Corporate Laws MyNotes

Section II (40 Marks) Answer Question No 5 which is compulsory and any two from the rest of this section Questions: 5. (a) Choose the most appropriate one from the stated options and write it down (only indicate A,B,C,D as you think correct): (1x5) 1) Under the Companies act, 1956, the first directors shall hold office upto A. The end of the statutory meeting B. The end of the period as prescribed by the articles of the company C. The end of three years from the date of appointment D. Till the first Annual General Meeting 2) Mr. Saxena is a Director of SUVALAXMI LTD. which failed to file its annual return from the year 2005-06.The maximum period for which Mr. Saxena will be disqualified from becoming a Director in any public limited company is A. 3 years B. 5 years C. 7 years D. 10 years 3) Which of the following items requires special resolution in a general meeting under the Companies Act, 1956? A. Issue of shares at discount B. Adoption of Statutory Report C. Appointment of Managing I whole time Director D. Reduction of Share Capital 4) The concept of Corporate Governance was initiated on the recommendations of A. The Report by the Confederation of Indian Industry (CII) B. The Report by Or. Y.V.Readdy C. The Report by Mr. Kumar Mangalam Birla D. The Report by Mr. Narayan Murthy 5) As per section 292a of the Companies Act; 1956 every public company having paid up of not less than ____of rupees shall constitute a committee of the Board known as Audit Committee. (Fill in the gape from the below) A. Fifty lakh B. Twenty five crore C. Five crore D. Ten crore 5. (b) State whether each of the following statement is True (T) or False (F): (1 X 5) (i) The qualification shares required to be taken up by a director must be purchased from the Company. (ii) Increasing the voting rights of the shares held by the management can be considered as an act of oppression under the Companies Act 1956. (iii) Risk Management is not a linear process; it is the balancing of a number of interwoven elements. (iv) The Companies act 1956 provides a positive definition of the term "Independent Director" (v) As per clause 49 of the listing agreement on Corporate Governance, the Audit Committee shall meet at least twice a year. (1 x 5) [MKN] Page 1

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6.(a) Ms VIVITHA is a director in 14 public limited companies on 30th November, 2008. This apart she is an alternate director in another public limited company. The following particulars are made available to you relating to her appointment as director in various companies in annual general meetings (AGM) held: Name/Details of Company Daya Organics Ltd. Vimala Plastics Ltd. Daya Organics Ltd. Balaji Vaishnav Association ( a company registered under section 25 of the Companies Act, 1956) Date of AGM 01 DECEMBER,2008 29 November,2008 30 November,2008

Based on the provisions of the Compan1es Act, 1956; you are required to advise Miss. VIVITHA, as to the options available to her for accepting or refusing the aforesaid appointments. (8) Answer to Question No 6(a): Sect1on 275 of the Companies Act, 1956 debars any person to hold office as a director of more than 15 companies simultaneously. As per the provisions of Section 277(2) of the Companies Act, 1956, where a person holds directorship of 14 or less companies is appointed as a director of other companies, and such appointments make the total number of his directorships more than 15, then the person concerned has to choose the directorships which he wishes to continue to hold or to accept so that the total number of directorships, old or new, henceforth to be held by him does not exceed 15. The said section 277(2) further provides that none of the new appointments shall be effective until such a choice is made and in case of failure of the person to make such a choice within 15 days of the day on which the last of the new appointments was made, all the new appointments shall become void. Section 278 of the Companies Act, 1956 states that for the purpose of section 275 and 277 the number of companies are not be counted are: (a) A private company unless it is a subsidiary of a public company (b) An unlimited company. (c) An association not carrying on business for profit or which prohibits the payment of dividend (d) A company in which such person is only an alternate director. In view of the abovementioned legal provisions, Miss. VIVITHA, who is already a director in 14 companies, has to consider the following aspects. Alternate directorship or directorship in section 25 company is not affected. Hence she can take up the d1rectorship in Balaji Vaishnav Association, the company registered u/s 25. The appointment in the Vimal Plastics takes the number to 15 on 29th November, 2008, and in the Daya Organics Ltd on 1st December, 2008, takes the number of directorship to 16 (Hence counting of days shall start here). Hence within 15 days from the date on which the last appointment was made viz. 1st December, 2008, Miss. VIVITHA has to decide upon one of the two companies in which she would take up the directorships. If she fails to decide, the two new appointments shall become void and shall not take effect.

