Paper-7 Module- IV CS Professional Programme Due Diligence and Corporate Compliance Management Solution June - 2013 Answer: 2013 - June [1] (i) Ch-5 As per part VI of clause 49 of the listing agreement, there shall be a separate section on corporate Governance in the Annual Reports of company ,with a detailed compliance report on Corporate Governance. Non compliance of any mandatory requirement of this clause with reasons thereof and the extent to which the nonmandatory requirements have been adopted should be specifically highlighted. The clause also prescribes suggested lit of items to be included in Annual Report. Answer: 2013 - June [1] (ii) Ch-15 As per section 207(i) the dividend including interim dividend is required to be paid within 30 days from the date of declaration. Thus the dividend declared on 21st November 2012 can not be paid on 25th December 2012. Answer: 2013 - June [1] (iii) Ch-2 The statement is not correct because according to Regulation 72 (2) of SEBI (ICDR) Regulations 2009, the issuer shall not make preferential issue of specified securities to any person who has sold any equity shares of the issuer during the six months preceding the relevant date. Answer: 2013 - June [1] (iv) Ch-2 According to clause 8 of SEBI (Employee stock option scheme and Employee stock purchase scheme)Guidelines 1999. The companies granting option to its employees pursuant to the scheme have the freedom to determine the exercise price subject to confirming to the accounting policies specified in the guidelines. Answer: 2013 - June [1] (v) Ch-15 As per section 383 A(1) of the Companies Act,1956, every company having a paid up share capital of not less than five crores rupees shall have a whole- time Company secretary. Thus the company having a paid - up share capital of ` 1crore to less than `5 crore is not required to employ a whole- time company secretary.

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Answer: 2013 - June [1] (Vi)-Ch-8 As per SEBI (ICDR) Regulations 2009, the following conditions are prescribed for issue of Indian Depository Receipts. (a) Issue size shall not be less than fifty crore rupees; (b) Procedure to be followed by each class of applicant for applying shall be mentioned in the prospectus; (c) Minimum application amount shall be twenty thousand rupees; (d) At least 50%of the IDR issued shall be allotted to qualified institutional buyers on proportionate basis. (e) The balance 50% may be allocated among the categories of non-institutional investors and retail individual investors including employees at the discretion of the issuer and the manner of allocation shall be disclosed in the prospectus. (f) At any given time, there shall be only one denomination of IDR of the issuing company. Answer: 2013-June-[1] (Vii) Ch-9 As per consolidated FDI policy, Compliance may not require fresh prior approval of the Government for bringing in additional foreign investment into the same entity in the following cases: (i) Entities the activities of which had earlier required prior approval of government and which had accordingly, earlier obtained prior approval of government for their initial foreign investment but subsequently such activities sector have been placed under automatic route; (ii) Entities the activities of which had sectoral caps earlier and which had, accordingly earliear obtained prior approval of government for their initial foreign investment but subsequently such caps were removed '|increased and the activities placed under the automatic route; provided that such additional investment along with the initial/original investment does not exceed the existing sectoral caps; and (iii) Additional foreign investment into the same entity, where prior approval of government had been obtained earlier for the initial/original foreign investment due to requirement of Press Note 18/1998 or Press Note 1 of 2005(deals with foreign investment /technical collaboration where the foreign investor has or had any previous joint venture or technology transfer/trademark agreement in the same or allied field) and prior approval of the Government under the FDI policy is not required for any other reason'purpose. Answer: 2013 - June [2] (a) (i) Ch-18 (c)Listed public companies

