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Chapter 12 Cross Border Insolvency – CS Professional Insolvency Law and Practice Notes is designed strictly as per the latest syllabus and exam pattern.

Cross Border Insolvency – CS Professional Insolvency Law and Practice Study Material

Question 1.
‘Insolvency and Bankruptcy Code also regulates cross border transactions’ Elucidate the relevant provisions of Insolvency and Bankruptcy Code, 2016. (June 2019, 6 marks)
Answer:
Sections 234 and 235 of the Insolvency and Bankruptcy Code, 2016 make provisions to deal with cases involving cross border insolvency. Agreements with foreign countries: Section 234 of the Code empowers the central government to enter into an agreement with other countries to resolve situations pertaining to cross border insolvency. Section 234 of the Code provides that the Central Government may enter into an agreement with the Government of any country outside India for enforcing the provisions of this Code. [Section 234(1)]
The Central Government may, by notification in the Official Gazette, direct that the application of provisions of this Code in relation to assets or property of corporate debtor or debtor, including a personal guarantor of a corporate debtor, as the case may be, situated at any place in a country outside India with which reciprocal arrangements have been made, shall be subject to such conditions as may be specified. [Section 234(2)]
Letter of request to a country outside India in certain cases: Section 235 of the Code lays down that notwithstanding anything contained in this Code or any law for the time being in force if, in the course of insolvency resolution process, or liquidation or bankruptcy proceedings, as the case may be, under this Code, the resolution professional, liquidator or bankruptcy trustee, as the case may be, is of the opinion that assets of the corporate debtor or debtor, including a personal guarantor of a corporate debtor, are situated in a country outside India with which reciprocal arrangements have been made under section 234, he may make an application to the Adjudicating Authority that evidence or action relating to such assets is required in connection with such process or proceeding. [Section 235(1)]
The Adjudicating Authority on receipt of an application under sub-section(l) and, on being satisfied that evidence or action relating to assets under sub- section(1) is required in connection with insolvency resolution process or liquidation or bankruptcy proceeding, may issue a letter of request to court or an authority of such country competent to deal with such request. [Section 235(2)]
The current cross border insolvency framework in India is dependent on India entering bilateral agreements with other countries. Finalisation of bilateral agreements is a long drawn process as it involves long term negotiations and thus takes a lot of time. Moreover, every trade is distinct and thus, it would be difficult for the adjudicating authorities to enforce the agreements/treaties entered into with other countries.

Question 2.
“A domestic business may have foreign branches or subsidiaries, or a foreign business may have domestic branches or subsidiaries. Foreign creditors may have valid claims in domestic bankruptcy cases, and domestic creditors may have valid claims in foreign bankruptcy cases”.
Elucidate with reference to the objectives and scope of Model Law developed in this regard? (Dec 2019, 6 marks)
Answer:
The Preamble to UNCITRAL Model Law on Cross-Border Insolvency provides that:
The purpose of this Law is to provide effective mechanisms for dealing with cases of cross-border insolvency so as to promote the objectives of:
(a) Co-operation between the courts and other competent authorities of this State and Foreign States involved in cases of Cross-border insolvency;
(b) Greater legal certainty for trade and investment;
(c) Fair and efficient administration of Cross-border insolvencies that protects the interests of all creditors and other interested persons, including the debtor;
(d) Protection and maximization of the value of the debtor’s assets; and
(e) Facilitation of the rescue of financially troubled business, thereby protecting investment and preserving employment.

UNCITRAL Model Law on Cross-Border Insolvency applies where:

• Assistance is sought in this State by a foreign court or a foreign representative in connection with foreign proceeding; or
• Assistance is sought in a foreign State in connection with a proceeding under [identify laws of the enacting State relating to insolvency]; or
• A foreign proceeding and a proceeding under (identify laws of the enacting State relating to insolvency) in respect of the same debtor are taking place concurrently; or
• Creditors or other interested persons in a foreign State have an interest in requesting the commencement of or participating in a proceeding under (identify laws of the enacting State relating to insolvency).

UNCITRAL Model Law on Cross-Border Insolvency does not apply to a proceeding concerning (designate any types of entities, such as Banks or Insurance Companies, that are subject to a special Insolvency regime in this State and that this State wishes to exclude from this Law).
The acceptance of the cross border insolvency norms was observed in the CIRP of Jet Airways Limited where the NCLAT has allowed Dutch Administrator to attend the meeting of the Committee of Creditors, however, with limited or no power to participate directly.

Question 3.
The United Nations Commission on International Trade Law’s. Model Law on Cross Border Insolvency do not lead to harmonization of Insolvency Laws enacted by the individual Countries’. Do you agree with this statement? Explain. (Dec 2020, 6 marks)
Answer:
No, we do not agree with the said statement. In fact the UNCITRAL Model Law on Cross Border Insolvency do harmonize the Insolvency Laws enacted by the individual countries.
Globally, cross-border insolvency laws are based on one country providing assistance to the other in taking control of the assets and eventual disposition of such assets of the debtor company. Such aims are achieved by the mutual recognition of each country’s insolvency regime.
Some countries have adopted the UN Commission on International Trade Law (UNCITRAL) Model Law on cross-border insolvency, adopted in 1997. The model law is designed to provide a harmonized approach to the treatment of cross-border insolvency proceedings, facilitate cooperation between the courts and office holders involved in the insolvency in different jurisdictions, and provide forthe mutual recognition of judgements and direct access of foreign representatives to the courts of the enacting state.
The Legislative Guide on Insolvency Law is intended to be used as a reference by national authorities and legislative bodies when preparing new laws and regulations or reviewing the adequacy of existing laws and regulations.
The UNCITRAL Model Law on Cross-Border Insolvency, is designed to assist States to equip their insolvency laws with a modern, harmonized and fair framework to address more effectively instances of cross-border insolvency. Those instances include cases where the insolvent debtor has assets in more than one State or where some of the creditors of the debtor are not from the State where the insolvency proceeding is taking place.

Question 4.
Whether a foreign company can merge into an Indian company or vice versa? Discuss the relevant provisions of the Insolvency and Bankruptcy Code, 2016. (Dec 2021, 6 marks)
Answer:
Sections 234 and 235 of the Insolvency and Bankruptcy Code, 2016 make provisions to deal with cases involving cross border insolvency. Agreements with foreign countries : Section 234 empowers the central government to enter into an agreement with other countries to resolve situations pertaining to cross border insolvency. Section 234 of the Code provides that: The Central Government may enter into an agreement with the Government of any country outside India for enforcing the provisions of this Code. [(Section 234(1)].
The Central Government may, by notification in the Official Gazette, direct that the application of provisions of this Code in relation to assets or property of corporate debtor or debtor, including a personal guarantor of a corporate debtor, as the case may be, situated at any place in a country outside India with which reciprocal arrangements have been made, shall be subject to such conditions as may be specified. [Section 234(2)].
Letter of request to a country outside India in certain cases : Section 235 of the Insolvency and Bankruptcy Code, 2016 lays down that notwithstanding anything contained in this Code or any law for the time being in force if, in the course of insolvency resolution process, or liquidation or bankruptcy proceedings, as the case may be, under this Code, the resolution professional, liquidator or bankruptcy trustee, as the case may be, is of the opinion that assets of the corporate debtor or debtor, including a personal guarantor of a corporate debtor, are situated in a country outside India with which reciprocal arrangements have been made under section 234, he may make an application to the Adjudicating Authority that evidence or action relating to such assets is required in connection with such process or proceeding. [(Section 235(1)]
The Adjudicating Authority on receipt of an application under sub-section (1) and, on being satisfied that evidence or action relating to assets under sub-section (1) is required in connection with insolvency resolution process or liquidation or bankruptcy proceeding, may issue a letter of request to a court or an authority of such country competent to deal with, such request. [Section 235(2)]
The current cross border insolvency framework in India is dependent on India entering bilateral agreements with other countries. Finalisation of bilateral agreements is a long drawn process as it involves long term negotiations and thus takes a lot of time. Moreover, every trade is distinct and thus it would be difficult for the adjudicating authorities to enforce the agreements/treaties entered into with other countries.

Question 5.
UN Commission on International Trade Law on cross-border insolvency, was adopted in 1997. Since then the subject was deliberated in various statutes in India and abroad and finally as per the Banking Law Reforms Committee (BLRC) Report, the Insolvency and Bankruptcy Code, 2016 (IBC) was enacted which contains the provisions relating to the question of cross-border insolvency. In this context describe the provisions of cross-border insolvency as contained in the IBC. (June 2022, 6 marks)

Question 6.
What is cross border insolvency?
Answer:

• Cross-border insolvency (sometimes called international insolvency) regulates the treatment of financially distressed debtors where such debtors have assets or creditors in more than one country.
• In recent times, the number of cross-border insolvency cases has increased significantly.

Question 7.
What should be the objective of effective and efficient insolvency law?
Answer:
An effective and efficient insolvency regime should aim to achieve the following key objectives in a balanced manner:

• Maximization of value of assets.
• Ensuring equitable treatment of similarly situated creditors
• Provision for timely, efficient and impartial resolution of insolvency
• Preservation of the insolvency estate to allow equitable distribution to creditors
• Ensuring a transparent and predictable insolvency law that contains incentives for gathering and dispensing information
• Recognition of existing creditor rights and establishment of clear rules for ranking of priority claims
• Establishment of a framework for cross-border insolvency.

Question 8.
What is “The United Nations Commission on International Trade (UNCITRAL)”?
Answer:

• The United Nations Commission on Internationa Trade Law (UNCITRAL) is a subsidiary body of the General Assembly.
• The United Nations Commission on International Trade Law (UNCITRAL) was established by the General Assembly in 1966.
• The Commission carries out its work at annual sessions.
• The United Nations Commission on International Trade Law prepares international legislative texts for use by States in modernizing commercial law and non-legislative texts for use by commercial parties in negotiating transactions.

Question 9.
Explain the key provisions of UNCITRAL Legislative guide on Insolvency Laws.
Answer:

• The Legislative Guide on Insolvency Law was prepared by the United Nations Commission on International’Trade Law (UNCITRAL).
• The Legislative Guide is divided into four parts.
• Part one discusses the key objectives of an insolvency law, structural issues such as the relationship between insolvency law and other law, the types of mechanisms available for resolving a debtor’s financial difficulties and the institutional framework required to support an effective insolvency regime.
• Part two deals with core features of an effective insolvency law, various stages of an insolvency proceeding from their commencement to discharge of the debtor and closure of the proceedings.
• Part three addresses the treatment of enterprise groups in insolvency, both nationally and internationally. In terms of the international treatment of groups, part three focuses on cooperation and coordination.
• Part four focuses on the obligations that might be imposed upon those responsible for making decisions with respect to the management of an enterprise when that enterprise faces imminent insolvency or insolvency becomes unavoidable. The aim is to protect the legitimate interests of creditors and other stakeholders.

Question 10.
State the key differences between UNCITRAL Legislative Guide on Insolvency Law vis-a-vis UNCITRAL Model Law on Cross-Border Insolvency.
Answer:

• There are differences between UNCITRAL Legislative Guide on Insolvency Law vis-a-vis UNCITRAL Model Law on Cross-Border Insolvency.
• A model law generally is used differently than a legislative guide.
• Specifically, a model law is a legislative text recommended to States for enactment as part of national law, with or without modification. As such, model laws generally propose a comprehensive set of legislative solutions to address a particular topic and the language employed supports direct incorporation of the provisions of the model law into a national law.
• The focus of a legislative guide, on the other hand, is upon providing guidance to legislators and other users and for that reason guides generally include a substantial commentary discussing and analysing relevant issues. It is not intended that the recommendations of a legislative guide be enacted as part of national law as such. Rather, they outline the core issues that it would be desirable to address in that law, with some recommendations providing specific guidance on how certain legislative provisions might be drafted.

Question 11.
Write a note on UNCITRAL Model Law on Cross-Border Insolvency.
Answer:

• The UNCITRAL Model Law on Cross-Border Insolvency, adopted in 1997, is designed to assist States to equip their insolvency laws with a modern, harmonized and fair framework to address more effectively instances of cross-border insolvency.
• The Model Law is designed to assist States to equip their insolvency laws with a modern legal framework to more effectively address cross-border insolvency proceedings concerning debtors experiencing severe financial distress or insolvency.
• It focuses on authorizing and encouraging cooperation and coordination between jurisdictions, rather than attempting the unification of substantive insolvency law, and respects the differences among national procedural laws.
• For the purposes of the Model Law, a cross-border insolvency is one where the insolvent debtor has assets in more than one State or where some of the creditors of the debtor are not from the State where the insolvency proceeding is taking place.

Question 12.
Explain the key provisions /elements of UNCITRAL Model Law on Cross-Border Insolvency.
Answer:
The Model Law focuses on four elements identified as key to the conduct of cross-border insolvency cases:
1. Access:
These provisions give representatives of foreign insolvency proceedings and creditors a right of access to the courts of an enacting State to seek assistance and authorize representatives of local proceedings being conducted in the enacting State to seek assistance elsewhere.

2. Recognition:

• One of the key objectives of the Model Law is to establish simplified procedures for recognition of qualifying foreign proceedings in order to avoid time-consuming legalization or other processes that often apply and to provide certainty with respect to the decision to recognize.
• These core provisions accord recognition to orders issued by foreign courts commencing qualifying foreign proceedings and appointing the foreign representative of those proceedings.
• Recognition of foreign proceedings under the Model Law has several effects – principal amongst them is the relief accorded to assist the foreign proceeding.

3. Relief

• A basic principle of the Model Law is that the relief considered necessary for the orderly and fair conduct of cross-border insolvencies should be available to assist foreign proceedings.
• Key elements of the relief available include interim relief at the discretion of the court between the making of an application for recognition and the decision on that application, an automatic stay upon recognition of main proceedings and relief at the discretion of the court for both main and non-main proceedings following recognition.

4. Cooperation and coordination

• These provisions address cooperation among the courts of States where the debtor’s assets are located and coordination of concurrent proceedings concerning that debtor.
• The Model Law expressly empowers courts to cooperate in the
  areas governed by the Model Law and to communicate directly with foreign counterparts.
• Cooperation between courts and foreign representatives and between representatives, both foreign and local, is also authorized.
• The provisions addressing coordination of concurrent proceedings aim to foster decisions that would best achieve the objectives of both proceedings, whether local and foreign proceedings or multiple foreign proceedings.

Question 13.
Explain the purpose of UNCITRAL Model Law on Cross-Border Insolvency.
Answer:
The purpose of this Law is to provide effective mechanisms for dealing with cases of cross-border insolvency are as under:

•  Cooperation between the courts and other competent authorities of this State and foreign States involved in cases of cross-border insolvency;
• Greater legal certainty for trade and investment;
• Fair and efficient administration of cross-border insolvencies that protects the interests of all creditors and other interested persons, including the debtor;
• Protection and maximization of the value of the debtor’s assets; and
• Facilitation of the rescue of financially troubled businesses, thereby protecting investment and preserving employment.

Question 14.
Explain the cases where UNCITRAL Model Law on Cross-Border Insolvency applies.
Answer:
UNCITRAL Model Law on Cross-Border Insolvency applies where:

• Assistance is sought in this State by a foreign court or a foreign representative in connection with a foreign proceeding; or
• Assistance is sought in a foreign State in connection with a proceeding under laws of the enacting State relating to insolvency; or
• A foreign proceeding and a proceeding under laws of the enacting State relating to insolvency in respect of the same debtor are taking place concurrently; or
• Creditors or other interested persons in a foreign State have an interest in requesting the commencement of, or participating in, a proceeding under laws of the enacting State relating to insolvency
  UNCITRAL Model Law on Cross-Border Insolvency does not apply to a proceeding concerning [designate any types of entities, such as banks or insurance companies, that are subject to a special insolvency regime in this State and that this State wishes to exclude from this Law].

Question 15.
Explain the Principle of Supremacy of International Obligations as per UNCITRAL Model Law on Cross-Border Insolvency.
Answer:
Article 3 provides that to the extent the Model Law conflicts with an obligation of the State enacting the Model Law arising out of any treaty or other form of agreement to which it is a party with one or more other States, the requirements of the treaty or agreement prevail.

Question 16.
Explain the following key terms as per UNCITRAL Model Law on Cross-Border Insolvency.
(a) Foreign proceeding
(b) Foreign representative
(c) Foreign court
Answer:
(a) Foreign proceeding: “Foreign proceeding” means a collective judicial or administrative proceeding in a foreign State, including an interim proceeding, pursuant to a law relating to insolvency in which proceeding the assets and affairs of the debtor are subject to control or supervision by a foreign court, for the purpose of reorganization or liquidation;
(b) Foreign representative: “Foreign representative” means a person or body, including one appointed on an interim basis, authorized in a foreign proceeding to administer the reorganization or the liquidation of the debtor’s assets or affairs or to act as a representative of the foreign proceeding
(c) Foreign court: “Foreign court” means a judicial or other authority competent to control or supervise a foreign proceeding.

Question 17.
Explain the legal provisions related to filing of application by foreign representative to commence a proceeding as per Model Law.
Answer:

• According to Article 11, a foreign representative is entitled to apply to commence a proceeding under the laws of the enacting State relating to insolvency, if the conditions for commencing such proceeding otherwise met.
• A foreign representative has this right without prior recognition of the foreign proceeding because the commencement of an insolvency proceeding might be crucial in cases of urgent need for preserving the assets of the debtor.
• The Model Law avoids the need to rely on cumbersome and time-consuming letters rogatory or other forms of diplomatic or consular communications that might otherwise have to be used.
• This facilitates a coordinated, cooperative approach to cross-border insolvency and makes fast action possible.
• The Model Law provides that the foreign representative has procedural standing for commencing an insolvency proceeding in the enacting State (under the conditions applicable in the enacting State) and that the foreign representative may participate in an insolvency proceeding in the enacting State
• Upon recognition of a foreign proceeding, the foreign representative is entitled to participate in a proceeding regarding the debtor under the laws of the enacting State relating to insolvency (Article 12).

Question 18.
Explain the legal provisions related to recognition of foreign proceedings as per Model Law.
Answer:

• Article 15 defines the core procedural requirements for an application by a foreign representative for recognition.
• A foreign representative may apply to the court for recognition of the foreign proceeding in which the foreign representative has been appointed.
• An application for recognition shall be accompanied by:
  (a) A certified copy of the decision commencing the foreign proceeding and appointing the foreign representative; or
  (b) A certificate from the foreign court affirming the existence of the foreign proceeding and of the appointment of the foreign representative; or
  (c) In the absence of evidence referred to in subparagraphs (a) and (b) above, any other evidence acceptable to the court of the existence of the foreign proceeding and of the appointment of the foreign representative.
• An application for recognition shall also be accompanied by a statement identifying all foreign proceedings in respect of the debtorthat are known to the foreign representative.
• As per Article 17 of Model Law, a foreign proceeding shall be recognized if:
  (a) The foreign proceeding is a proceeding within the meaning as defined under Article 2;
  (b) The foreign representative applying for recognition is a person or body within the meaning as defined in Model Law
  (c) The application meets the requirements of Article 15; and
  (d) The application has been submitted to the court.
• The foreign proceeding shall be recognized as a foreign main proceeding if it is taking place in the State where the debtor has the centre of its main interests; or as a foreign non-main proceeding if the debtor has an establishment within the meaning of subparagraph (f) of Article 2 in the foreign State.

Question 19.
What are the reliefs that may be granted upon recognition of a foreign proceeding?
Answer:
According to Article 21, upon recognition of a foreign proceeding, whether main or non-main, where it is necessary to protect the assets of the debtor or the interests of the creditors, the court may, at the request of the foreign representative, grant any appropriate relief, including:
(a) Staying the commencement or continuation of individual actions or individual proceedings concerning the debtor’s assets, rights, obligations or liabilities, to the extent they have not been stayed under Article 20;
(b) Staying execution against the debtor’s assets to the extent it has not been stayed under Article 20;
(c) Suspending the right to transfer, encumber or otherwise dispose of any assets of the debtor to the extent this right has not been suspended under Article 20;
(d) Providing for the examination of witnesses, the taking of evidence or the delivery of information concerning the debtor’s assets, affairs, rights, obligations or liabilities;
(e) Entrusting the administration or realization of all or part of the debtor’s assets located in this State to the foreign representative or another person designated by the court;
(f) Extending relief granted under Article 19; and
(g) Granting any additional relief that may be available to a person or body administering a reorganization or liquidation under the law of the enacting State under the laws of that State.

Question 20.
Cooperation is the key for effective implementation of Model Law on Cross-Border Insolvency. Comment.
Answer:
Cooperation is the key for effective implementation of Model Law on Cross-Border Insolvency.
Cooperation with Foreign Courts and Foreign Representatives:

• Chapter IV (Articles 25-27), on cross-border cooperation, is a core element of the Model Law. Its objective is to enable courts and insolvency administrators from two or more countries to be efficient and achieve optimal results.
• Articles 25 and 26 not only authorize ctoss-border cooperation, they also mandate it by providing that the court and the insolvency administrator “shall cooperate to the maximum extent possible”.
• The Articles are designed to overcome the widespread problem of national laws lacking rules providing a legal basis for cooperation by local courts with foreign courts in dealing with cross-border insolvencies.
• The enactment of Articles 25-27 offers an opportunity for making that principle more concrete and adaptable to the particular circumstances of cross-border insolvencies.
  Cooperation and direct communication between courts or foreign representatives (Article 25):
• The court is entitled to communicate directly with, or to request information or assistance directly from, foreign courts or foreign representatives.
• The ability of courts, with appropriate involvement of the parties, to communicate “directly” and to request information and assistance “directly” from foreign courts or foreign representatives is intended to avoid the use of time-consuming procedures traditionally in use, such as letters rogatory.
  Cooperation and direct communication between a person or body administering a reorganization or liquidation under the law of the enacting State and foreign courts or foreign representatives (Article 26):
• Article 26 on international cooperation between persons who are appointed to administer assets of insolvent debtors reflects the important role that such persons can play in devising and implementing cooperative arrangements, within the parameters of their authority.
• The provision makes it clear that an insolvency administrator acts under the overall supervision of the competent court.
  According to Article 27, Cooperation may be implemented by any appropriate means, including:
• Appointment of a person or body to act at the direction of the court;
• Communication of information by any means considered appropriate by the court;
• Coordination of the administration and supervision of the debtor’s assets and affairs;
• Approval or implementation by courts of agreements concerning the coordination of proceedings
• Coordination of concurrent proceedings regarding the same debtor;
• The enacting State may wish to list additional forms or examples of cooperation.

Question 21.
The World Bank Principles have been designed as a broad-spectrum assessment tool to assist countries in their efforts to evaluate and improve core aspects of their commercial law systems. Comment.
Answer:

• The World Bank Principles have been designed as a broad-spectrum assessment tool to assist countries in their efforts to evaluate and improve core aspects of their commercial law systems that are fundamental to a sound investment climate, and to promote commerce and economic growth.
• Efficient, reliable and transparent creditor rights and insolvency systems are of key importance for reallocation of productive resources in the corporate sector, for investor confidence and forward-looking corporate restructuring.
• The Principles emphasize contextual, integrated solutions and the policy choices involved in developing those solutions.
• The Principles highlight the relationship between the cost and flow of credit (including secured credit) and the laws and institutions that recognize and enforce credit agreements (Part A).
• The Principles also outline key features and policy choices relating to the legal framework for risk management and informal corporate workout systems (Part B), formal commercial insolvency law frameworks (Part C) and the implementation of these systems through sound institutional and regulatory frameworks (Part D).
• The principles have broader application beyond corporate insolvency regimes and creditor rights. The Principles are designed to be flexible in their application, and do not offer detailed prescriptions for national systems.
• The Principles embrace practices that have been widely recognized and accepted as good practices internationally.

Question 22.
Discuss the key elements of the World Bank Principles for effective insolvency and creditor rights system.
Answer:
Key elements of the World Bank Principles for effective insolvency and creditor rights systems is given below:
1. Credit Environment:

• Compatible credit and enforcement systems : A regularized system of credit should be supported by mechanisms that provide efficient, transparent and reliable methods for recovering debt, including seizure and sale of immovable and movable assets and sale or collection of intangible assets, such as debt owed to the debtor by third parties. An efficient system for enforcing debt claims is crucial to a functioning credit system
• Collateral systems : One of the pillars of a modern credit economy is the ability to own and freely transfer ownership interests in property, and to grant a security interest to credit providers with respect to such interests and rights as a means of gaining access to credit at more affordable prices. The legal framework for secured lending addresses the fundamental features and elements for the creation, recognition and enforcement of security interests in all types of assets, movable and immovable, tangible and intangible, including inventories, receivables, proceeds and future property, and on a global basis, including both possessory and non-possessory interests.
• Enforcement systems: A modern, credit-based economy requires predictable, transparent and affordable enforcement of both unsecured and secured credit claims by efficient mechanisms outside of insolvency, as well as a sound insolvency system. These systems must be designed to work in harmony.
• Credit information systems: A modern credit-based economy requires access to complete, accurate and reliable information concerning borrowers’ payment histories. This process should take place in a legal environment that provides the framework for the creation and operation of effective credit information systems. Privacy concerns should also be addressed
• Informal corporate workouts: Corporate workouts should be supported by an environment that encourages participants to restore an enterprise to financial viability. Informal workouts are negotiated in the “shadow of the law.” Accordingly, the enabling environment must include clear laws and procedures that require disclosure of or access to timely and accurate financial information on the distressed enterprise; encourage lending to, investment in or recapitalization of viable distressed enterprises; support a broad range of restructuring activities, such as debt write-offs, restructurings and debt-equity conversions; and provide favourable or neutral tax treatment for restructurings.

2. Insolvency Law Systems:
Effective insolvency systems have a number of aims and objectives.
Systems should aspire to:

• integrate with a country’s broader legal and commercial systems;
• maximize the value of a firm’s assets and recoveries by creditors;
• provide for both efficient liquidation of nonviable businesses and those where liquidation is likely to produce a greater return to creditors and reorganization of viable businesses;
• strike a careful balance between liquidation and reorganization, allowing for easy conversion of proceedings from one proceeding to another;
• provide for equitable treatment of similarly situated creditors, including similarly situated foreign and domestic creditors;
• provide for timely, efficient and impartial resolution of insolvencies;
• prevent the improper use of the insolvency system;
• prevent the premature dismemberment of a debtor’s assets by individual creditors seeking quick judgments;
• provide a transparent procedure that contains, and consistently applies, clear risk allocation rules and incentives for gathering and dispensing information;
• recognize existing creditor rights and respect the priority of claims with a predictable and established process; and
• establish a framework for cross-border insolvencies, with recognition of foreign proceedings.
  Where an enterprise is not viable, the main thrust of the law should be swift and efficient liquidation to maximize recoveries for the benefit of creditors.

3. Implementation: Institutional and Regulatory Frameworks:
Strong institutions and regulations are crucial to an effective insolvency system. The institutional framework has three main elements: the institutions responsible for insolvency proceedings, the operational system through which cases and decisions are processed and the requirements needed to preserve the integrity of those institutions— recognizing that the integrity of the insolvency system is the linchpin for its success.

4. Overarching considerations of sound investment climates:

• Transparency, accountability and corporate governance :
  Minimum standards of transparency and corporate governance should be established to foster communication and cooperation. Disclosure of basic information – including financial statements, operating statistics and detailed cash flows – is recommended for sound risk assessment. Accounting and auditing standards should be compatible with international best practices so that creditors can assess credit risk and monitora debtor’s financial viability. Corporate law and regulation should guide the conduct of the borrower’s shareholders. A corporation’s board of directors should be responsible, accountable and independent of management, subject to best practices on corporate governance.
• Transparency and Corporate Governance: Transparency and good corporate governance are the cornerstones of a strong lending system and corporate sector. Transparency and corporate governance are especially important in emerging markets, which are more sensitive to volatility from external factors. Without transparency, there is a greater likelihood that loan pricing will not reflect underlying risks, leading to higher interest rates and other charges. Transparency and strong corporate governance are needed in both domestic and cross-border transactions and at all phases of investment-at the inception when making a loan, when managing exposure while the loan is outstanding, and especially once a borrower’s financial difficulties become apparent and the lender is seeking to exit the loan. Transparency increases confidence in decision.
• Predictability: Investment in emerging markets is discouraged by the lack of well-defined and predictable risk allocation rules and by the inconsistent application of written laws. Moreover, during systemic crises investors often demand uncertainty risk premiums too onerous to permit markets to clear. Some investors may avoid emerging markets entirely despite expected returns that far outweigh known risks. Rational lenders will demand risk premiums to compensate for systemic uncertainty in making, managing and collecting investments in emerging markets.