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6. (b) The Audit Committee of Yash Telecommunications Ltd; constituted under section 292a of the Companies Act, 1956, submitted to the Board of Directors, a report containing its recommendations .These recommendations were however not accepted by the Board. In this scenario, state your views on the followings: (i) Can the Board adopt the stand of not accepting the Audit Committee's recommendations? (ii) If yes, the board does not accept the recommendations, what should the Boards do? (iii) How should the Chairman of the Audit Committee respond? Answer to Question No 6(b): (i) As per Section 292A(6), the recommendations of the Audit Committee shall be binding on the Board of Directors, in so far as relating to the financial management including the audit report. In respect of other matters, the recommendations are not bringing on the board. (ii) Section 292A (7) enjoins that, if the Board does not accept the recommendations of the Audit Committee, it shall record the reasons therefor and communicate such reasons to the shareholders. (iii) As per section 292A (10), the Chairman of the Audit Committee shall attend the Annual General Meeting(s) of the company to provide any clarifications on matters relating to audit. Beyond this the Chairman of the Audit Committee cannot do anything in the case of non-listed companies. It may be noted that in case of listed companies, clause 49 of the Listing Agreement gives more powers to the Audit committee in this context. 7. (a) HEMA BIOMWDICALS LTD. is an existing profit making company with strong free reserves and having a huge real estate property. The Managing Director obtains reliable information that a group of undesirable persons are cornering the shares of the company, with a view to transfer them to their names and effect change in the composition of the Board of Directors. He apprehends that such change will be prejudicial to the public interest. You are requested to advise the company with reference to the provisions of the Companies Act, 1956, as to how the company can block the aforesaid transfer of shares. (7) Answer to question 7 (a): Power to block transfer of shares As per section 250(4) of Companies Act, 1956, Where the Company Law Board (CLB herein after, & now CLB is replaced by Company Law Appellate Tribunal) has reasonable ground to believe that a transfer of shares in a company is likely to take place, and The CLB is of the opinion that any such change would be prejudicial to the public interest The CLB may, by an order, direct that any transfer of shares in the concerned company, during such period not exceeding three years, as may be specified in the order, shall be void. As per Section 250(1) &(2) of Companies Act, 1956, if the CLB is of the view that There are good reasons to find out the relevant facts about any shares and That such facts cannot be found out unless the restrictions are imposed as an interim measure, It may, by an order, direct that transfer of any such shares shall be void and no voting rights shall be exercised in respect of such shares. The CLB is also conferred with the power to vary or rescind its order any time. The facts given here, squarely fall within the purview of the provisions of said section 250. The management, therefore, may lodge a complaint with the CLB and prove to it that the transfer of share in favor of the group of unscrupulous persons would change the composition of BOD of the company, which shall be prejudicial to the public interest; if the CLB is persuaded of the plea of the company, it may pass an order as stated above, which would block the transfer of shares, as mentioned in the question. [MKN] Page 3

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7. (b) Your help is sought in drafting the relevant portion of directors' Responsibility statement forming part of Directors' Report. Draft the same. (4) Answer to question 7. (b): Directors' Responsibility Statement Pursuant to the requirements of Section 217(2AA) of the Compan1es Act, 1956, it is hereby confirmed :i) That in preparation of the annual accounts, the applicable accounting standards have been followed and that no material departures have been made from the same; ii) That the Directors has selected such accounting policies and applied them consistently and made judgments and estimates that are reasonable and prudent so as to give a true and fair view of the state of affairs of the Company as at 31st March, 2008 and of the profit of the Company for the year ended 31st March, 2008; iii) That the Directors had taken proper and sufficient care for the maintenance of adequate accounting records in accordance with the provisions of the Companies Act, 1956, for safeguarding the assets of the Company and for preventing and detecting fraud and other irregularities; iv) That the Directors had prepared the annual accounts for the year ended 31st March, 2008 on going concern basis. 7. (c) State the additional requirements stipulated in clause 49 of the Listing Agreement which are Silent 1n sect1on 292A of the Companies Act, 1956. (4) Answer to Question No. 7. (c): Additional requirements stipulated as per Clause 49 The following additional requirements are stipulated as per Clause 49 of the Listing Agreements which are silent in Section 292A of the Companies Act, 1956: (I) The audit committee should invite such of the executives, as it considers appropriate (and particularly head of the finance function) to be present at the meeting of the committee, but on occasions it may also met without the presence of any executive of the company. (ii) The company secretary shall act as secretary to the committee. . . . (iii) The audit committee shall meet at least thrice a year. One meeting shall be held before finalization of annual accounts and once in every six months. (iv) The quorum of the audit committee shall be two members or one-third of the members of the audit committee whichever is higher and minimum of two independent directors. (v) The powers and role of the audit committee are elaborately contained in sub-paragraphs C&D of paragraph II. 8. (a) A group of shareholders in a public limited company, apprehend that the company is solvency is at stake, as the Board of Directors of the company is not managing the affairs in accordance with sound business principles. They seek your advice for obtaining directions for conducting special audit. Briefly state the provisions of the Companies Act, 1956 in this regard. Answer to guestion No 8(a): Provisions regarding Special Audit Section 233A of the Companies Act, 1956 deals with the aspects connected with the Special Audit. The Special Audit can be ordered by Central Government if it is of the opinion: (i) That the affairs of the company are not being managed in accordance with sound business principles or prudent commercial practices, or (ii) That the company is being managed in manner likely to cause serious injury or damage to the interest of the trade, industry or business to which it pertains, or (iii) That the financial position of the company is such as to endanger its solvency. The dissatisfied group of shareholders should lodge a complaint with the Central Government requesting for conduct of the special audit. If the Central Government is satisfied that there exist sufficient reasons, it may order a special audit to be carried out by a Chartered Accountant who may or may not be company's statutory auditor or who may or may not be in practice. Advice should be tendered on above lines to the group. [MKN] Page 4