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Answer: 2013 - June [2] (a) ( ii) Ch-18 (b)Within 48 hours Answer: 2013-June-[2] (a) (iii) Ch-18 (a)Contributories Answer: 2013-June [2] (a) (iv) Ch-18 (b)B Answer: 2013-June-[2] (a) (V) Ch-18 (c)1000 Answer 2013-June-[2] (a) (Vi) Ch-18 (b)Three Answer: 2013-June-[2 ] (b) (i) Ch-15 Redemption of preference shares:As per Section 80 of Companies Act 1956,a company limited by shares may, if so authorised by its articles, issue preference shares which are, or at the option of the company are to be liable to be redeemed .For the redemption of preference share a reserve is created only when the redemption is not of fresh issue. Redemption of debentures: As per section 117C of the Companies Act requires the company to create a debenture redemption reserve for the redemption of debentures and to which adequete amount shall be credit from out of the profits until such debentures are redeemed.The company should not use the debenture reserve except for the redemption of debentures. Further the company has to pay interest and redeem the debentures in accordance with the terms and conditions of their issue. For redemption of debenture a redemption reserve is always necessary. Answer: 2013 - June [2 ] (b) (ii) Ch-9 Foreign Direct Investment: FDI is an investment by non- resident in resident entities through transfer or issue of security to person resident outside India and it is a ‘capital account transaction’ and Government of India and Reserve Bank India regulate this under the FEMA 1999 and consolidated FDI Policy. Most of the sectors for foreign direct investment are under automatic route where some of the sectors have sectoral cap and very few sectors are prohibited under the FDI policy.

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Foreign Institutional Investor: FII means an institution established or incorporated outside India which proposes to make investment in India in securities .Reserve Bank of India has given general permission to SEBI registered F II / sub accounts to invest under the portfolio investment scheme. Accordingly total holding of each F II / sub account under this scheme shall not exceed 10% of total paid-up capital and the total holdings by all F II shall not exceed 24%. Answer: 2013 - June [3] (a) Ch -6 Bhola may be advised as follows: SEBI has put in place the following safeguards to address the Concerns of the investors arising out of transfer of securities from the Beneficial owner (BO) Account without proper authorization by (BO) on electronic transfer: (a) The depositories shall give more emphasis on investor education particularly with regard to careful preservation of Delivery Instruction Slip (DIS)by the BOs. The depositories may advice the BOs not to leave “blank or signed”DIS with the depository participants (Dps)or any other person/entity. (b) The DPs shall not accept pre-signed DIS with blank columns from the BO(S). (c) The DPs shall issue only one DIs booklet containing not more than 20 slips for individual account holders and not more than 100 slips for non-individual account holders, at a time. (d) If the DIS booklet is lost/stolen /not traceble by the BO the same must be intimated to the DP immediately by the BO in writing. On receipt of such intimation the DP shall cancel the unused DIS of the said booklet. (e) The Dps can issue subsequent DIS booklet to a BO only after the BO has used not less than 75% of the slips contained in the previous DIS booklet. The DP shall also ensure that a new DIS booklet is issued only on the strength of the DIS instruction request slip (contained in the previous booklet) duly complete in all respects, unless the request for fresh booklet Is due to loss etc, as referred to in clause(d) above. (f) The DPs shall not issue more than 10 loose DIS to one account-holder in a financial year(April to March).The loose DIS can be issued only if the BO (s) come in person and sign the loose DIS in the presence of an authorised DP official. (g) The DPS shall put in place appropriate checks and balance with regard to verification of signature of the BOs while processing DIS. (h) The DPs shall cross check with the BOs under exceptional circumstances before acting upon the DIS.

(i)

The DPs shall mandatorily verify with a BO before acting upon the DIS, in case of

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an account which remained in active i.e where no debit transaction had taken place for a continuous period of 6 months, whenever all the ISIN balances in that account (irrespective of the number of ISINs) are transferred at a time. However, in case of active accounts, such verification may be made mandatory only if the BO account has 5 or more ISINs and all such ISIN balances are transferred at a time. The authorized official of the DP verifying such transactions with the BO shall record the details of the process, date, time, etc, of the verification on the instruction slip under his signature. Thus by way of above directions to the Depository Participants and guidelines to the Beneficial Owner, Bhola may be advised about the safety of holding and transfer in depository mode. Answer: 2013 - June [3 ] (b) Ch-10 Important clauses in International Joint Ventures. A well drafted joint venture agreement should provide a comprehensive road map on the rights and obligations of parties to the agreement and minimizes disputes and complications. Though the clauses of joint venture agreements can not be tailor made, before signing a joint venture agreement, clauses relating to the following may be addressed. 1. Objectivity. 2. Terms and Tenures of the agreement. 3. Proportion of holding. 4. Managerial Control. 5. Appointment of Board members. 6. Restriction on sale. 7. Arbitration. 8. Governing Law. 9. Force majeure clause. 10. Right of first refusal. 11. Representation and warranties. 12. Clauses relating to patent and IPR issues. 13. Legal compliance. 14. Time limits. 15. Change of location. 16. Change of control. 17. Foreign Trade Rights. 18. Indemnity Clause. 19. Prohibition on assignment. 20. Limitation of liability. 21. Confidentiality.