Question 23.
Discuss the key provisions of United States Bankruptcy Code.
Answer:
In the United States of America, all bankruptcy cases are handled in federal courts under rules outlined in the “Bankruptcy Code”, a federal law. It is a uniform federal law that governs all bankruptcy cases in America. The Bankruptcy Code was enacted in 1978 by § 101 of the Bankruptcy Reform Act, 1978 and is codified as title 11 of the United States Code. The procedural aspects of the bankruptcy process are governed by the Federal Rules of Bankruptcy Procedure (Bankruptcy Rules).
Six basic types of bankruptcy cases are provided for under the Bankruptcy Code.

1. Chapter 7 titled “Liquidation”. In Chapter 7 Bankruptcy, a court-appointed trustee or administrator takes possession of non-exempt assets, liquidates these assets and then uses the proceeds to pay creditors.
2. Chapter 9 titled “Adjustment of Debts of a Municipality”. Chapter 9 Bankruptcy proceedings provides for reorganization which is available to municipalities. In Chapter 9 Bankruptcy proceedings a municipality (which includes cities, towns, villages, counties, taxing districts, municipal utilities, and school districts) get protection from creditors and a municipality can pay back debt through a confirmed payment plan.
3. Chapter 11 titled “Reorganization”. Unlike Chapter 7 where the business ceases operations and a trustee sells all of its assets, under Chapter 11 the debtor remains in control of its business operations and repay creditors concurrently through a court-approved reorganization plan.
4. Chapter 12 was added to the Bankruptcy Code in 1986. It allows a family farmer or fisherman to continue to operate the business while the plan is being carried out.
5. Chapter 13 enables individuals with regular income to develop a plan to repay all or part of their debts.
6. Chapter 15 was added to the Bankruptcy Code in 2005. It provides mechanism for dealing with insolvency cases involving debtors, claimants and other interested parties involving more than one country. Under Chapter 15 a representative of a corporate bankruptcy proceeding outside the country can get access to the United States courts.

Question 24.
Write a note on the provisions for cross border transactions under Insolvency and Bankruptcy Code, 2016.
Answer:
Sections 234 and 235 of the Insolvency and Bankruptcy Code, 2016 make provisions to deal with cases involving cross border insolvency.
Section 234: Agreements with foreign countries

• Section 234 empowers the central government to enter into an agreement with other countries to resolve situations pertaining to cross border insolvency.
• Section 234 of the Code provides that the Central Government may enter into an agreement with the Government of any country outside India for enforcing the provisions of this Code. [Section 234(1)]
• The Central Government may, by notification in the Official Gazette, direct that the application of provisions of this Code in relation to assets or property of corporate debtor or debtor, including a personal guarantor of a corporate debtor, as the case may be, situated at any place in a country outside India with which reciprocal arrangements have been made, shall be subject to such conditions as may be specified. [Section 234(2)]
  Section 235: Letter of request to a country outside India in certain cases
• Section 235 of the Code lays down that notwithstanding anything contained in this Code or any law for the time being in force if, in the course of insolvency resolution process, or liquidation or bankruptcy proceedings, as the case may be, under this Code, the resolution professional, liquidator or bankruptcy trustee, as the case may be, is of the opinion that assets of the corporate debtor or debtor, including a personal guarantor of a corporate debtor, are situated in a country outside India with which reciprocal arrangements have been made under section 234, he may make an application to the Adjudicating Authority that evidence or action relating to such assets is required in connection with such process or proceeding. [Section 235(1)]
• The Adjudicating Authority on receipt of an application under sub-section (1) and, on being satisfied that evidence or action relating to assets under sub-section (1) is required in connection with insolvency resolution process or liquidation or bankruptcy proceeding, may issue a letter of request to a court or an authority of such country competent to deal with such request. [Section 235(2)]
• The current cross border insolvency framework in India is dependant on India entering bilateral agreements with other countries. Finalisation of bilateral agreements is a long drawn process as it involves long term negotiations and thus takes a lot of time. Moreover, every trade is distinct and thus it would be difficult for the adjudicating authorities to enforce the agreements/treaties entered into with other countries.

Question 25.
Write a note on the Insolvency Law Committee (ILC) on Cross Border Insolvency.
Answer:
Insolvency Law Committee (ILC) on Cross Border Insolvency:

• The Ministry of Corporate Affairs has constituted the Insolvency Law Committee (ILC) to recommend amendments to the Insolvency and Bankruptcy Code of India, 2016.
• The Committee has submitted its 2nd Report to the Government on 16 October 2018 recommending amendments in the Insolvency and Bankruptcy Code, 2016 with respect to cross-border insolvency.
• The necessity of having Cross Border Insolvency Framework under the Insolvency and Bankruptcy Code arises from the fact that many Indian companies have a global presence and many foreign companies have presence in India.
• Inclusion of comprehensive legal framework dealing with cross border insolvency will be a major step forward and will bring Indian Insolvency Law on a par with that of matured jurisdictions.
• The Committee proposed a draft ‘Part Z’ in the Insolvency and Bankruptcy Code, 2016, based on an analysis of the UNCITRAL Model Law. The Committee has also recommended a few carve outs to ensure that there is no inconsistency between the domestic insolvency framework and the proposed Cross Border Insolvency Framework.
• The UNCITRAL Model Law has been adopted in as many as 44 countries and, therefore, forms part of international best practices in dealing with cross border insolvency issues.
• The advantages of the Model Law are the precedence given to domestic proceedings and protection of public interest.
• The other advantages include greater confidence generation among foreign investors, adequate flexibility for seamless integration with the domestic Insolvency Law and a robust mechanism for international cooperation.

Question 26.
Write a note on the recommendations of the Insolvency Law Committee (ILC) on Cross Border Insolvency.
Answer:
Key recommendations of the Committee are as under:
1. Applicability: The Committee recommended that at present, draft Part Z should be extended to corporate debtors only.

2. Duplicity of regimes: The Committee noted that currently the Companies Act, 2013 contains provisions to deal with insolvency of foreign companies. It observed that once Part Z is enacted, it will result in a dual regime to handle insolvency of foreign companies. It recommended that the Ministry of Corporate Affairs undertake a study of such provisions in the Companies Act, 2013 to assess whether to retain them.

3. Reciprocity: The Committee recommended that the Model Law may be adopted initially on a reciprocity basis. This may be diluted subsequently upon re-examination. Reciprocity indicates that a domestic court will recognise and enforce a foreign court’s judgment only if the foreign country has adopted similar legislation to the domestic country.

4. Access to Foreign Representatives: The Model Law allows foreign insolvency professionals and foreign creditors access to domestic courts to seek remedies directly. Direct access with regards to foreign creditors is envisaged under the Code even presently. With respect to access by foreign insolvency professionals to Indian courts, the Committee recommended that the Central Government be empowered to devise a mechanism that is practicable in the current Indian legal framework.

5. Centre of Main Interests (COMI): The Model Law allows recognition of foreign proceedings and provides relief based on this recognition. Relief may be provided if the foreign proceeding is a main proceeding or non-main proceeding. If the domestic courts determine that the debtor has its COMI in a foreign country, such foreign proceedings will be recognised as the main proceedings. This recognition will result in certain automatic relief, such as allowing foreign representatives greater powers in handling the debtor’s estate. For non-main proceedings, such relief is at the discretion of the domestic court. The Committee recommended that a list of indicative .factors comprising COMI may be inserted through rule-making powers. Such factors may include location of the debtor’s books and records, and location of financing.

6. Cooperation: The Model Law lays down the basic framework for cooperation between domestic and foreign courts, and domestic and foreign insolvency professionals. Given that the infrastructure of adjudicating authorities under the Code is still evolving, the cooperation between Adjudicating Authorities and foreign courts is proposed to be subject to guidelines to be notified by the Central Government.

7. Concurrent Proceedings: The Model Law provides a framework for commencement of domestic insolvency proceedings, when a foreign insolvency proceeding has already commenced or vice versa. It also provides for coordination of two or more concurrent insolvency proceedings in different countries by encouraging cooperation between courts. The Committee recommended adopting provisions in relation to these in draft Part Z.

8. Public policy considerations: Part Z provides that the Adjudicating Authority may refuse to take action under the Code if it is contrary to public policy. The Committee recommended that in proceedings where the Authority is of the opinion that a violation of public policy may be involved, a notice must be issued to the Central Government. If the Authority does not issue notice, the Central Government may be empowered to apply to it directly.

Chapter 1 Overview of Business Valuation – CS Professional Valuations and Business Modelling Study Material is designed strictly as per the latest syllabus and exam pattern.

Overview of Business Valuation – CS Professional Valuations and Business Modelling Study Material

Question 1.
(b) What are the misconceptions about Valuation? (June 2013, 5 marks) [CMA Final]
(c) How do you minimize Valuation bias? (5 marks) [CMA Final]
Answer:
(b) There are a number of misconceptions about valuation. Some of the misconceptions are as under:

1. A valuation is an objective search for true value
2. A good valuation provides a precise estimate of value
3. The more quantitative, the better the valuation
4. Valuing a private business should be done only when the business is ready to be sold
5. Business in an industry always sell for ‘X’ times the annual revenue. So why should valuation of the business be done by external valuer
6. The business should be at least worth equivalent to what a competitor sold his business recently
7. The business loses money, so it is not worth much.

(c) Valuation bias exists and no valuation is completely objective or ‘true’. The effort can be made to minimize the direction (i.e. over or under valuation) and magnitude(how much is the variation) of the bias. Bias may be introduced due to personal views of valuer, source of data, assumptions made, which party has commissioned the valuation (buyer or seller) etc.
Bias can’t be regulated or legislated out of existence, However, there are ways in which we can mitigate the-effects of bias on valuation: –

Reduce institutional Pressures
A significant portion of bias can be attributed to pressures Institutional factors. Equity-research analysts in the 1990s, for instance, in addition to dealing with all of the standard sources of bias had to grapple with the demand from their employers that they bring in investment banking business. Institutions that want honest sell-side equity research should protect their equity research analysts from such bias.

De-link valuations from reward/punishment
Any valuation process where the reward or punishment is conditioned on the outcome of the valuation will result in biased valuations. In other words, if we want acquisition valuations to be unbiased, we have to separate the deal analysis from the deal making to reduce bias.

No pre-commitments
Decision makers should avoid taking strong public positions on the value of a firm before the valuation is complete: An acquiring firm that comes up with a price prior to the valuation of a target firm has put analysts in an untenable position, where they are-called upon to justify this price. In far too many cases, the decision on whether a firm is under or overvalued precedes the actual valuation, leading to seriously biased analyses.

Self-Awareness The best antidote to bias is awareness. An analyst who is aware of the biases he or she brings to the valuation process can either actively try to confront these biases when making input choices or open the process up to more objective points of view about a company’s future.

Honest reporting
In Bayesian statistics, analysts are required to reveal their priors (biases) before they present their results from an analysis. Thus, an environmentalist will have to reveal that he or she strongly believes that there is a hole In the ozone layer before presenting empirical evidence to that effect. The person reviewing the study can then factor that bias in while looking at the conclusions. Valuations would be much more useful if analysts revealed their biases up front. While we cannot eliminate bias in valuations, we can try to minimize its impact by designing valuation processes that are more protected from overt outside influences and by report our biases with our estimated values.

Question 2.
What are the uncertainties in business valuation? (Dec 2013, 4 marks) [CMA Final]
Answer:

• Starting early in life, we are taught that if we do things right, we will get the right answers. In other words, the precision of the answer is used as a measure of the quality of the process that yielded the answer.
• While this may be appropriate in mathematics or physics, it is a poor measure of quality in valuation.
• Barring a very small subset of assets, there will always be uncertainty associated with valuations, and even the best valuations come with a substantial margin for error.
• This arises due to the sources of uncertainty which have an effect on the valuation.
• The value of a business is not a static figure. It depends on change in purpose or circumstances.

There are a number of uncertainties involved in the valuation process which if not handled appropriately, would lead to an absurd value. We may design complex financial models with several inputs to handle uncertainties but that does not mean that the value derived is reasonable or the process is sound. What we need to understand is the impact of each input on the value.

The following factors are crucial:

1. The macro economic factors.
2. The business.
3. Its growth potential in the industry in which it operates.
4. How is the business positioned?
5. Who are competitors?
6. What is the quality and stability of the company’s management?

Question 3.
What are the misconceptions about valuation? (Dec 2014, 5 marks) [CMA Final]
Answer:
There are a number of misconceptions about valuation. Some of the misconceptions are as under:

1. A valuation is an objective search for true value.
2. A good valuation provides a precise estimate of value.
3. The more quantitative, the better the valuation.
4. Valuing a private business should be done only when the business is ready to be sold.
5. Business in an industry always sells for ‘x’ times the annual revenue. So why should valuation of the business be done by external valuer.
6. The business should be at least worth equivalent to what a competitor sold his business recently.
7. The business loses money, so it is not worth much.

Question 4.
There are a number of factors both macro economic and micro economic which have an impact on business. Valuation of a business involves making forecasts for the future. Comment on the sources of uncertainties in business valuation in the light of the above. (June 2015, 5 marks) [CMA Final]
Answer:
Sources of uncertainties:
Uncertainty is part and parcel of the valuation process, both at the point in time that we value a business and in how that value evolves over time as we get new information that impacts the valuation. That information can be specific to the firm being valued, more generally about the sector in which the firm operates or even be general market information (about interest rates and the economy).

When valuing an asset at any point in time, we make forecasts for the future. Since none of us possess crystal balls we have to make our best estimates, give the information that we have at the time of the valuation. Our estimates of value can be wrong for a number of reasons, and we can categorize these reasons into three groups.

Estimation Uncertainty: Even if our information sources are impeccable, we have to convert raw information into inputs and use these inputs in models. Any mistakes or mis-assessments that we make at either stage of this process will cause estimation error.

Firm-specific Uncertainty: The path that we envision for a firm can prove to be hopelessly wrong. The firm may do much better or much worse than we expected it to perform and the resulting earnings and cash flows will be very different from our estimates.

Macroeconomic Uncertainty: Even if a firm evolves exactly the way we expected it to, the macroeconomic environment can change in unpredictable ways. Interest rates can go up or down and the economy can do much better or worse than expected. These macroeconomic changes will affect value.

Question 5.
(a) “There are a number of factors both macro- economic and micro-economic which have an impact on business. Valuation of a business involves making forecasts for the future”.
Comment on the sources of uncertainties in business valuation in the light of the above. (5 marks)
(b) State under what conditions/assumptions the following statements are true (state only one important condition/assumption for each):
(i) Fair Value of an asset is always equal to its Market Value. (June 2019, 5 marks)
Answer:
(a) Sources of Uncertainties: Uncertainty is part and parcel of the valuation process both at the point of time when-the valuation is made and also on basis of how the business evolves over time. The valuation involves a process where the valuer has to make various forecasts about the future both in terms of general economic conditions as well as how the firm will perform individually.

Valuation uncertainty is defined as – ‘The possibility that the estimate value may differ from the price that could be obtained in a transfer of the same asset or liability taking place at the same time under the same terms and within the same market environment’.

It is important to note that a valuation is not a fact; it is an estimate of the most probable of a range of possible outcomes based on the assumptions made in the valuation process. Market valuations are estimates of the most probable price that would be paid in a transaction on the valuation date.

However, even where assets are identical and exchanged in contemporaneous transactions, fluctuations in the prices agreed between different transactions can often be observed. These fluctuations can be caused by factors such as differences in the objectives, knowledge or motivation of the parties. Consequently, an element of uncertainty is inherent in most market valuations as there is rarely a single price with which the valuation can be compared.

The valuation involves a process where the valuer has to make forecasts about the future both in terms of general economic conditions as well as how the firm will perform individually.

Uncertainties caused by these various conditions and factors can be broadly categorized into the following three groups based on the reasons/sources of these uncertainties.

Estimated/Model/Input Uncertainty: Even if our information sources are impeccable, we have to convert raw information into inputs and use these inputs in models. Any mistakes or mis-assessment that we make at either stage of this process will cause estimation error.

Further, uncertainty arises from characteristics of either the valuation model, or method, used. For certain asset types, more than one method may be customarily used to estimate value. However, those models may not always produce the same outcome and therefore the selection of the most appropriate method may of itself be a source of uncertainty.

Also uncertainty arises where there are a number of equally reasonable or feasible inputs or assumptions that can be used from the degrees of veracity that can be attached to the data inputs used in the valuation and their impact on the outcome.

Firm-specific Uncertainty: The specific risks associated with the firms Business, Modus Operandi may also add to uncertainty in the business valuation. The firm may do much better or much worse than we expected it to perform, and the resulting earnings and cash flows will be very different from our estimates.

Macroeconomic Uncertainty/Market Uncertainty: Even if a firm evolves exactly the way we expected it to, the macroeconomic environment can change in unpredictable ways. Interest rates can go up or down and the economy can do much better or worse than expected. These macro-economic changes will affect value.
Further, uncertainty arises when a market is disrupted at the valuation date by current or very recent events such as sudden economic or political crises.

The disruption can manifest itself in a number of ways, for example, either through panic buying or selling or by a loss of liquidity due to disinclination by market participants to trade. An outbreak of sudden trading activity in response to a crises may cause rapid price changes that are not necessarily representative of those that would be agreed between parties acting “knowledgeably and prudently”. Conversely, a loss of liquidity will mean fewer contemporaneous or relevant recent transactions which may impact on the reliability on the valuation.

(b)
(i) Fair value of an asset is always equal to its Market Value, when markets are efficient.

Question 6.
Everest, Manufacturing Industrial Limited started 4 years ago, is expected to grow at a higher rate of 4 years in the coming years and thereafter the growth rate will fall and stabilize at a lower level. The following information has been made available to you for your analysis:

Base Year (Year 0) Information
	(In Million ₹)
Revenues	3000 Million
EBIT	500 Million
Capital Expenditure	350 Million
Depreciation	250 Million
Net Working Capital as a percentage of EBIT	25%
Corporate tax rate (for all scenarios)	30%
Paid-up Equity Capital (10 Face Value)	400 Million
Market Value of debt	1200 Million

Inputs for the High Growth Phase
Length of high growth phase	4 years
Growth rate in revenues, depreciation	20%
EBIT and Capital expenditure:
Net Working Capital as a percentage of EBIT	25%
Cost of debt (pre-tax)	13%
Debt-equity ratio	1:1
Risk-free rate	11%
Market risk premium	7%
Equity Beta	1.129
Cost of debt (pre-tax)	12.14%
Risk-free rate	10%
Market risk premium	6%
Equity Beta	1.0
Debt-equity ratio	2:3

With above information background, answer the following questions of the Management:

(i) What is the Cost of Capital and Weighted Average Cost of Capital (WACC) for the high growth phase and for the stable growth phase. (Dec 2019, 10 marks)
(ii) What is the Value of the Firm? (Dec 2019, 10 marks)
(iii) What will be the Cost of Capital and WACC for the high growth phase and for the stable growth phase, if the debt-equity ratio is 1:2 during high growth phase and 3:2 in the stable growth phase? Will this change impact the Value of the Firm? If yes, what will be the value of the Firm with revised debt equity ratio? (Dec 2019, 10 marks)
(iv) Comparing the given case, discuss on the advantages and disadvantages of the Dividend Discount Models. (Dec 2019, 10 marks)

Question 7.
A listed Company has a beta of 1.5 and the riskless rate for one-year Treasury bills is 5.2% and the expected return for the market is 13.5%. What is the company’s capitalization rate? Suppose the company has expected earnings of ₹ 6.80 per share that have been growing at a rate of 5.5%. The Company retains 25%. What should be the company’s share price using a capitalization of earnings approach? (Dec 2019, 5 marks)

(b) Abishek Powers Ltd. has a constant dividend growth rate of 5% per annum for perpetuity. This year the company has given a dividend of ₹ 6 per share. Further, the required rate of return for the company is 10% per annum. Then, what should be the purchase price for a share of Abishek Powers Ltd. ? (Dec 2019, 5 marks)

Chapter 1 Constitution and Labour Laws – CS Professional Labour Laws and Practice Notes is designed strictly as per the latest syllabus and exam pattern.

Constitution and Labour Laws – CS Professional Labour Laws and Practice Study Material

Question 1.
State the specific directions issued by Supreme Court to the State Government in case of Bandhua Mukti Morcha Versus Union of India. (Dec 2019, 6 marks)
Answer:
In the case of Bandhua Mukti Morcha versus Union of India AIR 1984 SC 802, the Supreme Court issued directions to the Central Government, the government of Haryana and various authorities as:
The Central Government and State Government will immediately ensure that mine lessees and stone crusher owners start supplying pure drinking water to the workmen on a scale of at least 2 litres for every workmen at conveniently accessible points, in clean and hygienic conditions. In case of default, action to be taken against defaulter.

The mine owners and stone crusher owners are to obtain water from unpolluted sources and transport it by tankers to the work site with sufficient frequency so as to keep the vessels filled up for supply of clean drinking water for workmen.

The State Government must ensure that conservancy facilities in the shape of latrines and urinals in accordance with the Section 20 of the Mines Act 1952 and Rules 33 to 36 of the Mines Rules, 1955 were to be provided at the latest by 15th February 1984.

To ensure that appropriate and adequate medical and first aid facilities are provided to workmen as required by Section 21 of the Mines Act 1952 and Rules 40 to 45-A of the Mines Rules 1955.

To ensure that every workmen who is required to carry out blasting with explosives is trained under the Mines Vocational Training Rules, 1966 and also holds first aid qualifications and carries a first aid outfit while on duty.

To ensure that the mine lessees and owners of stone crushers provide proper and adequate medical treatment to the workmen and their families free of cost.

The Central Government and the Government of Haryana will ensure that payment of wages is made directly to the workmen by the mine lessees and stone crusher owners or at any rate in the presence of a representative of the mine lesseses or stone crusher owners and the inspecting officers of the Central Government as also of the Government of Haryana shall carry out periodic checks in order to ensure that the payment of the stipulated wage is made to the workmen.

Question 2.
“The concept of Social Justice is so innate and demonstrated in the Industrial Laws of our country”. Explain the statement. (Aug 2021, 3 marks)
Answer:
The concept of social justice is so innate and demonstrated in the industrial laws of our country. As proclaimed in the Preamble of the Constitution and the Directive Principles of State Policy, the industrial jurisprudence of the country is founded on the basic idea of socio-economic equality and its aim is to assist the removal of socio-economic disparities and inequalities. The laws particularly the Industrial Laws of the country revolve on this basic philosophy of the Constitution.

The concept of social justice is though not limited to any particular branch of legislation although it is more prominent and conspicuous in industrial laws and relations. Its scope is comprehensive and is founded to the basic ideals of social economic equality and it aims at assisting the removal of social economic disparities and inequalities of birth and the competing claims especially between the employers and workers by finding a just fair and equitable solution to their human relation problem, so that peace, harmony and collection of the highest order prevails among them which may further the growth and progress of nations. (Mahesh Chandra, ‘Industrial Jurisprudence’ (1976. P.47).

Question 3.
List the various Articles of the Constitution having a bearing on the Labour rights enjoyed by the citizens of India.
Answer:
Following are the Articles under Fundamental Rights and Directive Principles of State Policy of the Constitution tha impact the Labour rights:

Fundamental Rights	Article 14	Equality before Law
	Article 16	Equality of opportunity
	Article 19	Right to form associations or union
	Article 21	Right to Life
	Article 23	Prohibition of trafficking and forced labour
	Article 24	Prohibition of child labour under the age of 14 years
Directive Principles of State Policy	Article 38	State shall strive to promote the welfare of the people
	Article 39	Equal pay for equal work
	Article 41	Right to work
	Article 42	Provision for just and humane conditions of work
	Article 43	Right to a living wage
	Article 43A	Participation of workers in management

Question 4.
Industrial laws are socio-economic justice oriented Comment.
Answer:

1. The Preamble to the constitution of India spells “SCOAL ECONOMIC JUSTICE “ as one of the prime objective of the State.
2. Article 38 of the Constitution provides that the State shall strive to promote the welfare of the people by securing and protecting, as effectively as it may, social order in which justice, social, economic and political shall inform all institutions of the national life.
3. Article 39 states that it shall be the duty of the State to apply certain principles of social justice in making laws.
4. In the economic sphere, social justice means opportunities in greater measure to the poor and the needy for the betterment of their social and economic conditions.
5. It does not mean making rich man poor in order to make poor men rich. It does not mean that all wealth should be shared equally provision of basic minimum to all in response to life and living facilities for promoting one’s own values and manner worth are the essential contents of social justice.
6. As a result, the Industrial Laws are framed on the foundation of social economic justice.
7. The laws strive to remove social economic disparities and inequalities of birth and competing claims (especially between employers and workers) by provide just, fair and equitable solution to human relation problem in order to maintain peace and accelerate growth of the country.

Question 5.
What will be the outcome in case labour laws enacted to enforce Directive Principles infringes Fundamental Rights?
Answer:

• The Fundamental Rights are not an end in themselves but are the means to an end. The end is specified in Directive Principles.
• Also, the goals set out in Directive Principles are to be achieved without abrogating the Fundamental Rights.
• Thus, Fundamental Rights and Directive Principles should go hand in hand and together constitute the core of our constitution .
• Directive Principles have mostly been used to broaden, and to give depth to some Fundamental Rights and to imply more rights to the general masses over and above what are expressly stated in the Fundamental Rights.

Question 6.
What does PIL and SAL stands for and how are they useful in enforcing labour rights?
Answer:

• PIL is the acronym for Public Interest Litigation while SAL stands for Social Action Litigation
• The general law in India is that legal process can be initiated in a court of law at the instance of an aggrieved person.
• A third party generally does not have the capacity to initiate proceedings against others.
• However, the Court now permits Public Interest Litigation (PIL) or Social Action Litigation (SAL) at the instance of ‘public spirited citizens’ for the enforcement of Constitutional and other legal rights.
• PIL is enabled to be initiated by a third party for any person /group of persons who were not in a position to approach Court because of their socially or economically disadvantaged status.
• Public Interest Litigation is part of the process of participative justice.
• Once the fundamental rights of labourers are infringed they can approach the Court for relief under Article 32 and if any other legal right is also infringed for relief under Article 226.

Question 7.
What are the Principles of State Policy as per Article 39 of the Constitution?
Answer:

• Article 39 of the constitution provides that the State should direct its policy towards securing:
  • That all citizens, irrespective of sex, equally have the right to an adequate means of livelihood.
  • That the ownership and control of the material resources of the community are so distributed as best to subserve the common good
  • That the operation of the economic system does not result in the concentration of wealth and means of production to the common detriment.
  • That there is equal work for both men and women
  • That the health and strength of workers, men and women, and tender age of children are not abused and that citizens are not forced by economic necessity to enter avocations unsuited to their age or strength.
  • That children are given opportunities and facilities to develop in a healthy manner and in conditions of freedom and dignity and that childhood and youth are protected against exploitation and against moral and material abandonment.
• It is the result of these Directive Principles that laws such as Equal Remuneration, Minimum Wages, Child Labour (Regulation and Abolition) Act were passed.

Question 8.
What are Social security related provisions contained in Article 41 of the Constitution and which all labour laws help in accomplishing the same?
Answer:

• Article 41 of the Constitution provides that the State should direct its policy:
• To make effective provision for securing the right to work, to education and to public assistance in cases of unemployment, old age, sickness and disablement, and in other cases of undeserved want.
• Social security is guaranteed in our Constitution under Articles 39, 41 and 43.
• The Employees’ State Insurance Act, 1948 is a pioneering piece of legislation in the field of social insurance.
• The Employees’ Provident Funds and Miscellaneous Provisions Act, 1952 aims at providing substantial security and timely monetary assistance to industrial employees and their families.
• The Maternity Benefit Act provides maternity leave with full wages and security of employment.
• The object of the Payment of Gratuity Act, 1972 is to provide a scheme for the payment of gratuity to employees.
• The Apprentices Act, 1961 was enacted to supplement the programme of institutional training by on-the-job training and to regulate the training arrangements in industry.
• The Employment Exchanges (Compulsory Notification of Vacancies) Act, 1969 has made it obligatory on the employers to notify vacancies occurring in their establishments to the prescribed employment exchanges before they are filled.