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8. (b) Briefly discuss the provisions of the Competition Act, 2002 relating to (i) Power of Central Government to exempt, (ii) Restriction on disclosure of information. Answer to question No 8(b)(i): Competition Act, 2002 Power to Exempt The Central Government may, by notification, exempt from the application of the Competition, Act, 2002, or any provisions thereof, and for such period as it may specify in such notificationa) Any class of enterprises if such exemption is necessary in the interest of security of the State or public interest; b) Any practice or agreement arising out of and in accordance with any obligation as summed by India under any treaty, agreement or convention with any other country or countries; c) Any enterprise which performs a sovereign function on behalf of the Central Government or a State Government; Provided that, in case an enterprise is engaged in any activity including the activity relatable to the sovereign functions of the Government, the Central Government may grant exemption only in respect of activity relatable to the sovereign functions. Answer to question No 8(b) (ii): Competition, Act, 2002 Restriction on disclosure of information No information relating to any enterprise, being an information which has been obtained by or on behalf of the Commission for the purpose of the Competition Act, shall, without the previous permission in writing of the enterprise, be disclosed otherwise than in compliance with or for the purpose of the Act or any other law for the time being in force. 8. (c) What are the actions required in identifying suitable responses to Risk in the context of risk Management? Answer to question No. 8.(c): Identify suitable responses to risk. The action break into broadly five types, as shown below: 1) Prevention: Terminate the risk- by doing things differently and thus removing the risk, where it is feasible to do so. Countermeasures are put in place that either stop the threat or problem from occurring or prevent it having any impact on the project or business. 2) Reduction: Treat the risk- take action to control it in some way where the actions either reduce the likelihood of the risk developing or limit the impact on the project to acceptable levels. 3) Transference: This is a specialist form of risk reduction where the management of the risk is passed to a third party via, for instance, an insurance policy or penalty clause, such that the impact of the risk is no longer an issue for the health of the project. Not all risks can be transferred in this way 4) Acceptance: Tolerate the risk- perhaps because nothing can be done at a reasonable cost to mitigate it or the likelihood and impact of the risk occurring are at an acceptable level. 5) Contingency: These are actions planned and organized to come into force as and when the risk occurs. Any given risk could have appropriate actions in any or all these categories. There may be no cost- effective action available to deal with a risk, in which case the risk must be accepted or the justification for the project revisited (to review whether the project is too risky), possibly resulting in the termination of the project. The results of the risk evolution activities are documented in the Risk Log. If the project is part of a programme, project risks should be examined for any impact on the programme (and vice versa). Where any cross-impact is found, the risk should be added to the other Risk Log.

