulatory Development Authority (IRDA) provide the IRDA (Investment) Regulations, 2000 as amended from time to time for Insurance Companies with regards to the investments.

As per Regulation 3, a life insurer, for the purposes of these regulations, shall invest and at all times keep invested, the Investment Assets forming part of the Controlled Fund as defined in Section 27 of the Act as under:

• all funds of Life Insurance business and One Year Renewal pure Group Term Assurance Business (OYRGTA), and non-unit reserves of all categories of Unit-linked life insurance business, as per Regulation 4;
• all funds of Pension, Annuity and Group Business [as defined under Regulation 2 (d) of [IRDA (Actuarial Report and Abstract) Regulations, 2000] as per Regulation 5;
• the unit reserves portion of all categories of Unit linked funds, as per Regulation 6.

Question 2.
Outline the Insurance Regulator’s guidelines with respect to financial inclusion.
Answer:
Insurance Regulatory & Development Authority (IRDA) has been making immense efforts to educate and empower the common citizens about insurance industry in India and their rights and responsibilities. IRDA has been at the forefront of insurance sector deepening, protecting the rights of policyholders, regulating insurance companies and advisors and bringing about insurance inclusion in India for all segments especially the poor.

Some of the steps taken by IRDA for financial inclusion include the following:
National Strategy for  Financial Education:
The National Strategy recognises that financial literacy and financial education play a vital role in financial inclusion and inclusive growth and envisages ways towards creating awareness and educating consumers on access to financial services, availability of various types of products and their features; changing attitudes to translate knowledge into responsible financial behaviour and making consumers of financial services understand their rights and obligations.

Website on Insurance Education:
In an attempt to increase insurance awareness levels across the country, the authority has taken a number of consumer education initiatives and has recently launched an exclusive insurance education website www.policyholder.gov.in this website has self-explanatory menus and gives information in simple language.

Grant of Corporate Agency license to Department of Postal:
To promote financial inclusion, insurance regulator, Insurance Regulatory and Development Authority (IRDA) has granted corporate agency license to the Department of Post for distributing insurance products.

Emphasis on educating insurance agents to weed out mis-spelling:
IRDA has been emphasizing specialized training to the country’s 2.5 million insurance agents after they clear the basic examination to qualify as a licensed agent to sell insurance products. The training, aimed at instilling seriousness among insurance agents about sales as a career and stop unfairly selling insurance schemes just to earn commissions.

Question 3.
Do you agree with the statement that the roles played by a third-party administrator and a surveyor in the matter of after-sales service of an insurance product are the same? Discuss.
Answer:
A surveyor and a Third Party Administrator (TPA) both come into picture for a claim settlement purpose for insurance products but their roles are quite different.

The primary responsibility of a Surveyor is to estimate the liability of the loss incurred by the policyholder who has take insurance cover, to enable the assurance company to arrive at the amount to be indemnified to the policyholders under the terms of the insurance contract.

A surveyor has to be a qualified person both academically as well as technically with experience in the field in which he is required to offer his services for survey. Surveyors come into the picture when estimated losses are in excess of ₹ 50,000 for a motor insurance claim and over ₹ 1 lakh in other insurance claims, such as for fire or marine insurance.

Third-Party Administrator (TPA) is a person (generally a company) complying with certain requirements as stipulated under the Act. TPAS are appointed by an insurance company to render services in connection with health insurance business. TPAS are also required to deal with the claim settlement process in case of health insurance policies but they do not act like surveyors as they do in case of general insurance business.

A person can act as a TPA only with a valid licence issued by IRDAI to perform the functions of a TPA. It is generally only a company registered under the Companies Act which is allowed the licence to act as a TPA. The main object of the Memorandum of the company should provide for carrying out of the business as TPA in the health services. Further engaging in any other business than IPA is prohibited. The company must have minimum paid-up capital of ₹ 1 crore at all times.

Thus, the role of surveyor for a general insurance (motor, marine and fire) and role of TPA for health insurance come under after-sales services of the insurers and before and during the settlement of claim. Prima facie the roles look to be the same, but functionally their roles are quite different. The surveyor only assesses the quantum of the claim and reports to the insurer whereas the TPA besides offering health-related services also processes the documents for the health insurance claims and communicates with the insured on behalf of the insurer.

Question 4.
Evaluate the pros and cons of portability feature introduced in health insurance policies in India.
Answer:
Portability is the right accorded to the policyholder to transfer the credit gained by the pre-existing conditions and time-bound exclusions from one insurer to another insurer or from one plan to another plan of the same insurer. It is the right conferred on a policyholder who decides to move from one general or health insurer to another or to another plan of the same general or health insurer.

Portability is not applicable to fixed benefits payable under Health insurance policies issued by a Life Insurer. The advantage of portability is the carry forward of the credits accrued on account of having a policy with previous insurer Request for portability should be given by filling up a portability form to the existing insurer, earlier than 45 days but not before 60 days from the date of expiry.

Portability form should be submitted to the old insurer who shall send it through a portal to the new insurer. New insurer may request the claims history and other details from the previous insurer who shall submit the required details within a period of 7 days from the date of receipt of request.

An insurer may reject the request for portability if the policyholder approaches 60 days before or within 45 days of the date of expiry of the insurance policy. However, an insurer may at their option consider the request for portability even outside the above period.

New insurer is under obligation to accept or reject within a period of 15 days from the date of receipt of the portability form. If the new insurer does not convey any decision within the aforesaid 15 days he is deemed to have accepted the request for portability. No charges for portability can be levied either by the previous insurer or the new insurer No commission shall be paid to any agent or intermediary for the policy which is ported from one insurer to another insurer.

Question 5.
Shri Prithipal Singh, 48 years of age, on 7th May 1990, secured for himself a medical claim policy from X General Insurance Co. Ltd. Necessary formalities were completed by him in this regard after due consultation with and guidance of the insurance company’s agent. Shri Singh nominated his wife Smt. Satwant Kaur as the beneficiary under the policy. The policy was for a period of due year and has to run from 7th May 1990 to 6th May 1991. The annual premium charged by the company was ₹ 1,500 which was duly paid in cash by the insured.

In filling the proposal form leading to the issue of the policy Shri Singh, while answering questions 10 and 11 thereof, had clearly stated that he had not suffered from any illness in the past and that he had not undergone any medical procedures.

On 11th September 1990, Shri Singh fell ill suddenly and was admitted to a local hospital at Ludhiana where he was residing. The Ludhiana hospital, in the course of the treatment, suggested his shift to a specialised hospital and hence on 7th December 1990, Shri Singh was shifted to the Madras Institute of Nephrology, Chennai also known as Vijaya Health Centre. While under treatment the Chennai hospital, Shri Singh’s condition deteriorated and ultimately he died in the Chennai hospital on 26th December, 1990.

Smt. Satwant Kaur intimated the insurer X General Insurance Co. Ltd., of her husband’s death early in January 1991 and followed up the intimation with a claim statement in February 1991 in which she had claimed reimbursement of medical and hospital charges of ₹ 5,23,500.

The insurance company made enquiries with the Madras Institute of Nephrology and obtained a certificate from them on 6th May 1992 stating that the deceased Shri Singh was a known case of chronic renal failure/diabetic nephropathy; that he was on a regular haemo-dialysis for some years and also after admission into their Institute and suffered from severe breathlessness leading to the development of a sudden cardiac arrest leading to death on 26th December 1990. Their certificate also mentioned that the insured was a confirmed diabetic for the last 16 years of his life. In the circumstances, the insurance company by its letter of 30th August 1993 repudiated the claim and informed Mrs. Singh so.

Feeling aggrieved, Mrs. Singh approached the Consumer Dispute Redressal Forum with the prayer that the insurance company should be directed to pay her claim fully along with interest on the claim amount at 24% per annum and also compensation for causing her mental agony. Additionally, she claimed that the litigation expenses should be fully granted to her. The insurance company, in defence, stated before the authority that the claim was unsustainable and had been refused by it on the strength of the report of the treating hospital.

The insurer also pointed out that while filling the proposal form, the insured had specifically started against columns 10 and 11 that he had always been in sound health and had not undergone any medical treatment or operation in the 12 months prior to the date of proposal.

The medical report issued by the Madras hospital confirmed that the insured was a confirmed diabetic and was suffering from chronic renal failure or diabetic nephropathy. The insurer also relied on certificates obtained from two independent doctors to state that the claim was not payable as material facts relating to the health of the insured had been concealed at the time of taking the policy. They indicated that even though they had not treated the insured personally, they were of the view that the facts established that the claim could not be paid.

After hearing the parties, the District Forum rejected the opinion/view of the independent doctors since they had neither seen nor treated the deceased. The Forum also held that the report of the Chennai hospital was not supported by any circumstantial evidence and was thus not to be relied upon. On this basis, the Forum held in favour of the claimant and against the insurance company and that the claim be paid.

The District Forum also concluded that the insurance company was guilty of deficiency of service and that the repudiation of the claim was not based on any full material information. The forum also felt that there was an inordinate delay on the part Of the insurance company in dealing with the claim under the policy. The forum directed the insurance company to pay the claim along with interest at 12% per annum from 1st April 1991, that is, 3 months after the death of the insured, till date of payment. The forum also directed the insurance company to pay Mrs. Singh ₹ 1,000 as costs of litigation.

Not satisfied with the District Forum’s decision, the insurance company filed an appeal before the State commission reiterating the same facts as had been pressed before the District Forum. The State commission, on hearing the parties, allowed the appeal of the insurance company and part of its order dated 31st December 1998 read as under: “Death of the insured occurred within seven months of taking the mediclaim policy and section 45 of the Insurance Act is not even remotely attracted.

We are of the considered view that repudiation of the claim was on a consideration of the aforesaid record of the Madras Institute of Nephrology and therefore answer to col. 10 of the proposal form amounted to misrepresentation of and suppression of material facts regarding health made by the policyholder. No case of deficiency in service has been established.”

Mrs. Singh filed a revision petition before the National Commission. The National Commission dismissed the revision petition stating that as it was a case of concurrent finding of facts recorded both by the District Forum and the State Commission, “there was no reason to interfere and hence dismissed.” However, the learned counsel for the respondent submitted that the repudiation of the claim was fully justified because at the time of submission of the proposal form, the proposer had made a false declaration that he was possessing a sound health and had not undergone any treatment in the last 12 years and taking the facts disclosed as correct, the policy was issued.

It was urged that the mediclaim policy was issued solely on the basis of facts disclosed and the representation made by an insured in the proposal form filled in and submitted by him without subjecting the insured to any medical tests. It was also pointed out that the proposal form contained a declaration to the effect that if after the insurance is effected, it was found that any statements answer or particulars stated in the proposal form and its questionnaire were found to be incorrect or untrue in any respect, the insurance company shall incur no liability under the policy.

It was thus asserted that the insured having suppressed the fact of his suffering from chronic renal failure/diabetic nephropathy, which fact was within his knowledge, the insurance company was justified in repudiating the claim. There was a clear suppression of material facts in regard to the health of the insured and, therefore, the insurance company was fully justified in repudiating the insurance claim/contract. The National Commission did not find any merit in the revision petition and dismissed it. No order was made by the Commission as to the costs of litigation.

Based on the facts given above, deal with the following issues:
(a) Was the insurance company justified in repudiating the claim? Was there any breach of faith in the case?
(b) Define the principle of utmost good faith and state the pertinent interpretation of IRDAI with regard to material facts.
(c) What is the implication of Section 45 of the Insurance Act? Is a reference to that section relevant to the above case?
(d) Explain the coverage available under a mediclaim policy and state the exclusions under such a policy.
(e) Explain the importance of conditions and warranties as applicable to medi-claim insurance with reference to the above case. Was there any breach of such provisions?
Answer:
(a) In the present case, the core question for consideration is whether the fact that at the time of taking out the mediclaim policy, the policyholder was suffering from Chronic Diabetes and Renal failure was a material fact. It is indeed a material fact as, it would have influenced the decision of the company in giving him a policy in the first place. And moreover, this fact was not disclosed by him in his application also.