Question 9.
Explain the concept of’ living wage’ and how does it differentiates from ‘minimum wage’ and ‘fair wage’?
Answer:

• A ‘living wage’ is such wage as enables the male earner to provide for himself and his family not merely the bare essentials of food, clothing and shelter, but includes education for children, protection against ill-health, requirements of essential social needs, and a measure of insurance against the more important misfortunes including old age.
• A ‘minimum wage’, on the other hand, is just enough to cover the bare physical needs of a worker and his family. Minimum wage is to be fixed in an industry irrespective of its capacity to pay.
• A ‘fair wage’ is a mean between ‘living wage’ and ‘minimum wage’. ‘Living’ and ‘fair’ wages have to be fixed keeping in view the capacity of the industry to pay.

Question 10.
What is meant by Workers Participation in Management?
Answer:

• Workers’ participation in management implies mental and emotional involvement of workers in the management of any enterprise.
• It is process by which subordinate employees, either individually or collectively, become involved in one or more aspects of organizational decision making within the enterprises in which they work.
• ILO has been encouraging member nations to promote the scheme of Workers’ Participation in Management.

Question 11.
List the ways of Workers Participation in Management prevalent in India.
Answer:
The various forms of Workers Participation in Management prevalent in India are as follows:

• Suggestion Schemes
• Works Committee
• Joint Management council
• Work directors
• Co-partnership
• Joint Councils
• Shop Councils

Question 12.
Narrate the impact of various Fundamental Rights on industrial laws and industrial relations.
Answer:
Below is the impact of various Fundamental Rights on industrial laws and industrial relations:
Article 14 : Equality before Law
Impact on Labour Laws:

• Equality before law prohibits discrimination.
• The concept of ‘equal protection of the laws’ requires the State to give special treatment to persons in different situations in order to establish equality amongst all.

Article 16 : Equality of opportunity
Impact on Labour Laws:

• Equality of opportunity provides equality in matters of public employment and prevents the State from any sort of discrimination on the grounds of religion, race, caste, sex, descent, place of birth, residence or any of them.
• Also provides the autonomy to the State to grant special provisions for the backward classes, under¬represented States, SC & ST for posts under the State.
  Article 19 Right to form associations or union – Article 19(1) (c) gives right to citizen to form associations and unions.
• It thus includes the right to form companies, societies, partnership, trade union and political parties.
• The right guaranteed is not merely the right to form association but also to continue with the association as such.
• The freedom to form association implies also the freedom to form or not to form, to join or not to join, an association or union.

Article 21 : Right to Life
Impact on Labour Laws:

• Article 21 assures every person right to life and personal liberty.
• The right to life enshrined in Article 21 has been liberally interpreted so as to mean something more than mere survival and mere existence or animal existence.
• It therefore includes all those aspects of life which go to make a man’s life meaningful, complete and worth living.
• Article 21 facilitated the enacted of Sexual Harassment of Women at Workplace (Prevention, Prohibition and Redressal) Act, 2013 on December 9, 2013 which seeks to protect women from sexual harassment at their place of work.

Article 23 : Prohibition of trafficking and forced labour
Impact on Labour Laws:

• Article 23(1 prohibits three unsocial practices:
  • beggar
  • traffic in human beings
  • forced labour
• The term ‘begar’ means compulsory work without any payment. Begar is labour or service which a person is forced to give without receiving any remuneration for it. Withholding of pay of a government employee as a punishment has been held to be invalid and is prohibited.
• The term ‘trafficking in human beings,’ refers to the buying and selling of human beings, the same has been constitutionally abolished.
• Forced labour violates human dignity and is contrary to the basic human values. Article 23 intends to abolish every form of forced labour even if it has origin in a contract.

Article 24 : Prohibition of child labour under the age of 14 years .
Impact on Labour Laws:

• Article 24 provides for prohibition against the employment of children below the age of fourteen years in any factory or mine or any other hazardous employment.
• This is also in consonance with Articles 39(e) and (f) of the Constitution which emphasizes the need to protect the health and strength of workers, and also to protect children against exploitation.
• The Child Labour (Prohibition and Regulation) Act, 1986 was enacted as a result of this underlying Fundamental right and prohibits the employment of children in certain industries deemed to be hazardous and provides the scope for extending such prohibition to other sectors.

Question 13.
Narrate in detail various Directive Principles which have bearing on industrial laws and industrial relations.
Answer:
Below are the set of Directive Principles having a bearing on industrial laws and industrial relations:

Article 38 : Promote the welfare of the people
Impact on Labour Laws:

• Article 38 of the constitution directs State to secure a social order for the promotion of welfare of the people
• The State shall strive to promote the welfare of the people by securing and protecting as effectively as it may a social order in which justice, social, economic and political, shall inform all the institutions of the national life
• The State shall, in particular, strive to minimize the inequalities in income, and endeavor to eliminate inequalities in status, facilities and opportunities, not only amongst individuals but also amongst groups of people residing in different areas or engaged in different vocations
• Various labour laws enacted have been based on this foundation stone itself.

Article 39 : Equal pay for equal work
Impact on Labour Laws:

• Article 39 of the constitution provides that the State should direct its policy towards securing:
  • That all citizens, irrespective of sex, equally have the right to an adequate means of livelihood
  • That the ownership and control of the material resources of the community are so distributed as best to subserve the common good
  • That the operation of the economic system does not result in the concentration of wealth and means of production to the common detriment
  • That there is equal work for both men and women
  • That the health and strength of workers, men and women, and tender age of children are not abused and that citizens are not forced by economic necessity to enter avocations unsuited to their age or strength
  • That children are given opportunities and facilities to develop in a healthy manner and in conditions of freedom and dignity and that childhood and youth are protected against exploitation and against moral and material abandonment.
• It is the result of these Directive Principles that laws such as Equal Remuneration , Minimum Wages , Child Labour (Regulation and Abolition) Act were passed.

Article 41 : Right to work, to education and to public assistance in certain cases
Impact on Labour Laws:

• Article 41 of the constitution provides that the State should direct its policy:
• To make effective provision for securing the right to work, to education and to public assistance in cases of unemployment, old age, sickness and disablement, and in other cases of undeserved want.
• The Employees’ State Insurance Act, 1948, The Employees’ Provident Funds and Miscellaneous Provisions Act, 1952, The Maternity Benefit Act Payment of Gratuity Act, 1972, The Apprentices Act, 1961, The Employment Exchanges (Compulsory Notification of Vacancies) Act, 1969 were enacted keeping in mind this very Directive Principle of the Constitution.

Article 42 : Provision for just and humane conditions of work
Impact on Labour Laws:

• Requires the state to make provision for securing just and humane conditions of work and for maternity relief.
• “Right to live with human dignity” was included in Article 21 as a result of Article 42.
• Provisions contained in Factories Act, 1948 and Contract Labour (Regulation and Abolition) Act of 1970 have been made in line with facilitation of provisions of Article 42.

Article 43 : Living wage, etc, for workers
Impact on Labour Laws:

• Article 43 imposes an obligation towards ensuring the provision of a ‘living wage’ in all sectors as well as acceptable conditions of work.
• A ‘living wage’ is such wage as enables the male earner to provide for himself and his family not merely the bare essentials of food, clothing and shelter, but includes education for children, protection against ill-health, requirements of essential social needs, and a measure of insurance against the more important misfortunes including old age.
• A ‘minimum wage’, on the other hand, is just sufficient to cover the bare physical needs of a worker and his family. Minimum wage is to be fixed in an industry irrespective of its capacity to pay.
• Minimum Wages, Payment of Bonus are means of attaining goals enshrined in Article 43.

Article 43A : Participation of workers in management
Impact on Labour Laws:
Article 43-A provides that the State shall take steps by suitable legislation or any other means to secure the participation of workers in the management of industrial establishments.

Industrial Disputes Act, 1947 (containing dual provisions of prevention and settlement of industrial disputes) and The Industrial Policy Resolution, 1948 advocated Workers Participation in Management by suggesting that labour should be in all matters concerning industrial production. The First Five-Year Plan and the successive plans emphasised the need for workers’ participation in management.

Question 14.
Discuss briefly forms of Workers Participation in Management in India.
Answer:
Various forms of workers’ participation in management prevalent in India are:
Suggestion schemes:

• Participation of workers can take place through suggestion scheme.
• Under this method workers are invited and encouraged to offer suggestions for improving the working of the enterprise.
• A suggestion box is installed and any worker can write his suggestions and drop them in the box.
• Periodically all the suggestions are scrutinized by the suggestion committee or suggestion screening committee.
• The committee is constituted by equal representation from the management and the workers.
• The committee screens various suggestions received from the workers. Good suggestions are accepted for implementation and suitable awards are given to the concerned workers.
• Suggestion schemes encourage workers’ interest in the functioning of an enterprise.

Works Committee:

• Under the Industrial Disputes Act, 1947, every establishment employing 100 or more workers is required to constitute a works committee.
• Such a committee consists of equal number of representatives from the employer and the employees.
  • The main purpose of this committee is to provide measures for securing and preserving amity and good relations between the employer and the employees.

Joint Management Councils:

• Under this system Joint Management Councils are constituted at the plant level.
• These councils consist of equal number of representatives of the employers and employees, not exceeding 12 at the plant level.
• The plant should employ at least 500 workers.
• The council discusses various matters relating to the working of the industry like welfare measures, supervision of safety and health schemes, scheduling of working hours, rewards for suggestions etc..

Work directors:

• Under this method, one or two representatives of workers are nominated or elected to the Board of Directors.
• This is the full-edged and highest form of workers’ participation in management.

Co-partnership:

• Co-partnership involves employees’ participation in the share capital of a company in which they are employed. By virtue of their being shareholders, they have the right to participate in the management of the company.
• Shares of the company can be acquired by workers making cash payment or by way of stock options scheme.
• The basic objective of stock options is not to pass on control in the hands of employees but providing better financial incentives for industrial productivity. But in developed countries, WPM through co-partnership is limited.

Joint Councils:

• The joint councils are constituted where 500 or more workers are employed in an industrial unit

Shop councils:

• Shop Council is constituted in every Industrial establishment employing 500 or more workmen.
• Shop council represents each department or a shop in a unit.
• Each shop council consists of an equal number of representatives from both employer and employees.
• Shop Council aim to assist management in achieving monthly production targets, improving production, productivity and efficiency and also to enable proper flow of communication between employer and employees.

Constitution and Labour Laws Notes

Constitution and Labour Laws

• The basic document containing fundamental law of the land and which acts as a guiding book for the Government is called the Constitution.
• The Constitution is the supreme law of the country and it contains laws in relation to the government and its relationships with the people.
• As per the Indian Constitution, Labour is a subject in the Concurrent List.
• Concurrent List of the constitution refers to those sets of matters wherein both the Central and the State Governments are competent to enact legislations.
• Labour welfare connotes a condition of well-being, happiness, satisfaction, conservation and development of human resource.

Constitution and Labour Rights
Fundamental Rights
Article 14 : Equality before Law
Article 16 : Equality of opportunity
Article 19 : Right to form associations or union
Article 21 : Right to Life
Article 23 : Prohibition of trafficking and forced labour
Article 24 : Prohibition of child labour under the age of 14 years

Directive Principles and Labour Laws

Article 38 (Promote the welfare of the people)

• • Directs State to secure a social order for the promotion of welfare of the people.
  • Various labour laws enacted have been based on this foundation stone itself.

Article 39 (Equal pay for equal work)

• • Provides that the State should direct its policy towards securing all citizens, irrespective of sex, right to an adequate means of livelihood
  • It is the result of these Directive Principles that laws such as Equal Remuneration, Minimum Wages, Child Labour (Regulation and Abolition) Act were passed.

Article 41 (Right to work, to education and to public assistance in certain cases)

• • Provides that the State should direct its policy to make effective provision for securing the right to work, to education and to public assistance in cases of unemployment, old age, sickness and disablement, and in other cases of undeserved want.
  • The Employees’ State Insurance Act, 1948, The Employees’ Provident Funds and Miscellaneous Provisions Act, 1952, The Maternity Benefit Act, Payment of Gratuity Act, 1972, The Apprentices Act, 1961, The Employment Exchanges (Compulsory Notification of Vacancies) Act, 1969 were enacted keeping in mind this very Directive Principle of the Constitution.

Article 42 (Provision for just and humane conditions of work)

• • Requires the state to make provision for securing just and humane conditions of work and for maternity relief.
  • Provisions contained in Factories Act, 1948 and Contract Labour (Regulation and Abolition) Act of 1970 have been made in line with facilitation of provisions of Article 42.

Article 43 (Living wage, etc, for workers)

• • Imposes an obligation towards ensuring the provision of a ‘living wage’ in all sectors as well as acceptable conditions of work.
  • Minimum Wages, Payment of Bonus are means of attaining goals enshrined in Article 43.

Article 43A (Participation of workers in management)

• • Provides that the State shall take steps by suitable legislation or any other means to secure the participation of workers in the management of industrial establishments.
  • Industrial Disputes Act, 1947 (containing dual provisions of prevention and settlement of industrial disputes) and The Industrial Policy Resolution, 1948 advocated Workers Participation in Management by suggesting that labour should be in all matters concerning industrial production.

Chapter 1 Forensic Audit Introduction – Forensic Audit ICSI Study Material is designed strictly as per the latest syllabus and exam pattern.

Forensic Audit Introduction – CS Professional Forensic Audit Study Material

Question 1.
Raj & Company has been dealing with reputed company’s TVs. They are the agents of many company’s TVs. They offer instalment systems payments which attracts customers and their turnover has been improving. They have a spacious office where TVs are displayed which naturally tempts the customers to visit and buy. Adjacent to their office they have taken a warehouse to keep stock of TVs received from companies and would draw stocks from the warehouse as and when required. They maintain necessary records like goods received report, sales register and stock statement on daily basis. They have the system of maintaining parallel stock ledger at the office also. There was an outbreak of fire in the warehouse and stocks and records have been completely destroyed. Raj & Company preferred their claim with the underwriters for ₹ 15 lakh being the cost of 50 TVs, which seems to be very high according to Insurance Company. Insurance Company is of the view that the claim requires to be probed before accepting. They doubt that there is a possibility of manipulation in the claim. If you are appointed as Forensic Auditor
(i) What investigation would you follow to detect the genuineness of the claim? (Dec 2019, 4 marks)
(ii) Highlight the important differences between audit and forensic audit. (Dec 2019, 4 marks)

Question 2.
Write Short note on fraud.
Answer:
‘Fraud’, in general, refers to a wrongful or criminal deception practiced which is intended to result in financial or personal gain to oneself and a financial or personal loss to the other.
As per Business Dictionary, ‘Fraud’ is an act or course of deception, an intentional concealment, omission, or perversion of truth, to:

• Gain unlawful or unfair advantage,
• Induce another to part with some valuable item or surrender a legal right, or
• Inflict injury in some manner.

‘Wilful fraud’ is a criminal offence which calls for severe penalties, and its prosecution and punishment (like that of a murder) is not bound by the statute of limitation.
In law, fraud is a deliberate deception to secure unfair or unlawful gain, or to deprive a victim of a legal right,
Fraud can also be a civil wrong (i.e., a fraud victim may sue the fraud perpetrator to avoid the fraud or recover monetary compensation), a criminal wrong (i.e., a fraud oerpetrator may be prosecuted and imprisoned by governmental authorit es) or it may cause no loss of money, property or legal right but still be an element of another civil or criminal wrong.
The ultimate object of practising fraud may be some monetary gain or other benefit, such as, obtaining a passport or travel document, driver’s license or qualifying for a mortgage by way of false statements.

As per Black Law Dictionary, ‘Fraud’ refers to ‘All multifarious means which human ingenuity can devise, and which are resorted to by one individual to get an advantage over another by false suggestions or suppression of the truth. It includes all surprises, tricks, cunning or dissembling, and any unfair way which another is cheated.
‘Fraud’ is most commonly practiced in the acts of buying or selling of property, including real estate, personal property, and intangible property, such as, stocks, bonds, and copyrights. Indian law under various statutes criminalizes fraud, but not all cases graduate to the level of criminality. Prosecutors also have discretion in determining which case to pursue and which not. Victims may also seek redress in civil court, provided that the fraud conducted does not affect the society at large.

Question 3.
Write short note on Audit.
Answer:
Meaning of Audit:
Audit, in general, refers to the examination or inspection of various books of accounts by an auditor followed by physical checking of inventory to make sure that all departments are following documented system of recording transactions. It is done to ascertain the accuracy of financial statements provided by the organization. Audit can be done internally by employees or heads of a particular department and externally by an outside firm or an independent auditor. The idea is to check and verify the accounts by an independent authority to ensure that all books of accounts are made in a fair manner and there is no misrepresentation or fraud that is being conducted.

Audit: An Adhering Significance:
The word audit is derived from a Latin word “audire” which means “to hear”. During the medieval times when manual book-keeping was prevalent, auditors in Britain used to hear the accounts read out for them and checked that the organization’s personnel were not negligent or fraudulent.
Any subject matter may be audited. Auditing is a safeguard measure not only in medieval times, rather it is in existence since ancient times.
As per the description referred by Loeb and Shamoo, Audit provides third party assurance to various stakeholders that the subject matter is free from material misstatement. The term is most frequently applied to audits of the financial information relating to a legal person. Other areas which are commonly audited include, secretarial & compliance audit, internal controls, quality management, project management, water management, and energy conservation.
In view of Audits’ imperative value for detecting the fraud and ensuing financial health of the corporate, auditing has become such a ubiquitous phenomenon in the corporate and the public sector that professionals started to specialize the process of auditing, wherein forensic audit is also one specialized branch of audit having specific objectives in operation.
During the Audit, the auditor perceives and recognizes the propositions before them for examination, obtains evidence, evaluates the same and formulates an opinion on the basis of his judgment which is communicated through their audit report.
Whenever the financial auditor has adverse findings, then the auditor expresses the qualified opinion, with/without quantification, in caseof the adverse findings, the forensic auditors are required to quantify the damages to the clients and is also supposed to point the culprit. Many a times, Legal action will be sought.

Question 4.
Write down the similarities and differences between Audit and Forensic
Audit.
Answer:
Forensic Audit vis-a-via Audit:
Major difference between Audit and Forensic Audit is discussed as below:

• Objective of financial auditing is to express opinion as to ‘true & fair’ presentation. Forensic Audit determines correctness of the accounts or whether any fraud has actually taken place.
• Techniques used in the financial auditing are more of ‘Substantive’ and ‘compliance’ procedures. The techniques used in the forensic auditing are analysis of past trend and substantive or ‘in depth’ checking of selected transactions.
• Normally all transactions for the particular accounting period are covered under the financial audits. Forensic audits don’t face any such limitations. Forensic auditors may be appointed to examine the accounts from the beginning.
• For ascertaining the accuracy of the current assets and the liabilities financial auditor relies on the management certificate or representation of management. Forensic auditors are required to carry out the independent verification of suspected or selected items.

Question 5.
Write a note explaining Meaning and Definition under the Companies Act, 2013 as well as Criminal Procedure Code, 1973.
Answer:
Meaning and Definition under Companies/Vet, 2013:
Explanation of Section 447 of Companies Act 2013 defines Fraud and related terms as below:

• ‘Fraud’ in relation to affairs of a company or anybody corporate, includes any act, omission, concealment of any fact or abuse of position committed by any person or any other person with the connivance in any manner, with intent to deceive, to gain undue advantage from, or to injure the interests of, the company or its shareholders or its creditors or any other person, whether or not there is any wrongful gain or wrongful loss;
• ‘Wrongful gain’ means the gain by unlawful means of property to which the person gaining is not legally entitled;
• ‘Wrongful loss’ means the loss by unlawful means of property to which the person losing is legally entitled.

In the context of this definition, it could be said that Corporate Fraud is a Fraud in relation to affairs of a company or any corporate body as defined in the explanations of Section 447 of Companies Act 2013, which includes
a. Any act,
b. Omission,
c. Concealment of any fact or
d. Abuse of position committed by any person or any other person with the connivance in any manner,
i. with intent to deceive,
ii. to gain undue advantage from, or
iii. to injure the interests of,
a. the company or
b. its shareholders or
c. its creditors or any other person,
Whether or not there is any wrongful gain or wrongful loss.

Meaning and Definition under Criminal Procedure Code, 1973:
The Code of Criminal Procedure, 1973 is the procedural law providing the machinery for punishment of offenoers under substantive criminal law. The Code contains elaborate details/provisions regarding the procedure to be followed in every investigation, inquiry and trial, for every offence under the IPC or any other criminal law. In general, the Code does not provide for the definition of various terms rather it only describes certain limited terms like Complaint, Cognizable Offence, Warrant Case and alike, which helps in the interpretation of the Code. For rest of the terms, section 2(y) of Code says that “words and expressions used herein and not defined but defined in the Indian Penal Code (45 of 1860) have the meanings respectively assigned to them in that Code.” Therefore, to understand the meaning of ‘Fraud’ in the sphere of criminal law, one has to take recourse of Indian Penal Code, 1860.

Question 6.
What do you mean by Forensic Audit? Discuss its need and significance in detail.
Answer:
Meaning of Forensic Audit:
Forensic audit is, in general, referred to as an examination of evidence regarding an assertion to determine its correspondence to established criteria carried out in a manner suitable to the court.
As per the definition given in Investopedia, Forensic Audit is an examination and evaluation of a frm’s or individual’s financial information for use as evidence in court. A Forensic Audit can be conducted in order to prosecute a party for fraud, embezzlement or other financial claims. In addition, an audit may be conducted to determine negligence or even to determine how much spousal or child support an individual will have to pay.

Significance of Forensic Audit:
Forensic auditing has taken an important role in both private and public organizations since the dawn of the 21st century especially in the advance economies. The catastrophe of some formerly prominent public companies such as Enron and World Com (MCI Inc.) in the late 1990s, coupled with the terrorist attacks of September 11,2001 and the recent incidence of frauds taken place in the cooperates including the one in the leading public bank of Indian economy, have fueled the prominence of forensic auditing/ accounting, creating a new, important and lucrative specialty. Forensic auditing procedures target mostly financial and operational fraud, discovery of hidden assets, and adherence to federal regulations.

A Ready Reference to the Significance of Forensic Audit could be rationalized as below:

• In general, forensic auditing, which is described as a specialized field of accountancy investigates fraud and analyses financial information to be used in legal proceedings.
• In Forensic Audit, a systematic and independent examination of books, accounts, statutory records, documents and vouchers of an organization is held to ascertain fraud or probability of fraud.
• Much beyond the official documents of the company, the Forensic audit involves lot of field work, trying to talk to multiple stake holders to gather information and then look for evidence to corroborate it and alike.
• It also attempts to identify or to corroborate the culprit behind the fraud.
• It arranges and collects the evidences of the fraud and the person accused of fraud.
• The collected evidences and reviewed facts are used in the legal proceedings which assist the court in granting punishment to the real accused of the fraud.
• Forensic auditing uses accounting, auditing, and investigative skills to conduct investigations into theft and fraud. It encompasses both Litigation Support and Investigative Accounting.

Key Benefits of Forensic Audit:
As we have discussed clearly that Forensic Audit is an examination of a company’s financial records to derive evidence which can be used in a court of law or legal proceeding. In the contemporary times, when the Government is looking forward for a robust economy and nation building at par, financial stability is a must in the corporates. Henceforth, Forensic audit submits r various recompenses in ensuring commercial health of the companies through aiding in the Prevention, Regulation and Penalization of financial frauds and scams.

Key Advantages:
In this context, few key benefits of Forensic Audit are listed below:

1. Detection and Responsibility of Corruption.
2. Detection of Asset Misappropriation.
3. Detection of Financial Statement Fraud
4. Fraud Identification and Prevention
5. Marking Sound Investment Decision
6. Formulation of Economic Policies
7. Rewarding Career Opportunity

Other Advantages:
Objectivity and Credibility: An external party as a forensic auditor would be far more independent and objective than an internal auditor or company accountant who ultimately reports to management on his findings. An established frm of forensic auditors and its team would also
have credibility stemming from the frm’s reputation, network and track record.

Accounting Expertise and Industry Knowledge: An external forensic auditor would add to the organization’s investigation team with breadth and depth of experience and deep industry expertise in handling frauds of the nature encountered by the organization.

Provision of Valuable Manpower Resources: An organization in the midst of reorganization and restructuring following a major fraud would hardly have the full-time resources to handle a broad-based exhaustive investigation. The forensic audit and his team of assistants would provide the much needed experienced resources, thereby freeing the organization’s staff for other more immediate management demands. This is all the more critical when the nature of the fraud calls for management to move quickly to contain the problem and when resources cannot be mobilized in time.

Enhanced Effectiveness and Efficiency: This arises from the additional dimension and depth which experienced individuals in fraud investigation bring with them to focus on the issues at hand. Such individuals are specialists in rooting out fraud and would recognize transactions normally passed over by the organization’s accountants or auditors.

Question 7.
Discuss the elements of Frauds and Civil and Criminal Remedies available against it.
Answer:
ELEMENTS OF FRAUD:
1. False and Wilful representation or Assertion:
To constitute fraud there must be some representation or assertion, which is untrue. In the absence of representation or assertion except in the following two cases, there can be no fraud.

• Where silence may itself amount to fraud, and
• Where there is active concealment of facts

The person making the representation should not believe it to be true, otherwise he/she will not be guilty of fraud. Moreover, to constitute fraud, the false representation must have been made wilfully or intentionally.

2. Perpetrator of Representation: The false representation or misstatement must have been made by a party to the contract or by anyone with its connivance, or by its agent. If a stranger makes the misstatement to the contract, it cannot result in fraud.

3. intention to deceive: Intention to deceive the other party is the essence of fraud. In order to commit a fraud, one person asserts or misstates the fact with the intention that it should be acted upon. As a matter of fact, misrepresentation elevates to the level of fraud when it is prefixed by the element of intention to deceive the other party.

4. Representation must relate to a fact: The representation made by the party must relate to a fact, which is material to the formation of the contract. A mere statement of opinion, belief, or commendation cannot be treated as fraud.

5. Active concealment of facts: ‘Active concealment’ must be distinguished from ‘passive concealment’. Passive concealment implies mere silence as to material facts, which barring a few cases, does not amount to fraud. Whereas, active concealment implies ‘when the party takes positive or deliberate steps to prevent information from reaching the other party and this is treated as fraud.’

6. Promise made without intention of performing it: If a person while entering into a contract has no intention to perform his/her promise, there is a fraud on his/her part, for the intention to deceive the other party is there from the very beginning.

7. Representation must have actually deceived the other party: The representation made with the intention to deceive must actually deceive. The party, induced by fraudulent statement, must have relied on it to accord its consent.

8. Any other act fitted to deceive: The expression ‘any other act fitted to deceive’ obviously means any act, which is dope with the intention of committing fraud. This category includes all tricks, dissembling, and other unfair ways, which are used by cunning and clever people-to cheat others.

9. Any such Act or omission that the law specially declares as void: This category includes the act or omission that the law specially declares to be fraudulent. For example, the Insolvency Act and the Companies Act declare certain kinds of transfers to be fraudulent. Similarly, under the Transfer of Property Act, the transferor of real estate is bound to disclose to the transferee the following details:

•  Material defects, if any, in the property such as, cracks in the wall or in beams, and/or
• Any defect or dispute as regards transferor’s title, such as property is subject to encumbrance, i.e., mortgaged or is subject to some dispute-pending in a court of law. An omission to make such disclosure on the part of transferor amounts to fraud.

10. Wrongful Loss and Wrongful Gain is Immaterial. For the purposes of “Fraud” under the Companies Act, 2013, it is immaterial whether there has been some wrongful loss to one and/or wrong gain to another. The only important thing is intention to deceive and the act or omission actually deceiving the victim. Common corporate frauds for example are, if the CMD husband benefits from a loan transaction sanctioned by her it is a fraud. If a CEO take bribe to approve a contract that is a fraud.

