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Appendix CS Professional Programme M - II (Solution upto June - 2012 & Questions of December 2012 Included) Paper - 4: Corporate Restructuring & Insolvency Chapter- 2: Strategies 2012-June [1] (a) ,(b) (a) Please refer to 2004 Dec. [6] (c) on page no. 28 (b) Strategic alliance is a relationship between two or more parties to pursue a set of agreed upon goals or to meet a critical business need while remaining independent organisations. Some of the features of stretegic alliance are as follows:(i) It aims for a synergy where each partner hopes that the benefits from the alliance will be greater than those from individual efforts. (ii) Alliance often involves technology transfer, economic specialisation, shared expenses, reduction in cost, etc. (iii) It is gaining importance in infrastructure sectors. (iv) Strategic alliance aims to pool the resources & facilitate innovative ideas & techniques while implementing large projects.

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(v)

It could help company to develop a more effective process, expand into a new market or develop an advantage over a competitor, among other possibilities.

Chapter-3: Mergers and Amalgamations 2012-June [1](c) Conglomerate merger is a merger between firms that are involved in totally unrelated business activities. The companies which merge are neither competitors nor complimentaries. The business of these companies are neither horizontally nor vertically related to each other. Merging companies operate in unrelated markets. Thus conglomerate merger is neither a type of horizontal merger nor a vertical merger. 2012-June [2](a) (i) Disclosure requirements in every type of amalgamation: Name of amalgamating companies.  General nature of business of the amalgamating companies.  Effective date of amalgamation.  Particulars of the scheme if amalgamation.  Type of amalgamation. (ii) Additional disclosure requirements in case of amalgamation accounted for under the pooling of interests methods which are required to be made in first financial statements: Description & number of shared issued.  Percentage of each company’s equity shares exchanged.  Amount of any difference between the consideration & the value of assets acquired & the treatment thereof. (iii) Additional disclosure requirements that are required to be made in first financial statements in case of amalgamation accounted for under the purchase method: Description of the consideration paid or payable for the amalgamation.  Amount of any difference between the consideration & the value of assets acquired & treatment thereof. 2012-June [4](a) It was held by Supreme Court in Sambhaji V/s Gangabhai (2008) 17 Scc 117, that the procedural law in certain systems tries to overpower substantive rights & substantial cause for justice.

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Appendix CS Prof. Prog. M II Paper 4 3 Procedures should be handmaid, not the mistress. Procedural prescriptions should be treated as lubricant & not a resistant in the administration of justice. Thus in this case application filed by the KGL Limited is to be allowed & entension is to be granted for filing the certified copy of order sanctioning the scheme. Chapter-5 : Funding of Mergers and Takeovers 2012-June [2](b) Provisions of the SEBI (Issue of Capital & Disclosure requirements) Regulations, 2009 relating to pricing in public issue is as under:Pricing :  Issuer may determine the price of specified securities in consultation with lead merchant banker or through book building process. Differential Pricing : An issuer may offer specified securities at different prices, subject to the following: Retail individual investors may be offered specified securities at a price lower than the price at which net offer is made to others, provided that such difference shall not be more than 10% of the price which is offered to others.  In case of book built issue, price offered to an anchor investor shall not be lower than the price offered to others.  In case of composite issue, price of the specified securities offered in the public issue may be different from the price offered in right issue. Price & Price bond :  The issuer may mention a floor price or price bond in the red herring prospectus (in case of book building issue) & determine the price at a later date before registering the prospectus with ROC.  The cap on the price bond shall be less than or equal to one hundred & twenty percent of the floor price.  The floor price or the final price shall not be less than the face value of the securities. 2012-June [4](b)  There are various methods of funding like through FCB, ADR, GDR, equity share capital, preference share capital, etc.  Funding through financial institutions & banks is one of the important means of funding of a merger or takeover.