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5. (a) Choose the most appropriate one from the stated options and write it down (only indicate A,B. C.D as you think correct): (i) A public information officer shall as expeditiously as possible provide information from the date of receipt of request but in any case within A. 15 days B. 30 days C. 45 days D. 60 days (ii) Under Competition Act, 2002, penalty for offences in relation to furnishing of information is A. Rs. 5 1akh B. Rs. 10 lakh C. Rs . 25 lakh D. Rs. 50 lakh (iii) In the Context of corporate governance, Narayana Committee was formed in the year A. 2002 B. 2003 C. 2004 D. 1999 (iv) An ordinary resolution is one which is passed in a general meeting by A. a simple majority of votes including the casting vote of the chairman B. 3/4 th majority of votes C. 2/3 rd majority of votes D. None of the above v) In the context of classification risk, tax risk will fall under _________ (Fill in the gap from the below). A. Credit Risks B. Liquidity Risk C. Disaster Risks D. Legal Risks 5. (b) State whether each of the following statements is True (T) or False (F): (i) An entity is to obtain certificate from a company secretary as to compliance of conditions of corporate Governance as provided in clause 49 of the listing agreement. (ii) Related party transactions means a transfer of resource or obligations between related parties of regardless of whether or not a price is charged. (iii) SEBI had in the rev1sed clause 49 of the list1ng agreement mandated that at least 30% of the Board of a listed company comprise of independent Directors. (iv) An index of members must be maintained by a company when its membership exceeds 100. (v) Without the sanction of the Tribunal, the liquidator of a company can appoint an agent to do any business which he is unable to do himself. (1 x 5)

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6. (a) State the importance of a remuneration committee in the context of Corporate Governance. What are the responsibilities normally assigned to such Committee? (3+3) Answer to Question No 6. (a): REMUNERTATION COMMITTEE: It is now a universally accepted proposition of corporate governance practice that Boards of Directors of companies appoint appropriately composed remuneration committees to work out executive remuneration on their behalf. The combined code of the UK says that the remuneration committee will be responsible for working out remuneration package "to attract, retain and motivate executives of the quality required". The committee should decide where to position the company relative to other companies and take account of comparable remuneration and relative performance. With regard to the composition of the committee, as overwhelming majority of guidelines suggest that it be composed exclusively of independent non-executive directors. The committee would make its well-considered recommendations to the board for final decision. The following responsibilities are normally assigned to a remuneration committee, which should have written terms of reference: a) Remuneration packages and service contracts of the CEO and other senior executives. b) Remuneration packages for non-executive directors. c) Remuneration policies and practice of the company. d) Any company share and other incentive schemes. e) Company superannuation and pension arrangements. 6. (b) What are the additional requirements stipulated 1n section 292A of the Companies Act, 1956 which are silent in clause 49 of the Listing Agreement? (3) Answer to Question No 6. (b): Additional requirements stipulated as per Section 292A The following additional requirements are stipulated as per Section 292A of the Companies Act, 1956 which are silent to Clause 49 of the Listing Agreement: (i) The audit committee constituted shall act in accordance with terms of reference to be specified in writing by the board. (ii) The recommendations of the audit committee on any matter relating to financial management, including the audit report, shall be binding on the board. (iii) If the board does not accept the recommendation of the audit committee, it shall record the reasons therefore and communicate such reasons to the shareholders

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6. (c) It is said that after the risk identification takes place, the actions involved in pinpointing suitable responses to the risk are broadly of five types. Elaborate on these live types of actions. (1+5) Answer to Question No 6. (c) : Risk Identification: This step identifies the potential risks (or opportunities) facing the project. It is important not to judge the likelihood of a risk at this early time. This is done in a controlled manner in a later step. Attempting to form judgments while 'brainstorming' a list of potential risks may lead to hurried and incorrect decision to exclude some risks. Once identified, risks are all entered in the Risk log. This contains details of all risks, their assessment, owners and status. The Risk log is a control tool for the Project Manager, providing a quick reference to the key risks facing the project, what monitoring activities should be taking place and by whom. Reference to it can lead to entries. Identifies suitable responses to risk The actions break into broadly five types, as shown below, 1. Prevention Terminate the risk- by doing things differently and thus removing the risk where it is feasible to do so. Countermeasures are put in place that either stop the threat or problem from occurring or prevent it having any impact on the project or business. 2. Reduction threat the risk- take action to control it in some way where the actions either reduce the likelihood of the risk developing or limit the impact on the project to acceptable levels. 3. Transference- This is a specialist form of risk reduction where the management of the risk is passed to a third party via, for instance, an insurance policy or penalty clause, such that the impact of the risk is no longer an issue for the health of the project. Not all risk can be transferred in this way. 4. Acceptance- Tolerate the risk -perhaps because nothing can be done at a reasonable cost to mitigate it or likelihood and impact or the risk occurring are at an acceptable level. 5. Contingency- These are-actions planned and organized to come into force as and when the risk occurs. Any given risk could have appropriate actions in any or all these categories. There may be no cost-effective actions available to deal with a risk, in which case the risk must be accepted or the justification for the project revisited (to review whether the project is too risky), possibly resulting in the termination of the project. The results of the risk evaluation activities are documented in the Risk log. If the project is part of a programme, project risk should be examined for any impact on the programme (and vice versa).Where any cross-impact is found, the risk should be added to the other Risk log.