Forensic Audit Introduction Notes

Introduction
In general, Forensic Audit represents an area of finance that combines detective skills and financial acuity. The forensic audit professionals dig deep into financial reports, locate financial transactions and figure out what really happened at various companies and who is the real culprit behind any fraud which has taken place in the company.
They cover areas such as:

• Frauds Finding,
• Fraud detection and prevention techniques;
• Fraud related auditing;
• Investigation and analysis of financial evidence;
• Development of computerized applications to assist in the analysis and presentation of financial evidence;
• Communication of findings in the form of reports, exhibits and collections of documents; and
• Assistance in legal proceedings, including testifying in court as expert witness and preparing visual aids to support trial evidence, etc

What is Fraud?
‘Fraud’, in general, refers to a wrongful or criminal deception practiced which is intended to result in financial or personal gain to oneself and a financial or personal loss to the other.
As per Business Dictionary, ‘Fraud’ is an act or course of deception, an intentional concealment, omission, or perversion of truth, to:

1. Gain unlawful or unfair advantage,
2. Induce another to part with some valuable item or surrender a legal right, or
3. Inflict injury in some manner.

‘Wilful fraud’ is a criminal offence which calls for severe penalties, and its prosecution and punishment (like that of a murder) is not bound by the statute

Elements of Fraud:

• False and Wilful representation or Assertion.
• Perpetrator of Representation.
• Intention to deceive.
• Representation must relate to a fact.
• Active concealment of facts.
• Promise made without intention of performing it.
• Representation must have actually deceived the other party.
• Any other act fitted to deceive.
• Any such Act or omission that the law specially declares as void.
• Wrongful Loss and Wrongful Gain is Immaterial.

Forensic Audit: Meaning and Significance
As, it has been thoroughly laid down in the previous discussion that fraud is a termite to growth, development and prosperity, in general, and to the progression of the corporates and economy, in specific. And therefore, the Government is quite dynamic in regulating and preventing the practices of fraud as well as any likelihood of fraud from Indian economy.
In addition, with various laws constituting civil as well as criminal liability for the accused, it is important that fraud should be detected at the first instance and further accused should be penalized with the appropriate punishment in order to introduce the element of deterrence for the anticipated frausters, while preventing them from playing any fraud in future.

Meaning of Audit:
Audit, in general, refers to the examination or inspection of various books of accounts by an auditor followed by physical checking of inventory to make sure that all departments are following documented system of recording transactions. It is done to ascertain the accuracy of financial statements provided by the organization.
Audit can be done internally by employees or heads of a particular department and externally by an outside firm or an independent auditor. The idea is to check and verify the accounts by an independent authority to ensure that all books of accounts are made in a fair manner and there is no misrepresentation or fraud that is being conducted.

Meaning of Forensic Audit:
Forensic audit is, in general, referred to as an examination of evidence regarding an assertion to determine its correspondence to established criteria carried out in a manner suitable to the court.
As per the definition given in Investopedia, Forensic Audit is an examination and evaluation of a frm’s or individual’s financial information for use as evidence in court. A Forensic Audit can be conducted in order to prosecute a party for fraud, embezzlement or other financial claims. In addition, an audit may be conducted to determine negligence or even to determine how much spousal or child support an individual will have to pay.

Significance of Forensic Audit:
A Ready Reference to the Significance of Forensic Audit could be rationalized as below:

• In general, forensic auditing, which is described as a specialized field of accountancy investigates fraud and analyses financial information to be used in legal proceedings.
• In Forensic Audit, a systematic and independent examination of books, accounts, statutory records, documents and vouchers of an organization is held to ascertain fraud or probability of fraud.
• Much beyond the official documents of the company, the Forensic audit involves lot of field work, trying to talk to multiple stake holders to gather information and then look for evidence to corroborate it and a like.
• It also attempts to identify or to corroborate the culprit behind the fraud.
• It arranges and collects the evidences of the fraud and the person accused of fraud.
• The collected evidences and reviewed facts are used in the legal proceedings which assist the court in granting punishment to the real accused of the fraud.
• Forensic auditing uses accounting, auditing, and investigative skills to conduct investigations into theft and fraud. It encompasses both Litigation Support and Investigative Accounting.

Key Advantages

1. Detection and Responsibility of Corruption.
2. Detection of Asset Misappropriation.
3. Detection of Financial Statement Fraud.
4. Fraud Identification and Prevention.
5. Making Sound Investment Decisions.
6. Formulation of Economic Policies.
7. Rewarding Career Opportunity.

Forensic Audit vis-a-vis Audit:
Major difference between Audit and Forensic Audit is discussed as below 26:

• Objective of financial auditing is to express opinion as to ‘true & fair’ presentation. Forensic Audit determines correctness of the accounts or whether any fraud has actually taken place.
• Techniques used in the financial auditing are more of ‘Substantive’ and ‘compliance’ procedures. The techniques used in the forensic auditing are analysis of past trend and substantive or ‘in depth’ checking of selected transactions.
• Normally all transactions for the particular accounting period are covered under the financial audits. Forensic audits don’t face any such limitations. Forensic auditors may be appointed to examine the accounts from the beginning.
• For ascertaining the accuracy of the current assets and the liabilities financial auditor relies on the management certificate or representation of management. Forensic auditors are required to carry out the independent verification of suspected or selected items.
• Whenever the financial auditor has adverse findings, then the auditor expresses the qualified opinion, with/without quantification. In case of the adverse findings, the forensic auditors are required to quantify the damages to the clients and is also supposed to point the culprit. Many a times, Legal action will be sought.

Chapter 1 Overview of Indian Banking System – CS Professional Banking Law and Practice Notes is designed strictly as per the latest syllabus and exam pattern.

Overview of Indian Banking System – CS Professional Banking Law and Practice Study Material

Question 1.
Write short note on the following:
Specialised development financing institutions (June 2009, 3 marks)
Answer :
Specialised development financing institutions: Specialised Development Finance Institutions are financial institutions set up by the government to provide long-term financial and technical assistance to economic sectors of the country that other providers of capital do not necessarily go into.

The specialised development financing institutions both at National level and state level are as under:
For Industry : IDBI, SIDBI, IIBI, IFCI, ICICI, SIDCO
For Agriculture : NABARD
For Exports : Export – Import Bank
For Housing : National Housing Bank of India
For Infrastructure : IDFC

Question 2.
Describe the main functions of the Small Industries Development Bank of India (SIDBI). (Dec 2008, 5 marks)
Answer:
Functions of Small Industries Development Bank of India (SIDBI):
Over the years, the scope of promotional and developmental activities of SIDBI has been enlarged to encompass several new activities. It performs a series of functions in collaboration with voluntary organisations, non¬governmental organisations, consultancy firms and multinational agencies to enhance the overall performance of the small scale sector. The important functions of SIDBI are discussed as follows:

1. Initiates steps for technology adoption, technology exchange, transfer and up gradation and modernisation of existing units.
2. SIDBI participates in the equity type of loans on soft terms, term loan, working capital both in rupee and foreign currencies, venture capital support, and different forms of resource support to banks and other institutions.
3. SIDBI facilitates timely flow of credit for both term loans and working capital to MSMEs in collaboration with commercial banks.
4. SIDBI enlarges marketing capabilities of the products of MSMEs in both domestic and international markets.
5. SIDB1 directly discounts and rediscounts bills with a view to encourage bills culture and helping the SSI units to realise their sale proceeds of capital goods / equipments and components etc.
6. SIDBI promotes employment oriented industries especially in semi-urban areas to create more employment opportunities so that rural-urban migration of people can be checked.

Question 3.
Attempt the following:
List down some of the strengths of the Indian banking system. (June 2009, 5 marks)
Answer :
Strengths of the Indian Banking System :
According to a recent survey conducted by the Federation of Indian Chamber of Commerce and Industry (FICCI) over 95% of the respondents were of the view that the Indian Financial Sector is robust and sound.

According to the survey, some of the strengths of the banking system are :

• Regulatory system
• Economic growth
• Technological advancement
• Risk assessment system
• Credit quality
• Overall health of these banks has improved.

Asset quality has improved. Almost all Public Sector Banks are earning net profits.

NPA level has come down drastically. Capital adequacy ratio has improved substantially. Latest technology has been adopted. Supervisory and monitoring systems have been adopted which have stood the test of time.

Question 4.
Comment on the following:
RBI is a banker to the government. (Dec 2016, 2 marks)
Answer:
True: In terms of Sections 20 and 21 of the RBI Act 1934, the RBI has the obligation to transact the banking business of the Central Government.

Question 5.
Read the following case study and answer the questions that follow : (June 2022)

Non-Banking Financial Companies (NBFCs)
The Non-Banking Finance Companies (NBFCs) ecosystem in our country is a place of immense diversity and complexity as well. There are more than 9,000 NBFCs across different categories focussed on a diverse set of products, customer segments, and geographies. As of March 31, 2021, the NBFC sector (including HFCs) has assets worth more than ₹ 54 lakh crore, equivalent to about 25% of the asset size of the banking sector. Therefore, there can be no doubt regarding its significance and role within the financial system in meeting the credit needs of a large segment of society. Over the last five years the assets of the NBFC sector have grown at a cumulative average growth rate of 17.91 percent. Demand-side pull or supply-side push which is contributing to the growth of the NBFC sector.

This distinction becomes important as it has significant implications for the efficiency of the sector. Conventional wisdom tells that growth consequential to demand-side pull factors translates into increased efficiency and better services to the customers. Supply-driven growth could, on the other hand, arise out of entry by entrepreneurs who would like to enter financial services industries but are unable to meet the scale and stringent norms meant for banks.

The preamble to the Reserve Bank of India Act, 1934, enjoins on the Bank, to operate the currency and the credit system of the country to its advantage. Thus, the promotion of an efficient financial intermediation system, which facilitates adequate credit flow to every segment of the society, more so to the financially disadvantaged population is an embedded goal for the Reserve Bank.

The non-banking financial sector assumes an important role in the process as it is a valuable source of financing for many firms, micro, and small units as well as individuals and small business, facilitating competition and diversity among credit providers. Further, niche NFBCs fulfill the unmet and exclusive credit needs of various segments such as infrastructure, factoring, leasing, etc. NBFC-MFIs reach out to the underprivileged sections of society. Along with banking, which is the primary channel of financial intermediation, NBFCs have been increasingly playing a significant complementary role in financial intermediation and provision of last-mile delivery of financial services.

Non-banking financial entities, by their regulatory design, enjoy the freedom to undertake a wider spectrum of activities as compared to banks for which the permissible activities are enshrined in the statute itself. This freedom, coupled with a light touch regulatory prescription, gives them a greater risk-taking capacity to engage in financial intermediation in the segments which are often underserved by other players. Hence, even with large universal banking’s reach across the country, the NBFC sector can create a space for itself with customized services with a local feel.

Apart from furthering the financial inclusion agenda, the added advantage of a well-functioning NBFC sector is that it can promote resilience in the financial system by being innovative and agile in offering tailored financial products and solutions as a supplemental source of credit alongside banks. It has to be noted that many recent financial sector credit delivery innovations, for example, micro-credit, were popularised by non-banking financial entities. This capability and freedom to innovate spurs a competitive advantage in the financial services sector with the ultimate beneficiary in the process being the customer.

However, the reputation of the non-banking financial sector has been dented in recent times by the failure of certain entities due to idiosyncratic factors. The challenge, therefore, is to restore trust in the sector by ensuring that few entities or activities do not generate vulnerabilities that go undetected and create shocks and give rise to systemic risk through their interlinkages with the financial system. Forestalling and where necessary, decisively resolving such episodes becomes a key focus of our regulatory and supervisory efforts.

The Global monitoring report on Non-banking Financial Institution (NBFI) by Financial Stability Board (FSB) classifies non-banking financial activities into five economic functions, (i) collective investment vehicles, (ii) loan companies which depend on short-term funding, (iii) market intermediaries, (iv) entities which engage in the facilitation of credit creation (such as credit insurance companies, financial guarantors) and (v) entities undertaking securitization- based credit intermediation.

Globally, the collective investment vehicles are the most dominant category of non-banking financial activity and account for 73 percent of the global NBFI sector. In the global context, the second function of NBFIs i.e., loan companies depending on short-term funding is a small segment constituting just around 7 percent of the total NBFI sector, but in India, the non-banking sector is largely into direct credit intermediation. The regulatory challenge in India is thus different with the focus on designing prudential regulations specifically meant for lending activities of NBFCs without compromising on their operational flexibility.

Over the years, the NBFC sector has evolved in terms of its size, operations, technological sophistication with entry into newer areas of financial services and products. To keep pace with the same, regulations have also evolved to address various accompanying risks and concerns. Reserve Bank had introduced an element of the differential regulation way back in 2006 when the regulatory framework for systematically important NBFCs was strengthened. Further in 2014, a revised regulatory framework was announced and many of the regulatory parameters with regard to net owned fund, prudential requirements, and corporate governance standards were strengthened.

The regulatory framerwork for NBFCs has remained a work in progress and it continues to be so. The fundamental premise has, however, been to allow operational flexibility to NBFCs and help them grow and develop expertise.

Based on the above information, answer the following questions :
(a) What is a Non-Banking Financial Company (NBFC)? (4 marks)
(b) Flow does NBFCs differ from Banks ? (4 marks)
(c) Is it necessary that every NBFC should be registered with RBI? (4 marks)
(d) Why are certain NBFCs classified as systemically important NBFCs? (4 marks)
(e) Give an example of Flarmonisation of different categories of NBFCs. (4 marks)
(f) Flow are Core Investment Companies (CICs) different from other NBFCs in terms of regulations? (4 marks)
(g) What action can be taken against persons/financial companies making a false claim of being regulated by the Reserve Bank? (4 marks)
(h) Explain the terms ‘owned fund’ and ‘net owned fund’ about NBFCs. (4 marks)
(i) NBFCs are charging high-interest rates from their borrowers. Is there any ceiling on the interest rate charged by the NBFCs to their borrowers? (4 marks)
(j) Whether NBFCs can accept deposits from NRIs? (4 marks)

Question 6.
Write a short note on National Flousing Bank (NFIB)
Answer:
National Housing Bank (NHB):
National Housing Bank was set up in July, 1988 as the apex financing institution for the housing sector with the mandate to promote efficient, viable and sound Housing Finance Companies (HFCs). Its functions aim at to augment the flow of institutional credit for the housing sector and regulate HFCs. NHB mobilizes resources and channelizes them to various schemes of housing infrastructure development.

It provides refinance for direct housing loans given by commercial banks and non-banking financial institutions. The NHB also provides refinance to Housing Finance Institutions for direct lending for construction/purchase of new housing/dwelling units, public agencies for land development and shelter projects, primary cooperative housing societies, property developers.

At present, it is a wholly owned subsidiary of Reserve Bank of India which contributed the entire paid-up capital. RBI has proposed to transfer its entire shareholding to Government of India to avoid conflict of ownership and regulatory role. For this transfer, the central bank will pay RBI, in cash, an amount equal to the face value of the subscribed capital issued by the RBI. The outstanding portfolio of NHB at ₹ 33,083 crores as on 31^st December 2012 is almost equally divided between the commercial banks and the HFCs.

Question 7.
State the types of activities undertaken by NABARD.
Answer:
NABARD undertakes a number of inter-related activities/services which fall under three broad categories
(a) Credit Dispensation:
NABARD prepares for each district annually a potential linked credit plan which forms the basis for district credit plans. It participates in finalization of Annual Action Plan at block, district and state levels and monitors implementation of credit plans at above levels. It also provides guidance in evolving the credit discipline to be followed by the credit institutions in financing production, marketing and investment activities of rural farm and non- farm sectors.

(b) Developmental & Promotional:
The developmental role of NABARD can be broadly classified as:-

• Nurturing and strengthening of – the Rural Financial Institutions (RFIs) like SCBs/SCARDBs, CCBs, RRBs etc. by various institutional strengthening initiatives.
• Fostering the growth of the SHG Bank linkage programme and extending essential support to SHPIs NGOsA/As/ Development Agencies and client banks.
• Development and promotional initiatives in farm and non-farm sector.
• Extending assistance for Research and Development.
• Acting as a catalyst for Agriculture and rural development in rural areas.

(c) A Supervisory Activities:
As the Apex Development Bank, NABARD shares with the Central Bank of the country (Reserve Bank of India) some of the supervisory functions in respect of Cooperative Banks and RRBs.

Chapter 1 Indian Equity-Public Funding – Corporate Funding and Listing in Stock Exchange ICSI Study Material is designed strictly as per the latest syllabus and exam pattern.

Indian Equity-Public Funding – Corporate Funding & Listing in Stock Exchange Study Material

Question 1.
Write notes on the following:
(i) Promoters contribution
(iv) Basis of allotment (June 2012, 4 marks each)
Answer:
(i) Minimum Promoters Contribution:
Regulation 113 of SEBI (ICDR) provides for minimum promoters’ contribution

Case-1: Minimum promoters contribution in case of Pure Securities [Reg.113(1)): The promoters shall contribute in the public issue as follows:
(a) either to the extent of 20% of the proposed issue size or to the extent of 20% of the post-issue capital;
(b) in case of a composite issue (i.e. further public offer cum rights issue), either to the extent of 20% of the proposed issue size or to the extent of 20% of the post-issue capital excluding the rights issue component.

Case-II: Minimum promoters contribution in case of Convertible Securities ( Reg.113(2)]:
In case of a public issue or composite issue of convertible securities, the minimum promoter& contribution shall be as follows:

(a) the promoters shall contribute 20% as stipulated in clause (a) or (b) of Regulation 113(1), as the case may be, either by way of equity shares or by way of subscription to the convertible securities:

Provided that if the price of the equity shares allotted pursuant to conversion is not pre-determined and not disclosed in the offer document, the promoters shall contribute only by way of subscription to the convertible securities being issued in the public issue and shall undertake in writing to subscribe to the equity shares pursuant to conversion of such securities.

(b) in case of any issue of convertible securities which are convertible or exchangeable on different dates and if the promoters’ contribution is by way of equity shares (conversion price being pre-determined), such contribution shall not-be at a price lower than the weighted average price of the equity share capital arising out of conversion of such securities.

Case – III: Minimum promoters’ contribution in case of further Securities [Reg. 113(3)]:
In case of a further public offer or composite issue where the promoters contribute more than the stipulated minimum promoters’ contribution, the allotment with respect to excess contribution shall be made at a price determined in terms of the provisions of Regulation 164 or the issue price, whichever is higher.

(iv) Basis of allotment:
After the closure of the issue, the bids received are aggregated under different categories i.e., firm allotment, Qualified Institutional Buyers (QIBs), Non-Institutional Buyers (NIBs), Retail, etc. The oversubscription ratios are then calculated for each of the categories as against the shares reserved for each of the categories in the offer document.

Within each of these categories, the bids are then segregated into different buckets based on the number of shares applied for. The oversubscription ratio is then applied to the number of shares applied for and the number of shares to be allotted for applicants in each of the buckets is determined. Then, the number of successful allottees is determined. This process is followed in case of proportionate allotment. In case of allotment for QIBs, it is subject to the discretion of the post issue lead manager.

The authorised employees of the designated stock exchange along with the lead manager(s) and registrars to the issue shall ensure that the basis of allotment is finalised in a fair and proper manner in accordance with the allotment procedure as specified in Part A of Schedule XIV.

Question 2.
Write notes on the following:
(i) Promoters’ minimum contribution
(v) Qualified institutional buyers (QIBs) (Dec 2012, 4 marks each)
Answer
(v) Qualified Institutional Buyers (QIBs)
Regulation 2(1)(ss) of SEBI (ICDR) Regulations, 2018 defines “qualified institutional buyer” means:

1. a mutual fund, venture capital fund, alternative investment fund and foreign venture capital investor registered with the Board;
2. a foreign portfolio investor other than Category III foreign portfolio investor, registered with the Board;
3. a public financial institution;
4. a scheduled commercial bank;
5. a multilateral and bilateral development financial institution;
6. a state industrial development corporation;
7. an insurance company registered with the Insurance Regulatory and Development Authority of India;
8. a provident fund with minimum corpus of ₹ 25 crores;
9. a pension fund with minimum corpus of ₹ 25 crores;
10. National Investment Fund set up by resolution no. F. No. 2/3/2005-DDI! dated November 23, 2005 of the Government of India published in the Gazette of India;
11. insurance funds set up and managed by army, navy or air force of the Union of India; and
12. insurance funds set up and managed by the Department of Posts, India; and
13. systemically important non-banking financial companies.

Question 3.
Write a note on the following:
(iii) Voluntary delisting of securities (June 2013, 4 marks)
Answer:
Voluntary delisting of securities: According to SEBI (Delisting of Equity Shares) Regulations, 2021, a company can voluntarily apply to the concerned stock exchange(s) for delisting. There are two types of delisting as follows:

(I) Delisting from some of the recognised stock exchanges [Regulation 5]:
A company may delist its equity shares from one or more of the recognised stock exchanges on which it is listed without providing an exit opportunity to the public shareholders, if after the proposed delisting, the equity shares remain listed on any recognised stock exchange that has nationwide trading terminals.

(II) Delisting from all the recognised stock exchanges [Regulation 7]: The equity shares of a company may be delisted from all the recognised stock exchanges having nationwide trading terminals on which they are listed, after an exit opportunity has been provided by the acquirer to all the public shareholders holding the equity shares sought to be delisted, in accordance with Chapter IV of these regulations and after following the procedure as mentioned in Part-B of this Chapter.

Question 4.
Write notes on the following:
(iv) Draft offer document (Dec 2013, 4 marks)
Answer:
Draft Offer Document:
(I) Draft Offer Document: [Regulation 2(n)]: It means the draft offer document filed with the Board in relation to a public issue under SEBI (ICDR) Regulation, 2018.

(II) Important provisions about Draft Offer Document [Regulations. 25, 26]:
(a) Disclosures in the draft offer document and offer document [Reg. 24]
24. (1) The draft offer document and offer document shall contain all material disclosures which are true and adequate to enable the applicants to take an informed investment decision.

(b) Filing of the draft offer document and offer document [Sec.25] Prior to making an initial public offer, the issuer shall file three copies of the draft offer document with the concerned regional office of the Board under the jurisdiction of which the registered office of the issuer company is located, in accordance with Schedule IV, along with fees as specified in Schedule III, through the lead manager(s).

(c) Draft offer document and offer document to be available to the public [Sec.26]
The draft offer document filed with the Board shall be made public for comments, if any, for a period of at 21 days from the date of filing, by hosting it on the websites of the Board, stock exchanges where specified securities are proposed to be listed and lead manager(s) associated with the issue.

Question 5.
Write a note on the following:
(ii) Differential pricing of securities. (June 2016, 4 marks)
Answer:
Regulation 30 of SEBI (ICDR) Regulation, 2018 permits the issuer to offer its specified securities at different prices, subject to the following:

(a) retail individual investors or retail individual shareholders or employees entitled for reservation made under Regulation 33 may be offered specified securities at a price not lower than by more than 10% of the price at which net offer is made to other categories of applicants, excluding anchor investors;
(b) in case of a book built issue, the price of the specified securities offered to the anchor investors shall not be lower than the price offered to other applicants;
(c) In case the issuer opts for the alternate method of book building in terms of Part D of Schedule XIII, the issuer may offer the specified securities to its employees at a price not lower than by more than 10% of the floor price.
(d) Discount, if any, shall be expressed in rupee terms in the offer document.

Question 6.
Write notes on the following:
(v) Price and Price Band. (June 2017, 4 marks)
Answer:
Following are the provisions of “Price and price band” as per SEBI (ICDR) Regulations, 2018, specified under Regulation 127:
(1) The issuer may mention a price or a price band in the offer document (in case of a fixed price issue) and a floor price or a price band in the red herring prospectus (in case of a book built issue) arid determine the price at a later date before registering the prospectus with the Registrar of Companies:
However, the prospectus registered with the Registrar of Companies shall contain only one price or the specific coupon rate, as the case may be.

(2) The cap on the price band, and the coupon rate in case of convertible debt instruments, shall be less than or equal to 120% of the floor price.
Provided that the cap of the price band shall be at least 105% of the floor price.

(3) The floor price or the final price shall not be less than the face value o the specified securities.

(4) Where the issuer opts not to make the disclosure of the floor price or price band in the red herring prospectus, the issuer shall announce the floor price or the price band at least one working day before the opening of the bid in the same newspapers in which the pre-issue advertisement was released or together with the pre-issue advertisement in the format prescribed under Part A of Schedule X.

(5) The announcement referred to in sub-regulation (4) shall contain relevant financial ratios computed for both upper and lower end of the price band and also a statement drawing attention of the investors to the section title “basis of issue price” of the offer document.

(6) The announcement referred to in sub-regulation (4) and the relevant financial ratios referred to in sub-regulation (5) shall be disclosed on the websites of the stock exchange(s) and shall also be pre-filled in the application forms to be made available on the websites of the stock exchange(s).

Question 7.
Write notes on the following:
(iii) Institutional Placement Programme (Dec 2017, 4 marks)
Answer:
Institutional Placement Programme (IPP):
When a listed issuer makes a further public offer of equity shares, or offer for sale of shares by promoter / promoter group of listed issuer in which, the offer allocation and allotment of such shares is made only to QIBs in terms of chapter VIIIA of SEBI (ICDR) Regulations, 2018 for the purpose of achieving minimum public shareholding it is called an IPP.

Question 8.
Write note on the following:
(iii) Fast Track Issue. (June 2018, 4 marks)
Answer:
(I) Fast Track Issues: It may be defined as a time saving manner for bringing public issue by a listed company, satisfying the prescribed conditions of Regulations 155 of SEBI (ICDR) Regulation, 2018. As per the Regulation 155, a listed company can bring further public offer, without fulfilling the requirements of Regulation 123, which are as follows:

(a) No need to file three copies of the draft offer document with the concerned regional office of the Board;
(b) No need to file the draft offer document with the stock exchange(s) where the specified securities are proposed to be listed,

(II) Provision Related to Fast Track issue:
(a) Minimum Listing Period: Equity shares of the issuer have been listed on any stock exchange for a period of at least three years immediately preceding the reference date;
(b) Demat Form: Entire shareholding of the promoter group of the issuer is held in dematerialised form on the reference date.
(c) Average Market Capitalisation: Average Market Capitalisation of public shareholding of the issuer is at ₹ 1000 crores in case of public issue

EXPLANATION	average market capitalisation of public shareholding
It means the sum of daily market capitalisation of public shareholding for a period of one year up to the end of the quarter preceding the month in which the proposed issue was approved by the shareholders or the board of the Issuer, as the case may be, divided by the number of trading days.

(d) Annualised trading turnover: Annualised trading turnover of the equity shares of the issuer during 6 calendar months immediately preceding the month of the reference date has been at least 2% of the weighted average number of equity shares listed during such 6 months’ period.
(e) Annualized delivery-based trading turnover: Annualized delivery-based trading turnover of the equity shares during six calendar months immediately preceding the month of the reference date has been at least 10% of the annualised trading turnover of the equity shares during such 6 months’ period.
(f) Compliance with Listing Agreement: Issuer has been in compliance with the equity listing agreement or the SEBI (LODR) Regulations, 2015, as applicable, for a period of at least 3 years immediately preceding the reference date.
(g) Grievances Redressed: Issuer has redressed at least 95% of the complaints received from the investors till the end of the quarter immediately preceding the month of the reference date;
(h) No Prosecution: No show-cause notices have been issued or prosecution proceedings have been initiated by the Board and pending against the issuer or its promoters or whole-time directors as on the reference date;
(i) No Settlement: Issuer or Promoter or Promoter group or Director of the issuer has not settled any alleged violation of securities laws through the consent or settlement mechanism with the Board during 3 years immediately preceding the reference date.
(j) No Suspension of Trading: Equity shares of the issuer have not been suspended from trading as a disciplinary measure during last 3 years immediately preceding the reference date.
(k) No Conflict of interest: There shall be no conflict of interest between the lead manager(s) and the issuer or its group companies in accordance with the applicable regulations.
(l) Impact of Audit qualifications: Impact of Audit qualifications, if any and where quantifiable, on the audited accounts of the issuer in respect of those financial years for which such accounts are disclosed in the letter of offer does not exceed 5% of the net profit or loss after tax of the issuer for the respective years.