Appendix CS Prof. Prog. M II Paper 4 4 

Funding through this method is that the period of such funds is definite which is fixed at the time of taking such loans on the negative side, interest burden on such loans is quite high. + Please refer to 2005 June [7] (a) on page no. 127

2012-June [5] (a)  Indian Depository Receipts (IDR) is a negotiable receipt created by domestic depository in India against the underlying equity shares of issuing company which is located outside India.  IDR is a negotiable receipt which is denominated in Indian currency.  It provides a means to Indian investors to trade in foreign equity.  It provides a source to raise capital in India by foreign companies.  It widens the investor base of the issuing company.  Moreover, it increases the reputation of the issuing company.  IDR involves low cost of raising finance as compared with other means of raising finance. Chapter-6: Valuation of Shares and Business 2012-June [5] (b)  The Court does not go into the matter of fixing of exchange ratio in great detail.  Court will only see if there is any fraud or unreasonableness involved in the scheme.  If the exchange ratio is being worked out by the recognized firm of Chartered Accountants & the same has been accepted by the shareholders / creditors with overwhelming majority, then the court does not go into the matter of fixing of exchange ratio in great detail. Chapter-7: Corporate Demergers and Reverse Mergers 2012-June [5] (c)  ‘Appointed date’ means the date for identification of assets & liabilities of existing company for transfer to new company.  ‘Appointed date’ is relevant for fixation of the share valuation / exchange ratio which the company would offer to the existing shareholders after de-merger or spin-off.  ‘Appointed date’ is different from ‘effective date’.  Effective date is the date on which all consents & approvals required under the scheme were to be obtained & transfer effected.

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Chapter-9: Financial Restructuring 2012-June [3] (i)  Reduction of capital under Section 100 gives liberty to the company to reduce its capital in ‘any manner’ other than what is illustrated in Clause (a), (b) and (c) of Section 100 (1).  Clauses (a), (b) and (c) of Section 100 (1) are mere illustrations & are not the only manner in which share capital of a company can be reduced.  Section 100 of the Companies Act, 1956 expressly permits a company, if so authorised by its Articles of Association, to reduce its share capital provided a Special Resolution has been passed & the resolution has been sanctioned by the Court. Hence the given statement is correct. (ii)  Section 77A should not be applicable in case where petition for reduction of capital is moved to the court pursuant to section 100 to 105.  Section 77A enables a company to buy back its shares without approaching to the Court under Section 100 to 105 of the Act.  Section 77A is merely an enabling provision & Court’s power under Section 100 to 105 are not in anyway affected.  The two sections [Section 77A & 100 of the Act] operates in different / independent field. Chapter-10: Revival and Restructuring of Sick Companies 2012-June [6] (b)

Please refer to 2007 - June [5] (b) on page no.216

Chapter-13: Securitization and Debt Recovery 2012-June [6] (a)  In the above case, Company Judge has committed an error in not approving the report submitted by the Sale Committee, without giving any reason.  In ‘Asst. Commissioner Commercial Tax Department works Contract & Leasing V/s Shukla & Bros (2010), it was held by Supreme Court that recording of reasons is an essential feature of dispensation of justice.

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Recording of reasons are soul of the orders & non-recording of reasons hampers the proper administration of justice.  Non recording of reasons may cause prejudice to the affected party.  In this case, ARCIL would be successful in getting the favourable order from division branch & division branch should reverse the order of Company Judge & confirm the sale of assets of the company in favour of highest bidder. 2012-June [7] (b) RBI is entitled to exercise its power to cancel the certificate of registration issued by it to any asset reconstruction company under Section 4 of the SARFESI Act, 2002. The Grounds for cancellation of certificate of registration are as under: If the company ceases to receive or hold any investment from qualified institutional buyer or ceases to carry on asset reconstruction business.  If the company fails to comply with the conditions of registration or fails to comply with the direction of RBI.  If the company fails to maintain its accounts or it does not submit documents on inspection by RBI.  Reserve Bank of India should give an opportunity to such company before canceling the registration of such company. Chapter-14: Winding-Up 2012-June [7] (a)  In the above case, GCL Ltd. was unable to repay the amount to Mr.Ranjan.  Profit & Loss & Balance sheet suggests that the liability of the company was more than its assets.  Hence in this case, it can be said that company is unable to pay its debts.  As per Section 433 (e) & (f) of the Companies Act, 1956, if the company is unable to pay its debts & Court is of the opinion that it is just & equitable that the company should be wound up then the company may be wound up by the case.  Ranjan would be successful in getting the winding up order against GCL Ltd. if the Court is of the opinion that it is just & equitable that the company should be wound up as held in ‘Ashok Gowda V Gopika Credit & Investment Co.’ 2012-June[8] (a) (i) Circumstances under which a company may be wound up voluntarily are as under: Where the period fixed for the duration of the company has expired