Therefore, on account of non-disclosure of this fact in the proposal form, the respondent Insurance Company was justified in law in repudiating the claim of the appellant. The National Commission also opined the same thing and held that in the light of the material on record, answer to the question posed has to be in the affirmative.

There was a breach of faith in this case. The principle of “Utmost good faith” has indeed been violated company can refuse to pay for the claim.

(b) The principle of Utmost good faith can be defined as a positive duty voluntarily to disclose, accurately and fully, all facts material to the risk being proposed, whether requested or not. Uberrimae Fidei – ‘Fidei’ means faith and Uberrimae means utmost. Faith is complete between both the parties of contract. Thus, it needs little emphasis that when an information on a specific aspect is asked for in the proposal form, an assured is under a solemn obligation to make a true and full disclosure of the information on the subject which is within his knowledge.

Therefore, a fundamental principle of insurance law, is that utmost faith must be observed by the contracting parties. Good faith forbids either party from non-disclosure of the facts which the party privately knows. The assured’s duty to disclose can be summarized as under:” …the assured must disclose to the insurer all facts material to an insurer’s appraisal of the risk which are known or deemed to be known by the assured but neither known nor deemed to be known by the insurer. Breach of this duty by the assured entitles the insurer to avoid the contract of insurance so long as he can show that the non-disclosure induced the making of the contract on the relevant terms.

IRDA has made the 15 days free look-in period a ‘mandatory regulation’. The company spends heavily to train its agents/advisors so that they are able to guide and give the right product to the customers.
As per the Regulation 2(l)(d) of the Insurance Regulatory and Development Authority (Protection of Policyholders’ Interests) Regulations, 2002, which explains the meaning of term “material”.

The Regulation reads thus: “Proposal Form” means a form to be filled in by the proposer for insurance, for furnishing all material information required by the insurer in respect of a risk, in order to enable the insurer to decide whether to accept or decline, to undertake the risk and in the event of acceptance of the risk, to determine the rates, terms and conditions of a cover to be granted. The explanation for “Material” for the purpose of these regulations shall mean and include all-important, essential and relevant information in the context of underwriting the risk to be covered by the insurer.”

Thus, the Regulation also defines the word “material” to mean and include all “important, “essential” and “relevant” information in the context of guiding the insurer to decide whether to undertake the risk or not. In a Contract of Insurance, any fact which would influence the mind of a prudent insurer in deciding whether to accept or not to accept the risk is a “material fact”.

If the proposer has knowledge of such fact, he is obliged to disclose it, particularly while answering questions in the proposal form. Needless to emphasise that any inaccurate answer will entitle the insurer to repudiate his liability because there is clear presumption that any information sought for in the proposal form is material for the purpose of entering into a Contract of Insurance.

As per IRDAI matters to be stated in general insurance policy states that “a company has a provision for cancellation of the policy on grounds of misrepresentation, fraud, non-disclosure of material facts or non-cooperation of the insured”.
(c) As per Section 45 of Insurance Act, “Policy not to be called in question on ground of misstatement after 2 years”. In other words, it means that no policy of life insurance effected before the commencement of the Insurance Act shall, after the expiry of two years from the date of the commencement of the Act and no policy of life insurance effected after the coming into force of this Act shall, after the expiry of two years from the date on which it was effected, be called in question by an insurer on the ground that a statement made in the proposal for insurance or in any report of a medical officer, or referee, or friend of the insured, or in any other document leading to the issue of the policy, was inaccurate or false, unless the insurer shows that such statement was on a material matter or suppressed facts which it was material to disclose and that it was fraudulently made by the policyholder and that the policyholder knew at the time of making it that the statement was false or that it suppressed facts which it was material to disclose.

In the present case, there is no dispute that Section 45 of the Insurance Act, 1938, which places restrictions on the right of the insurer to call in question a life insurance policy on the ground of misstatement after a particular period, has no application on facts at hand, in as much as the said provision applies only in a case of life insurance policy. The present case relates to a mediclaim policy, which is entirely different from a life insurance policy. A mediclaim policy is a non-life insurance policy meant to assure the policy holder in respect of certain expenses pertaining to injury, accidents or hospitalizations.

It is a contract of insurance falling in the category of contract ubemimae Fidei, means a contract of utmost good faith on the part of the assured. Therefore, in the present case, Section 45, cannot apply and it is not relevant also. Generally, an insurer would believe the information given in the application form or proposal form as it is generally called. Based on the information given in the form, the insurance company deems it to be true as the applicant also gives in a declaration at the end of the form. Hence, the insurance company issues a policy based on the facts disclosed in the application form.

Moreover, a Mediclaim or any general insurance policy is issued only for one year tenure only and so the insurance company will believe the information furnished by the policyholders. Only when a claim is lodged, the insurance company starts verifying the facts of the case with the information furnished in the proposal form. However, in the case of a life insurance policy, since it is a long term contract, the law gives the insurance company a right to repudiate or cancel the policy if any discrepancy of information is found within a period of two years only.

Therefore, in the present case, the mention of Section 45 is irrelevant and does not hold good.
(d) “Health insurance business” can be defined as a contract that provides for sickness benefits and medical expenses on the basis of an indemnity, reimbursement, service or prepaid plan. A Mediclaim Insurance Policy provides for reimbursement of hospitalization/ domiciliary hospitalization expenses arising out of illness/diseases or injury, administered through TPA. The policy provides for Family discount in premium, Cumulative bonus for claim, free renewals, Cost of health check-up once in 4 claim-free years of policy renewals @ 1 % of the average Sum Insured, Room, Boarding Expenses as provided by the hospital/ nursing home, Nursing expenses, Surgeon, Anesthetist, Medical practitioner, Consultants fees, Anesthesia, Blood, Oxygen, Operation theatre charges, Surgical Appliances, Medicines and Drugs, Diagnostics material, and X-rays. Dialysis, Chemotherapy, Radiotherapy, Cost of pacemaker, artificial limbs, and Cost of organs, and similar expenses.

The Policy however excludes:

• Expenses of pre and post-hospital treatment
• Expenses incurred for the treatment for any of the following diseases: like Asthma
• Bronchitis / Chronic Nephritis
• Diarrhea / Epilepsy / Hypertension / diabetes
• Influenza, cough and cold, pyrexia
• All psychiatric disorders
• Tonsillitis and respiratory infection
• Pre-existing diseases
• First 30/First-year exclusion
• Injury/disease caused by war, invasion, act of foreign enemy, warlike operations
• Cosmetic surgery or plastic surgery
• Cost of spectacles, hearing aids, contact lens
• Dental treatment / Intentional self-injury, use of drugs / alcohol / Aids / Vitamins and tonics
• Pregnancy-related treatment
• Naturopathy treatment
• War-related
• Elective cosmetic surgery
• non-accident related dental care
• Eye test, glasses, hearing examination, hearing aid
• Pregnancy and childbirth except complications
• Work-related injury and Experimental surgery.

(e) A warranty in an insurance policy is a promise by the insured party that statements affecting the validity of the contract are true. Most insurance contracts require the insured to make certain warranties.

For example, to obtain a health insurance policy, an insured party may have to warrant that he does not suffer from a terminal disease. If a warranty made by an insured party turns out to be untrue, the insurer may cancel the policy and refuse to cover claims.

However, not all misstatements made by an insured party give the insurer the right to cancel a policy or refuse a claim. Only misrepresentations on conditions and warranties in the contract give an insurer such rights. To qualify as a condition or warranty, the statement must be expressly included in the contract and the provision must clearly show that the parties intended that the rights of the insured and insurer would depend on the truth of the statement.

Sometimes it will exclude claims arising either directly or indirectly from pre-existing conditions. Sometimes it will exclude only claims that are directly connected to the pre-existing condition. There can sometimes be confusion between pre-existing medical conditions and “nondisclosure”: For example, where a consumer has failed to disclose a pre-existing condition in response to a question. But these are usually confined to long term policies (for example, income protection or critical illness) – where traditional proposal forms are used and the consumers are given the opportunity to answer detailed questions about their health.

From the above discussion, it was clear that there is breach of such provisions indicated in the case because of “non-disclosure” of pre-existing medical conditions.

Question 6.
X is an individual, non-Indian, non-citizen and non-resident of India and controls a group of organizations engaged in the financial sector located outside India. He intends to set up a life insurance company in India and after due diligence has decided to align himself with an Indian Company.

The negotiated terms and conditions of the joint venture agreement are as under:
(i) The authorised capital of the company will be ₹ 150 crore and the issued and paid-up capital ₹ 100 crore.

(ii) The capital will be divided into equity and cumulative preference shares in equal measure. The Preference shares will carry a dividend of 8% p.a.

(iii) The proposed insurance company will also issue 9 year secured debentures carrying an interest rate of 11% p.a. The issue will be of ₹ 25 crore, the whole of which will be subscribed to by the companies controlled by X.

(iv) Two companies controlled by X will hold 30% and 25% of the issued equity shares of the proposed company.

(v) The Indian Company, who is a partner in the joint venture, together with associated organisations will hold 45% of the proposed issued equity in the new company.

(vi) Preference shares of the face value of ₹ 20 crore will be held equally by X and the Indian partners.

(vii) The proposed insurance company will also carry out health insurance business in addition to life insurance business in India.

(viii) It is agreed to between X and the Indian partners that the CEO of the proposed insurance company will be an expatriate (non-Indian) who will be in control of the insurance business.

(ix) The Indian insurance company, when setup, proposed to appoint a British Citizen as the actuary.

(x) The proposed insurance company plans to recruit a number of persons from the Indian market, train them in the marketing of insurance products and appoint them as agents for marketing of the policies.

(xi) As part of the understanding between X and the Indian promoter, there is a proposal to invest 10% of the net premium every year in the group companies owned and controlled by X.

On the basis of the above understanding, an application seeking registration of an Indian insurance company has been made to the Insurance Regulatory and Development Authority of India.
What will be the approach of the authority to this proposal? Comment with the necessary explanations with respect to the relevant statutory provisions as applicable against all the points as mentioned above from (i) to
Answer:
The setting up of an insurance company in India is governed by the Insurance Act, 1938, IRDA, 1999 and other related Acts. The proposed company intends to carry out Life Insurance Business and Health Insurance Business in India where the partners are non-Indian and an Indian partner.

As required they have to set up a public limited company in India (comply with all the requirements of the Companies Act, 2013). As per the present rules the foreign shareholding cannot exceed 49%. The registration is 2 stage process R1 and R2. Every company desirous of seeking insurance business registration from IRDAI has to first apply in Form R1 giving all the details as required therein to IRDAI.

Once R1 is approved which is based on the due diligence of the proposed management and fulfilling of the other criteria for authorized capital, paid-up capital etc. Once R1 is accepted and approved the proposed company can proceed to file form R2 in details and then on being satisfied for all the aspects of the company as required under the Act(s), IRDAI will grant a certificate of registration to the applicant company to carry on the insurance business in India.

(i) Every insurer carrying on insurance business in India shall have a minimum paid-up capital of ₹ 100 crores for life insurance and general insurance business. The proposed company while applying to IRDAI is keeping the authorized share capital at ₹ 150 crores and the issued and paid-up capital at ₹ 100 crores which is well within the stipulated requirements of the Act. Hence this condition would be acceptable to the authority.