Question 9.
Distinguish between the following :
(ii) Private Placement and Preferential Allotment (Dec 2019, 5 marks)
Answer:
Following are the main difference between private placement and preferential allotment:

Private Placement	Preferential Allotment
1. Private Placement can be described as an offer or invitation to offer made to specified investors by issuing securities, so as to raise funds.	On the contrary, Preferential Allotment is the issue of shares or debentures to a particular group of persons is made by a listed company, to raise funds.
2. Private Placement is governed by Section 42 of the Companies Act, 2013.	Conversely, in the case of Preferential Allotment Section 62 (I) of the Companies Act, 2013 will apply.
3. In the case of private placement, ‘Private placement offer letter’ is sent to the investors for inviting them to subscribe for shares.	As against, in the case of preferential allotment, no such offer document is issued to people.
4. In private placement, application money can be received through cheques, demand draft or any other banking modes but not cash.	Unlike, preferential allotment in which the money is received in cash or kind.
5. In private placement, the application money is kept in the separate bank account of a scheduled commercial bank.	On the contrary, no such account is required in case of preferential allotment.
6. The private placement must be authorized by the articles of association of the company.	In contrast, no such authorization is required in case of preferential allotment.

Question 10.
Discuss briefly the following methods of raising funds from the primary capital market:
(i) Public issue
(ii) Rights issue
(iii) Preferential issue
(iv) Private placement.
(v) Qualified institutional placement (QIP). (June 2012, 3 marks each)
Answer:
(i) When an issue/offer of securities is made to new investors for becoming part of shareholders’ family of the issuer it is called a public issue. Public issue can be further classified into Initial public offer (IPO) and Further public offer (FPO).

(ii) When an issue of securities is made by an issuer to its shareholders existing as on a particulars date fixed by the issuer (i.e. record date), it is called a rights issue. The right are offered in a particular ratio to the number of securities held as on the record date.

(iii) Preferential issue means issuance of equity shares to promoter group or selected investors. It covers allotment of fully convertible debentures, partly convertible debentures or any other financial instruments that could be converted into equity shares at a later date’. The investors could be institutional investors, private equity investors, high net-worth individuals, or companies.

(iv) Private placement [Sec. 42(2)] means offer of securities or invitation to subscribe securities made to such number of persons not exceeding 50 or such higher number as may be prescribed i.e. 200, in a financial year.
Here, for the purpose of 200 persons, Securities Offered to following will be excluded:
(a) qualified institutional buyers; and
(b) employees of the company, to whom securities are offered under employees stock option.

(v) “Qualified Institutional Placement” means issue of eligible securities by a listed issuer to qualified institutional buyers on a private placement basis and includes an offer for sale of specified securities by the promoters and/or promoter group on a private placement basis, in terms of SEBI(ICDR) Regulation, 2018. Here following terms are important:
(a) “eligible securities” include equity shares, non-convertible debt instruments along with warrants and convertible securities other than warrants;
(b) “relevant date” means:

(i) in case of allotment of equity shares, the date of the meeting in which the board of directors of the issuer or the committee of directors duly authorised by the board of directors of the issuer decides to open the proposed issue;

(ii) in case of allotment of eligible convertible securities, either the date of the meeting in which the board of directors of the issuer or the committee of directors duly authorised by the board of directors of the issuer decides to open the issue of such convertible securities or the date on which the holders of such convertible securities become entitled to apply for the equity shares.

Question 11.
Explain the concept of ASBA in an IPO. (June 2012, 5 marks)
Answer:
ASBA is an application for subscribing to an issue, containing an authorization to block the application money in a bank account. In all public issues and rights issues, where not more than one payment option is given, the issuer shall provided the facility of ASBA in accordance with the procedure and eligibility criteria specified by SEBI. However in case of qualified institutional buyers and non-institutional investors the issuer shall accept bids using ASBA facility only. ASBA process is applicable to all book-built public issues which provide for not more than one payment option.

Question 12.
What are the criteria for compulsory delisting by stock exchanges? (June 2012, 5 marks)
Answer:
The Compulsory delisting by a stock exchange is given in Regulation 32 of SEBI (Delisting of Equity Shares) Regulation, 2021. Following are the relevant provisions in this regard:

(1) Reasonable opportunity of being heard [Reg. 32(1)]: ARSE may, by a reasoned order, delist equity shares of a company on any ground prescribed in the rules made under the Securities Contracts (Regulation) Act, 1956, by giving a reasonable opportunity of being heard.

(2) Constitution of Panel [Reg. 32(2)]: The decision regarding the compulsory delisting shall be taken by a panel to be constituted by the recognised stock exchange consisting of –
(a) two directors of the recognised stock exchange one of whom shall be a public representative;
(b) one representative of an investor association recognised by the Board;
(c) one representative of the Ministry of Corporate Affairs or Registrar of Companies; and
(d) the Executive Director or Secretary of the recognised stock exchange.

(3) Publication in Newspaper [Reg. 32(3)]: Before passing an order for delisting, the RSE shall also give a notice in at least one English national newspaper with wide circulation, one Hindi national newspaper with wide circulation in their all India editions and one vernacular newspaper of the region where the relevant recognised stock exchange is located, of the proposed delisting, giving a time period of not less than fifteen working days from the date of such notice, within which representations, if any, may be made to the recognised stock exchange by any person aggrieved by the proposed delisting and shall also display such notice on its trading systems and website.

(4) Considering the representation [Reg. 32(4)]: The RSE shall, while passing any order under sub-regulation (1), consider the representation, if any, made by the company and also any representation received in response to the notice given under sub-regulation (3), and shall comply with the guidelines provided in Schedule III of these regulations.

(5) Publication of Notice of delisting [Reg. 32(5)]: Where the RSE passes an order under sub-regulation (1), it shall, –
(a) forthwith publish a notice in one English national newspaper with wide circulation, one Hindi national newspaper with wide circulation in their all India editions and one vernacular newspaper of the region where the relevant recognised stock exchange is located, of the fact of such delisting, disclosing therein the name and address of the company, the fair value of the delisted equity shares determined under sub-regulation (1) of regulation 33 of these regulations and the names and addresses of the promoters of the company who would be liable under sub-regulation (4) of regulation 33 of these regulations;
(b) inform all other stock exchanges where the equity shares of the company are listed, about such delisting; and
(c) upload a copy of the said order on its website.

(6) Non Applicability [Reg. 32(6)]: The provisions of Chapter IV of these regulations shall not be applicable to a compulsory delisting made by a RSE under this Chapter.

Question 13.
Explain the following statements:
(ii) “Pre-marketing is a tool through which syndicate members evaluate the prospects of the issue.”
(iii) “SEBI has provided alternative eligibility norms for the public issues of securities.”
(iv) “Preferential issue is not for retail investors.”
(vi) “Market making is compulsory for public issues.”
(vii) “An issuer can offer specified securities at different prices.” (Dec 2012, 4 marks each)
Answer:
(ii) Pre-marketing is a tool through which the syndicate members evaluate the prospectus of the issue. This is normally done closer to the issue. The research analysts along with the sales force of the syndicate members meet the prospective investors during pre-marketing road show. This enables the syndicate members to understand the market and the probable response from the prospective investors.

The pre-marketing exercise helps in assessing the depth of investors’ interest in the proposed issued, their view about the valuation of the share and the geographical locations of the investors who are interested in the issue. The response received during pre-marketing provides vital information for taking important decisions relating to timing, pricing and size of the issue. This would also help the syndicate members in evolving strategies for marketing the issue.

(iii) An issuer not satisfying the condition stipulated in Regulation 6(1) of SEBI (Issue of Capital & Disclosure Requirements) Regulations, 2018 shall be eligible to make an initial public offer only if the issue is made through the book-building process and the issuer undertakes to allot at least 75% of the net offer to qualified institutional buyers and to refund the full subscription money if it fails to do so. The purpose of alternative eligibility route is to provide sufficient flexibility and also to ensure that genuine companies do not suffer on account of rigidity of the parameters.

(iv) Preferential issue means issuance of equity shares to promoter group or selected investors. It covers allotment of fully convertible debentures, partly convertible debentures or any other financial instruments that could be converted into equity shares at a later date. The investors could be institutional investors, private equity investors, high networth individuals, or companies. Thus, preferential issue is not for retail investors.

(vi) The given statement that “Market making is compulsory for public issues” following are the relevant points in this regard:”

(1) The lead manager(s) shall ensure compulsory market making through the stock brokers of the SME exchange(s) appointed by the issuer, in the manner specified by the Board for a minimum period of 3 years from the date of listing of the specified securities or from the date of migration from the Main Board in terms of Regulation 276.

(2) The market maker or issuer, in consultation with the lead manager(s) may enter into agreements with the nominated investors for receiving or delivering the specified securities in market making, subject to the prior approval of the SME exchange.

(3) The issuer shall disclose the details of the market making arrangement in the offer document.

(4) The specified securities being bought or sold in the process of market making may be transferred to or from the nominated investors with whom the lead manager(s) and the issuer have entered into an agreement for market making: Provided that the inventory of the market maker, as on the date of allotment of the specified securities, shall be at least 5% of the specified securities proposed to be listed on SME exchange.

(5) The market maker shall buy the entire shareholding of a shareholder of the issuer in one lot, where the value of such shareholding is less than the minimum contract size allowed for trading on the SME exchange: Provided that market maker shall not sell in lots less than the minimum contract size allowed for trading on the SME exchange.

(6) The market maker shall not buy the shares from the promoters or persons belonging to the promoter group of the issuer or any person who has acquired shares from such promoter or person belonging to the promoter group during the compulsory market making period.

(vii) yes, an issuer can issue specified securities at different prices. Following are important points in this regard relating to different prices, given in Regulation 30:
(1) The issuer may offer its specified securities at different prices, subject to the following:

(a) retail individual investors or retail individual shareholders or employees entitled for reservation made under Regulation 33 may be offered specified securities at a price not lower than by more than ten percent, of the price at which net offer is made to other categories of applicants, excluding anchor investors;

(b) in case of a book built issue, the price of the specified securities offered to the anchor investors shall not be lower than the price offered to other applicants;

(c) In case the issuer opts for the alternate method of book building in terms of Part D of Schedule XIII, the issuer may offer the specified securities to its employees at a price not lower than by more than ten percent, of the floor price.
(2) Discount, if any, shall be expressed in rupee terms in the offer document.

Question 14.
Discuss briefly the SEBI regulations for preferential issue of shares by listed companies. (Dec 2012, 5 marks)
Answer:
1. Conditions for preferential Issue: A listed issuer making a preferential issue of specified securities shall ensure that:
(a) all equity shares allotted by way of preferential issue shall be made fully paid up at the time of the allotment;
(b) a special resolution has been passed by its shareholders;
(c) all equity shares held by the proposed allottees in the issuer are in dematerialised form;
(d) the issuer is in compliance with the conditions for continuous listing of equity shares as specified in the listing agreement with the stock exchange where the equity shares of the issuer are listed and the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements), 2015, as amended, and any circular or notification issued by the Board thereunder;
(e) the issuer has obtained the Permanent Account Numbers of the proposed allottees, except those allottees which may be exempt from specifying their Permanent Account Number for transacting in the securities market by the Board.

2. 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 month preceding the relevant date.

3. Any person belonging to promoter(s) or the promoter group has previously subscribed to warrants of an issuer but failed to exercise the warrants, the promoter(s) and promoter group shall be ineligible for issue of specified securities of such is jer on preferential basis for a period of one year from:

• the date of expiry of the tenure of the warrants due to non- exercise of the option to convert, or
• the date of cancellation of the warrant.

Question 15.
(b) What are the eligibility conditions for making a fast track issue (FTI)? (June 2013, 5 marks)
(c) What do you understand by Qualified Institutional Placement (QIP)? (June 2013, 5 marks)
(d) State the SEBI regulations relating to issue of rights Shares. (June 2013, 5 marks)
Answer:
(b) Regulation 155 of SEBI (ICDR) Regulations, Institutions provides for following conditions for fast track public issue:
(a) Minimum listing period: Equity shares of the issuer have been listed on any stock exchange for a period of at least 3 years immediately preceding the reference date;
(b) Demat Form: Entire shareholding of the promoter group of the issuer is held in dematerialised form on the reference date.
(c) Average Market Capitalisation: Average market capitalisation of public shareholding of the issuer is at ₹ 1,000 crores in case of public issue.

EXPLANATION	Average market capitalisation of public shareholding
It means the sum of daily market capitalisation of public shareholding for a period of one year up to the end of the quarter preceding the month in which the proposed issue was approved by the shareholders or the board of the Issuer, as the case may be, divided by the number of trading days.

(d) Annualised trading turnover: Annualised trading turnover of the equity shares of the issuer during 6 calendar months immediately preceding the month of the reference date has been at least 2% of the weighted average number of equity shares listed during such 6 months period.

(e) Annualized delivery-based trading turnover: Annualized delivery-based trading turnover of the equity shares during six calendar months immediately preceding the month of the reference date has been at least 10% of the annualised trading turnover of the equity shares during such 6 months period.

(f) Compliance with Listing Agreement: Issuer has been in compliance with the equity listing agreement or the SEBI (LODR) Regulations, 2015, as applicable, for a period of at least 3 years immediately preceding the reference date.

(g) Grievances Redressed: Issuer has redressed at least 95% of the complaints received from the investors till the end of the quarter immediately preceding the month of the reference date;

(h) No Prosecution: No show-cause notices have been issued or prosecution proceedings have been initiated by the Board and pending against the issuer or its promoters or whole-time directors as on the reference date;

(i) No Settlement: Issuer or promoter or promoter group or director of the issuer has not settled any alleged violation of securities laws through the consent or settlement mechanism with the Board during 3 years immediately preceding the reference date.

(j) No suspension of Trading: Equity shares of the issuer have not been suspended from trading as a disciplinary measure during last 3 years immediately preceding the reference date.

(k) No conflict of interest: There shall be no conflict of interest between the lead manager(s) and the issuer or its group companies in accordance with the applicable regulations.

(l) Impact of audit qualifications: Impact of audit qualifications, if any and where quantifiable, on the audited accounts of the issuer in respect of those financial years for which such accounts are disclosed in the letter of offer does not exceed 5% of the net profit or loss after tax of the issuer for the respective years.

(c) (I) Definition of Qualified Institutions Placement [Reg.2(tt)]: “Qualified institutions placement” means issue of eligible securities by a listed issuer to qualified institutional buyers on a private placement basis and includes an offer for sale of specified securities by the promoters and/or promoter group on a private placement basis, in terms of these regulations.

(II) Qualified Institutions Placement: A listed issuer may make a qualified institutions placement of eligible securities if it satisfies the following conditions:

(a) a special resolution approving the qualified institutions placement has been passed by its shareholders; Provided that no shareholders’ resolution will be required in case the qualified institutions placement is through an offer for sale by promoters or promoter group for compliance with minimum public shareholding requirements specified in the Securities Contracts (Regulation) Rules, 1957;

(b) that allotment pursuant to the special resolution shall be completed within a period of 365 days from the date of passing of the resolution.

(c) the equity shares of the same class, which are proposed to be allotted through qualified institutions placement or pursuant to conversion or exchange of eligible securities offered through qualified institutions placement, have been listed on a stock exchange for a period of at least 1 year prior to the date of issuance of notice to its shareholders for convening the meeting to pass the special resolution:

(d) An issuer shall be eligible to make a qualified institutions placement if any of its promoters or directors is not a fugitive economic offender.

(e) All eligible securities issued through a qualified institutions placement shall be listed on the recognised stock exchange where the equity shares of the issuer are listed. Provided that the issuer shall seek approval under Rule 19(7) of the Securities Contracts (Regulation) Rules, 1957, if applicable.

(f) The issuer shall not make any subsequent qualified institutions placement until the expiry of 6 months from the date of the prior qualified institutions placement made pursuant to one or more special resolutions.

(d) Securities and Exchange Board of India (SEBI) has issued circular No. SEBI/HO/CFD/DIL2/CIR/P/2020/13 dated January 22, 2020 regarding Streamlining the Process of Rights Issue by amending SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 (“ICDR Regulations”) and SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (“LODR Regulations”). This circular shall be applicable for all rights issues and fast track rights issue where Letter of Offer (LoF) is filed with the stock exchanges on or after February 14, 2020.

The Securities and Exchange Board of India (SEBI), has simplified the rights issue process to make it more efficient and effective, by amending the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 (“ICDR Regulations”) and SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (“LODR Regulations”). Accordingly, following changes are made with respect to the Rights Issue process :

1. The period for advance notice to stock exchange(s) under Regulation 42(2) of LODR Regulations has been reduced from at least 7 working days to at least 3 working days (excluding the date of intimation and the record date), for the purpose of rights issue.

2. Issuance of newspaper advertisement disclosing date of completion of dispatch and intimation of same to the stock exchanges for dissemination on their websites, as per Regulation 84 (1) of ICDR Regulations, shall be completed by the issuer at least 2 days before the date of opening of the issue.

3. Introduction of dematerialized Rights Entitlements (REs) –

1. In the letter of offer and the abridged letter of offer, the issuer shall disclose the process of credit of REs in the demat account and renunciation thereof.
2. REs shall be credited to the demat account of eligible shareholders in dematerialized form.
3. In REs process, the REs with a separate ISIN shall be credited to the demat account of the shareholders before the date of opening of the issue, against the shares held by them as on the record date.
4. Physical shareholders shall be required to provide their demat account details to Issuer / Registrar to the Issue for credit of REs not later than two working days prior to the issue closing date, such that credit of REs in their demat account takes place at least one day before the issue closing date.

4. Trading of dematerialized REs on stock exchange platform –

1. REs shall be traded on secondary market platform of Stock exchanges, with T+2 rolling settlement, similar to the equity shares. Trading in REs on the secondary market platform of stock exchanges shall commence along with the opening of the issue and shall be closed at least four days prior to the closure of the rights issue.

2. Investors holding REs in dematerialized mode shall be able to renounce their entitlements by trading on stock exchange platform or off-market transfer. Such trades will be settled by transferring dematerialized REs through depository mechanism, in the same manner as done for all other types of securities.

5. Payment mode – Application for a rights issue shall be made only through ASBA facility.

6.

1. No withdrawal of application shall be permitted by any shareholder after the issue closing date.
2. The detailed procedures on the Rights Issue process are given at Annexure I for due compliance.
3. This circular shall be applicable for all rights issues and fast track rights issue where Letter of Offer (LoF) is filed with the stock exchanges on or after February 14, 2020.
4. All entities involved in the Rights Issue process are advised to take necessary steps to ensure compliance with this circular including the procedures stated at Annexure I of this circular.
5. This circular is being issued in exercise of the powers under section 11 read with section 11A of the Securities and Exchange Board of India Act, 1992.

Question 16.
Explain the following terms associated with public offering of equity shares. Attempt any five:
(i) Subscription list
(ii) Issue opening date
(iii) Differential pricing
(iv) Lock-in-period
(v) Price band
(vi) Red-herring prospectus. (June 2013, 4 marks each)
Answer:
(i) Subscription List:
(I) Meaning of subscription list: It means a list or record of subscription and subscribers. In case of issue of securities subscription list or subscription record is kept open for a certain period, which is known as “ Period of subscription”.
(II) Subscription period: As per Regulation 45 subscription period is as follows:
(1) Except as otherwise provided in these regulations, an initial public offer shall be kept open for at least three working days and not more than ten working days.

(ii) Issue Opening Date:
(I) Meaning of “Issue Opening date”: It means the maximum period, within which shares must be offered to public for subscription.
(II) Provision relating to “Opening of the issue”[ Reg. 140]:

(1) Subject to the compliance with the provisions of the Companies Act, 2013, a public issue may be opened within 12 months from the date of issuance of the observations by the Board under sub-regulation (4) of Regulation 123; or Provided that in case of a fast track issue, the issue shall open within the period specifically stipulated under the Companies Act, 2013.

(2) In case of shelf prospectus, the first issue may be opened within 3 months of issuance of observations by the Board.

(3) The issue shall be opened after at least 3 working days from the date of filing the red herring prospectus with the Registrar of Companies in case of book built issues and prospectus with the Registrar of Companies in case of fixed price issues.

(iii) Differential pricing:
Yes, an issuer can offer specified securities at different prices. Regulation 30 of SEBI (ICDR) Regulation, 2018 permits the issuer to offer its specified securities at different prices, subject to the following conditions

(a) Discounted price for retail individual investors or retail individual shareholders or employees entitled for reservation made under Regulation 33 may be offered specified securities at a price not lower than by more than 10% of the price at which net offer is made to other categories of applicants, excluding anchor investors;

(b) No lower price for anchor investor in case of a book built issue, the price of the specified securities offered to the anchor investors shall not be lower than the price offered to other applicants;

(c) Discounted price in case of alternate book building in case the issuer opts for the alternate method of book building in terms of Part D of Schedule XIII, the issuer may offer the specified securities to its employees at a price not lower than by more than 10% of the floor price.

(d) Disclosure of Discount: Discount, if any, shall be expressed in rupee terms in the offer document.

(iv) Lock-in-period: The specified securities held by the promoters shall not be transferable (hereinafter referred to as “lock-in”) for the periods as stipulated hereunder:
(a) minimum promoters’ contribution including contribution made by AIFs, FVCs etc, shall be locked-in for a period of 3 years from the date of commencement of commercial production or date of allotment in the initial public offer, whichever is later;
(b) promoters’ holding in excess of minimum promoters’ contribution shall be locked-in for a period of 1 year from the date of allotment in the initial public offer.

(v) Price and Price Band :
(I) Meaning of Price Band: It means a range of prices within which investors can bid. This pricing technique is used in case of book building process.

(II) Regulation about Price Band [Regulation 29]:

(1) The issuer may mention a price or a price band in the offer document (in case of a fixed price issue) and a floor price or a price band in the red herring prospectus (in case of a book built issue) and determine the price at a later date before filing the prospectus with the Registrar of Companies: Provided that the prospectus filed with the Registrar of Companies shall contain only one price or the specific coupon rate, as the case may be.

(2) The cap on the price band and coupon rate in case of convertible debt instruments shall be less than or equal to 120% of the floor price. Provided that the cap of the price band shall be at least 105% of the floor price.

(3) The floor price or the final price shall not be less than the face value of the specified securities.

(4) Where the issuer opts not to make the disclosure of the floor price or price band in the red herring prospectus, the issuer shall announce the floor price or the price band at least 2 working days before the opening of the issue in the same newspapers in which the pre-issue advertisement was released or together with the pre-issue advertisement in the format prescribed under Part A of Schedule X.

(5) The announcement referred to in sub-regulation (4) shall contain relevant financial ratios computed for both upper and lower end of the price band and also a statement drawing attention of the investors to the section titled “basis of issue price” of the offer document.

(6) The announcement referred to in sub-regulation(4) and the relevant financial ratios referred to in sub-regulation(5) shall be disclosed on the website of the stock exchange(s) and shall be made available on the websites of the stock exchange(s).

(vi) Red-herring prospectus: Red-herring prospectus (RHP) is a prospectus, which does not have details of either price or number of shares being offered, or the amount of issue. A RHP for a Further Public Offer (FPO) can be filed with the ROC without the price band and the issuer, in such a case will notify the floor price or a price band by way of an advertisement.

In the case of book-built issues, it is a process of price discovery and the price cannot be determined until the bidding process is completed. Hence, such details are not shown in the Red Herring Prospectus filed with ROC in terms of the provisions of the Companies Act. Only on completion of the bidding process, the details of the final price are included in the offer document. The offer document thereafter with ROC is called a prospectus.

Question 17.
Comment on the following statements:
(a) Book-building process of determining price of a public issue is preferred in case of initial public offer (IPO) while fixed price process is used for further public offer (FPO).
(d) A company cannot offer shares at different prices to different sets of people in a particular public issue.
(e) Every institutional buyer is a qualified institutional buyer (QIB). (Dec 2013, 4 marks each)
Answer:
(a) False:
‘Fixed price process’ and ‘Book Building process’ are pricing mechanisms in the issue of shares through public offer. When an issuer at the outset decides the issue price and mentions in the offer document, it is commonly known as “Fixed price issue”. On the other hand, when the price of an issue is discovered on the basis of demand received from the prospective investors at various price levels, it is called as “Book Built Issue”.

A company, whether issues shares through Initial Public Offer (IPO) or Further Public Offer (FPO) has the option to choose the pricing mechanism, under ‘Fixed Price Issue’ or ‘Book Built Issue’, subject to conditions specified under SEBI (ICDR) Regulations, 2018.

(d) The given statement i.e. “A company can’t offer shares at different prices to different sets of people in a particular public issue” is not correct. As per Regulation 30 of SEBI (ICDR) Regulations, 2018 an issuer company can offer specified securities at different prices, subject to following conditions:

(1) The issuer may offer its specified securities at different prices, subject to the following:
(a) retail individual investors or retail individual shareholders or employees entitled for reservation made under Regulation 33 may be offered specified securities at a price not lower than by more than ten percent, of the price at which net offer is made to other categories of applicants, excluding anchor investors;
(b) in case of a book built issue, the price of the specified securities offered to the anchor investors shall not be lower than the price offered to other applicants;
(c) In case the issuer opts for the alternate method of book building in terms of Part D of Schedule XIII, the issuer may offer the specified securities to its employees at a price not lower than by more than ten percent, of the floor price.
(2) Discount, if any, shall be expressed in rupee terms in the offer document.

(e) False:
Every ‘Institutional Buyer’ is not a ‘Qualified Institutional Buyer (QIB)’. SEBI (ICDR) Regulations, 2018 defines “Qualified Institutional Buyers”. Accordingly, “Qualified Institutional Buyers” shall mean the following:

1. A mutual fund, venture capital fund, alternative investment fund and foreign venture capital investor registered with SEBI;
2. A foreign portfolio investor other than category III foreign portfolio investor registered with SEBI.
3. Public Financial Institutions within the meaning of Section 2(72) of Companies Act, 2013;
4. Scheduled Commercial Banks;
5. Multilateral and Bilateral Development Financial Institutions;
6. State Industrial Development Financial Corporations;
7. Insurance Companies;
8. Provident Funds with minimum corpus of ₹ 25 Crores;
9. Pension Funds with minimum corpus of ₹ 25 Crores; and
10. National Investment Fund;
11. Insurance Funds set up and managed by Army, Navy or Air Force; and
12. Insurance Funds set up and managed by the Department of Posts. So it is obvious that only selected institutional buyers are covered here, so it will be wrong to say that “Every institutional buyer is a qualified institutional buyer”.

Question 18.
The shares of Runfast Ltd. were listed in Delhi Stock Exchange. The stock exchange delisted the shares of the company. The aggrieved company approaches you as a Company Secretary in Practice to know the remedy available to the company. Give your suggestions to the company keeping in view the provisions of the Securities Contracts (Regulation) Act, 1956. (Dec 2014, 10 marks)
Answer:
Section 21A provides that a recognised stock exchange may delist the securities, after recording the reasons therefor, from any recognised stock exchange on any of the ground or grounds as may be prescribed under this Act. The securities of a company shall not be delisted unless the company concerned has been given a reasonable opportunity of being heard.

A listed company or an aggrieved investor may file an appeal before the Securities Appellate Tribunal against the decision of the recognised stock exchange delisting the securities within 15 days from the date of the decision of the recognized stock exchange delisting the securities and the provisions of Sections 22B to 22E of this Act, shall apply, as far as may be, to such appeals.

The Securities Appellate Tribunal may, if it is satisfied that the company was prevented by sufficient cause from filing the appeal within the said period, allow it to be filed within a further period not exceeding 1 month. So in the instant case ‘Runfast Ltd.’ should file an appeal to the SAT against the delisting decision of Delhi Stock Exchange within 15 days or such extended period not exceeding 1 (one) month after showing sufficient cause of not filing within 15 days.