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(ii)

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(iii)

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that event has occured on the occurrence of which the articles provide that the company is to be dissolved. If the company passes special resolution for winding up of the company. In case of expiry of the term fixed for duration of the company or on the occurrence of the event as provided in the articles, only an ordinary resolution may be passed in the general meeting of the company for winding of the company voluntarily. Otherwise, a special resolution is required to be passed at meeting for voluntarily wound up of company for which a proper notice is required to be given to all members & the resolution when passed must be advertised within 14 days in official Gazette & in regional newspaper where the registered office of the company is situated. Provisions of voluntary winding up are essential in the Companies Act, 1956. It enables members / creditors to initiate the winding up process. It is an easier process of winding up. It enables the company & its creditors to settle their affairs without going to Court.

Chapter-15: Cross Border Insolvency 2012-June [7] (c)

Please refer to 2010 - June [8] (b) (i) on page no. 285 2012-June [8] (b) (i) State:- It refers to the country that enacts the law. It is used throughout the UNCITRAL Model Law. It should not be understood as referring to a state in a country. (ii) Establishment:- It refers to any place of operations where the debtor carries out a non-transitory economic activity with human means & goods or services. (iii) Foreign main proceeding:- It is a foreign proceeding taking place in the country where the debtor has the centre of its main interests. (iv) Foreign Court:- Any judicial or other authority competent to control or superwise a foreign proceeding. (v) Foreign representative:- Any person or body which is authorised to administrator the reorganisation or liquidation of the debtor’s asset in a foreign proceeding or to act as a representative of the foreign proceeding.

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Chapter-16: Objective Questions 2012-June [1] (d) (i) True : Scheme of amalgamation which is not approved at a meeting by the requisite majority but is subsequently approved by individual affidavits, the court may sanction the scheme.  Section 391 (2) is not mandatory but is merely directory & there should be substantial compliance thereof. (ii) True : The Scheme would be deemed to be disapproved & court can disapprove the scheme. As per the provisions of the Act, the scheme should be passed by creditors with more than 3/4th in value & in majority. Since the scheme was not approved by majority in number, hence the scheme shall be deemed to be disapproved. (iii) True : Where the court finds that the scheme is fraudulent or intended to be contrary to the public policy, the court may reject the scheme at the outset without calling a meeting of shareholders / creditors for their approval on scheme of amalgamation. (iv) False : Court can sanction a scheme of amalgamation where order of winding up has been made & a liquidator has been appointed. Court has to see that the scheme is bonafide & whether there is a genuine attempt to revive the company & such attempt is in public interest. (v) False : Sanction of the scheme by the court is essential for scheme to be binding on all creditors even though the any compromise or arrangement has been approved by majority of creditors. Individual creditors shall be entitled to file separate individual application in this case. Question Paper of December - 2012 Chapter-2: Strategies 2012 - Dec [1] {C} (c) As per the provisions of the Companies Act, 1956 and the Income-tax Act, 1961 there is no difference between de-merger and slump sale; though it results in separation of a division or unit of an existing company to a potential buyer. But in common parlance, it means rightward and leftward, i.e., totally different approach from one to another. The first requires no payment but second requires down payment. But the ultimate objective is to hive off some business which is not compatible with the core business competency of the main company. Discuss the eventuality in conjunction with the provisions of the Income-tax Act, 1961.(5 marks)