(ii) The Act earlier required that the capital of an insurance company shall consist of only Equity Share Capital and no other forms of capital are allowed. However as per amendments made in 2015, insurance companies are allowed to issue total quantum of preference shares and debentures not exceeding 25% of the equity share capital. Further, there is a progressive decrease in the proportion in which the instruments are included as part of the capital (for the purposes of calculation of “Available Solvency Margins”) for the final five years prior to maturity of such instruments.

Here the proposal is to divide the total capital into equity and preference shares in equal measure, i.e., 50% of equity and 50% of preference share capital. As per the Act this is not allowed and hence the proposed company is required to make necessary amendments on the proposed capital structure to comply with total cap of 25% of equity capital for total of preference shares and debentures. The company must have paid-up equity capital of ₹ 100 crores.

(iii) As stated above the company has to have a cap of 25% of equity capital for preference capital and debentures. Thus the company needs to rework out the amounts of preference capital and debentures to meet the requirements as stipulated by the law. This it is not advisable to consider the proposal of issuing 11% Secured Debentures for 9 years of value of ₹ 25 crores to be held by group company of X.

(iv) As per the present law the maximum holding allowed to a foreign partner for insurance business is 49% (with up to 26% foreign investment being under the automatic route) hence the proposal of X company holding total 55% (30% and 25% by two companies of X) will not be permitted. Hence, the proposal have to be revised and maximum 49% can be the company holding.

(v) The Indian partner in an insurance business company is required to hold minimum 51% of the total share capital in the new company would not be approved by the Authority.

(vi) The quantum of preference capital will have to be reworked by both the partners of the proposed company to comply with the requirements of the capital structure as stipulated by the law as it is more than 25% of the equity capital.

Based on the above, the proposed company of X and the Indian partner need to review the proposal and rework the whole proposal and arrive at a new joint venture agreement to proceed further with IRDAI to get the certificate of registration.

(vii) The proposal to carry out the health insurance business in addition to the life insurance business in India will be acceptable to the authorities as long as other conditions of grant of registration are suitably complied with by the proposed company.

Registration and Scope of Health Insurance Business:
(a) Health Insurance products may be offered only by entities with a valid registration granted to carry on Life Insurance or General Insurance or Health Insurance Business under the Insurance Regulatory and Development Authority (Registration of Indian Insurance Companies) Regulations 2000 as amended from time to time.

(b) Life Insurers may offer long term Individual Health Insurance products i.e., for term of 5 years or more, but the premium for such products shall remain unchanged for at least a period of every block of three years, thereafter the premium may be reviewed and modified as necessary.

Provided that a life insurer may not offer indemnity based products either Individual or Group. All existing indemnity based products offered by life insurers shall be withdrawn as specified under these Regulations.
Provided also that no single premium health insurance product shall be offered under Unit Linked platform.

(c) General Insurers and Health Insurers may offer individual health products with a minimum tenure of one year and a maximum tenure of three years, provided that the premium remains unchanged for the tenure.

(d) Group Health Policies may be offered by any insurer for a term of one year except credit linked products where the term can be extended up to the loan period not exceeding five years. Provided General Insurers and Health Insurers may also offer Credit Linked Group Personal Accident policies for a term extended upto the loan period not exceeding five years. Provided further, notwithstanding the provisions of Regulation 4 (b) of these Regulations, Life Insurers may offer Group Health Insurance Policies as specified in Regulation (3)(d).

(e) Group Personal Accident Policies may be offered by General Insurers and Health insurers with term less than one year also to provide coverage to specific events. Other Insurance Products offering Travel Cover and Individual Personal Accident Cover may also be offered for a period less than one year.

(f) Overseas or Domestic Travel Insurance policies may only be offered by General Insurers and Health Insurers, either as a standalone product or as an add-on cover to a health or personal accident policy.

(viii) The proposal to appoint an expatriate (non-Indian) as CEO of the proposed insurance company will also be acceptable as long as other conditions of the management structure of the proposed company are fulfilled as required under the law.

(ix) As per the Appointed Actuary Regulations, 2000 the person to be appointed as an Appointed Actuary of Life Insurance Company in India shall be:
(a) Ordinarily resident in India,
(b) A fellow member of an affiliate member in accordance with the Actuaries Act, 2006.
(c) An employee of life insurer in case of life insurance business etc. Now if the Britisher who is proposed to be appointed as the Appointed Actuary of the proposed life insurance business company in India fulfills the requirements as stipulated under the Act, the authority will permit such appointment otherwise not.

(x) Recruitment of persons from Indian market and training them for marketing of insurance products as agents of the company will also be permitted if these persons to be appointed as agents of the company fulfil the requirements to be appointed as agents. They are required to be provided with practical training, pass the exams conducted by IRDAI for life insurance agents, pay the prescribed fees as required and obtain the certificate to act as Life insurance agents.

(xi) The understanding between X and the Indian promoter to invest 10% of the net premium every year in group companies owned and controlled by X will not be allowed as these fall under Prohibited investments as per Sections 27A(5) and 27C of the Insurance Act, 1938. These are companies outside India and hence investments in these companies are not allowed. If these companies were in India the total limit for investment in such companies is set at 5% of the aggregate funds of the insurer.

Thus based on our observations, the terms and conditions of the understanding have to be reviewed and revised to meet the requirements of the Insurance Act, 1938 and the IRDAI provisions to get the certificate of registration for Life Insurance Business in India.

Question 7.
Write short notes on:
(b) Powers/Functions of IRDA
Answer:
Powers/Functions Of Irda:
Under Section 14 of the IRDA Act, IRDA has the following powers:

• Issue of Certificate of Registration to insurance companies, renew, modify, withdraw, suspend or cancel the certificate of registration.
• Protection of interests of policyholders in matters concerning assignment of policies, nomination, insurable interest, claim settlement, surrender value and other terms and conditions of insurance contract.
• Specification of requisite qualifications, practical training and code of conduct for insurance agents and intermediaries.
• Specification of code of conduct for surveyors and loss assessors.
• Promoting efficiency in the conduct of insurance business.
• Promoting and regulating professional organizations connected with insurance and reinsurance business.
• Levying fees and other charges for carrying out the purposes of the Act.
• Calling for information from or undertaking inspection of insurance companies, intermediaries and other organisations connected with insurance business.
• Control and regulation of rates, advantages, terms and conditions that may be offered by general insurance companies.
• Specifying the form and manner in which books of account shall be maintained by insurance companies and intermediaries.
• Regulation of investments of funds by insurance companies.

Regulation of maintenance of margin of solvency.

Question 8.
Write a brief on the history of regulation of insurance business in India.
Answer:
Regulation of Insurance Business in India: This millennium has seen insurance come a full circle in a journey extending to nearly 200 years. The process of re-opening of the sector had begun in the early 1990s and the last decade and more has seen it been opened up substantially. In 1993, the Government set up a committee under the chairmanship of R. N. Malhotra, former Governor of RBI, to propose recommendations for reforms in the insurance sector.

The objective was to complement the reforms initiated in the financial sector. The committee submitted its report in 1994 wherein, among other things, it recommended that the private sector be permitted to enter the insurance industry. They stated that foreign companies be allowed to enter by floating Indian companies, preferably a joint venture with Indian partners.

The IRDA opened up the market in August 2000 with the invitation for application for registrations. Foreign companies were allowed ownership of up to 26%. The Authority has the power to frame regulations under Section 114A of the Insurance Act, 1938 and has from 2000 onwards framed various regulations ranging from registration of companies for carrying on insurance business to protection of policyholders’ interests.

Today there are 24 general insurance companies including the ECGC and Agriculture Insurance Corporation of India and 23 life insurance companies operating in the country.
Besides IRDA Act and Insurance Act, 1938, there are some common Acts/Regulations to the General and Life Insurance Business in India and some Acts have been made for specific requirements of Life Insurance/General Insurance.

Acts/Regulations common to General and Life Insurance Business in Indian:
The following Acts regulate the Insurance Business in India.

• Insurance Act, 1938
• IRDA Act, 1999
• Insurance Amendment Act, 2002
• Exchange Control Regulations (FEMA)
• Insurance Co-op Society
• Indian Stamp Act, 1899
• Consumer Protection Act, 1986
• Insurance Ombudsman.

CS Professional Insurance Law and Practice Notes

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

Question 1.
Write a short note on: “Bills re-discoun ting”
Answer:
Bills Re-discounting:

• Bills Re-discounting means the re-discounting of trade bills which have already been purchased by/discounted with the bank by the customer. These trade bills arise out of supply of goods/services.
• Bill re-discounting is a money market instrument where the bank buys the bill (Le. Bill of Exchange of Promissory Note) before it is due and credits the value of the bill after a discount- charge to the customer’s account.
• The bank now-a-days has discounted the bill may require getting it ‘re-discounted’ with some other bank to get the fund.

Question 2.
Distinguish between the following: Bill Discounting and Factoring
Answer:
Difference between “Bill Discounting” and “Factoring”:
Bill Discounting:
In common practice, the seller who gets the accepted bills of exchange discounts it with the Bank or financial institution or a bill discounting house and collects the money (less the interest charged for the discounting).

Commercial bills are basically negotiable instruments accepted by buyers for goods or services obtained by them on credit. Such bills being bills of exchange can be kept up to the maturity date and encashed by the seller or may be endorsed to a third party in payment of dues owing to the latter.

Factoring:

• Factoring is a financial transaction wherein an entity sells its receivables to a third party called a ‘factor’, at discounted prices.
• Factoring is a financial option for the management of receivables.
• It is the conversion of credit sales into cash.
• In factoring, a financial institution (factor) buys the accounts receivable of a company (Client) and pays up to 80% (rarely up to 90%) of the amount immediately on formation of agreement.

Question 3.
Distinguish between the following: Bills Finance and Project Finance
Answer:
Distinguish between “Bills Finance” and “Project Finance”:
“Bills Finance”:

• Bills finance is short term and self liquidating finance in nature.
• Bills can be classified as Demand Bills and Usance Bills.
• Demand Bill is purchased and Usance bill is discounted by the banks. The credits available to the seller against the bills drawn under Letter of Credit either on sight draft or usance draft are called bills negotiated by the banks.
• Advantage of bills finance is that the seller of goods (borrower) gets immediate money from the bank for the goods sold by him irrespective of whether it is a purchase, discount or negotiation by the bank.
• The ‘Demand Bills’ can be documentary or clean. Generally, banks accept only documentary bills for purchase. However, clean bills from good parties also purchased by the banks.

“Project Finance”:

• It is the long-term financing of infrastructure and industrial projects based upon the projected cash flows of the project.
• Generally, a project financing structure involves a number of equity investors, known as ‘sponsors’, a ‘syndicate’ of banks or other lending institutions that provide loans to the operation.
• Most commonly loans which are secured by the proj ect assets and paid entirely from project cash flow rather than from the general assets or creditworthiness of the project sponsors.
• The financing is typically secured by all of the project assets including the revenue-producing contracts.
• Project lenders are given a lien on all of these assets and are able to assume control of a project if the project company has difficulties complying with the loan terms.