Question 19.
What is ‘market-making’? Discuss in brief the obligation of a market-maker. (June 2015, 5 marks)
Answer:
(I) Meaning of Market Making:
Market making is a process whereby two way quotes are offered for the purpose of facilitating trading in respect of certain scrips. Market-making is aimed at infusing liquidity in securities that are not frequently traded on stock exchanges. It adds liquidity to scrips, for which market making is being done, the main advantage of market making is that it affords much needed liquidity to the securities. It also increases the supply of scrips in the market and also triggers demand for the scrips in the market.

(II) Obligations of Market Maker:
The person(s) who offers the facility of market making is known as ‘Market Maker’. Following are the obligations of market maker:

(i) A market-maker is responsible for enhancing the demand supply situation in securities such as stocks and futures & options (F&O).

(ii) A market-maker usually is responsible for enhancing activity in a few chosen securities. In the process, the market-maker provides both a buy and a sell quote for his chosen securities. He profits from the spread between buy and sell quotes. For example, if the market-maker gives a bid-ask quote of ₹ 505-500 (which means the market – maker will buy from the market at ₹ 500 and sell at ₹ 505), then the profit is ₹ 5. For illiquid securities, the profit spreads are usually higher (within a regulator-prescribed band) because of the higher risk taken by the market-maker.

(iii) Market-makers are obligated to buy or sell the security at a price and size they have quoted.

(iv) One may wonder the role of a market-maker in the computerised system, as investors can transact directly without a third party. The market-maker’s role here is to ensure supply of stocks at any given point in time. Market-makers are helpful as they are always ready to buy or sell as long as investors are willing to pay the price quoted by them.

Question 20.
What do you mean by ‘reservation on competitive basis’? Who are the persons eligible in case of issue made through book building process? (June 2015, 5 marks)
Answer:
(I) Meaning: Reservation on competitive basis means reservation wherein specified securities are allotted in portion of the number of specified securities applied for in respect of a particular reserved category to the number of specified securities reserved for that category.

(II) Eligible Persons: As per Regulation 130(1) of SEBI (ICDR) Regulations 2018, the issuer may make reservations on a competitive basis out of the issue size excluding promoters’ contribution in favour of the following categories of persons:
(a) employees;
(b) shareholders (other than promoters and promoter group) of listed subsidiaries or listed promoter companies.

Provided that the issuer shall not make any reservation for the lead manager(s), registrar, syndicate member(s), their promoters, directors and employees and for the group or associate companies (as defined under the Companies Act, 2013) of the lead manager(s), registrar and syndicate member(s) and their promoters, directors and employees.

Question 21.
Comment on the following statement:
(c) Delisting is not permissible under certain circumstances. (June 2015, 4 marks)
Answer:
In following cases delisting is not permissible as per SEBI (Delisting of Equity Shares) Regulations, 2021:
(a) Buy back of equity shares by the company; or
(b) Preferential allotment made by the company; or
(c) Unless a period of three years has elapsed since the listing of that class of equity shares; or
(d) Instruments which are convertible into the same class of equity shares that are sought to be delisted are outstanding.
(e) Delisting of convertible securities.
(f) No promoter shall directly or indirectly employ the funds of the company to finance an exit opportunity or an acquisition of shares made pursuant to provided under these regulation.
(g) Employ any device, scheme or artifice to defraud any shareholder or other person; or
(h) Engage in any transaction or practice that operates as a fraud or deceit upon any shareholder or other person; or
(i) Engage in any act or practice that is fraudulent, deceptive or manipulative in connection with such delisting.

Question 22.
What is SME exchange? Explain the benefits of listing on SME exchange. (Dec 2015, 4 marks)
Answer:
(I) Meaning of SME exchange:
(a) It 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 SEBI (ICDR) Regulation and includes a stock exchange granted recognition for this purpose but does not include the Main Board.
(b) Here Main Board means a recognized stock exchange having nationwide trading terminals, other than SME exchange.
(c) The two stock exchange of India i.e. Bombay Stock Exchange (BSE) and National Stock Exchange (NSE) have begun their SME listing platforms. While BSE SME Exchange began its operation in March, 2012, NSE’s SME exchange titled EMERGE commenced operations in September, 2012.

(II) Benefits of Listing on SME Exchange:

(a) Access to capital and future financing opportunities: Going public would provide the-MSME’s with equity financing opportunities to grow their business from expansion of operations to acquisitions.

(b) increased visibility and prestige:
Going public is likely to enhance the company’s visibility. Greater public awareness gained through media coverage, publicly filed documents and coverage of stock by sector investment analysts can provide the SME with greater profile and credibility. This can result in a more diversified group of investors, which may increase the demand for that company’s shares leading to an increase in the company’s value.

(c) Participation by Venture Capital (VC):
It has been seen that there is greater vitality of venture capital in stock market-centered systems. The underdeveloped equity culture has made it difficult for companies to both get into the VC phase as well as graduate from venture capital/startups phase to a scale of operations that would make them internationally competitive. A vibrant equity market would provide prove to be an added incentive for greater venture capital participation by providing an exit option leading to a reduction in their lock-in period.

(d) Liquidity for shareholders:
Becoming a public company establishes a market for the company’s shares, providing its investors with an efficient and regulated vehicle in which to trade their own shares. Greater liquidity in the public market can lead to better valuation for shares than would be seen through private transactions.

(e) Create employee incentive mechanisms:
The employees of the SME enterprises can participate in the ownership of their own company and benefit from being a shareholder.

(f) Facilitate growth through Mergers and Acquisitions:
As a public company, company’s shares can be utilized as an acquisition currency to acquire target companies, instead of a direct cash offering. Using shares for an acquisition can be a tax efficient and cost effective vehicle to finance such a transaction.

(g) Encourages Innovation and Entrepreneurial Spirit:
The ability of companies in their early stages of development to raise funds in the capital markets allows these companies to grow very quickly. This growth helps speed up the dissemination of new technologies throughout the economy. In addition, by raising the returns available from pursuing new ideas, technologies etc the capital markets facilitate entrepreneurial activities.

Question 23.
Whether fast track issue can be proceeded just like an IPO or, are there any other conditions to fast track issue? Explain. (Dec 2015, 8 marks)
Answer:
No, in case of fast track issue the company has to fulfill some additional conditions which are as:
(a) Minimum listing period: Equity shares of the issuer have been listed on any stock exchange for a period of at least three years immediately preceding the reference date;

(b) Demat Form: Entire shareholding of the promoter group of the issuer is held in dematerialised form on the reference date.

(c) Average Market Capitalisation: Average market capitalisation of public shareholding of the issuer is at ₹ 1000 crores in case of public issue.

(d)

EXPLANATION	average market capitalisation of public sharehoiding
It means the sum of daily market capitalisation of public shareholding for a period of one year up to the end of the quarter preceding the month in which the proposed issue was approved by the shareholders or the board of the Issuer, as the case may be, divided by the number of trading days.

(e) Annualized delivery-based trading turnover: Annualized delivery- based trading turnover of the equity shares during six calendar months immediately preceding the month of the reference date has been at least 10% of the annualised trading turnover of the equity shares during such 6 months period.

(f) Compliance with Listing Agreement: Issuer has been in compliance with the equity listing agreement or the SEBI(LODR) Regulations, 2015, as applicable, for a period of atleast 3 years immediately preceding the reference date.

(g) Grievances Redressed: Issuer has redressed at least 95% of the complaints received from the investors till the end of the quarter immediately preceding the month of the reference date;

(h) No Prosecution: No show-cause notices have been issued or prosecution proceedings have been initiated by the Board and pending against the issuer or its promoters or whole-time directors as on the reference date;

(i) No Settlement: Issuer or promoter or promoter group or director of the issuer has not settled any alleged violation of securities laws through the consent or settlement mechanism with the Board during 3 years immediately preceding the reference date.

(j) No suspension of Trading: Equity shares of the issuer have not been suspended from trading as a disciplinary measure during last 3 years immediately preceding the reference date.

(k) No conflict of interest: There shall be no conflict of interest between the lead manager(s) and the issuer or its group companies in accordance with the applicable regulations.

(l) Impact of audit qualifications: Impact of audit qualifications, if any and where quantifiable, on the audited accounts of the issuer in respect of those financial years for which such accounts are disclosed in the letter of offer does not exceed 5% of the net profit or loss after tax of the issuer for the respective years.

Question 24.
Comment on the following:
(b) A company cannot offer its shares at different prices to different sets of people in a particular public issue. (Dec 2015, 5 marks)
(c) Book-building process of determining price of a public issue is preferred in case of initial public offer (IPO) while fixed price process is used for further public offer (FPO). (Dec 2015, 5 marks)
Answer:
(b) Yes, an issuer company can offer specified securities at different prices. However, it has to satisfy following conditions:

(a) retail individual investors or retail individual shareholders or employees entitled for reservation made under Regulation 33 may be offered specified securities at a price not lower than by more than 10% of the price at which net offer is made to other categories of applicants, excluding anchor investors;
(b) in case of a book built issue, the price of the specified securities offered to the anchor investors shall not be lower than the price offered to other applicants;
(c) In case the issuer opts for the alternate method of book building in terms of Part D of Schedule XIII, the issuer may offer the specified securities to its employees at a price not lower than by more than 10% of the floor price.
(d) Discount, if any, shall be expressed in rupee terms in the offer document.

Question 25.
Comment on the following and support your answer with necessary reasons:
(iii) The market makers infuse liquidity in securities that are not frequently traded on stock exchanges. (June 2016, 4 marks)
Answer:
(i) Nature of Statement: The given statement i.e. “The market makers infuse liquidity in securities that are not frequently traded on stock exchanges” is correct.
(ii) Reason: A market-maker is responsible for enhancing the demand supply situation in securities such as stocks and futures. In the process, the market-maker provides both a buy and a sell quote for his chosen securities. Market-makers are obligated to buy or sell the security at a price and size they have quoted.

Question 26.
Can a company issue shares at differential price in a public issue? If yes, to whom and under what circumstances the shares can be issued at differential price? (Dec 2016, 4 marks)
Answer:
Yes, a company can issue shares at differential prices in a public issue as per SEBI (ICDR) Regulations, 2018, an issuer company can offer specified securities at different prices, subject to following conditions:

The Statement i.e. “A Company can’t offer shares at different prices to different sets of people in a particular public issue” is not correct. As per SEBI (ICDR) Regulation 2018, an issuer company, can offer specified securities at different prices, subject to following conditions:

(a) retail individual investors or retail individual shareholders or employees entitled for reservation made under regulation 33 may be offered specified securities at a price not lower than by more than 10% of the price at which net offer is made to other categories of applicants, excluding anchor investors;
(b) in case of a book built issue, the price of the specified securities offered to the anchor investors shall not be lower than the price offered to other applicants;
(c) In case the issuer opts for the alternate method of book building in terms
of Part D of Schedule XIII, the issuer may offer the specified securities to its employees at a price not lower than by more than 10% of the floor price.
(d) Discount, if any, shall be expressed in rupee terms in the offer document.

Question 27.
As a Company Secretary of Lucky Ltd., prepare a Board note giving various requirements of SEBI guidelines for rights issue and enumerate the various major steps involved in such an issue. (Dec 2016, 8 marks)
Answer:
To
The Board of Directors

Date:———

Lucky Limited
Sub: SEBI Regulation for right issue and major steps for right issue Sir/ Madam,
We are highlighting SEBI Regulations for right issue for your consideration:
1. Check whether the rights issue is within the authorised share capital of the company. If not, steps should be taken to increase the authorised share capital.
2. In case of a listed company, notify the stock exchange concerned the date of Board Meeting at which the rights issue is proposed to be considered at least 2 days in advance of the meeting.
3. Rights issue shall be kept open for at least 15 days and not more than 30 days.
4. Convene the Board Meeting and place before it the proposal for rights issue.
5. The Board of Directors should decide on the following matters:

1. Quantum of issue and the proportion of rights shares.
2. Alteration of share capital, if necessary, and offering shares to persons other than existing holders of shares in terms of Section 62 of the Companies Act, 2013.
3. Fixation of record date.
4. Appointment of merchant bankers and underwriters (if necessary).
5. Approval of draft letter of offer or authorisation of managing director/ company secretary to finalise the letter of offer in consultation with the managers to the issue, the stock exchange and SEBI.

6. Immediately after the Board Meeting notify the concerned Stock Exchanges about particulars of Board’s of Directors decision.
7. If it is proposed to offer shares to persons other than the shareholders of the company, a General Meeting has to be convened and a resolution is to be passed for the purpose in terms of Section 62 of the Companies Act, 2013.
8. Forward 6 sets of letter of offer to concerned Stock Exchange(s).
9. Dispatch letters of offer to shareholders by registered post.
10. Check that an advertisement giving date of completion of dispatch of letter of offer has been released in at least an English National Daily, one Hindi National Paper and a Regional Language Daily where registered office of the issuer company is situated.
11. Check that the advertisement contains the list of centres where shareholders or persons entitled to rights may obtain duplicate copies of composite application forms in case they do not receive original application form along with the prescribed format on which application may be made.
12. The applications of shareholders who apply both on plain paper and also in a composite application form are liable to be rejected.
13. Make arrangement with bankers for acceptance of share application forms.
14. Prepare a scheme of allotment in consultation with Stock Exchange.
15. Convene Board Meeting and make allotment of shares.
16. Make an application to the Stock Exchange(s) where the company’s shares are listed for permission of listing of new shares.

Thanking you
Your Sincerely
Sd/- ‘
(———)
(Signature)

Question 28.
Define the following:
(i) Fast track issue (Dec 2016, 3 marks)
Answer:
(I) Fast Track Issues: It may be defined as a time saving manner for bringing public issue by a listed company, satisfying the prescribed conditions of Regulations 155 of SEBI (ICDR) Regulation, 2018. As per the Regulation 155, a listed company can bring further public offer, without fulfilling the requirements of Regulation 123, which are as follows:
(a) No need to file three copies of the draft offer document with the concerned regional office of the Board;
(b) No need to file the draft offer document with the stock exchange(s) where the specified securities are proposed to be listed,

(II) Provision Related to Fast Track issue:
(a) Minimum Listing Period: Equity shares of the issuer have been listed on any stock exchange for a period of at least three years immediately preceding the reference date;
(b) Demat Form: Entire shareholding of the promoter group of the issuer is held in dematerialised form on the reference date.
(c) Average Market Capitalisation: Average Market Capitalisation of public shareholding of the issuer is at ₹ 1000 crores in case of public issue

EXPLANATION	average market capitalisation of public shareholding
It means the sum of daily market capitalisation of public shareholding for a period of one year up to the end of the quarter preceeding the month in which the proposed issue was approved by the shareholders or the board of the Issuer, as the case may be, divided by the number of trading days.

(d) Annualised trading turnover: Annualised trading turnover of the equity shares of the issuer during 6 calendar months immediately preceding the month of the reference date has been at least 2% of the weighted average number of equity shares listed during such 6 months period.
(e) Annualized delivery-based trading turnover: Annualized delivery-based trading turnover of the equity shares during six calendar months immediately preceding the month of the reference date has been at least 10% of the annualised trading turnover of the equity shares during such 6 months period.
(f) Compliance with Listing Agreement: Issuer has been in compliance with the equity listing agreement or the SEBI (LODR). Regulations, 2015, as applicable, for a period of at least 3 years immediately preceding the reference date.
(g) Grievances Redressed: Issuer has redressed at least 95% of the complaints received from the investors till the end of the quarter immediately preceding the month of the reference date;
(h) No Prosecution: No show-cause notices have been issued or prosecution proceedings have been initiated by the Board and pending against the issuer or its promoters or whole-time directors as on the reference date;
(i) No Settlement: Issuer or Promoter or Promoter group or Director of the issuer has not settled any alleged violation of securities laws through the consent or settlement mechanism with the Board during 3 years immediately preceding the reference date.
(j) No Suspension of Trading: Equity shares of the issuer have not been suspended from trading as a disciplinary measure during last 3 years immediately preceding the reference date.
(k) No Conflict of interest: There shall be no conflict of interest between the lead manager(s) and the issuer or its group companies in accordance with the applicable regulations.
(l) Impact of Audit qualifications: Impact of Audit qualifications, if any and where quantifiable, on the audited accounts of the issuer in respect of those financial years for which such accounts are disclosed in the letter of offer does not exceed 5% of the net profit or loss after tax of the issuer for the respective years.

Question 29.
Comment on the followings:
(b) Benefits available to a company on listing at SME Exchange. (June 2017, 5 marks)
Answer:
Benefits of Listing on SME Exchange:
(a) Access to capital and future financing opportunities

(b) Going public would provide the MSME’s with equity financing opportunities to grow their business – from expansion of operations to acquisitions. Companies in the growth phase tend to get over-leveraged at which point, banks are reluctant to provide further credit. Equity capital is then necessary to bring back strength to the balance sheet.

(c) The option of equity financing through the equity market allows the firm to not only raise long-term capital but also get further credit due through an additional equity infusion. The issuance of public shares expands the investor base, and this in turn will help set the stage for secondary equity financings, including private placements.

(d) In addition, Issuers often receive more favourable lending terms when borrowing from financial institutions.

(e) The mechanics of listing on a stock exchange (audited balance sheets, being subject to corporate governance norms etc.) would address many of the transparency and informational asymmetry constraints that the financial institutions face in lending to the SME sector. In addition, equity financing lowers the debt burden leading to lower financing costs and healthier balance sheets for the firms. The continuing requirement for adhering to the stock market rules for the issuers lower the on-going information and monitoring costs for the banks.

(f) Increased visibility and prestige:
Going public is likely to enhance the company’s visibility. Greater public awareness gained through media coverage, publicly filed documents and coverage of stock by sector investment analysts can provide the SME with greater profile and credibility. This can result in a more diversified group of investors, which may increase the demand for that company’s shares leading to an increase in the company’s value.

Question 30.
Answer the following:
Briefly explain the provisions relating to delisting of equity shares under SEBI Regulations, 2021. (June 2017, 4 marks)
Answer:
(I) About Delisting: The term “delisting” of securities means permanent removal of securities of a listed company from a stock exchange. As
a consequence of delisting, the securities of that company would no longer be traded at that stock exchange. Delisting can be Voluntary or Compulsory as per SEBI (Delisting of Equity Shares) Regulations, 2021.

(II) Provisions regarding Delisting:
(a) Regulation 6 & 7: A company may delist its equity shares from one or more recognised stock exchanges where they are listed and continue their listing on one or more other recognised stock exchanges, if after the proposed delisting the equity shares:

• would remain listed on any recognised stock exchange which has nationwide trading terminals, no exit opportunity needs to be given to the public shareholders; and,
• do not remain listed on any recognised stock exchange having nation wide trading terminals, exit opportunity shall be given to all the public shareholders holding the equity shares sought to be delisted.

(b) Regulation 27: Further Regulation 35 of the SEBI (Delisting of Equity Shares) Regulations, 2021 provides special provisions for small Companies to be delisted from all the recognised stock exchanges where they are listed.

Question 31.
Answer the following:
(a) SEBI in exercise of the powers conferred by Section 31 read with Section 21A of the Securities Contracts (Regulation) Act, 1956, Section 30, Sub-section (1) of Section 11 and Sub-section (2) of Section 11A of SEBI Act, 1992 made the SEBI (Delisting of Equity Shares) Regulations 2021. Explain the framework and complete process of delisting as per regulations. (8 marks)
Answer:
Delisting” through Regulation 5 to 12:
The procedure of voluntary delisting can be conveniently summarized under two heads i.e.
Case I: Conditions and procedure for delisting where exit opportunity is not required (Reg.5-6)

(1) Delisting from some of the recognised stock exchanges [Reg. 5]:
A company may delist its equity shares from one or more of the recognised stock exchanges on which it is listed without providing an exit opportunity to the public shareholders, if after the proposed delisting,! the equity shares remain listed on any recognised stock exchange that has nationwide trading terminals.

(2) Procedure for delisting where no exit opportunity is required [Reg. 6]:

(1) Any company desirous of delisting its equity shares under the provisions of regulation 5 of these regulations shall –

(a) obtain the prior approval of its Board of Directors;
(b) make an application to the relevant recognised stock exchange(s) for delisting its equity shares;
(c) issue a public notice of the proposed delisting from the relevant stock exchange(s) in at least one English national newspaper with wide circulation, one Hindi national newspaper with wide circulation in their all India editions and one vernacular newspaper of the region where the relevant stock exchange(s) is located;
(d) disclose the fact of delisting in its first annual report post delisting.

(2) The public notice issued under clause (c) of sub-regulation (1) shall mention the name(s) of the recognised stock exchange(s) from which the equity shares of the company are intended to be delisted, the reasons for such delisting and the fact of continuation of listing of equity shares on the recognised stock exchange(s) having nationwide trading terminals.

(3) An application for delisting made under clause (b) of sub-regulation
(1) shall be disposed of by the recognised stock exchange(s) within a period not exceeding thirty working days from the date of receipt of such application that is complete in all respects.

Case II: Conditions and procedure for delisting where exit opportunity is required:

(3) Delisting from all the recognised stock exchanges [Reg. 7]: The equity shares of a company may be delisted from all the recognised stock exchanges having nationwide trading terminals on which they are listed, after an exit opportunity has been provided by the acquirer to all the public shareholders holding the equity shares sought to be delisted, in accordance with procedure as mentioned in the regulation.

(4) Conditions for delisting where exit opportunity is required:

(a) Initial public announcement [Regu. 8]:
On the date when the acquirer(s) decides to voluntarily delist the equity shares of the company, it shall make an initial public announcement to all the stock exchanges on which the shares of the company are listed and the stock exchanges shall forthwith disseminate the same to the public.

(b) Appointment of the Manager to the offer [Regu. 9]:

• Prior to making an initial public announcement, the acquirer shall appoint a merchant banker registered with the Board as the Manager to the offer.
• The Manager to the offer appointed under sub-regulation (1) shall not be an associate of the acquirer.
• The initial public announcement and the subsequent activities as required under these regulations shall be undertaken by the acquirer through the Manager to the offer.

(c) Approval by the Board of Directors [Regu.10]:

• The company shall obtain the approval of its Board of Directors in respect of the proposal of the acquirer to delist the equity shares of the company, not later than twenty one days from the date of the initial public announcement.
• The Board of Directors of the company, before considering the proposal of delisting, shall appoint a Peer Review Company Secretary

(d) Approval by shareholders [Regu.11]:

• The company shall obtain the approval of the shareholders through a special resolution, not later than forty five days from the date of obtaining the approval of Board of Directors.
• The special resolution shall be passed through postal ballot and/ or e-voting as per the applicable provisions of the Companies Act, 2013 (18 of 2013) and the rules made thereunder.
• The company shall disclose all material facts in the explanatory statement sent to the shareholders in relation to such a resolution.
• The special resolution shall be acted upon only if the votes cast by the public shareholders in favour of the proposal are at least two times the number of votes cast by the public shareholders against it.

(e) In-principle approval of the stock exchange [Regu. 12]:

The company shall make an application to the relevant recognised stock exchange for in-principle approval of the proposed delisting of its equity shares in the Form specified by the recognised stock exchange from time to time, not later than fifteen working days from the date of passing of the special resolution or receipt of any other statutory or regulatory approval, whichever is later.

The application seeking in-principle approval for the delisting of equity shares shall be accompanied by an audit report as required under regulation 76 of the Securities and Exchange Board of India (Depositories and Participants) Regulations, 2018 in respect of the equity shares sought to be delisted, covering a period of six months prior to the date of the application.

Such application seeking in-principle approval for the delisting of the equity shares shall be disposed of by the recognised stock exchange within a period not exceeding, fifteen working days from the date of receipt of such application that is complete in all respects.

The recognised stock exchange shall not unfairly withhold such an application, but may require the company to satisfy or inform it as regards –
(a) compliance with regulations 10 and 11 of these regulations;
(b) resolution of investor grievances by the company;
(c) payment of listing fees due to the recognised stock exchange;

(d) compliance with any provision of the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015 as amended from time to time, that has a material bearing on the interests of its equity shareholders;

(e) any litigation or action pending against the company pertaining to its activities in the securities market or any other matter having a material bearing on the interests of its equity shareholders;
(f) any other relevant matter as it may deem fit.

Question 32.
Critically examine the following:
(d) Warrant cannot be issued along with public issue or right issue of specified securities. (Dec 2017, 5 marks)
Answer:
Warrant may be issued along with public issue or rights issue of specified securities subject to the following :

(a) The tenure of such warrant shall not exceed eighteen months from their date of allotment in the public/ rights issue;
(b) Not more than one warrant shall be attached to one specified security;
(c) The price or conversion formula of the warrant shall be determined upfront and at least 25% of the consideration amount shall also be received upfront;
(d) In case the warrant holder does not exercise the option to take equity shares against any of the warrants held by this, the consideration paid in respect of such warrant shall be forfeited by the issuer.

Question 33.
What do you understand by “Application Supported by Blocked Amount (ASBA)”? How does it work in Initial Public Offer (IPO)? Describe. (June 2018, 5 marks)
Answer:
SEBI has reviewed the processing of Application Supported by Blocked Amount (ASBA) applications in the Public Issues by market intermediaries and Self/Certified Syndicate Banks (SCSBs) as a part of the continuing efforts to further streamline the bidding process and to ensure the orderly development of securities market.

SEBI vide this circular has provided that the ASBA applications in Public Issues shall be processed only after the application monies are blocked in the investor’s bank accounts. Accordingly, all intermediaries/market infrastructure institutions are advised to ensure that appropriate systemic and procedural arrangements are made within three months from the date of issuance of this circular.

Further provided that the Stock Exchanges shall accept the ASBA applications in their electronic book building platform only with a mandatory confirmation on the application monies blocked. The circular shall be applicable for all categories of investors viz. Retail, QIB,- Nil and other reserved categories and also for all modes through which the applications are processed and for public issues opening on or after September 01, 2022.

Question 34.
Answer the following:
(b) “A company can raise funds from the primary market through different methods, different types of issues and by means of offer document and red herring prospectus”. Enumerate. (June 2018, 6 marks)
(c) “The book building process is very transparent. All investors including small investors can see on an hourly basis where the book is being built before applying”. Explain the offer to public through Book Building Process. (June 2018, 6 marks)
Answer:
(b) A company can raise funds from the primary market through different method:
(a) Public issue: When an issue/offer of securities is made to new investors for. becoming part of shareholders’ family of the issuer it is called a public issue. Public issue can be further classified into Initial public offer (IPO) and Further public offer (FPO). The significant features of each type of public issue are illustrated below:

(i) Initial public offer (IPO): When an unlisted company makes either a fresh issue of securities or offers its existing securities for sale or both for the first time to the public, it is called an IPO. This paves way for listing and trading of the issuer’s securities in the Stock Exchanges.
(ii) Further public offer (FPO) or Follow on offer: When an already listed company makes either a fresh issue of securities to the public or an offer for sale to the public, it is called a FPO.

(b) Right issue (RI): When an issue of securities is made by an issuer to its shareholders existing as on a particular date fixed by the issuer (i.e. record date), it is called a rights issue. The rights are offered in a particular ratio to the number of securities held as on the record date.

(c) Bonus issue: When an issuer makes an issue of securities to its existing shareholders as on a record date, without any consideration from them, it is called a bonus issue. The shares are issued out of the Company’s free reserve or share premium account in a particular ratio to the number of securities held on a record date.

(d) Private placement: When an issuer makes an issue of securities to a select group of persons not exceeding 49, and which is neither a rights issue nor a public issue, it is called a private, placement. Private placement of shares or convertible securities by listed issuer can be of two types:

(i) Preferential allotment: When a listed issuer issues shares or convertible securities, to a select group of persons in terms of provisions of SEBI (ICDR) Regulations, it is called a preferential allotment. The issuer is required to comply with various provisions which inter alia .include pricing, disclosures in the notice, lock in etc., in addition to the requirements specified in the Companies Act, 2013.

(ii) Qualified institutions placement (QIP): When a listed issuer issues equity shares or securities convertible into equity shares to Qualified Institutions Buyers (QIBs) only in terms of provisions of SEBI (IGDR) Regulations, it is called a QIP.