Appendix CS Prof. Prog. M II Paper 4 9 (d) Explain the meaning of ‘strategic planning’ and the steps involved in strategic planning.(4 marks) Chapter-3: Mergers and Amalgamations 2012 - Dec [1] {C} (a) “Section 394 contains reference to reconstruction of any company or companies or amalgamation of any two or more companies.” Comment on the relevant provisions for facilitating reconstruction and amalgamation of companies. (8 marks) 2012 - Dec [2] (a) Wide Ltd. prepared a scheme of amalgamation and arrangement with Narrow Ltd. and Small Ltd. and the same was duly approved by the Hon’ble High Court concerned. In the approved scheme, the swap ratio was as under: Narrow Ltd.: Wide Ltd. will issue 1 equity share of ` 1 each in exchange of 3 equity shares of Narrow Ltd. Small Ltd.: Wide Ltd. will issue 1 equity share of ` 1 each in exchange of 2 equity shares of Small Ltd. The pre-amalgamation share capital were as follows:

Particulars

Face value of equity share (`) No. of fully paid-up equity shares Paid-up value (`) Reserves and surplus (`) Total (`)

Wide Ltd.

Narrow Ltd.

Small Ltd.

1

1

1

1,00,000 10,00,000 5,00,000 15,00,000

5,00000 5,00,000 5,00,000 10,00,000

4,00,000 4,00,000 5,00,000 9,00,000

The pre-merger investments were as follows— In Wide Ltd.:

No. of Shares Equity shares of Narrow Ltd. 1,00,000 Equity shares of Small Ltd. 1,00,000 In Narrow Ltd.: Equity shares of Wide Ltd. 1,00,000 Equity shares of Small Ltd. 1,00,000 In Small Ltd.: Equity shares of Wide Ltd. 1,00,000 Equity shares of Narrow Ltd. 1,00,000 As the Company Secretary of Wide Ltd., you are required to advise the Chief Executive Officer:

Appendix CS Prof. Prog. M II Paper 4 10 (i)

The quantum of new shares of Wide Ltd. to be issued to the shareholders of transferor company (a) Narrow Ltd.; (b) Small Ltd.; and (ii) What will be the post-issue share capital of Wide Ltd. after cancellation of cross holding of equity shares of all companies? (10 marks) (b) State the different kinds of approvals required to be obtained in the scheme of amalgamation. (5 marks) 2012 - Dec [3] (b) In the modern economic era, it is a well known fact that neither the government nor the consumers allow the companies to insulate themselves through cartels for an infinite period in order to restrict competition. So what options are left to the companies with surplus capacities to mitigate the competition from its rival firm(s), as the excess capacity increases competition, erodes profits and reduces further growth. Write your answer with brief example. (5 marks) 2012 - Dec [4] (b) It is well settled principle of the various High Courts that if the shareholders approve a scheme of arrangement (whether it is amalgamation, demerger/ hive off, etc.) with required majority and is not against public policy or illegal, such scheme of arrangement shall not be disallowed. However, in rare cases High Courts reject a scheme on the ground of res judicata. What are the circumstances where the High Courts are applying this principle? (5 marks) Chapter - 6: Valuation of Shares and Business 2012 - Dec [3] (a) (i) In case of pricing of equity shares through ‘red-herring prospectus’, i.e., through book building process, what is the maximum gap between the floor price and the ceiling in the price band? Give example. (2 marks) (ii) If the floor price/price band is not mentioned in the red-herring prospectus— (a) What is the time limit to inform the same by the issuer for the initial public offer (IPO)? (b) What is the time limit to inform the same by the issuer for the further public offer (FPO)? (2 marks) 2012 - Dec [5] (b) What is the relevance of price-earnings ratio in a company? (5 marks) Chapter-7: Corporate Demergers and Reverse Mergers 2012 - Dec [3] (c) What is meant by partial demerger? State the factors/features which differentiate it from complete demerger. (6 marks) 2012 - Dec [4] (a) “Accounting Standard-14 is equally applicable whether it is a case of amalgamation or demerger.” Discuss the statement citing case law. (5 marks) Chapter-12: Legal Documentation