Question 4.
Discuss the steps involved in the process of factoring.
Answer:
Following steps are involved in “Factoring Process”:

• The seller interacts with the funding specialist or broker and explains the funding needs.
• The broker prepares a preliminary client profile form and submits to the appropriate funder for consideration.
• Once both parties agree that factoring is possible, the broker puts the seller in direct contact with the funder to ask/answer any additional questions and to negotiate a customized factoring agreement, which will meet the needs of all concerned.
• At this point, the seller may be asked to remit a fee with formal application to cover legal research costs, which will be incurred dining the course of “due diligence”. Here “Due Diligence” means a process by which the buyer’s credit worthiness is evaluated through background checks, using national database services
• During the next several days, the funder completes the “due diligence” process on the seller, further verifies invoices and acknowledges any liens, UCC filings, judgments or other recorded encumbrances on the seller’s accounts receivables.
• The seller is advised of the facility and is asked to advise the buyers of the Factor by letter and submit an acknowledged copy of the same to the Factor for records.
• A detailed sanction letter is given to the seller and their acceptance on the same taken, with the required signatories. (Authorized signatories would be mentioned in the “Signing Authorities” section of the Proposal presented by seller).

Sanction terms must contain the following:

• All facilities covered under the sanction.
• The period for which the sanction is valid.
• The Limits.
• The seller has to advise the buyer of the Factoring agreement.
• Copy of such advice acknowledged by the buyer should be submitted to the Factor. Buyer’s consent is not required to decide on the Factor.
• Who is an authorized signatory are for signing invoices for factoring

Question 5.
“Factoring is a financial option for the management of receivables.” In the light of this statement, explain the meaning and advantages of factoring.
Answer:
‘Factoring is a financial option for the management of receivables.’ It is the conversion of credit sales into cash. In factoring, a financial institution J (factor) buys the accounts receivable of a company (Client) and generally pays up to 80% of the amount immediately on agreement. Factoring company pays the remaining amount (Balance 20%- Finance cost-operating cost) to the client when the customer pays the debt. Collection of debt from the customer is done either by the factor or the client depending upon the type of factoring.

The following are the advantages of factoring for a seller:

• Seller gets funds immediately after the sale is affected and on presentation of accepted sales invoices and Promissory notes.
• Major part of paper work and correspondence is taken care of by the factor.
• Follow-up for recovery of funds is done mainly by the factor.
• Interest rates are not as high as normal discounting.
• Increased cash flow to meet payroll.
• Immediate funding arrangements.
• No additional debt is incurred on balance sheet.
• Other assets are not encumbered.
• Approval is not based on seller’s credit rating.

Question 6.
“Treasury bills are effective cash management product.” Comment.
Answer:

• “Treasury Bills” are very useful instruments to deploy short term surpluses depending upon the availability and requirement.
• Generally, Banks do not pay any interest on fixed deposits of less than 15 days or balances maintained in current accounts whereas treasury bills can be purchased for any number of days depending on the requirements. This helps in deployment of fund for very short periods as well.
• Since every week there is a 91 days treasury bill maturing and every fortnight a 364 days treasury bills maturing, one can purchase treasury bills of different maturities as per requirements so as to match with the respective outflow of funds.
• When the liquidity in economy is tight the returns on treasury bills are much higher as compared to bank deposits even for longer term.
• Apart from the better yields and availability for very short tenures, another advantage of treasury bills over bank deposits is that surplus cash can be invested.

Question 7.
In the recent past, a listed housing finance company issued MASALA BONDS for a sum of ₹ 3,000 crore.
Explain the term MASALA BONDS. Is there any advantage of MASALA BONDS over NORMAL BONDS?
Answer:

• Masala Bonds are rupee denominated borrowings by Indian companies in the overseas markets. This is different from the other overseas borrowings in the sense that in the other borrowings, the currency is normally dollar, euro, yen etc.
• The masala bonds were reckoned under both corporate debt and external commercial borrowings for Foreign Portfolio investment.
• The Reserve Bank of India recently amended the Regulations and currently treats Masala Bonds under the ECB category only where a borrower just needs to seek the RBI’s approval to sell those securities.
• The main advantage of issuing masala bonds is that the company does not have to worry about the depreciation in the rupee in comparison to the other currencies.
• In order to compensate the risk of currency depreciation, the buyer of the Masala Bond will get a higher coupon rate and therefore earns a higher yield.
• Many companies are in the battle to issue masala bonds as the com-panies can have access to more funds at a marginally higher cost of financing.

Question 8.
Write a detailed note on Islamic banking.
Answer:

• Islamic Banking or Sharia – Compliant Finance is banking or financing activity that complies with sharia (Islamic law) and its practical application through the development of Islamic economics.
• Some of the modes of Islamic banking/finance include Mudarahah (Profit sharing and loss bearing), Wadiah (safekeeping), Musharaka (joint venture), Murabahah (cost plus), and Ijara (leasing).
• Sharia prohibits riba, or usury, defined as interest paid on all loans (although some Muslims dispute whether there is a consensus that interest is equivalent to riba). Investment in businesses that provide goods or services considered contrary to Islamic principles (e.g. pork or alcohol) is also haraam (sinful).
• Islamic Banks work on the principles of an interest free banking. Riba or interest under Islamic Law basically means anything in “excess” – the investor should not make an “undue” profit from the hard work of the other.
• Islamic banks make available accounts which provide profit or loss instead of interest rates. The banks use this money collected by them and invest in something that is shari at compliant that is not haraam and does not involve high risks.

Question 9.
You are required to compute Maximum Permissible Bank Borrowings (MPBB) under three methods of Tandon Committee Norms pertaining to M Ltd. from following data and how you will present it to the Board:

Existing Current Assets	Amount in ₹	Amount in ₹
Raw Materials	8,00,000
Work in progress	80,000
Finished Goods	3,60,000
Receivables	2,00,000
Other current assets	40,000	14,80,000
Existing Current Liabilities
Creditors for purchase	4,00,000
Other current liabilities	2,00,000
Bank borrowings	8,00,000	14,00,000

Core Current assets are ₹ 3,80,000
Answer:
Maximum Bank Borrowings: (Tandon Committee norms):

Method-I	Method-II	Method-III
= 0.75(Current Assets – Current Liabilities)	= 0.75 (Current Assets) – Current Liabilities	= 0.7 5 (Current Assets – CAA) – Current Liabilities
= 0.75 (14,80,000 – 6,00,000)	= 0.75 (14,80,000) – 6,00,000	= 0.75(14,80,000 – 3,80,000)  – 6,00,000
= 0.75 (8,80,000) = 6,60,000.	= 11,10,000 – 6,00,000 = 5,10,000	= 0.75 (11,00,000) – 6,00,000 = 2,25,000.

Recapitulation:

Particulars	Method – I	Method – II	Method – III
Maximum Bank Borrowings	6,60,000	5,10,000	2,25,000
Actual Bank Borrowings	8,00,000	8,00,000	8,00,000
Excess Bank Borrowings	1,40,000	2,90,000	5,75,000

Note: Under all three methods, the excess bank borrowings can be converted in to long term debt.

Question 10.
Following data relates to M/s ABC Pvt. Ltd.:

Particulars	Amount (₹ in lakh)	Particulars	Amount (₹ in lakh)
Creditor for purchases	200	Raw Material	380
Other current liabilities	100	Work in process	40
		Finished Goods	180
		Receivables	110
		Other current Assets	30

Calculate the Maximum Permissible Bank Finance (MPBF) as per the Tandon Committee Recommendations using the norm of a current ratio of 1.33.
Answer:
Calculation of Maximum Permissible Bank Finance (MPBF) as per 2nd Method of Lending (Tandon Committee Recommendations) are as under:

Sr. No.	Particulars	Amount (₹ in Lakh)
1	Total Current Assets (TCA)	740
2	Less : Current Liabilities other than banking borrowing	300
3	Working Capital Gap (WCG) ( 1-2)	440
4	Less : 25% of Total Current Assets (25% of 1)	185
5	Maximum Permissible Bank Finance (MP BF) (3-4)	255

With this additional borrowing the Current Liabilities shall become ₹ 555 lakhs (300 + 255) and the new Current Ratio shall become 1.33 (740/555).

Working Note:

Sr. No.	Particulars	Amount (₹ in Lakh)
1	Raw Material	380
2	Work in Process	40
3	Finished Goods	180
4	Receivables	110
5	Other Current Assets	30
Total Cur­rent Assets		740

Question 11.
Discuss the parties in factoring?
Answer:
The factoring transaction involves three parties:

• The Seller who has produced the goods /services and raised the invoice.
• The Buyer who is the consumer of goods/services and the party to pay.
• The Factor i.e. the financial institution that advances the portion of funds to the seller.

Question 12.
What are types of factoring?
Answer:
Types of factoring are as follows:

• Recourse Factoring: In this type of factoring the bank purchases the receivables on the condition that any loss arising out or bad debts will be borne by the company which has taken factoring.
• Non-Recourse or Full Factoring: In this type of factoring the bank takes all the risk and bear all the loss in case of debts becoming bad debts.
• Advance Factoring: In advance factoring arrangement the factor provides an advance against the uncollected and non-due receivables to the firm.
• Maturity Factoring: In this type of factoring bank does not give any advance to the company rather bank collects it from customers and pays to the company either on the date of collection from the customers or on a guaranteed payment date.
• Undisclosed Factoring: In this type of factoring, the customer is not informed of the factoring arrangement. The firm may collect dues from the customer on its own or instruct to make remit once at some other address.
• Invoice Discounting: In this type of factoring the bank provide an advance to the company against the account receivables and in turn charges interest rate from the company for the payment which bank has given to the company.

Question 13.
What are the features of Loan against Securities?
Answer:
Following are features of Loan against Securities:

• Tenure – Generally, the tenure of loan against securities is one year.
• Processing Fees – Banks and financial institutions usually charge approximately 2 % as processing fees.
• Prepayment Charges – Generally, there are no prepayment charges.
• Secured Loan – Loan against securities is a secured loan as the bonds, shares, debentures or mutual funds owned by the borrower are kept as collateral security when this loan is advanced.
• Rate of Interest – Generally interest rates at which loan against securities is advanced varies from 12% – 15% p.a.
• Loan Amount – The loan amount for which the borrower may be eligible depends upon the type of security that is being offered.

Question 14.
Define Project Report. What are important aspects covered in the project report?
Answer:
Project Report: A Project Report is a detailed report containing all the details of company. A good project report must present diverse range analytical challenges to its clients and shareholders.

Following Important aspects covered in the project report are as follows:

• Introductory Page
• Summary of the project
• Details about the Promoters, their educational qualifications, work experience, etc.
• Current Status of the Bank, its products and services, target market, and activities.
• Infrastructure facilities, tools deployed, operational premises, machinery, etc.
• Customers, details about them as well as prospective customers
• Fiscal acquisitions and tie-ups
• Means of Financing
• Profitability projections and Cash flows for the entire repayment period of financial assistance
• Break Even Point Evaluations
• Product with capacity to be built up and processes involved
• Project location
• Cost of the Project and Means of financing thereof
• Availability of utilities
• Technical arrangements
• Market Prospects and Selling arrangements
• Environmental aspects.
• Balance Sheet
• Profit and Loss Statements
• Fund Flow Statement

Question 15.
Define project finance? Discuss features of project finance transactions?
Answer:
“Project Finance”: Project Finance is the long-term financing of in-frastructure and industrial projects based upon the projected cash flows of the project. A project financing structure involves a number of equity investors, known as ‘sponsors’, a ‘syndicate’ of banks or other lending institutions that provide loans to the operation.

Following are features of project finance transactions are:

• Highly leveraged: These transactions have high debt proportion as compared to equity.
• Capital Intensive: They tend to be large scale projects requiring debt and equity in a large amount.
• Long Term: The tenor for project financings can easily reach 15 to 20 years.
• Independent Entity with A Finite Life: They form a new legal entity with the sole purpose of executing the project.
• Non-Recourse Or Limited Recourse Financing: It means the creditor has no or limited claims on the loan in case of default.
• Many Participants: There are many national and international participants involved in a project laying different risk.
• Allocated Risk: There are many risk involved in a project for example Environmental, Country risk, market risk, project risk, Product risk, Supply risk, Funding risk, Currency risk, Interest risk.
• Costly: Raising capital through project finance is generally more costly than through typical corporate finance avenues.