(iii) Institutional placement programme (IPP): When a listed issuer makes a further public offer of equity shares, or offer for sale of shares by promoter / promoter group of listed issuer in which, the offer allocation and allotment of such shares is made only to QIBs in terms of SEBI (ICDR) Regulations, 2018 for the purpose of achieving minimum public shareholding it is called an IPP.

(c)

1. An issuer company may, subject to the requirements specified make an issue of securities to the public through a prospectus through 100% of the net offer to the public through book building process.
2. Reservation to the extent of percentage specified in these Regulations can be made only to the following categories:

(a) employees and in case of a new issuer, persons who are in permanent and full time employment of the promoting companies excluding the promoter and the relative of promoter of such companies.

(b) ‘shareholders of the listed promoting companies in the case of a new company and shareholders of listed group companies in the case of an existing company’ on a ‘competitive basis’ or on a ‘firm allotment basis’ excluding promoters. However, if the promoting companies are designated financial institutions or state or central financial institutions, the shareholder of such promoting companies shall be excluded for this purpose.

(c) persons who, on the date of filing of the draft offer document with SEBI, have business association, as depositors, bondholders and subscribers to services, with the issuer making an initial public offering.
However, no reservation can be made for the issue management team, syndicate members, their promoters, directors and employees and for the group/associate companies of issue management team and syndicate members, and their promoters, directors and employees.

3. The issuer company is required to enter into an agreement with one or more of the Stock Exchange(s) which have the requisite system of on-line offer of securities. The agreement would cover inter-alia, the rights, duties, responsibilities and obligations of the company and stock exchange (s) inter-se. The agreement may also provide for a dispute resolution mechanism between the company and the stock exchange. The company may also apply for listing of its securities on an exchange other than the exchange through which it offers its securities to public through the on-line system.

4. The Lead Merchant Banker shall act as the Lead Book Runner. In case the issuer company appoints more than one merchant banker, the names of all such merchant bankers who have submitted the due diligence certificate to SEBI, may be mentioned on the front cover page of the prospectus. A disclosure to the effect that “ the investors may contact any of such merchant bankers, for any complaint pertaining to the issue” is required to be made in the prospectus, after the “risk factors.

5. The lead book runner/issuer may designate, in any manner, the other Merchant Bankers if the inter-se allocation of responsibilities amongst the merchant bankers is disclosed in the prospectus on the page giving the details of the issue management team and a co-ordinator has been appointed amongst the lead book runners, for the purpose of co-ordination with SEBI. However, the names of only those merchant bankers who have signed the inter-se allocation of responsibilities would be mentioned in the offer document on the page where the details of the issue management team is given.

6. The primary responsibility of building the book is of the Lead Book Runner. The Book Runner(s) may appoint those intermediaries who are registered with SEBI and who are permitted to carry on activity as an ‘Underwriter’ as syndicate members. The Book Runner(s)/ syndicate members shall appoint brokers of the exchange, who are registered with SEBI, for the purpose of accepting bids, applications and placing orders with the company and ensure that the brokers so appointed are financially capable of honouring their commitments arising out of defaults of their clients/investors, if any. However, in case of application supported by blocked amount, Self Certified Syndicate Banks, Registrar to Issue and Share Transfer Agents, Depository Participants shall accept and upload the details of such application in electronic bidding system of the stock exchange.

7. The brokers, and Self Certified Syndicate Banks, Registrar to Issue and Share Transfer Agents, Depository Participants accepting applications and application monies, are considered as ‘bidding/collection centres’.

Question 35.
“Right issue as identified in the SEBI Regulations is an issue of capital under Section 62 of the Companies Act, 2013 to be offered to the existing shareholders of the company through a letter of offer”. Enumerate the steps involved in issue and listing of rights shares. (June 2018, 8 marks)
Answer:
The various steps involved for issue of rights share are enumerated below:

1. Check whether the rights issue is within the authorised share capital of the company. If not, steps should be taken to increase the authorised share capital.
2. In case of a listed company, notify the stock exchange concerned the date of Board Meeting at which the rights issue is proposed to be considered at least 2 days in advance of the meeting.
3. Rights issue shall be kept open for at least 15 days and not more than 30 days.
4. Convene the Board meeting and place before it the proposal for rights issue.
5. The Board of directors should decide on the following matters:

1. Quantum of issue and the proportion of rights shares.
2. Alteration of share capital, if necessary, and offering shares to persons other than existing holders of shares in terms of Section 62 of the Companies Act, 2013.
3. Fixation of record date.
4. Appointment of merchant bankers and underwriters (if necessary).
5. Approval of draft letter of offer or authorisation of managing director/ company secretary to finalise the letter of offer in consultation with the managers to the issue, the stock exchange and SEBI.

6. Immediately after the Board Meeting notify the concerned Stock Exchanges about particulars of Board’s of Directors decision.
7. If it is proposed to offer shares to persons other than the shareholders of the company, a General Meeting has to be convened and a resolution is to be passed for the purpose in terms of Section 62 of the Companies Act, 2013.
8. Forward 6 sets of letter of offer to concerned Stock Exchange(s).
9. Despatch letters of offer to shareholders by registered post.
10. Check that an advertisement giving date of completion of despatch of letter of offer has been released in at least an English National Daily, one Hindi National Paper and a Regional Language Daily where registered office of the issuer company is situated.
11. Check that the advertisement contains the list of centres where shareholders or persons entitled to rights may obtain duplicate copies of composite application forms in case they do not receive original application form along with the prescribed format on which application may be made.
12. The applications of shareholders who apply both on plain paper and also in a composite application form are liable to be rejected.
13. Make arrangement with bankers for acceptance of share application forms.
14. Prepare a scheme of allotment in consultation with Stock Exchange.
15. Convene Board Meeting and make allotment of shares.
16. Make an application to the Stock Exchange(s) where the company’s shares are listed for permission of listing of new shares.

Question 36.
Explain the following:
Institutional Trading Platform (Dec 2018, 3 marks)
Answer:
Institutional Trading Platform (ITP) : SEBI has notified new norms for listing of small and medium enterprises (SMEs) including the start- up companies on Institutional Trading Platform (ITP) on stock exchanges without an initial public offering. This will allow SMEs to list themeselves on stock exchanges without raising funds form the public. In the modified rules to permit listing of start-ups and SMEs in ITP without having to make an IPO, a minimum amount of trading or investment on the ITP would be ₹ 10 lakh. This move will provide easier exit options for entities such as Angel investors, capital funds and private equity.

Question 37.
Critically examine the following:
Promoter’s contribution to be brought in before public issue opens. (Dec 2018, 4 marks)
Answer:
As per SEBI (ICDR) Regulations, 2018, Promoters shall bring in the full amount of the promoters’ contribution including premium at least one day prior to the issue opening date which shall be kept in an escrow account with a Scheduled Commercial Bank and the said contribution/ amount shall be released to the company along with the public issue proceeds.

However, where the promoters’ contribution has been brought prior to the public issue and has already been deployed by the company, the company shall give the cash flow statement in the offer document disclosing the use of such funds received as promoters’ contribution.

If the promoters’ minimum contribution exceeds ₹ 100 crores, the promoters shall bring in ₹ 100 crores before the opening of the issue and the remaining contribution shall be brought in by the promoters in advance on pro-rata basis before the calls are made on public.

Question 38.
Who are dissenting shareholders? Elucidate the conditions of any to provide exit opportunity to them. (Dec 2018, 5 marks)
Answer:
Dissenting Shareholders mean those shareholders who have voted against the resolution for change in objects or variation in terms of a contract, referred to in the prospectus of the issuer. Regulation 69 of SEBI (ICDR) Regulations, 2018, provides that only those dissenting shareholders of the issuer who are holding shares as on the relevant date shall be eligible to avail the exit offer.

The promoters or shareholders in control shall make the exit offer in accordance with the provisions of the SEBI (ICDR) Regulations, 2009, to the dissenting shareholders, if:

• the proposal for change in objects or variation in terms of a contract, referred to in the prospectus is dissented by at least 10 percent of the shareholders who voted in the general meeting; and
• the amount to be utilized for the objects for which the prospectus was issued is less than 75 % of the amount raised (including the amount earmarked for general corporate purposes as disclosed in the offer document).

Question 39.
Can an entity, pursue listing of its specified securities without making a public issue? Give the exemptions, if any. (Dec 2019, 3 marks)
Answer:
Yes. Regulation 282(1) of the SEBI (ICDR) Regulations, 2018 provides that the provisions of Chapter X of SEBI (LODR) Regulations shall apply to issuers seeking listing of their specified securities pursuant to an initial public offer or for only trading on a stock exchange of their specified securities without making a public offer. Regulation 284 (3) of the SEBI (ICDR)

Regulations, 2018 lays down that the regulations relating to the following as stated under the Chapter of Initial Public Offer on Main Board shalt not be applicable:
(a) allotment;
(b) issue opening or closing;
(c) advertisements;
(d) underwriting;
(e) sub-regulation (2) of regulation 5;
(f) pricing;
(g) dispatch of issue material; and
(h) other such provisions related to offer of specified securities to the public.

Question 40.
Explain the eligibility criteria for listing on Innovators Listing Growth Platform. (Dec 2019, 5 marks)
Answer:
Eligibility criteria for listing on innovators Listing Growth Platform are as under:

An issuer which is intensive in the use of technology, information technology, intellectual property, data analytics, bio-technology or nano-technology to provide products, services or business platforms with substantial value addition shall be eligible for listing on the innovators growth platform, provided that as on the date of filing of draft information document or draft offer document with the Board, as the case may be, twenty five percent of the pre-issue capital of the Issuer Company for at least a period of two years, should have been held by:

I. Qualified Institutional Buyers.
II. Family trust with net-worth of more than five hundred crore rupees, as per the last audited financial statements.
III. Accredited Investors for the purpose of Innovators Growth Platform.
IV. The following regulated entities:
a. Category III Foreign Portfolio Investor
b. An entity meeting all the following criteria:

1. It is a pooled investment fund with minimum assets under management of one hundred and fifty million USD.
2. It is registered with a financial sector regulator in the jurisdiction of which it is a resident.
3. It is resident of a country whose securities market regulator is a signatory to the International Organization of Securities Commission’s Multilateral Memorandum of Understanding (Appendix A Signatories) or a signatory to Bilateral Memorandum of Understanding with the Board.
4. It is not resident in a country identified in the public statement of Financial Action Task Force as:

(a) a jurisdiction having a strategic Anti-Money Laundering or Combating the Financing of Terrorism deficiencies to which counter measures apply or
(b) a jurisdiction that has not made sufficient progress in addressing the deficiencies or has not committed to an action plan developed with the Financial Action Task Force to address the deficiencies.

Explanation:
(a) The following entities shall be eligible to be considered as accredited investors for the purpose of innovators growth platform:

1. any individual with total gross income of fifty lakhs rupees annually and who has minimum liquid net worth of five crore rupees; or
2. anybody corporate with net worth of twenty five crore rupees.

(b) Not more than ten percent of the pre-issue capital may be held by Accredited Investors.
(c) For the purpose of accreditation: The persons /corporate bodies who wish to get accreditation for the purpose of innovators growth platform, shall approach the stock exchanges or depositories and follow the procedures prescribed by the Board and / or such stock exchange or depository for the purpose of accreditation as an Accredited Investor, from time to time.

An issuer shall be eligible for listing on the institutional trading platform if none of the promoters or directors of the issuer company is a fugitive economic offender.

Question 41.
Define and discuss the conditions for Preferential Issue. When an issuer becomes ineligible to make a such issue? (Dec 2020, 5 marks)
Answer:
Define and discuss the conditions for preferential issue:
A listed issuer may make a preferential issue of specified securities, if:

• all equity shares allotted by way of preferential issue shall be made fully paid up at the time of the allotment of share.
• a special resolution has been passed at general meeting by its shareholders.
• all the equity shares, if any, held by the proposed allottees in the issuer are in dematerialised mode.
• the issuer is in compliance with the conditions for continuous listing of equity shares as specified in the listing agreement with the recognised stock exchange.
• the issuer has obtained the Permanent Account Number (PAN) of the proposed allottees.

When an issuer becomes ineligible to make a such issue:

1. Preferential issue of specified securities shall not be made to any person who has sold or transferred any equity shares of the issuer during the six months prior to the relevant date.
2. An issuer shall not be eligible to make a preferential issue if any of its promoters or directors is a fugitive economic offender.
3. Where any person belonging to promoter(s) or the promoter group has earlier subscribed to warrants of an issuer but failed to exercise the warrants, the promoter(s) and promoter group shall be ineligible for issue of specified securities of such issuer on preferential basis for a period of 1 year from:

(a) the date of expiry of the tenure of the warrants due to non-exercise of the option to convert; or
(b) the date of cancellation of the warrants, as the case may be.

Question 42.
PQR Ltd. is listed on SME platform, The company has excellent performance in terms of turnover and profit during last few years. It is interested in migrating to the Main Board. Prepare a note on the same.
Answer:
Under the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018, an issuer, whose specified securities are listed on a SME Exchange and whose post issue face value capital is more than ten crore rupees and up to twenty five crore rupees, may migrate:

• its specified securities to Main Board if its shareholders approve such migration by passing a special resolution through postal ballot to this effect; and
• if such issuer fulfils the eligibility criteria for listing laid down by the Main Board.

Although, the special resolution shall be acted upon if and only if the votes cast by shareholders other than promoters in favour of the proposal amount to at least two times the number of votes cast by shareholders other than promoter shareholders against the proposal which means that resolution shall be approved by majority of minority.

Where the post issue face value capital of an issuer listed on SME exchange is likely to increase beyond twenty five crore rupees by virtue of any further issue of capital by the issuer by way of rights issue, preferential issue, bonus issue, etc.

The issuer shall first migrate its specified securities listed on SME exchange to Main Board and seek listing of specified securities proposed to be issued on the Main Board subject to the fulfilment of the eligibility criteria for listing of specified securities laid down by the Main Board.

Although no further issue of capital by the issuer shall be made unless:

the shareholders of the issuer have approved the migration by passing a special resolution through postal ballot wherein the votes cast by shareholders other than promoters in favour of the proposal amount to at least two times the number of votes cast by shareholders other than promoter shareholders against the proposal;

the issuer has get in- principle approval from the Main Board for listing of its entire specified securities on it.

Question 43.
(a) Ultra-Information Services Limited, provides IT and ITES services. The Board of Directors of the Company want to go for Initial Public Offer (IPO) to raise funds for expansion of the Company. During the previous year, the Company started a new line of business of providing aeronautical designs to an Australian entity and accordingly changed its name to Ultra Aero Technology Services Limited. As a Company Secretary, advise the Board of Directors about eligibility for an IPO. (Dec 2021, 5 marks)
(b) The Board of Directors of Minto Limited wanted to set up a new production plant at Manesar. In the Board Meeting where the budgets were being discussed, one Director suggested that funds can be raised by issuing warrants to fund the new project.
As a Company Secretary, advise the Board of Directors, whether the Company can issue warrants. (Dec 2021, 5 marks)
(c) Explain minimum promoter’s contribution to be brought in before public issue open under regulation 14(34). (Dec 2021, 5 marks)
Answer:
(a) The eligibility requirements for initial public offer are provided under Regulation 6(1) of the SEBI (ICDR) Regulations 2018.

The said Regulation inter-alia, provides that an “issuer shall be eligible to make an IPO only if, in case the issuer has changed its name within the last one year, at least 50% of the revenue calculated on a restated and consolidated basis, for the preceding one full year has been earned by it from the activity indicated by the new name.

Therefore based on the above it can be concluded that as the Company has changed its name in the previous year, it would be eligible for an Initial Public Offer, if at least 50% of the revenue calculated on a restated and consolidated basis, for the preceding one full year has been earned from its aeronautical designing business.

Nonetheless, in terms of the Regulation 6(2) of the SEBI (ICDR) Regulations 2018, an issuer not satisfying the condition stipulated above shall be eligible to make an Initial Public Offer (IPO) if the issue is made through the book-building process and the issuer undertakes to allot at least 75% of the net offer to qualified institutional buyers (QIB) and to refund the full subscription money if it fails to do so.

Conclusion:- Hence, Ultra Aero Technology Services Limited may also opt for this route if the conditions above are not satisfied.

(b) As per Regulation 13 of the SEBI (ICDR) Regulations 2018, an issuer shall be eligible to issue warrants in an initial public offer (IPO) subject to the following:

• the duration of such warrants shall not exceed 18 months from the date of their allotment in the initial public offer;
• a specified security may have one or more warrants attached to it;
• the price or formula for determination of exercise price of the warrants shall be determined upfront and disclosed in the offer document and at least 25 % of the consideration amount based on the exercise price shall also be received upfront;

Although, in case the exercise price of warrants is based on a formula, 25% consideration amount based on the cap price of the price band determined for the linked equity shares or convertible securities shall be received upfront.

in case the warrant holder does not exercise the option to take equity shares against any of the warrants held by the warrant holder, within 3 months from the date of payment of consideration, such consideration made in respect of such warrants shall be forfeited by the issuer.
Conclusion:- In the above case Minto Ltd. can issue warrants after complying with the aforementioned conditions.

(c) As per Regulation 14(3) of the SEBI (ICDR) Regulations 2018, the promoters shall bring full amount of the promoters’ contribution including premium at least one day prior to the date of opening of the issue.

As per Regulation 14(4) where the promoters have to subscribe to equity shares or convertible securities towards minimum promoters’ contribution, the amount of promoters’ contribution shall be kept in an escrow account with a scheduled commercial bank, which shall be released to the issuer along with the release of the issue proceeds.

Although, where the promoters’ contribution has already been brought in and utilised, the issuer shall give the cash flow statement disclosing the use of such funds in the offer document.

Further, where the minimum promoters’ contribution is more than ₹ 100 crore and the initial public offer (IPO) is for partly paid shares, the promoters shall bring in at least 100 crore before the date of opening of the issue and the remaining amount may be brought on a pro-rata basis before the calls are made to the public.

As per Regulation 14(4) of the SEBI (ICDR) Regulations 2018 further clarified that Promoters’ contribution shall be computed on the basis of the post-issue expanded capital:

(a) assuming full proposed conversion of convertible securities into equity shares;
(b) assuming exercise of all vested options, where any employee stock options are outstanding at the time of initial public offer.

Question 44.
Neel Bio Tech Limited whose specified securities are traded on the “Innovators Growth Platform” (IGP) pursuant to an initial public offer (IPO) would like to exit from IGP. Explain in brief the conditions under which the company can exit from the “Innovators Growth Platform” as per SEBI (ICDR) (Second Amendment) Regulations 2021. (June 2022, 5 marks)

Question 45.
Explain the eligibility conditions for the Fast Track Follow- on Public Offer (FPO). (June 2022, 5 marks)

Question 46.
Attempt the following questions:
(a) ABC Ltd. a company whose equity shares are listed at BSE and NSE is seeking delisting of its equity shares from both the recognised stock exchanges. It provides an exit opportunity to all public shareholders in accordance with SEBI (Delisting of Equity Shares) Regulations, 2021. Calculate the minimum number of equity shares to be acquired for the delisting offer to be successful. Also determine the final offer price from the details given hereunder:

(i)

	Number of shares	Percentage holding
Promoter	75,00,000	75
Public	25,00,000	25
	1,00,00,000	100

(ii) The floor price in terms of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 is 550 per share.
(iii) Assume that all the public shareholders holding shares in the demat mode had participated in the book building process as follows:

(Dec 2017, 5 marks)
Answer:
(i) Minimum No. of equity shares to be acquired:
An offer shall be deemed to be successful only if,-
(a) the post offer promoter shareholding (along with the persons acting in concert with the promoter) taken together with the shares accepted through eligible bids at the final price determined as per Schedule II, reaches 90% of the total issued shares of that class excluding the shares which are held by a custodian and against which depository receipts have been issued overseas; and

(b) at least 25% of the public shareholders holding shares in the demat mode as on date of the board meeting, had participated in the Book Building Process. Provided that this requirement shall not be applicable in a case, where the acquirer and the merchant banker demonstrate to the stock exchanges that they have delivered the letter of offer to all the public shareholders either through registered post or speed post or courier or hand delivery with proof of delivery or through email as a text or as an attachment to email or as a notification providing electronic link or Uniform Resource Locator including a read receipt.

(ii) Determination of final offer price:
The final offer price shall be determined as the price at which the shares accepted through eligible bids, that takes the shareholding of the promoter or the acquirer (along with the persons acting in concert) to 90% of the total issued shares of that class excluding the shares which are held by a custodian and against which depositary receipts have issued. If the final price is accepted, then, the promoter shall accept all shares tendered where corresponding bids placed are at the final price or at price which is lesser than final price. The promoter or acquirer may, if he deems fit, pay a higher final price.

Table for arriving at the final offer price is given as:

Bid price (₹)	Number of Investors	Demand (No. of Shares)	Cumulative demand (No. of Shares)
550	5	2,50,000	2,50,000
565	8	4,00,000	6,50,000
575	10	2,00,000	8,50,000
585	4	4,00,000	12,50,000
595	6	1,20,000	13,70,000
600	5	1,30,000	15,00,000
605	3	2,10,000	17,10,000
610	3	1,40,000	18,50,000
615	3	1,50,000	20,00,000
620	1	5,00,000	25,00,000
	48	25,00,000

Assuming floor price of ₹ 550/- per share, promoter/acquirer shareholding at 75% and number of shares required for successful delisting as 15,00,000, the final price would be the price at which the promoter reaches the threshold of 90%, i.e., it would be ₹ 600/- per share.

Question 47.
Answer the following:
(b) XYZ Ltd. made a public issue of equity shares in September, 2014 and sought listing of BSE and NSE. Soon, thereafter, the promoters of the company started contemplating a change in the objects clause mentioned in the prospectus. To give effect to the same the company convened an extra-ordinary general meeting of shareholders in November 2015. Though the resolution was passed by the company there were nevertheless, the dissenting shareholders too. The promoters decide to provide an exit opportunity to the dissenting shareholders. In the light of the above, answer the following questions:

(i) Is this act of the promoters justified? Highlight the relevant regulatory legal framework for the same?
(ii) Who are the dissenting shareholders?
(iii) Enumerate the conditions required to be complied with to give effect to this recourse which was availed by the promoters. (Dec 2017, 6 marks)
Answer:
(i) Action of promoter justified:
Schedule XX of SEBI (ICDR) Regulations 2018 provides-’Conditions and Manner of Providing Exit Opportunity to Dissenting Shareholders.’

The provisions of this Chapter shall apply to an exit offer made by the promoters or shareholders in control of an issuer to the dissenting shareholders in terms of Section 13(8) and Section 27(2) of the Companies Act, 2013, in case of change in objects or variation in the terms of contract referred to in the prospectus.

(ii) Meaning of Dissenting Shareholders:
“Dissenting Shareholders” mean those shareholders who have voted against the resolution for change in objects or variation in terms of a contract, referred to in the prospectus of the issuer.
However, the provisions of this Chapter shall not apply where there are neither identifiable promoters nor shareholders in control of the listed issuer.

(iii) Conditions for Exit Offer:
The promoters or shareholders in control shall make the exit offer in accordance with the provisions of this Chapter, to the dissenting shareholders, if:

(a) the public issue has opened after 1st April 2014; and
(b) the proposal for change in objects or variation in terms of a contract, referred to in the prospectus is dissented by at least 10 percent of the shareholders who voted in the general meeting; and
(c) the amount to be utilized for the objects for which the prospectus was issued is less than 75 % of the amount raised (including the amount earmarked for general corporate purposes as disclosed in the offer document).

Question 48.
Shaurya Ltd. a company dealing with glass molding and peripherals has plans to go public and raise ₹ 1,000 crores. They appoint CFQ Financial Services as their lead managers. The company’s directors having no knowledge of rules and regulations argue with the lead managers that 40% of shares are to be allotted to public, 40% to QIBs, 10% to HNI clients and balance to be taken by underwriters. As a Company Secretary, explain to the directors the Regulations 40 &136 of underwriting. (Dec 2019, 5 marks)
Answer:
The directors of the company are not correct as the rules pertaining to issue states that allotment of shares has to be made based on the following regulation:

(Regulation 40 & 136 of SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009

• If an issuer makes a IPO/FPO other than through the book building process, desires to have the issue underwritten, it shall appoint the underwriters in accordance with the SEBI (Underwriters) Regulations, 1993.
• If the issuer makes a public issue through a book building process:

(a) the issue shall be underwritten by lead managers and syndicate members. However, at least 75% of the net offer to the public is proposed to be compulsorily allotted to the QIBs, and such portion cannot be underwritten.
(b) the issuer shall, prior to filing the prospectus, enter into an underwriting agreement with the lead manager(s) and syndicate member(s) which shall indicate the number of specified securities which they shall subscribe to at the predetermined price in the event of under-subscription in the issue.
(c) if the syndicate member(s) fail to fulfil their underwriting obligations, the lead manager(s) shall fulfil the underwriting obligations.
(d) the lead manager(s) and syndicate member(s) shall not subscribe to the issue in any manner except for fulfilling their underwriting obligations.
(e) in case of every underwriting issue, the lead manager(s) shall undertake minimum underwriting obligation as specified in the SEBI (Merchant Bankers) Regulations, 1992.
(f) where the issue is required to be underwritten, the underwriting obligations should at least to the extent of minimum subscription.

Question 49.
The promoters of Z Ltd. holds 78 percent shares of the Equity Share capital of the company. The promoters are intending to reduce their holding to meet the provisions of regulatory authorities of minimum public subscription by way of Qualified Institutional Placement (QIP). Total Issued Share Capital of the Z Ltd. is ₹ 10 Crore consisting of 1 Crore shares of ₹ 10 each.
As a Company Secretary advise the Z Ltd. on the following points:
(i) What is minimum quantity the promoters should offer under the QIP?
(ii) Provisions regarding the approval of shareholders.
(iii) Rules regarding the listing of these shares with the Stock Exchange. (Aug 2021, 5 marks)
Answer:
(i) Every listed company is need to maintain public shareholding of at least twenty-five percent as per the Securities Contracts (Regulation) Rules, 1957 and so, balance can be held by promoter / promoter group.
In the above case the promoters can offer shares up to 3% of 1 crore shares i.e. 3 lakh shares of ₹ 10 each under QIP.
(ii) No resolution is need to be passed by the Shareholders in case the QIP is through an offer for sale by the promoters for compliance with minimum public shareholding requirements.
(iii) Since the shares offered are in offer for sale and hence, already listed, no further listing is required.

Question 50.
Mono Auto Limited raised ₹ 100 crores through an IPO with manufacturing of cars as one of its main objects. However due to economic downturn, the Company wants to change its objects to designing and supply of spare parts. Some of the shareholders have voted against this resolution for change in objects. Can the Company give such shareholders an option to exit. If so, what should be the exit price to be offered? (Dec 2021, 3 marks)
Answer:
Payment of Incentive Regulation 59 of the SEBI (ICDR) Regulations, 2018 states that the promoters, or shareholders in control of an issuer, shall provide an exit offer to dissenting shareholders (who does not given a consent) as provided for in the Companies Act, 2013, in case of change in objects or variation in the terms of contract related to objects referred to in the offer document as per conditions and manner is stated in Schedule XX. Further Schedule XX prescribes the procedure and computation of exit price as follows:

The promoters or shareholders in control shall make the exit offer, to the dissenting shareholders, in cases only if a public issue has opened after April 1, 2014; if:
(a) the proposal for change in objects or variation in terms of a contract, referred to in the offer document is dissented by at least 10 % of the shareholders who voted in the general meeting; and .
(b) the amount to be utilized for the objects for which the offer document was issued is less than 75 % of the amount raised.

The ‘exit price payable to the dissenting shareholders shall be the highest of the following:

1. the volume-weighted average price paid or payable for acquisitions, whether by the promoters or shareholders having control or by any person acting in concert with them, during the fifty-two weeks immediately preceding the relevant date;

2. the highest price paid or payable for any acquisition, whether by the promoters or shareholders having control or by any person acting in concert with them, during the twenty-six weeks immediately preceding the relevant date;

3. the volume-weighted average market price of such shares for a period of sixty trading days immediately preceding the relevant date as traded on the recognised stock exchange where the maximum volume of trading in the shares of the issuer are recorded during such period, provided such shares are frequently traded;

4. where the shares are not frequently traded, the price determined by the promoters or shareholders having control and the merchant banker considering valuation-parameters including book value, comparable trading multiples, and such other Hence, parameters as are customary for valuation of shares of such issuers.
Conclusion: Hence, Mono Auto Limited shall compute the exit price as stated above.