Appendix CS Prof. Prog. M II Paper 4 11 2012 - Dec [4] (c) Draft a Board resolution for appointment of merchant banker by an acquirer company under the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011. (5 marks) 2012 - Dec [5] (a) Draft a notice convening a meeting of creditors in the case of scheme of amalgamation. (5 marks) (c) What are the statutory forms required to be filed under the Companies (Court) Rules, 1959 in respect of scheme of demerger? Mention the purpose of these forms. (5 marks) Chapter -13: Securitization and Debt Recovery 2012 - Dec [6] (a) Section 35 of the Securitisation and Reconstruc-tion of Financial Assets and Enforcement of Security Interest Act, 2002 provides that the provisions of the Act shall have effect, notwithstanding anything inconsistent therewith contained in any other law for the time being in force or any instrument having effect by virtue of any such law. Further, in accordance with section 37, the provisions of the Act or the rules made thereunder shall be in addition to and not in derogation of any other law for the time being in force. Write a note on the combined effect of these two provisions. (5 marks) (b) Write a comprehensive note on the constitutional validity of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 referring to decided case law. (5 marks) 2012 - Dec [7] (a) “Non-performing assets constitute a real economic cost to the nation because they reflect the application of scarce capital and credit funds to unproductive uses.” Comment and discuss how securitisation has gained importance in India. (5 marks) (b) Define the following in brief in relation to the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002: (i) Originator (ii) Security receipt (iii) Qualified institutional buyer. (2 marks each) (c) You are the Company Secretary of an asset reconstruction company and allowed to operate securitisation activities throughout India. To expand the business horizon of the company, the present management wants to induct cash rich and experienced businessman in the management by transfer of shares from the promoters which entail a substantial change in the management of your company. The new person also wants to shift the registered office from Delhi to Mumbai. The present managing director has sought your views for formalities to be completed in this regard. (4 marks) 2012 - Dec [8] (b) Write note on the following:

Appendix CS Prof. Prog. M II Paper 4 12

(ii)

Cross examination at the Debt Recovery Tribunal (DRT). (4 marks)

Chapter -14: Winding-Up 2012 - Dec [6] (c) What is meant by an ‘unregistered company’? What are the circumstances under which an unregistered company is deemed to be unable to pay its debts? (5 marks) 2012 - Dec [8] (a) Can the court order winding-up of the company when a just and equitable ground does not exist at the time of hearing though it might have existed at the time of presenting the petition? Explain. (7 marks) Chapter -15: Cross Border Insolvency 2012 - Dec [8] (b) Write note on the following: (i) Corporate insolvency (c) Though UNCITRAL Model Law is not a substantive law, it recommends protection to creditors and other interested persons. Briefly describe the protections provided under the UNCITRAL Model Law. (4 marks) Chapter - 16: Objective Questions 2012 - Dec [1] {C} (b) State whether the following statements are true or false citing relevant provisions of the law: (i) The scheme of amalgamation is approved by shareholders holding more than 75% of the shares who vote at the meeting of the members of the company convened under the orders of the court. (ii) Application for approval of scheme of compromise or arrangement can be made by a creditor of the company. (iii) Proxies cannot be counted for the purpose of quorum at the general meeting convened in accordance with the directions of the Court. (iv) Copies of the order of the High Court sanctioning the scheme of arrangement are required to be affixed to all copies of memorandum of association and articles of association of the transferee company. (2 marks each)

Shuchita Prakashan (P) Ltd. 25/19, L.I.C. Colony, Tagore Town,

(2 marks)

Appendix CS Prof. Prog. M II Paper 4 13

Allahabad - 211002 Visit us: www.shuchita.com 