Question 16.
Write Short Note on: “Cash Credit Account (CC Account)”.
Answer:
“Cash Credit Account (CC Account)”:
A cash credit facility is a short-term finance to a borrower company having a tenure of up to one year which can be renewed for further period by the bank on the basis of projected sales and satisfactory operation in the account during the period of finance.

Cash credit facility is extended in two forms viz. Open Cash Credit and Key Cash Credit.
Open Cash Credit: Open Cash credit account is a running account just like a current account where the borrower is allowed to maintain debit balance in the account up to a sanctioned limit or drawing power whichever is lower.

Key Cash Credit: In the case of Key Cash Credit, the borrower lodges the stocks in his godown and the key of the godown will be handed over to the bank. With this process the goods lodged in the godown are pledged to the bank and the bank will allow the customer to draw funds against the value of the goods less margin. This is known as Drawing Power.

Question 17.
Describe the various types of bonds in India?
Answer:
Government Bonds:

• The bonds which are issued either directly by Government of India or by the Public Sector Units (PSU’s) in India.
• These bonds are seemed as they are backed up with security from Government.
• These are generally offered with low rate of interest com­pared to other types of bonds.

Tax saving bonds:

• The tax saving bonds is issued by the Government of India for providing benefit to investors in the form of tax savings.
• The bond holder would also get tax benefit along-with normal interest.

Corporate Bonds:

• These are the bonds issued by the private corporate com­panies.
• Indian corporate issue secured or non-secured bonds

Banks and other financial institutions bonds:

• These bonds are issued by banks or any financial institution.
• The financial market is well regulated and the majority of the bond markets are from this segment.
• However care to be taken to consider the credit rating given by crredit Rating Agencies before investing in these  bonds.

Corporate Funding and Listings in Stock Exchanges Notes

Listing – Indian Stock Exchanges – Corporate Funding and Listings in Stock Exchanges Important Questions

Question 1.
Comment on the following: “Corporate governance is looked upon as a distinctive brand and benchmark in the profile of corporate excellence”.
Answer:
→ Corporate excellence refers to a transformation from the status of a good company to the status of a great company. The essence of corporate excellence is to have a competitive advantage over other firms in the industry.

→ Corporate excellence is about developing and strengthening the management system and process of a company to improve performance and create value for stakeholders. Corporate governance is the one and only route to achieve corporate excellence.

→ Corporate Governance provides a structure through which the objectives of a company are set and how they are achieved and monitored.

→ Good governance practice enhances the efficiency of corporate sector and helps achieving excellence in all areas in the organization.

Question 2.
Write notes on: “Compliance Officer”.
Answer:
According to Regulation 6 of SEBI (LODR) Regulations, 2015 shall appoint a Qualified Company Secretary as the Compliance Officer who is responsible for:

• Ensuring conformity with the regulatory provisions in letter and spirit.
• Coordination with and reporting to SEBI, recognized stock exchange(s) and depositories.
• Monitoring email address of grievance redressal division for the purpose of registering complaint by investors.
• Ensuring correctness, authenticity and comprehensiveness of the information, statements and reports filed by listed entities.

Note. This regulation is not applicable to listing of units of mutual funds.

Question 3.
Write notes on: “Corporate Governance Compliance Certificate”.
Answer:
→ Part E of Schedule II of SEBI (LODR) Regulations, 2015 deals with Compliance Certificate on Corporate Governance.

→ Compliance Certificate from either the auditors or practicing company secretaries regarding compliance of conditions of corporate governance shall be annexed with the directors’ report.

→ The listed entity shall submit to stock exchange a comparative analysis of the corporate governance provisions that are applicable in its home country and in the other jurisdictions in which its equity shares are listed along with the compliance of the same vis-a-vis the corporate governance requirements applicable under Regulation 17 to Regulation 27 to other listed entities.

→ The disclosures of the compliance with corporate governance requirements specified in regulations 17 to 27 and clauses (b) to (i) of sub-regulation (2) of Regulation 46 shall be made in the section on corporate governance of the annual report.

Question 4.
Write notes on: “Whistle blower Policy.” ;
Answer:
“Whistle blower Policy” or “Vigil Mechanism”: As per Regulation 22 of SEBI (LODR) Regulations, 2015, following are the requirements for the “Whistle Blower Policy” in a listed entity:

• The listed entity shall formulate a vigil mechanism for directors and employees to report genuine concerns.
• The vigil mechanism shall provide for adequate safeguards against victimization of director(s) or employee(s) or any other person who avail the mechanism and also provide for direct access to the chair-person of the audit committee in appropriate or exceptional cases.
• Details of establishment of Vigil Mechanism shall be disclosed by the listed entity on its website and in the Board’s Report.

Question 5.
Discuss briefly the composition, meetings, role & responsibilities of an Audit Committee under Regulation 18 of SEBI (LODR) Regulations, 2015.
Answer:
Composition of Audit Committee: Every listed entity shall constitute a qualified and independent audit committee in accordance with the terms of reference, subject to the following:
Minimum Number of Directors: The Audit Committee shall have minimum 3 directors as members.

Number of Independent Directors: 2 /3rd of the members of audit committee shall be independent directors.

Financially literate: All members of audit committee shall be fi-nancially literate and at least one member shall have accounting or related financial management expertise.

Secretary: The Company Secretary shall act as the Secretary to the audit committee.

Chairperson: The Chairperson of the audit committee shall be an independent director and he shall be present at AGM to answer shareholders queries.

Invitation: The audit committee at its discretion shall invite the finance director or head of the finance function, head of internal audit and a representative of the statutory auditor and any other such executives to be present at the meetings of the committee.

Meeting of Audit Committee: The listed entity shall conduct the meeting of audit committee in the following manner:
Minimum Number of Meeting: The audit committee shall meet at least 4 times in a year and not more than 120 days shall elapse between two meetings.

Quorum: The quorum for audit committee meeting shall either be:

• two members or
• one third of the members of the audit committee, whichever is greater, with at least two independent directors.

Role and Responsibilities of Audit Committee: Following are the role and responsibilities of audit committee as per Part C of Schedule II:

• Oversight of the listed entity’s financial reporting process and the disclosure of its financial information to ensure that the financial statement is correct, sufficient and credible.
• Recommendation for appointment of auditors and remuneration and terms of appointment of auditors of the listed entity.
• Approval of payment to statutory auditors for any other services rendered by the statutory auditor.

Reviewing, with the management, the annual financial statements before submission to the board for approval with particular reference to:

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

Reviewing, with the management:
Quarterly financial statements before submission to the board for approval.
Performance of statutory and internal auditors, and adequacy of the internal control systems.

• Approval of any subsequent modifications of transactions of the company with related parties.
• Scrutiny of inter-corporate loans and investment.
• Valuation of undertaking or assets of the company, wherever it is necessary.
• Evaluation of internal financial control and risk management systems.
• Discussion with statutory auditors before the audit commences, about the nature and scope of audit as well as post-audit discussion to ascertain any area of concern.
• To review the functioning of the Whistle Blower mechanism in case the same is existing.
• Carrying out any other function as is mentioned in the terms of reference of the Audit Committee.

Question 6.
MCS Ltd. is a listed company with Bombay Slock Exchange Ltd. The Company enters into related party transactions frequently with MAP Ltd. in which one of Director of MNC Ltd. holds 3% paid up capital of MAP Ltd. MCS Ltd. feels that getting the approval of Audit Committee for each transaction is time-consuming and delaying the operational plan. You, being a Company Secretary of MCS Ltd., advise the management with reference to SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 for approval of related party transactions from the Audit Committee for next one year. Will your answer be different if MAP Ltd. is wholly owned subsidiary of MCS Ltd.?
Answer:
According to Regulation 23(2) of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, all related party trans-actions shall require prior approval of the Audit Committee.

The Audit Committee may grant omnibus approval for related party transactions proposed to be entered into by the listed entity subject to the following conditions:
→ The audit committee shall lay down the criteria for granting the omnibus approval in line with the policy on related party trans-actions of the listed entity and such approval shall be applicable in respect of transactions which are repetitive in nature.

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

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

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

→ The omnibus approval shall specify:
i. the name(s) of the related party, nature of transaction, period of transaction, maximum amount of transactions that shall be entered into;
ii. The indicated base price/current contracted price and the formula for variation in the price if any; and iii Such other conditions as the audit committee may deem fit.

Nevertheless where the need for related party transaction cannot be foreseen and aforesaid details are not available, audit committee may grant omnibus approval for such transactions subject to their value not exceeding rupees one crore per transaction.

→ The provisions related to the prior approval of audit committee shall not apply, in case the transactions are entered between a holding company and its wholly owned subsidiary whose accounts are consolidated with such holding company and placed before the shareholders at the general meeting for approval.

Therefore, in the case of MAP Ltd. which is a wholly owned subsidiary of MCS Ltd., the approval of audit committee is not required.

Question 7.
You are Company Secretary of All Season Travels Ltd., which being listed on the stock exchange after an IPO is made by the Company. Your Board of Directors desires to understand about the compliance requirements under Regulation 33 of SEBI (Listing Obligations & Disclosure Requirements) Regulations, 2015. Write a Board note on Regulation 33.
Answer:
To,
The Board of Directors
All Season Travels Limited
Sub: Compliance requirements under Regulation 33 of SEBI (Listing Obligations & Disclosure Requirements) Regulations, 2015.
I would like to draw attention of the Board of Directors that while preparing financial results, the listed entity shall comply with the following:
→ The financial results shall be prepared on the basis of accrual accounting policy and shall be in accordance with uniform accounting practices adopted for all the periods.

→ The quarterly and year to date results shall be prepared in accordance with the recognition and measurement principles laid down in Accounting Standard 25 or Indian Accounting Standard 31 (AS 25/Ind AS 34 – Interim Financial Reporting), as applicable, specified in Section 133 of the Companies Act, 2013 read with relevant rules framed thereunder or as specified by the Institute of Chartered Accountants of India, whichever is applicable.

→ The standalone financial results and consolidated financial results shall be prepared as per Generally Accepted Accounting Principles in India. However, in addition to the above, the listed entity may also submit the financial results as per the International Financial Reporting Standards notified by the International Accounting Standards Board.

→ The listed entity shall ensure that the limited review or audit reports submitted to the stock exchange(s) on a quarterly or annual basis are to be given only by an auditor who has subjected himself to the peer review process of Institute of Chartered Accountants of India and holds a valid certificate issued by the Peer Review Board of the Institute of Chartered Accountants of India.

→ The listed entity shall make the disclosures specified in Part A of Schedule IV.

Approval and Authentication of the financial results:
In addition to the above, following are provisions regarding approval and authentication of the financial results:

• The quarterly financial results submitted shall be approved by the board of directors.
• The financial results submitted to the stock exchange shall be signed by the chairperson or managing director, or a whole time director or in the absence of all of them. It shall be signed by any other director of the listed entity who is duly authorized by the board of directors to sign the financial results.
• The limited review report shall be placed before the board of directors, at its meeting which approves the financial results, before being submitted to the stock exchange(s).
• The annual audited financial results shall be approved by the board of directors of the listed entity and shall be signed in the manner specified in sub-regulation (2 )(b).

Manner of Submission of Financial Results: Furthermore, the listed entity shall submit the financial results in the following manner:
→ The listed entity shall submit quarterly and year-to-date standalone financial results to the stock exchange within 45 days of end of each quarter, other than the last quarter.

→ In case the listed entity has subsidiaries, in addition to the requirement at clause (a) of sub-regulation (3), the listed entity shall also submit quarterly/ year-to date consolidated financial results.