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22. Severability. 23. Termination. Answer: 2013 - June [3] (c) Ch-15 According to Section 210, the company must lay before the Annual General Meeting, the profit & loss account within a months of the close of the first financial year in case of its first Annual General Meeting and within 6 months of the close of its relevant financial year in case of subsequent Annual General Meeting. In those cases, where the extension of time for holding a meeting has been granted by the Registrar, the Annual General Meeting must be held within 6 months plus extension of time granted from the close of the relevant financial year. Thus, in the given case: (i) The annual general meeting of the company was held within statutory time and the company has adjourned the Annual General Meeting as the accounts were not ready. (ii) The meeting adjourns to a date beyond six months from the end of the financial years to which the accounts related permission from extension of time period must have been taken from Registrar of Companies, which was not done. The action of Registrar of companies in issuing show cause notice to the company for violation of section 210 of the companies Act is justified as the company has not laid down the accounts before the Annual General Meeting within six months from the closure of the financial year. To rectify this offence the company can make corresponding application under section 621A of the Companies Act-1956. Answer: 2013 - June [4] (a)-Ch-15 According to Section 292(I) (c)directors have to pass resolution at a duly convened Board Meeting to borrow money. The Board may however, by a resolution passed at a meeting, delegate to any committee of directors, the managing director, the manager or any other principal officer of the company or in the case of branch office of the company, a principal officer of the branch office, the powers specified in clause (c) to such an extent and on such conditions as the Board may prescribe. Every resolution of the board delegating the powers must specify the total amount outstanding at any one time upto which the moneys may be borrowed by the delegate under clause (c)of Section 292(2).

Further Section 293 (1)(d)of the Act prohibits the Board of Directors of a public

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company from borrowing a sum which exceeds the aggregate of the paid-up share capital of the company and its free reserves unless they have received the prior consent of the company in general meeting. Thus the action of the Board is valid if the borrowing is not exceeding the paid up capital and free reserve of the company. Answer: 2013 - June [4] (b) Ch-15 It was held in the case of Arunachalam Chettiar V. Kaleeswarar Mills Ltd. that where articles of the company provide that there will be a meeting of the Board of Directors on the first Saturday of every month, there will be no necessity of service of notice to individual director and such clause in the articles of association is sufficient compliance of section 286(1) of the Companies Act 1956. Thus the clause in the article is sufficient compliance of the requirement of sending the notice for a Board Meeting and the content of some of the directors is not legally valid. However, as a good secretarial practice, notice for every board meeting should be sent to all the directors eligible to receive the notice. Answer: 2013 - June [4] (c) Ch-15 Please refer 2008-Dec [3] (b) on Page No. ? Answer: 2013 - June [5] (a)-Ch-5 Clause 40A-minimum level of public shareholding: (i) The company agrees to comply with the requirements specified in Rule 19(2) and Rule 19A of the securities Contracts (Regulation)Rule,1957. (ii) Where the issuer company is required to achieve the minimum level of public shareholding specified in Rule 19(2)(b) and /or Rule 19A of the securities contracts (Regulation)Rules 1957, it shall adopt any of the following methods to raise the public share holding to the required level: (a) Issuance of share to public through prospectus; or (b) Offer for sale of shares held by promoters to public through prospectus; or (c) Sales of shares held by promoters through the secondary market in terms of SEBI circular /MRD/DP/05/2012 dated February 1,2012;or (d) Institutional Placement Programme (IPP) in terms of chapter viiiA of SEBI (Issue of Capital and Disclosure Requirements) Regulations 2009, as amendment; or (e) Rights issues to public shareholders, with promoter/promoter group shareholders forgoing their entitlement, to equity shares, whether present or future, that may arise from such issue or (f)