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7. (a) The Board of directors of Vivitha Pharma Ltd., decide to terminate the services of Mr. Upadhyay, employed as General manager. Mr.Upadhyay is occupying a flat owned by the company at Kolkata. The company fears that he may not vacate the flat. The Board desired to know the action to be taken under the Companies Act, 1956 to reassume possession of the flat. Advise appropriately. Will your answer be d1fferent if the flat is not owned by the company, but has been taken on lease? (4) Answer to Question No 7(a): ACTION AGAINST GENERAL MANAGER The company can take action under Section S30 of the Companies Act, 1956 if the general manager ref uses to vacate the premises provided by the company. According to Section 630, it is an offence, if any officer or employee of a company(1) Wrongfully obtains possession of any property of a company or (2) Having any such property in his possession wrongfully withholds it or knowingly applies it to purposes other than those expressed or directed in the articles and authorized by the Act and such an offence is punishable with fine up to Rs. 10000/-. Further the court may also order such officer or employee to deliver to the company any such property wrongly obtained or wrongfully withheld within a time fixed by the court. So the company can file a complaint under Sec1ion 630, as it provides speedy relief. Section 630 covers either existing as well as past officers or employees. Thus, action may also be initiated after termination of the services of Mr. Upadhyay. It is not necessary that the property in question should be owned by the company. Even if the company exercise only a lease hold right, the provisions of Section 630 can be invoked. 7. (b) Vasudha Footwear Ltd. is of the view that XYZ Co. ltd., is abusing its dominant position in the footwear industry. It wishes to lodge a complaint against XYZ Co. ltd., before the Competition Commission .Briefly elucidate the factors which the commission will consider to ascertain whether XYZ Co. ltd., is enjoying a dominant position in the footwear industry. (6) Answer to Quest ion No 7. (b): Dominant position of an enterprise The Competition Commission while inquiring whether the enterprise XYZ Company enjoys a dominant position or not under Section 4 of the Competition Act, 2002 will take the following factors Into account: (a) Market share of the enterprise (b) Size and resource of the enterprise (c) Size and 1mportance of the competitors (d) Economic power of the enterprise including commercial advantages over competitors. (e) Vertical integration of the enterprises or sale or service network of such enterprises. (f) Dependence of consumers on the enterprises. (g) Monopoly or dominant position whether acquired as result of any statute or by virtue of being a Government company or a public sector undertaking or otherwise. (h) Entry barriers including barriers such as regulatory-barriers, financial risk, high capital cost of entry, marketing entry barriers, technical entry barriers, economies of scale, high cost of substitutable goods or services for consumers. (i) Countervailing buying power. (j) Market structure and size of market. (k) Social obligations and size of market. (I) Relative advantage, by way of contribution to the economic development, by the enterprise enjoying a dominant position, having or likely to have an appreciable adverse effect on competition. (m) Any other factor which the commission may consider relevant for the inquiry. [MKN] Page 9

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7. (c) Mr. Janak who had been appointed as director in Madhav Marbles ltd., was to retire by rotation on 21st August, 2008. Due to reasons beyond the company's control, annual general meeting could not be held on scheduled date. Further, in the adjourned meeting also, the vacancy could not be filled up. You are required to ascertain whether under the provisions of the Companies Act, 1956, Mr. Janak shall be deemed to have vacated office on 21 st August, 2008 when the annual general meeting was scheduled to be held or whether it will be deemed that he has been reappointed. (5) Answer to Question No 7(c): DEEMED REAPPOINTMENT OF DIRECTOR Section 256 of the Companies Act, 1956 deals with deemed re-appointment of a retiring director. The vacancies caused by retirement of a director by rotation should be filled up at the same meeting or at an adjourned meeting. If it is not so done, the retiring director shall be deemed to have been reappointed at such adjourned meeting except in the following cases(i) at any previous meeting, a resolution for his reappointment was put to vote but was lost, or, (ii) the retiring director has, in writing expressed his unwillingness to continue, or (iii) he is not qualified or is disqualified for the said appointment ,or (iv) a special or ordinary resolution is necessary for his appointment or reappointment by virtue of any provisions of the Companies Act,1956, or (v) it is resolved to appoint two or more directors by a single resolution, or (vi) it is resolved not to fill the vacancy. It the instant case the above mentioned exceptions are not applicable and hence Mr. Janak cannot be deemed to be retired. He is deemed to be re-appointed as director.

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