→ The listed entity shall also submit as part of its standalone or consolidated financial results for the half year, by way of a note, a statement of assets and liabilities as at the end of the half-year.

→ The listed entity shall submit annual audited standalone financial results for the financial year, within sixty days from the end of the financial year along with the audit report and Statement on Impact of Audit Qualifications applicable only for audit report with modified opinion.

However, if the listed entity has subsidiaries, it shall, while submitting annual audited standalone financial results also submit annual audited consolidated financial results along with the audit report and Statement on Impact of Audit Qualifications applicable only for audit report with modified opinion.

However, in case of audit reports with unmodified opinion(s), the listed entity shall furnish a declaration to that effect to the Stock Exchange(s) while publishing the annual audited financial results.

Mr.___________
(Company Secretary)
All Season Travels Ltd.

Question 8.
What do you mean by SME Exchange? Discuss the role of Company Secretary in the model SEBI (LODR) Regulations, 2015 laid down by SEBI for SMEs for the purpose of listing. [(Dec 2013) (5 Marks)]
Answer:
“SME exchange” means a trading platform of a recognised stock exchange having nationwide trading terminals permitted by SEBI to list the specified securities issued in accordance with Chapter IX and includes a stock exchange granted recognition for this purpose but does not include the Main Board.

Explanation: ‘Main Board’ means a recognized stock exchange having nationwide trading terminals, other than SME exchange.

Example: BSE and NSE have started their SME listing platforms in India.

“Role of Company Secretary” in the model SEBI (LODR) Regulations, 2015 laid down by SEBI for SMEs for the purpose of listing:
Following are roles of Company Secretary:
→ All listed SMEs on SME platform are required to appoint the Company Secretary of the Issuer as Compliance Officer who will be responsible for monitoring the share transfer process and report to the Issuer board in each meeting.

→ ‘Compliance Officer’ will directly liaise with the authorities such as SEBI, Stock Exchange, ROC etc., and investors with respect to implementation of various clause, rules, regulations and other directives of such authorities and investors service and complaints related matter.

→ “Registrar and Transfer Agent” of a listed SMEs are required to produce a certificate from a practicing company secretary that all the transfers have been completed within the stipulated time and certification regarding compliance of conditions of Corporate Governance.

Question 9.
What are the policies required to be framed under SEBI (LODR) Regulations, 2015?
Answer:
Following policies required to be framed under SEBI (LODR) Regulations, 2015:

Regulation	Description
1. Regulation 16(1)(c)	Policy for determining ‘material’ subsidiary.
2. Regulation 9	Policy for Preservation of Documents
3. Regulation 43A	Dividend Distribution Policy
4. Regulation 30(4)	Policy for determination of materiality.
5. Regulation 23(1)	Policy on materiality of Related Party Transactions.

Question 10.
Comment on the following statement: “Listing of securities with stock exchanges is a matter of great importance for companies and investors.”
Answer:
Listing of securities with stock exchange is a matter of great importance for companies and investors, because this provides the liquidity to the securities in the market. The following benefits are available when securities are listed by a company in the stock exchange:

• Public Image: Enhancement of Public image of the company.
• Liquidity: The liquidity of the security is ensured making it easy to buy and sell the securities in the stock exchange.
• Tax Concessions: Tax concessions are made available both to the investors and the companies.
• Attract more Investors through disclosure of important information for Investment: Listing procedure compels company management to disclose important information to the investors enabling them to make crucial decisions with regard to keeping or disposing of such securities.
• Better Support Services from Banks and FIs: Listed companies command better support such as loans and investments from Banks and Financial Institutions.

Question 11.
For ensuring independence in the spirit of Independent Directors and their active participation in functioning of the company, SEBI has accepted many recommendations of committee setup under the Chairmanship of Shri Uday Kotak and made amendments in SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015. Explain any four amended provisions related to Independent Directors.
Answer:
Based on the recommendations of Kotak Committee, the amendments made in the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 with respect to Independent Directors are as follows:
Independent Women Director: The Board of Directors of the top 500 listed entities shall have at least one independent woman director by April 1, 2019 and the Board of Directors of the top 1000 listed entities shall have at least one independent woman Director By April 1, 2020.

Quorum for Board Meetings: The quorum for every meeting of the Board of Directors of the top 1000 listed entities with effect from April 1, 2019 and the top 2000 listed entities with effect from April 1, 2020 shall be one-third of its total strength or three Directors, whichever is higher, including at least one independent director.

Limit on Independent Directorship Holding: A person shall not serve as an independent director in more than seven listed entities. However, any person who is serving as a whole time director/managing director in any listed entity shall serve as an independent director in not more than three listed entities.

Evaluation of Independent Director: The evaluation of independent director shall be done by the entire Board of Directors which shall include:

• Performance of the director.
• Fulfillment of the Independence criteria as specified in SEBI Listing Regulations and their Independence from the management.

Nevertheless, in the above evaluation directors who are subject to evaluations shall not participate.

Quorum for NRC Meeting: The quorum for a meeting of the nomination and remuneration committee shall be either two members or one-third of the members of the committee whichever is greater, including at least one independent director in attendance.

One common independent director on Board of listed entity and its unlisted material subsidiary: At least one independent director on the Board of Directors of the listed entities shall be a director on the Board of Directors of an unlisted material subsidiary whether incorporated in India or not.

Reason for resignation of an independent director: Detailed reasons for the resignation of an independent director who resigns before the expiry of his tenure along with a confirmation by such director that there are no other material reasons other than those provided.

Question 12.
You are the Company Secretary of Sunglow Ltd., which being listed on the Stock Exchange after an IPO is made by the Company. The managing Director desires to know about quarterly compliance requirements under listing agreement. Prepare a list of quarterly compliances as per the listing regulations.
Answer:
The followings are the quarterly compliances required to be made under the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015:

Question 13.
Explain the Regulation 39 of Issuance of Certificates or Receipts for securities and dealing with unclaimed securities under SEBI Listing Regulations, 2015.
Answer:
As per Regulation 39 of the SEBI (Listing Obligations and Disclosure I Requirements) Regulations, 2015 provides that:
→ The listed entity shall comply with Rule 19(3) of Securities Contract (Regulations) Rules, 1957 in respect of Letter/Advices of Allotment, Acceptance or Rights, transfers, subdivision, consolidation, renewal, exchanges, issuance of duplicates thereof or any other purpose.

→ The listed entity shall issue certificates or receipts or advices, as applicable, of subdivision, split, consolidation, renewal, exchanges, endorsements, issuance of duplicates thereof or issuance of new certificates or receipts or advices, as applicable, in cases of loss or old decrepit or worn out certificates or receipts or advices, as applicable within a period of thirty days from the date of such lodgement.

→ The listed entity shall submit information regarding loss of share certificates and issue of the duplicate certificates, to the stock exchange within two days of its getting information.

→ The listed entity shall comply with the procedural requirements specified in Schedule VI to these regulations while dealing with securities issued pursuant to the public issue or any other issue, physical or otherwise which remain unclaimed and/or are lying in the escrow account as applicable.

Question 14.
List out the half yearly Compliance calendar for listed entity for SME (Small and Medium Enterprise) as per SEBI Listing Regulations, 2015.
Answer:
Half Yearly Compliance Calendar for listed entity for SME (Small and | Medium Enterprise) as per SEBI Listing Regulations, 2015:

Regulation	Period Covered	Date by which to be filed
1. Regulation 31(1) – Shareholding Pattern.	April September October	21st October and 21st April.
2. Regulation 32(8) – Statement of deviation or variation.	April September October	–
3. Regulation 33(5) – Financial Results.	April September October	14th November and 30th May.
4. Regulation 7(3) – Compliance Cer­tificate to the exchange.	April September October	31st October and 30th April.
5. Regulation 40(10) – Compliance Certificate w.r.t Transfer or trans­mission or transposition of securi­ties within 30 days.	April September October March	31st October and 30th April.

Question 15.
The provisions of SEBI Listing Regulations, 2015, shall not be applicable to “perpetual debt instrument” and “perpetual non-cumulative preference shares” listed by Banks. Comment.
Answer:
Chapter V of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 provides for obligations of listed entity which has listed its non-convertible debt securities or non-convertible redeemable preference shares or both. The provisions of this chapter shall also be applicable to “perpetual debt instrument” and “Perpetual non-cumulative preference share” listed by banks.

Chapter V of these regulations deals with the provisions which are applicable to “perpetual debt instrument” and “perpetual non-cumulative preference share” listed by banks relating to the following:

• Intimation to stock exchange(s).
• Disclosure of information having bearing on performance/operation of listed entity and/or price sensitive information.
• Financial Results.
• Annual Report.
• Asset Cover.
• Documents and Intimation to Debenture Trustees.
• Other submissions to stock exchange(s).
• Documents and information to holders of non-convertible debt securities and non-convertible preference shares.
• Structure of non-convertible debt securities and non-convertible redeemable preference shares.
• Record Date.
• Terms of non-convertible debt securities and non-convertible redeemable preference shares.
• Website etc.

Thus, the given statement is wrong.

Question 16.
Enumerate the principles governing disclosures for the listed companies.
Answer:
As per Regulation 4(1) of SEBI Listing Regulations, 2015, the listed entity shall abide by the following principles, while making disclosures to the stock exchanges or its website or through any other medium:
→ Information shall be prepared and disclosed in accordance with applicable standards of accounting and financial disclosure.

→ The Listed Entity shall:

• implement the prescribed accounting standards in letter and spirit in the preparation of financial statements taking into consideration the interest of all stakeholders and shall also ensure that the annual audit is conducted by an independent, competent and qualified auditor.
• refrain from misrepresentation and ensure that the information provided to recognised stock exchange and investors is not mis-leading.
• provide adequate and timely information to recognised stock exchange and investors.
• ensure that disseminations made under provisions of these regulations and circulars made thereunder, are adequate, accurate, explicit, timely and presented in a simple language.
• make the specified disclosures and follow its obligations in letter and spirit taking into consideration the interest of all stakeholders.

→ Channels for disseminating information shall provide for .equal, timely and cost efficient access to relevant information by investors.

→ Filings, reports, statements, documents and information which are event based or are filed periodically shall contain relevant information.

→ Periodic filings, reports, statements, documents and information reports shall contain information that shall enable investors to track the performance of a listed entity over regular intervals of time and shall provide sufficient information to enable investors to assess the current status of a listed entity.

Question 17.
Explain the relevant SEBI Regulation regarding prior intimations to stock exchanges, which are required for Board Meetings, where certain proposals, e.g. financial results and fund raising, are to be considered.
Answer:
The Prior intimation of Board Meeting is required where any of the following proposals is to be considered as per Regulation 29 of SEBI (LODR) Regulations, 2015 are as follows:

At least 5 clear Days (excluding the date of the intimation and date of the meeting):

• Financial results viz. quarterly, half yearly, or annual, (Intimation with Date of BM).

At least 2 clear Working Days (excluding the date of the intimation and date of the meeting):

• Proposal for buyback of securities.
• Proposal for voluntary delisting.
• Fund raising by way of further public offer, Rights Issue, American Depository Receipts, Global Depository Receipts, Foreign Currency Convertible Bonds, Qualified Institutions Placement, Debt issue, Preferential issue and determination of issue price.
• Any AGM or EGM or Postal Ballot proposed to be held for ob-taining shareholder approval for further fund raising indicating type of issuance.
• Declaration/recommendation of dividend, issue of convertible securities including convertible debentures or of debentures carrying a right to subscribe to equity shares or the passing over of dividend.
• The proposal for declaration of bonus securities, if part of Agenda papers.