Bonus issues to public shareholders, with promoter/promoter group shareholders

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forgoing their entitlement to equity shares, whether present or future, that may arise from such issue; or (g) Any other method as may be approved by SEBI, on a case to case basis. Consequences of non-compliance of clause 40A The penal provisions for non compliance of the condition of the Listing Agreement are governed by Section 23(2)and Section 23E of the Securities Contract (Regulation) Act (SCRA), 1956. Section 23(2)of SCRA states that any person who fails to comply with the provisions of Section 21(conditions for listing) shall without prejudice to any award of penalty by Adjudicating Officer on conviction be punishable with imprisonment for a term which may extend to ten years or with fine which may extend to twenty five crore rupees or with both. Section 23E of SCRA states that if any company fails to comply with the listing conditions or delisting conditions or grounds or commits a breach thereof , it shall be liable to a penalty not exceeding twenty five crore rupees. Apart from the above, a recognized stock exchange may suspend or withdraw admission to dealings in the securities of a company or body corporate either for a breach of or non-compliance with, any of the conditions of admission to dealings or for any other reason, to be recorded in writing, which in the opinion of the stock exchange justifies such action. The Stock Exchanges may delist companies which have been suspended for a minimum period of six months for non-compliance with the Listing Agreement. Answer: 2013 - June [5] (b) (i) Ch-5 No, when the company decides to commence a new business given in other objects not german to existing business it has to comply with the requirements of clause(b) of Sub-section (2A) of Section 149 of the Companies Act, which lays down that the company must approve the commencement of any such business by a special resolution passed in that behalf by it in general meeting. Answer: 2013 - June [5] (b) (ii) Ch-5 As per Section 292A of the Companies Act? 1956 every public company having paid up share capital of not less than 5 crore of rupees shall constitute a committee of the Board known as “Audit Committee” which shall consist of not less than three directors and such number of other directors as the Board may determine of which twothirds of the total number of member shall be directors, other than managing director or whole time directors. Thus, constitution of audit committee is obligatory for public company if the paid up capital is not less that ` 5 crores whether it is listed or not .

Answer:

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2013 - June [6] (a) Ch-18 (i) 3 months (ii) 20% (iii) Convertible (iv) Down stream merger (v) ` 20,000 (vi) Reserve Bank of India Answer: 2013 - June [6] (b) Ch-6 Please refer 2012-Dec [ 2 ] (b) (i) Answer: 2013 - June [6] (c) Ch-9 Please refer 2009-June [ 5 ] (b) Answer: 2013 - June [7] (a) (i) Ch-15 “Register of investments” To check the following entries in the register: (a) The name of the investee. (b) The amount, terms and purpose of the investment. (c) Date of investment. To check the above entries were made chronologically within seven days of making such investment. (d) Whether all investments made by the company on its own behalf are held in its own name. (e) Whether Certificate or letter of allotment of concerned shares or securities, is in its custody or with the banker etc. and make a physical certification of it. (f) When any shares or securities in which investments have been made by a company are not held by it in its own name pursuant to permissible conditions in Section 49 of the Companies Act, the company shall forthwith enter in a register maintained by it for the purpose, particulars specified below: C The nature, value and such other particulars as may be necessary fully to indentify the shares or securities in question; and C The bank or person in whose name or custody the shares or securities are held. To verify that the register is kept open for inspection of any member or debenture holder of the company, without charge, during business houses, subject to such reasonable restrictions as the company may by its articles or in general meeting impose, so that not less than two hours in each day are allowed for inspection.

Answer:

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2013 - June [7] (a) (ii) Ch-15 “Issue of Sweat Equity Shares” check whether: (i) At least one year has elapsed since the date on which the company was entitled to commence business; (ii) That the sweat equity shares issued are shares only of a class already issued; (iii) That a special resolution was passed at a general meeting authorising the issue; (IV) Also that the special resolution specified the number of shares, current market price consideration, if any and the class or classes or directors or employees to whom such shares are to be issued; (v) Whether the company has filed e-form No.23 with the ROC along with a copy of the resolution within 30 days from the date the resolution was passed; (vi) If the company is an unlisted company, that the issue of sweat equity shares was in accordance with the rules as prescribed by the Central Government, unlisted companies (Issue of Sweat Equity Shares) Rules,2000. “If the company is a listed company” 6Check inter alia : (vii)