At least 11 working days before any of the following proposal is placed before the board of directors:

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

Question 18.
Explain the manner in which a listed entity, before issuing securities, shall obtain an ‘in principle’ approval from recognized stock ex-change(s).
Answer:
According to the provisions of Regulation 28 of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 issued by Securities and Exchange Board of India, the listed entity before issuing securities shall obtain an ‘in-principle’ approval from recognised stock exchange(s) in the following manner:

→ Where the securities are listed only on recognized Stock Exchange having nationwide trading terminals from all such stock exchanges.

→ Where the securities are not listed on any recognised stock exchange having nationwide trading terminals from all the stock exchange(s) in which the securities of the issuer are proposed to be listed.

→ Where the securities are listed on recognised stock exchange(s) having nationwide trading terminals as well as on the recognised stock ex-change(s) not having nationwide trading terminals from all recognised stock exchange(s) having nationwide trading terminals.

→ The requirement of obtaining in-principle approval from recognised stock exchange(s) shall not be applicable for securities issued pursuant to the scheme of arrangement for which the listed entity has already obtained No-Objection Letter from recognised stock exchange(s) in accordance with Regulation 37 of the SEBI (Listing Obligation and Disclosure Requirements) Regulations, 2015 issued by Securities and Exchange Board of India.

Question 19.
Give the list of documents and information required to be submitted to holders of Non-Convertible Preference Shares.
Answer:
As per the provisions of Regulation 58 of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, following are the list of documents and information required to be submitted to holders of Non-Convertible Preference Shares:
→ Hard copy of statement containing the salient features of all the documents, as specified in Section 136 of the Companies Act, 2013 and rules made thereunder to those holders of Non-Convertible Preference Shares who have not so registered.

→ Hard copies of full annual reports to those holders of Non-Convertible Debt Securities and Non-Convertible Preference Shares, who request for the same.

→ Soft copies of full annual reports to all the holders of Non-Convertible Preference Shares who have registered their email address(es) for the purpose.

→ Half yearly communication to holders of Non-Convertible Debt Securities and Non-Convertible Preference Shares.

• To send the notice of all meetings of holders of Non-Convertible Debt Securities and Non-Convertible Preference Shares specifically stating that the provisions for appointment of proxy as mentioned in Section 105 of the Companies Act, 2013, shall be applicable for such meeting.
• To send proxy forms to holders of Non-Convertible Debt Securities and Non-Convertible Preference Shares which shall be worded in such a manner that holders of these securities may vote either for or against each resolution.

Question 20.
Nikhil Lid., a listed company is confused about the composition of Board of Directors, seek your advice regarding the composition of Board of Directors as per Regulation 17(1) of the SEBI (LODR) Regulations, 2015. As a Company Secretary of Nikhil Ltd., offer your suggestions by highlighting the regulation.
Answer:
As Company Secretary of Nikhil Ltd., my advice regarding the composition of Board of Directors of the listed entity in line with Regulation 17(1) of the SEBI (LODR) Regulations, 2015 are as follows:
Executive/Non Executive: Board of directors shall have an optimum combination of executive and non-executive directors with at least one woman director and not less than fifty percent of the board of directors shall comprise of non-executive directors.

One Independent Women Director: The Board of directors of the top 500 listed entities shall have at least one independent woman director by April 1, 2019 and the Board of directors of the top 1000 listed entities shall have at least one independent woman director by April 1, 2020.

Chairperson of the Board of Directors is a non-executive director: The chairperson of the board of directors is a non-executive director at least one-third of the board of directors shall comprise of independent directors and where the listed entity does not have a regular non-executive chairperson, at least half of the board of directors shall comprise of independent directors.

However, where the regular non-executive chairperson is a promoter of the listed entity or is related to any promoter or person occupying management positions at the level of board of director or at one level below the board of directors, at least half of the board of directors of the listed entity shall consist of independent directors.

Minimum No. of Directors: The board of directors of the top 1000 listed entities (with effect from April 1, 2019) and the top 2000 listed entities ( with effect from April 1, 2020) shall comprise of not less than six directors.
(Note: The Top 500/1000/2000 listed entities shall be determined on the basis of market capitalisation, as at the end of the immediate previous financial year).

Question 21.
Start-ups companies have now come up with an initial Public offer with relaxation of many conditions applicable for Initial Public Offer. In this context, briefly, explain about the “Innovators Growth Platform (IGP)” and eligibility for listing.
Answer:
As per SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018, “Innovators Growth Platform” (“IGP”) means the growth platform for listing and trading of specified securities of issuer that comply with the eligibility criteria specified in regulation

SEBI has come up with a Chapter X of SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 with a new set of regulations laying down the terms and conditions for entities desirous of listing on IGP.

SEBI has notified new norms for listing of Small and Medium Enterprises (SMEs) including the start-up companies in Innovators Growth Platform (IGP) on stock exchanges without an initial public offering.

Eligibility: The following entities shall be eligible for listing on the IGP:
an issuer which is intensive in the use of technology, information technology, intellectual property, data Analytics, biotechnology or nanotechnology to provide products, services or business platforms with substantial value addition and at least 25% of its pre-issue capital is held by qualified institutional buyer(s) as on the date of filing of draft information document or draft offer document with the SEBI, as the case may be; or

Any other issuer in which at least 50% of the pre-issue capital is held by qualified institutional buyers as on the date of filing of draft information document or draft offer document with the SEBI, as the case may be.

Note: No person individually or collectively with persons acting in concert, shall hold 25% or more of the post-issue share capital in an entity.

Question 22.
Write Short Note on: “Applicability of SEBI (LODR) Regulations, 2015”.
Answer:
SEBI (LODR) Regulations, 2015 shall apply to the listed entity who has listed any of the following designated securities on recognised stock exchange(s):

• Specified securities listed on main board or SME Exchange or institutional trading platform.
• Non-Convertible Debentures, Non-Convertible Redeemable Preference Shares, Perpetual Debt, Perpetual Non-

Convertible Redeemable Preference Shares.

• Indian Depository Receipts (IDRs).
• Securitised debt instruments.
• Security receipts
• Units issued by Mutual Funds.
• Any other securities as may be specified by SEBI.

Question 23.
“The Listing regulations has specified the generic obligations or common obligations of listed entity with respect to filing of information, responsibilities of compliance officer, fees etc. and these requirements are applicable to all types of listed securities.” Comment.
Answer:
The given statement is correct. The Listing regulations has specified the generic obligations or common obligations of listed entity with respect to filing of information, responsibilities of compliance officer, fees etc. and these requirements are applicable to all types of listed securities.

The Common Obligations includes:

• Regulation 5: General obligation of compliance.
• Regulation 6: Appointment & obligations of Compliance Officer.
• Regulation 7: Appointment of Share Transfer Agent.
• Regulation 8: Co-operation with intermediaries registered with SEBI.
• Regulation 9: Preservation of documents.
• Regulation 10: E-Filing of information.
• Regulation 11: Scheme of Arrangement.
• Regulation 12: Payment of dividend or interest or redemption or repayment.
• Regulation 13: Grievance Redressal Mechanism.
• Regulation 14: Fees and other charges to be paid to the recognized stock exchangers).

Question 24.
Write Short Note on: “Record Date or Date of closure of transfer books under Regulation 42 of SEBI (LODR) Regulations, 2015”.
Answer:
As per the Regulation 42 of SEBI (LODR) Regulations, 2015, advance intimation of the Record Date for the following purposes:

At least 7 working days’ notice for record date or date of closure of transfer books for the purpose of (excluding the date of intimation and the record date/book closure start date):

• declaration of dividend
• issue of right or bonus shares;
• issue of shares for conversion of debentures
• shares arising out of rights attached to debentures
• corporate actions like mergers, de-mergers, splits and bonus shares.
• such other purposes as may be specified.

Recommend or declare all dividend and/or cash bonuses at least five working days (excluding the date of intimation and the record date) before the record date fixed for the purpose.
Ensure the time gap of at least 30 days between two record dates/ book closures.

For securities held in physical form may announce dates of closure of its transfer books in place of record date.

Question 25.
Write Short Note on: “Dividend under Regulation 43 of SEBI (LODR) Regulations, 2015”.
Ans.
As per Regulation 43 of SEBI (LODR) Regulations, 2015:

• Dividend declared and disclosed on per share basis only.
• Dividend shall not forfeited unclaimed dividends before the claim be-comes barred by law and such forfeiture, if effected shall be annulled in appropriate cases.

Question 26.
Discuss applicability, disclosure requirements and parameters to be included regarding Dividend Distribution Policy (DDP) under SEBI (LODR) Regulations, 2015?
Answer:
As per regulation 43A of SEBI (LODR) Regulations, 2015:

Applicability: Top 500 Listed entities based on market capitalization shall formulate a dividend distribution policy.
Note: Listed entities other than Top 500 may disclose their dividend distribution policies on a voluntary basis in their annual reports and on their websites.

Disclosure requirements: Dividend Distribution Policy shall be disclosed in their annual reports and on their websites.

Parameters to be included regarding Dividend Distribution Policy (DDP):
The dividend distribution policy shall include the following parameters:

• the circumstances under which the shareholders of the listed entities may or may not expect dividend;
• the financial parameters that shall be considered while declaring dividend;
• internal and external factors that shall be considered for declaration of dividend;
• policy as to how the retained earnings shall be utilized and
• parameters that shall be adopted with regard to various classes of shares.
• If the listed entity proposes to declare dividend on the basis of parameters in addition to above parameters or proposes to change such additional parameters or the dividend distribution policy contained in any of the parameters, it shall disclose such changes along with the rationale for the same in its annual report and on its website.

Question 27.
Discuss provisions regarding meetings of shareholders and voting under Regulation 44 of SEBI (LODR) Regulations, 2015.
Answer:
As per Regulation 44 of SEBI (LODR) Regulations, 2015, following are provisions regarding meetings of shareholders and voting:

• The top 100 listed entities by market capitalization determined as on March 31st of every financial year shall hold their annual general meetings within a period of five months from the date of closing of the financial year.
• The top 100 listed entities shall provide one-way live webcast of the proceedings of the annual general meetings.
• The facility of remote e-voting facility to shareholders in respect of all shareholders resolutions shall be provided.
• Compliance with the conditions specified under the Companies (Management and Administration) Rules, 2014.
• Submit to the stock exchange within 48 hours of conclusion of its General Meeting the details regarding the voting results in the format specified.
• Send proxy forms to holders of securities in all cases mentioning that a holder may vote either for or against each resolution.

Question 28.
Discuss the provisions regarding change in name of the Listed Entity?
Answer:
As per Regulation 45 of SEBI (LODR) Regulations, 2015:
→ Listed Entity is allowed to change its Name, subject to compliance with the following conditions:

• at least one year has elapsed from the last Name change;
• at least 50% of the Total Revenue in the preceding 01 year period has been accounted for by the new activity suggested by the new name; or
• amount invested in the new activity/project is at least 50% of the assets of the listed entity.

→ If any listed entity has changed its activities which are not reflected in its name it shall change its name in line with its activities within a period of six months from the change of activities in compliance of provisions as applicable to change of name prescribed under Companies Act, 2013.

→ On receipt of availability confirmation and before filing the request for change with the Registrar of Companies.

• Approval from Stock Exchange: Seeking approval from Stock Exchange before making final application to Registrar of Companies for name change.
• Certificate from CA: Submission of certificate from Chartered Accountant stating compliance with conditions as mentioned above.