The company had forwarded 3 copies of the notice and one copy of the proceedings of the general meeting to the stock exchange. (viii) That the issue was in accordance with the regulations made by SEBI in this regard; (iX) If the shares were issued for consideration other than cash, the articles of the company permit the same. Answer: 2013 - June [7] (a) (iii) Ch-15 Deposit of Contribution to Provident fund Check Whether: (i) The company has constituted a Provident Fund for its employees or any class of employees. If yes, check that all moneys contributed to such fund (Whether by the company or by the employees) or received or accruing by way of interest or otherwise to such fund has been deposited within 15 days from the date of contribution, receipt of accrual, as the case may be in an account as specified in clause(a) of sub-section (i) of section 418 of the companies Act, 1956 or invested in the securities mentioned or referred to in clause (a) to (e) of section 20 of the Indian Trust Act, 1882. (ii) where the company has created a trust for the employees provident fund, the company shall collect the contribution and pay to the trustees of the said fund, the employee’s and employers contribution within 15 days from the date of collection. Also, the Board for this purpose shall approve the execution of trust deed appointing trustees, getting approval of commissioner of income-tax etc.

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(iii) If the employee’s contribution is deducted from their salary, verify the amount deducted from salary register. (iv) The employees contribution, the employers contribution and aggregate tallies with the quantum mentioned in the statement sent to Provident Fund Commissioner. Answer: 2013 - June [7] (b) (i) Ch-7 Please refer 2009, June [2] (c) (ii) on Page No. 2 Answer: 2013 - June [7] (b) (ii) Ch-5 Penalty for non-compliance of listing agreement The penal provisions for non-compliance of the conditions of the Listing Agreement are governed by Section 23(2) and Section 23E of the Securities Contract (Regulation) Act,(SCRA)1956. Section 23(2) of SCRA states that any person who fails to comply with the provisions of Section 21(conditions for listing ) shall without prejudice to any award of penalty by Adjudicating officer on conviction be punishable with imprisonment for a term which may extend to ten years or with fine which may be extend to twenty five crore rupees or with both. Section (23) E of SCRA States that if any company fails to comply with the listing conditions or delisting conditions or grounds or commits a breach thereof, it shall be liable to a penalty not exceeding twenty five crore rupees. Apart of the above a recognized stock exchange may suspend or withdraw admission to dealings in the securities of a company or body corporate either for a breach of or non-compliance with, any of the conditions of admission to dealings or for any other reason to be recorded in writing, which in the opinion of the stock exchange justifies such action. The stock exchange may delist companies which have been suspended for a minimum period of six months for non compliance with the listing agreement. Answer: 2013 - June [7] (b) (iii) Ch-11 Please refer 2011-Dec [2] (b)(i) and 2010-June [8] (iv) on Page No. 2 Answer: 2013 - June [8] (i) Ch-6 Please refer 2010-Dec [8 ] (ii) on Page No. 2 Answer: 2013 - June [8] (ii) Ch-9 Benefits of Joint Venture (1) Joint ventures provide large capital funds . (2) Joint ventures provide access to technology /R&D/markets.

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(3) Joint venture make large projects and turn key projects feasible and possible. (4) Reduction of manufacturing costs and other overheads including expenditure on R&D. (5) Also provides synergy due to combined efforts of varied parties. Answer: 2013 - June [8] (iii) Ch-14 The transfer deed will have to be in form 7B appended to the companies (Central Government)General Rules and forms,1956. If the transfer deed relates to transfer of shares it should be stamped with date by the Registrar of Companies or other officials authorised in this behalf by the Central Government before anything is written on it. Validity of Transfer Deed The transfer deed so stamped is valid for lodgement in the case of a listed company within 12 months of the date so stamped, or first closure of the register of members after it is so dated stamped, whichever is later. In the case of an unlisted company it is valid for lodgement within two months of the date so stamped. Answer: 2013 - June [8] (iv) Ch-12 Corporate compliance management involves a full process of research and analysis as well as investigation and evaluation, which is nothing but a due diligence exercise. Such an exercise is undertaken in order to determine the potential issues and get a realistic view about how the entity is performing and how it is likely to perform in the future. Compliance with law and regulation must be managed as an integral part of any corporate strategy. Answer: 2013 - June [8] (v) Ch- 4 Please refer 2009-Dec [7] (b) (i) on Page No. 2

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