Question 29.
Write Note On: “Provisions regarding maintenance of Website under Regulation 46 of SEBI (LODR) Regulations, 2015”.
Answer:
As per Regulation 46 of SEBI (LODR) Regulations, 2015:

• The listed entity maintains a functional website containing the basic information about the listed entity.
• The listed entity ensures the contents of the website are correct.
• The listed entity updates any change in the content of its website within two working days from the date of such change in content.

The listed entity disseminate the following information under a separate section in its website:

• details of its business;
• terms and conditions of appointment of independent directors;
• composition of various committees of board of directors;
• code of conduct of board of directors and senior management personnel;
• details of establishment of vigil mechanism / Whistle Blower policy;
• criteria of making payments to non-executive directors, if the same has not been disclosed in annual report;
• policy on dealing with related party transactions;
• policy for determining ‘material’ subsidiaries;
• the email address for grievance redressal and other relevant details;
• contact information of the designated officials of the listed entity who are responsible for assisting and handling investor grievances;
• shareholding pattern;
• details of agreements entered into with the media companies and/or their associates, etc;
• schedule of analyst or institutional investor meet and presentations made by the listed entity to analysts or institutional investors simultaneously with submission to stock exchange; new name and the old name of the listed entity for a continuous period of one year, from the date of the last name change.

Question 30.
List the information which is required to be published in the News-papers under Regulation 47 of SEBI (LODR) Regulations, 2015.
Answer:
As per Regulation 47 of SEBI (LODR) Regulations, 2015:

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

Following information is required to be published in the newspaper:

• Notice of meeting of the board of directors where financial results shall be discussed.
• Financial results, along-with the modified opinion(s) or reservation(s), if any expressed by the auditor.
• Statements of deviation(s) or variation(s) on quarterly basis, after review by audit committee and its explanation in directors report in annual report.
• Notices given to shareholders by advertisement.

If the listed entity has submitted both standalone and consolidated financial results publish consolidated financial results along-with:

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

Question 31.
Prepare list of event based compliances in case Equity Listed on Stock Exchange(s) under SEBI (LODR) Regulations, 2016.
Answer:
List of event based compliances under SEBI (LODR) Regulations, 2016 for listed entities whose equity shares are listed on Stock Exchange(s):

Regulation Reference	Timeline
1. Regulation 7(5) – Intimation of ap­pointment of Share Transfer Agent.	Within 7 days of Agreement with RTA
2. Regulation 28(1) – In-principle approv­al of recognized stock exchange(s)	Before issuing securities.
3. Regulation 29(2)(b) to (f) – Prior intimation of Board meeting for Buyback, Dividend, Raising of Funds, Voluntary Delisting etc.	At least two working days in advance excluding the date of the intimation and date of the meeting.
4. Regulation 29(2)(a) – Prior intima­tion of Board meeting for Financial Results	At least five days in advance (exclud­ing the date of the intimation and date of the meeting).
5. Regulation 29(3) – Prior intimation of Board Meeting for alteration in nature of securities etc.	Atleast eleven working days in ad­vance.
6. Regulation 31(l)(a) – Shareholding Pattern prior to listing of securities	One day prior to listing of securities.
7. Regulation 39(3) – Loss of share cer­tificates and issue of the duplicate certificates.	Within two days of getting infor­mation.
8. Regulation 44(3) – Voting Results	Within 48 hours of conclusion of General Meeting.
9. Regulation 45(3) – Change in name	Prior approval from Stock Exchange before filing application with Regis­trar of Companies.
10. Regulation 46 – Website	Listed entity shall maintain a func­tional website containing the basic information about the listed entity.

Question 32.
Prepare list of Quarterly Compliance for Listed Entities for SMEs.
Answer:

Regulation	Period Covered	Date by which to be field
Regulation 13(3)- State­ment Grievance Redressal Mechanism	April-June, July- September, October-December, January-March	21st July, 21st October, 21st January, and 21st April.
Regulation 76 of SEBI (Depositories and Parti­cipants) Regulations, 2018	April-June, July- September, October-December, January-March	30th July, 30th October, 30th January, and 30th April.

Question 33.
Prepare List of Annual Compliance for Listed Entities for SMEs.
Answer:
List of Annual Compliance for Listed Entities for SMEs:

Regulation	Period Covered	Date by which to be field
Regulation 14 of SEBI (LODR) Regulations, 2015 Listing Fees	April – March	30th April
Regulation 34(1) of SEBI (LO’DR) Regulations, 2015 Annual Report	April – March	On the day of com­mencement of dispatch to its shareholders.

Question 34.
Discuss four event-based compliances for Listed Entities for SMEs?
Answer:
Following are four event-based compliances for Listed Entities for SMEs:

Regulation	Date by which to be filed
Regulation 7(5) – Intimation of appoint­ment of Share Transfer Agent	Within 7 days of Agreement with RTA
Regulation 29(1 )(a) – Prior Intimations of Board Meeting for financial Result	At least 5 clear days in advance (exclud­ing the date of the intimation and date of the meeting).
Regulation 3l(l)(a) – Shareholding Pat­tern prior to listing of Securities	One day prior to listing of securities.
Regulation 42(2) – Record date or Date of closure of transfer books	At least 7 clear working days in advance (excluding the date of intimation and the record date).

Question 35.
What disclosures are included in Annual Report in case non-con-vertible debentures are listed on Stock Exchanges?
Answer:
As per Regulation 53 of SEBI (LODR) Regulations, 2015, following disclosures are included in Annual Report in case non-convertible debentures are listed on Stock Exchanges:

• Audited Financial Statements.
• Auditors and Directors Report.
• Related Party Disclosures.
• Name of the debenture trustees with full contact details.
• Cash Flow statement presented under the Indirect Method as prescribed in Accounting Standard-3/Indian Accounting Standard 7 mandated under Section 133 of the Companies Act, 2013 read with relevant rules framed thereunder or by the Institute of Chartered Accountants of India whichever is applicable.

Question 36.
What documents and intimations are required to be forwarded to debenture trustee under Regulation 56 of SEBI (LODR) Regulations, 2015.
Answer:
As per Regulation 56 of SEBI (LODR) Regulations, 2015, following documents and intimations are forwarded to the debenture trustee promptly:

A copy of the annual report at the same time as it is issued along with a copy of certificate from the listed entity’s auditors in respect of utilisation of funds during the implementation period of the project for which the funds have been raised.

A copy of all notices, resolutions and circulars relating to

• New issue of NCDs at the same time as they are sent to share-holders/holders of NCDs.
• Meetings of holders of NCDs at the same time as they are sent to the holders of NCDs or advertised in the media including those relating to proceedings of the meetings.

Intimations regarding:

• Any revision in the rating.
• Any default in timely payment of interest or redemption or both in respect of the NCDs.
• Failure to create charge on the assets.

A half-yearly certificate regarding maintenance of 100% asset cover in respect of listed NCDs by either a practicing company secretary or a practicing chartered accountant, along with the half yearly financial results.

In the case of debentures or preference shares issued for financing working capital or general corporate purposes or for capital raising purposes: The copy of the auditor’s certificate may be submitted at the end of each financial year till the funds have been fully utilised or the purpose for which these funds were intended has been achieved.

Question 37.
What documents and information are required to be forwarded to holders of non-convertible debt securities and non-convertible preference shares?
Answer:
As per Regulation 58 of SEBI (LODR) Regulations, 2015, following documents and information are required to be forwarded to holders of non-convertible debt securities and non-convertible preference shares:
→ Soft copies of full annual reports to all the holders of NCRPs who have registered their email address(es) for the purpose.

→ Hard copies of full annual reports to those holders of NCDs and NCRPs who request for the same.

→ Half yearly communication, to holders of NCDs and NCRPs.

→ Hard copy of statement containing the salient features of all the documents, as specified in Section 136 of Companies Act, 2013 and rules made thereunder to those holders of NCRPs who have not so registered.

→ The notice of all meetings of holders of NCDs and NCRPs specifically stating that the provisions for appointment of proxy as mentioned in Section 105 of the Companies Act, 2013 shall be applicable for such meeting.

→ Proxy forms to holders of NCDs and NCRPs which shall be worded in such a manner that holders of these securities may vote either for or against each resolution.

Question 38.
What information is required to be included on functional website of Listed Entities when NCDs are listed on Stock Exchange(s)?
Answer:
As per Regulation 62 of SEBI (LODR) Regulations, 2015, following information is required to be included on functional website of Listed Entities when NCDs are listed on Stock Exchange(s):

• Details of its business.
• Financial information including complete copy of the annual report including balance sheet, profit and loss account, directors report etc.
• Contact information of the designated officials of the listed entity who are responsible for assisting and handling investor grievances.
• E-mail address for grievance redressal and other relevant details.
• Name of the debenture trustees with full contact details.
• Information, report, notices, call letters, circulars, proceedings, etc. concerning NCRPs or NCDs.
• All information and reports including compliance reports filed by the listed entity.

Information with respect to the following events:

• Default by issuer to pay interest on or redemption amount.
• Failure to create a charge on the assets.
• Revision of rating assigned to the NCDs.

Question 39.
Write Short Note on: “Recognition to Company Secretary under SEBI Listing Regulations, 2015”.
Answer:
“Recognition to Company Secretary under SEBI Listing Regulations, 2015”

SEBI has recognized the significant role played by a Company Secretary as a Governance Professional under the SEBI Listing Regulations as under:
Compliance Officer:
As per Regulation 6 of SEBI Listing Regulations, 2015 provides that a listed entity shall appoint a qualified company secretary as the “compliance officer”.

Furthermore, as per Regulation 7(3) of SEBI Listing Regulations, 2015 requires that the listed entity shall submit a compliance certificate to the exchange, duly signed by both the compliance officer of the listed entity and the authorised representative of the share transfer agent, wherever applicable.

Senior Management:
As per Regulation 16( 1 )(d) of SEBI Listing Regulations, 2015 provides that “Senior Management” shall mean Officers/Personnel of the listed entity who are members of its core management team excluding Board of directors and shall comprise all members of management one level below Chief Executive Officer/Managing Director /Whole Time Director/Manager (including Chief Executive Officer/Manager, in case they are not part of the board) specifically include Company Secretary and Chief Financial Officer.

Secretarial Audit Report:
As per Regulation 24A of SEBI Listing Regulations, 2015 mandates that every listed entity and its material unlisted subsidiaries incorporated in India shall undertake Secretarial Audit and shall annex with its Annual Report, a Secretarial Audit Report given by a Company Secretary in Practice, in such form as may be specified with effect from the year ended March 31, 2019.

Certification in case of Share Transfer Facility:
As per Regulation 40(9) of SEBI Listing Regulations, 2015 requires that the share transfer agent and/or the in-house share transfer facility as the case may be produces a certificate from a practising Company Secretary.

Certification that none of the directors on the board of the company have been debarred or disqualified from being appointed or continuing as Directors of Companies:
As per Schedule V, Part C, Clause 10(f) of SEBI Listing Regulations, 2015, a certificate from a Company Secretary in practice that none of the directors on the board of the company have been debarred or disqualified from being appointed or continuing as Directors of Companies by SEBI/Ministry of Corporate Affairs or any such Statutory Authority.

Certification on compliance of conditions of corporate governance:
Schedule V, Clause E of SEBI Listing Regulations, 2015 requires compliance certificate from either the auditors or practising Company Secretaries regarding compliance of conditions of corporate governance to be annexed with the directors’ report.

Certification regarding maintenance of 100% asset cover in respect of listed non-convertible debt securities:
As per Regulation 56(l)(d) of SEBI Listing Regulations, 2015 provides that a half-yearly certificate regarding maintenance of hundred percent asset cover in respect of listed non-convertible debt securities by either a practising Company Secretary or a practicing Chartered Accountant along with the half yearly financial results.

Corporate Funding and Listings in Stock Exchanges Notes