Question 51.
X Ltd. wants to issue 1000 shares through a book built offer within a Price Band of ₹ 130 to ₹ 150. Bids are received as follows :

Bid Price	No. of Shares	Total Demand
1. ₹150	200	200
2. ₹ 140	300	500
3. ₹ 138	500	1000
4. ₹130	1000	2000

(a) What is the cut off price in this offer? Can the company decide the cut off at a lower price at which the issue is subscribed? Can the company allot the shares to the retail investors at a price that is at a discount to the cut off price?
(b) What would be the allocation pattern, presuming the company fulfils the eligibility criteria regarding net tangible assets, average operating profit, net worth etc.?
(c) What would be allocation pattern, if the company does not meet the criteria as mentioned above in question no. 1 (b)? (June 2022, 5 marks each)

Indian Equity-Public Funding Notes

1. Initial Public Offering/Further Public Offering
A public issue of specified securities by an issuer can be either an Initial Public Offering (IPO) or a Further Public Offering (FPO). An IPO is done by an unlisted issuer while a FPO is done by a listed issuer. As per the ICDR Regulations, the issuer shall comply with the following conditions before making an IPO of specified securities. The conditions need to be satisfied both at the time of filing the draft offer document (commonly referred to as the Draft Red Herring Prospectus) and the time of registering or filing the final offer document (commonly referred to as the Prospectus) with the Registrar of Companies.

2. Eligibility Requirements to be complied with for IPO
Entities not eligible to make an initial public offer [Regulation 5]
An issuer shall not be eligible to make an initial public offer, if there are any outstanding convertible securities or any other right which would entitled any person with any option to receive equity shares of the issuer. An issuer shall not make an initial public offer:

(a) If the issuer, any of its promoters, promoter group, selling shareholders are debarred from accessing the capital market by SEBI.
(b) If any of the promoters or directors of the issuer is a promoter or a director of any other company which is debarred from accessing the capital market by SEBI.
(c) If the issuer or any of its promoters or directors is a willful defaulter.
(d) If any of the promoters or directors of the issuer is a fugitive offender.
(e) If there are any outstanding convertible securities or any other right which would entitle any person with any option to receive equity shares of the issuer except outstanding options granted to the employees under an employee stock option scheme and fully paid-up outstanding convertible securities which are required to be converted on or before the date of filing of the Red Herring Prospectus or the Prospectus.

3. Eligibility requirements for an initial public offer [Regulation 6]
An issuer shall be eligible to make an IPO only if:

(a) the issuer has net tangible assets of atleast ₹ 3 crores on a restated and consolidated basis, in each of the preceding three full years of (12 months each) of which not more than 50% is held in monetary assets’; However, if more than 50% of the net tangible assets are held in monetary assets, the issuer has utilized or made firm commitments to utilize such excess monetary assets in its business or project.
This limit of 50% shall not apply in case of IPO is made entirely through an offer for sale.
(b) the issuer has an average operating profit of at least ₹ 15 crores, calculated on a restated and consolidated basis, during the three preceding years with operating profit in each of the three preceding years;
(c) the issuer has a networth of atleast ₹ 1 crore in each of the preceding three full years, calculated on a restated and consolidated basis.
(d) in case the issuer has changed its name within the last one year, atleast 50% of the revenue calculated on a restated and consolidated basis, for the preceding one full year has been earned by it from the activity indicated by the new name.

4. Entities not eligible to make a FPO [Regulation 102]
An issuer shall not be eligible to make a FPO of specified securities:
(a) If the issuer, any of it’s a promoters. Promoter group or directors, selling share holders are debarred from
accessing the capital market by SEBI.
(b) If any of the promoters or directors of thé issuer is a promoter or a director of any other company which is debarred from accessing the capital market by SEBI.
(c) If the issuer or any of its promoters or directors is willful defaulter or fraudulent borrower.
(d) If any of the promoters or directors of the issuer is a fugitive offender.

5. Eligibility requirements for FPO [Regulation 103]

(1) An issuer shall be eligible to make a further public offer, if it has not changed its name in the last one year period immediately preceding the date of filing the relevant offer document:
Provided that if an issuer has changed its name in the last one year period immediately preceding the date of filing the relevant offer document, such an issuer shall make further public offer it at least fifty percent of the revenue for the preceding one full year has been earned by it from the activity indicated by its new name.

(2) An issuer not satisfying the condition stipulated in the proviso to sub-regulation (1), shall make a further public offer only if the issue is made through the book building process and the issuer undertakes to allot at least seventy five percent of the net offer, to qualified institutional buyers and to refund full subscription money if it fails to make the said minimum allotment to qualified institutional buyers.

6. Issue of Warrants [Regulation 13]
An issuer shall be eligible to issue warrants in an initial public offer subject to the following:

(a) the tenure of such warrants shall not exceed eighteen months from the date of their allotment in the initial public offer;
(b) a specified security may have one or more warrants attached to it;
(c) the price or formula for determination of exercise price of the warrants shall be determined upfront and disclosed in the offer document and at least 25 percent of the consideration amount based on the exercise price shall also be received upfront;

However, in case the exercise price of warrants is based on a formula, 25 percent consideration amount based on the cap price of the price band determined for the linked equity shares or convertible securities shall be received upfront.

7. Filing of Offer Document [Regulations 25 & 123]
The issuer shall also file the draft offer document with the stock exchange(s) where the specified securities are proposed to be listed, and submit to the stock exchange(s), the Permanent Account Number, bank account number and passport number of its promoters where they are individuals, and Permanent Account Number, bank account number, company registration number or equivalent and the address of the Registrar of Companies (ROC) with which the promoter is registered, where the ROC promoter is a body corporate.

8. Underwriting [Regulations 40 & 136]

• If an issuer makes a IPO/FPO other than through the book building process, desires to have the issue underwritten, it shall appoint the underwriters in accordance with the SEBI (Underwriters) Regulations, 1993.
• If the issuer makes a public issue through a book building process,

(a) the issue shall be underwritten by lead managers and syndicate members.
However, at least 75% of the net offer to the public is proposed to be compulsorily allotted to the QIBs, and such portion cannot be underwritten.

(b) the issuer shall, prior to filing the prospectus, enter into an underwriting agreement with the lead manager(s) and syndicate member(s) which shall indicate the number of specified securities which they shall subscribe to at the predetermined price in the event of under-subscription in the issue.

(c) if the syndicate member(s) fail to fulfill their underwriting obligations, the lead manager(s) shall fulfill the underwriting obligations.

(d) the lead manager(s) and syndicate member(s) shall not subscribe to the issue in any manner except for fulfilling their underwriting obligations.

9. Minimum Subscription [Regulations 45 & 141]
The minimum subscription to be received in an issue shall be not less than 90% of the offer through offer document except in case of an offer for sale of specified securities. In case of an IPO, the minimum subscription to be received shall be subject to allotment of minimum number of specified securities, as prescribed in sub-clause (b) of Clause (2) of Rule 19 of Securities Contracts (Regulation)

Rules, 1957, which stipulates that atleast twenty five percent of each class or kind of equity shares or debentures convertible into equity shares issued by the company was offered and allotted to public in terms of an offer document. In other words, the issue is said have received minimum subscription in an IPO if it receives 90% of the offer.through offer document and 25% of the post issue capital from the public.

In the event of non-receipt of minimum subscription, all application monies received shall be refunded to the applicants forthwith, but not later than 4 days from the closure of the issue.

10. Post-issue Advertisements [Regulations 51 & 147]
The lead manager(s) shall ensure that an advertisement giving details relating to:

• subscription,
• basis of allotment,
• number, value and percentage of all applications including ASBA,
• number, value and percentage of successful allottees for all applications including ASBA,
• date of completion of despatch of refund orders, as applicable, or
• instructions to self-certified syndicate banks by the registrar,
• date of credit of specified securities and date of filing of listing application, etc.

11. Pricing
An issuer in an IPO and FPO may determine the price of specified securities in consultation with the lead merchant banker or through the book building process.

Differential Pricing [Regulations 30 & 128]

An issuer may offer specified securities at different prices, subject to the following:

(a) retail individual investors or retail individual shareholders or employees entitled for reservation made under regulation 33 and 130 of the ICDR Regulations, may be offered specified securities at a price not lower than by more than ten percent of the price at which net offer is made to other categories of applicants, other than anchor investors;

In other words, if the issue price to the other categories of applicants is ₹ 100 the price at which the securities can be offered to the reserved categories shall not be less than ₹ 90.

(b) in case of a book built issue, the price of the specified securities offered to an anchor investor shall not be lower than the price offered to other applicants;

(c) in case the issuer opts for the alternate method of book building as specified under ICDR Regulations, 2018, the issuer may offer specified securities to its employees at a price not lower by more than 10% of the floor price.

12. Price and Price Band [Regulations 29 & 127]

The issuer may mention a price or price band in the draft prospectus (in case of a fixed price issue) and floor price or price band in the red herring prospectus (in case of a book built issue) and determine the price at a later date before registering the prospectus with the Registrar of Companies.

• However, the prospectus registered with the RoC shall contain only one price or the coupon rate, as the case may be.
• The cap on the price band, and the coupon rate in case of convertible debt instruments, shall be less than or equal to one hundred and twenty percent of the floor price.

Provided that the cap of the price band shall be at least 105% of the floor price.

The floor price or the final price shall not be less than the face value of the specified securities.

Where the issuer opt not to make disclosure of the floor price or price band in the red herring prospectus, the issuer shall be announce the floor price or price band at least two working days before the opening of the bid (in case of an initial public offer) and at least one working day before the opening of the bid (in case of a further public offer), in all the newspapers in which the pre issue advertisement was released.

13. Promoters’Contribution

1. In Case of IPO: The promoters of the issuer shall hold at least twenty percent of the post-issue capital.
2. Non applicability: Provided further that the requirement of minimum promoters’ contribution shall not apply In case an issuer does not have any identifiable promoter.
3. Minimum Promoters’ Contribution:
   The minimum promoters’ contribution shall be as follows:

(a) the promoters shall contribute twenty percent., as the case may be, either by way of equity shares or by way of subscription to convertible securities.

However, if the price of the equity shares allotted pursuant to conversion is not pre-determined and not disclosed in the offer document, the promoters shall contribute only by way of subscription to the convertible securities being issued in the public issue and shall undertake in writing to subscribe to the equity shares pursuant to conversion of such securities.

(b) in case of any issue of convertible securities which are convertible or exchangeable on different dates and if the promoters’ contribution is by way of equity shares (conversion price being pre-determined), such contribution shall not be at a price lower than the weighted average price of the equity share capital arising out of conversion of such securities.

(c) in case of an initial public offer of convertible debt instruments without a prior public issue of equity shares, the promoters shall bring in a contribution of at least twenty percent of the project cost in the form of equity shares, subject to contributing at least twenty percent of the issue size from their own funds in the form of equity
shares.

14. Minimum Offer to Public and Reservations

(i) Minimum Offer to Public [Regulation 31]
The minimum net offer to the public shall be subject to the provision of clause (b) of sub-rule (2) of Rule 19 of Securities Contracts (Regulations) Rules. 1957

(ii) Reservation on Competitive Basis [Regulations 33 & 130]
Reservation on competitive basis means reservation wherein specified securities are allotted in portion of the number of specified securities applied for in respect of a particular reserved category to the number of
specified securities reserved for that category.

According to SEBI (ICDR) Regulations, 2018, there are certain persons eligible for reservation on competitive basis.

1. The issuer may make reservation on a competitive basis out of the issue size excluding promoters’ contribution and net offer to public in favour of the following categories of persons:

• employees
• shareholders (other than promoters and prpmoter group) of listed subsidiaries or listed promoter companies.

2. In case of an FPO, other than in a composite issue, the issuer may make a reservation on a competitive basis out of the issue size excluding promoters’ contribution to the existing retail individual shareholders of the issuer.

3. The reservation on competitive basis shall be subject to following conditions:

the aggregate of reservations for employees shall not exceed five percent of the post issue capital of the issuer and the value of allotment to any employee shall not exceed two lakhs rupees;

4. An applicant in any reserved category may make an application for any member of specified securities, but not exceeding the reserved portion for that category.

15. Fast Track FPO
Eligibility

An Issuer Company need not file the draft offer document with SEBI and obtain observations from SEBI, or make a security Deposit with the Stock Exchanges if it satisfies the following conditions:

(a) the equity shares of the issuer have been listed on any stock exchange for a period of at least three years immediately preceding the reference date;
(b) entire shareholding of the promoter group of the issuer is held in dematerialised form on the reference date;
(c) the average market capitalisation of public shareholding of the issuer is at least one thousand crore rupees in case of public issue and two hundred and fifty crore rupees in case of rights issue;
(d) the annjališed trading turnover of the equity shares of the issuer during six calendar months immediately preceding the month of the reference date has been at least 2% of the weighted average number of equity shares listed during such six months’ period.
(e) annualized delivery-based trading turnover of the equity shares during six calendar months immediately preceding the month of the reference date has been at least ten percent of the annualised trading turnover of the equity shares during such six months period;
(f) The issuer has been in compliance with the equity listing agreement or SEBI Listing Regulations, 2015, as applicable, for a period of at least three years immediately preceding the reference date.
(g) the issuer has redressed at least ninety five percent of the complaints received from the investors till the end of the quarter immediately preceding the mónth of the reference date;
(h) no show-cause notices have been issued or prosecution proceedings have been initiated by the Board and pending against the issuer or its promoters or whole-time directors as on the reference date;
(i) equity shares of the issuer have not been suspended from trading as a disciplinary measure during last three years immediately preceding the reference date;
(j) There shall be no conflict of interest between the lead merchant banker(s) and the issuer or its group or associate company in accordance with applicable regulations.

16. Exit Opportunity to Dissenting Shareholders [Scheduled XX]
The provisions of this Chapter shall apply to an exit offer made by the promoters or shareholders ¡n control of an issuer to the dissenting shareholders in terms of Sections 13(8) and 27(2) of the Companies Act, 2013. in case of change in objects or variation in the terms of contract referred to in the offer document.

Conditions for exit offer
The promoters or shareholders in control shall make the exit offer in accordance with the provisions of this Chapter, to the dissenting shareholders, in cases only if a public issue has opened after April 1, 2014; if:

• the proposal for change in objects or variation in terms of a contract, referred to in the offer document is dissented by at least 10 percent of the shareholders who voted in the general meeting; and
• the amount to be utilized for the objects for which the offer document was issued is less than 75 % of the amount raised (including the amount earmarked for general corporate purposes as disclosed in the offer document).

17. Exit Offer Price
The ‘exit price’ payable to the dissenting shareholders shall be the highest of the following:

(a) the volume-weighted average price paki or payable for acquisitions. whether by the promoters or shareholders having control or by any person acting n concert with them, during the fifty-two weeks immediately preceding the relevant date;

(b) the highest price paid or payable for any acquisition, whether by the promoters or shareholders having control or by any person acting in concert with them, during the twenty-six weeks immediately preceding the relevant date;

(c) the volume-weighted average market price of such shares for a period of sixty trading days immediately preceding the relevant date as traded on the recognised stock exchange where the maximum volume of trading in the shares of the issuer are recorded during such period, provided such shares are frequently traded;

(d) where the shares are not frequently traded, the price determined by the promoters or shareholders having control and the merchant banker taking into account valuation parameters including book value, comparable trading multiples, and such other parameters as are customary for valuation of shares of such issuers.

18. Manner of Providing Exit to Dissenting Shareholders

The notice proposing the passing of special resolution for changing the objects of the issue and varying the terms of contract, referred to in the prospectus shall also contain information about the exit offer to the dissenting shareholders.

In addition to the disclosures required under the provisions of Section 102 of the Companies Act, 2013 read with rule 32 of the Companies (Incorporation Rules, 2014 and Rule 7 of the Companies (Prospectus and Allotment of Securities) Rules, 2014 and any other applicable law, a statement to the effect that the promoters or the shareholders having control shall provide an exit opportunity to the dissenting shareholders shall also be included in the explanatory statement to the notice for passing special resolution.

After passing of the special resolution, the issuer shall submit the voting results to the recognised stock exchange(s), in terms of the provisions of Regulation 44(3) of SEBI (LODR) Regulations, 2015.

• The issuer shall also submit the list of dissenting shareholders, as certified by its compliance officer, to the recognised stock exchange(s).
• The promoters or shareholders In control, shall appoint a merchant banker registered with SEBI and finalize the exit offer price in accordance with these regulations.

19. Maximum Permissible Non-Public Shareholding
In the event, the shares accepted in the exit offer were such that the shareholding of the promoters or shareholders in control, taken together with persons acting in concert with them pursuant to completion of the exit offer results in their shareholding exceeding the maximum permissible non-public shareholding, the promoters or shareholders in control, as applicable, shall be required to bring down the non-public shareholding to the level specified and within the time permitted under Securities Contract (Regulation) Rules, 1957.

20. Rights Issue
Unless otherwise provided, SEBI (ICDR) Regulations, 2018 shall apply to a rights issue by a listed issuer, where the aggregate value of the issue is ten crore rupees or more.

Eligibility Conditions
An issuer shall not be eligible to make a rights issue of specified securities:

(a) if the issuer, any of its promoters, promoter group or directors of the issuer are debarred from accessing the capital market by SEBI;
(b) if any of the promoters or directors of the issuer is a promoter or director of any other company which is debarred from accessing the capital market by SEBI;
(c) if any of its promoters or directors is a fugitive economic offender.

21. Reservations

The issuer shall make a rights issue of equity shares only if it has made reservation of equity shares of the same class in favour of the holders of outstanding compulsorily convertible debt instruments, if any, in proportion to the convertible part thereof.

The equity shares so reserved for the holders of fully or partly compulsorily convertible debt instruments shall be issued to the holder of such convertible debt instruments or warrants at the time of conversion of such convertible debt instruments, on the same terms at which the equity shares offered in the rights issue were issued.

Subject to other applicable provision of these regulations, the issuer may make reservation for its employees along with rights issue subject to the condition that the value of allotment to any employee shall not exceed two lakhs rupees.

22. Preferential Issue
Applicability
“Preferential issue” means an issue of specified securities by a listed issuer to any select person or group of persons on a private placement basis in accordance with Chapter V of SEBI ICDR Regulations, 2018 and does not include an offer of specified securities made through employee stock option scheme, employee stock purchase scheme or an issue of sweat equity shares or depository receipts issued in a country outside India or foreign securities.

Non-applicability

The provisions of Chapter V shall not apply where the preferential issue of equity shares is made pursuant to:
(a) conversion of a loan or an option attached to convertible debt instruments in terms of Section 62 (3) and (4) of the Companies Act, 2013,
(b) a scheme approved by a tribunal or the Central Government under Sections 230 to 234 of the Companies Act, 2013, as applicable;
(c) a qualified institutions placement in accordance with Chapter VI of these regulations.

The provisions of this Chapter, except the lock-in provisions, shall not apply where the preferential issue of specified securities is made in terms of the rehabilitation scheme approved under Section 31 of the IBC, 2016.

The provisions of this Chapter relating to pricing and lock-in shall not apply to equity shares allotted to any financial institution within the meaning of sub-clauses (ia) and (ii) of clause (h) of Section 2 of the Recovery of Debts due to Banks and Financial Institutions Act, 1993.

The provisions relating to issuers ineligible to make a preferential issue and lock-in of pre-preferential allotment holding, shall not apply to a preferential issue of specified securities where the proposed allottee is a mutual fund registered with SEBI or insurance company registered with IRDA or a scheduled commercial bank or a public financial institution.

23. Conditions for Preferential Issue
A listed issuer may make a preferential issue of specified securities, if:

• all equity shares allotted by way of preferential issue shall be made fully paid up at the time of the allotment;
• a special resolution has been passed by its shareholders;
• all the equity shares, if any, held by the proposed allottees in the issuer are in dematerialised form;
• the issuer is in compliance with the conditions for continuous listing of equity shares as specified in the listing agreement with the recognised stock exchange where the equity shares of the issuer are listed, SEBI Listing Regulations, 2015 as amended, and any circular or notifications issued by SEBI thereunder;
• the issuer has obtained the Permanent Account Number of the proposed allottees.

24. Qualified Institutions Placement
‘Qualified Institutions Placement’ means allotment of eligible securities by a listed issuer to qualified institutional buyers on private placement basis and includes an offer for sale of specified securities by the promoters and/or promoters group on a private placement basis in terms of SEBI (ICDR) Regulations, 2018.

25. Qualified Institutional Buyer (QIB)
“Qualified Institutional Buyer” means:

• a mutual fund, venture capital fund, alternative investment fund and foreign venture capital investor registered with SEBI;
• a foreign portfolio investor other than Category III foreign portfolio investor, registered with the SEBI;
• a public financial institution;
• a scheduled commercial bank;
• a multilateral and bilateral development financial institution;
• a state industrial development corporation;
• an insurance company registered with the Insurance Regulatory and Development Authority of India;
• a provident fund with minimum corpus of twenty five crore rupees;
• a pension fund with minimum corpus of twenty five crore rupees;
• National Investment Fund set up by resolution no. F. No. 2/3/2005-DDII dated 23^rd November, 2005 of the Government of India published in the Gazette of India;
• insurance funds set up and managed by army, navy or air force of the Union of India; and
• insurance funds set up and managed by the Department of Posts, India; and
• systemically important non-banking financial companies.

26. Appointment of Lead Managers
An issuer shall appoint one or more merchant bankers, which are registered with SEBI, as lead manager(s) to the issue.
At least one lead manager to the issue shall not be an associate, as defined under SEBI (Merchant Bankers) Regulations, 1992) of the issuer and if any of the lead manager is an associate of the issuer, it shall disclose itself as an associate of the issuer and its role shall be limited to marketing of the issue.

The lead manager(s) shall, while seeking in-principle listing approval for the eligible securities, furnish to each stock exchange on which the same class of equity shares of the issuer are listed, a due diligence certificate stating that the eligible securities are being issued under QIP and that the issuer complies with requirements of Chapter VI of SEBI (ICDR) Regulations, 2018, and also furnish a copy of the preliminary placement document along with any other document required by the stock exchange.

27. Placement Document

The lead manager(s) shall exercise due diligence and shall satisfy themselves with all aspects of the Issue including the veracity and adequacy of disclosures in the offer document.

The QIP shall be made on the basis of a placement document which shall contain all material information, including those specified in the Companies Act, 2013, if any, and disclosures as specified in SEBI (ICDR) Regulations, 2018, shall be made, including as specified therein if the issuer or any of its promoters or directors is a wilful defaulter. The preliminary placement document and the placement document shall be serially numbered and copies the same shall be circulated only to select investors.

28. Issue of Specified Securities by Small and Medium Enterprises
An issuer making an initial public offer of specified securities shall satisfy the conditions of Chapter IX of SEBI (ICDR) Regulations, 2018 as on the date of filing of the draft offer document with the SME Exchange and also as on the date of registering the offer document with the ROC.

(i) Eligibility requirements for an initial public offer

Eligibility
If the issuer’s post-issue paid-up capital is less than or equal to ten crore rupees.

If post issue face value capital is more than ten crore rupees and upto twenty five crore rupees.

If the issuer satisfies track, record and/or other eligibility conditions of the SME Exchange(s) on which the specified securities are proposed to be listed.

(ii) Filing of the offer document

• The issuer shall file a copy of the offer document with SEBI through the lead manager(s), immediately upon registration of the offer document with the Registrar of Companies.
• SEBI shall not issue an observation on the offer document.
• The lead manager(s) shall submit a due-diligence certificate including additional confirmations as provided in Form G of Schedule V of SEBI ICDR Regulations 2018 along with the offer document to SEBI.
• The offer document shall be displayed from the date of filing on the websites of SEBI, the lead manager(s) and the SME exchange(s).
• The draft offer document and the otter documents shall also be furnished to SEBI in a soft copy.

(iii) Offer document to be made available to public

The issuer and the lead manager(s) shall ensure that the offer documents are hosted on the websites as required under these regulations and its contents are the same as the versions as filed with the Registrar of Companies. SEBI and the SME exchange(s).

The lead manager(s) and the SME exchange(s) shall provide copies of the offer document to the public as and when requested and may charge a reasonable sum for providing a copy of the same.

(iv) Minimum Application Value and Number of Allottees

• The minimum application size shall be one lakh rupee per application.
• The minimum sum payable on application per specified securities shall at least twenty five percent of the issue price. In case of offer for sale, the full issue price for each specified security shall be payable on application.

(v) Migration to SME Exchange
A listed issuer whose post-issue face value capital is less than twenty five crore rupees may migrate its specified securities to SME exchange:

• if its shareholders approve such migration by passing a special resolution through postal ballot to this effect; and
• if such issuer fulfils the eligibility criteria for listing laid down by the SME exchange.

(vi) Migration to Main Board
An issuer, whose specified securities are listed on a SME Exchange and whose post issue face value capital is more than ten crore rupees and upto twenty five crore rupees, may migrate:

• its specified securities to Main Board if its shareholders approve such migration by passing a special resolution through postal ballot to this effect; and
• if such issuer fulfils the eligibility criteria for listing laid down by the Main Board.

29. Market Making

The lead manager shall ensure compulsory market making through the stock brokers of SME exchange appointed by the issuer, for a minimum period of three years from the date of listing of specified securities or from the date of migration from the Main Board.

The market maker or issuer, in consultation with the lead manager may enter into agreement with nominated Investors for receiving or delivering the specified securities in the market making subject to the prior approval by the SME exchange.

• The issuer shall disclose the details of arrangement of market making in the offer document.
• The specified securities being bought or sold in the process of market making may be transferred to or from the nominated investor with whom the merchant banker has entered into an agreement for the market making.
• The market maker shall buy the entire shareholding of a shareholder of the issuer in one lot, whore value of such shareholding is less than the minimum contract size allowed for trading on the SME exchange.
• Market maker shalt not buy the shares from the promoters or persons belonging to promoter group of the issuer or any person who has acquired shares from such promoter or person belonging to promoter group, during the compulsory market making period.

30. Listing on the Institutional Trading Platform
Applicability

• To issuers seeking listing of their specified securities pursuant to an initial public offer or for only trading on a stock exchange of their specified securities without making a public offer.
• The provisions of these regulations, in respect of the matters not specifically dealt or excluded under this Chapter, shall apply mutatis mutandis to any listing or trading of specified securities under this Chapter.

Non-applicability

• Sub-regulation (2) of Regulation 7 on restrictions on the amount of general corporate purposes; and
• Sub-regulation (1) and (2) of Regulation 6 on eligibility requirements.

Chapter 1 Shareholders’ Democracy – Resolution of Corporate Disputes Non Compliances & Remedies Notes is designed strictly as per the latest syllabus and exam pattern.

Shareholders’ Democracy – Resolution of Corporate Disputes Non Compliances & Remedies Study Material

Question 1.
Distinguish between the following:
‘Oppression’ and ‘mismanagement’. (Dec 2014, 4 marks)
Answer:

Points	Oppression	Mismanagement
Meaning	The term ‘Oppression’ is not defined in the Companies Act, 2013. Oppression, according to the dictionary meaning of the word, is any act exercised in a manner burdensome, harsh and wrongful. Oppression means violation of condition of fair play. The complaining member must be under a burden which is unjust, harsh or tyrannical. It involves lack of probity or fair dealing to a member in the matter of rights as a shareholders.	The term “Mismanagement’ is also not defined in the Companies Act, 2013. Normally mismanagement means gross misconduct of affairs of the company or misuse of powers given to directors or members under the Companies Act, 2013.
Examples	Some of the acts held as oppressive are as follows: Continuous refusal to register shares to retain control over affairs of the company. Illegal removal of director from one group and appointing other director without notice to one group of directors. Calling board meeting with 2 days notice so that NRI directors cannot attend and allotting shares to one group so that it comes into majority.  Issuing shares to wife of directors for wholly illusive consideration. Attempt to deprive members of his ordinary membership rights e.g. denial of voting right or denial to contest election as director.	Some of the acts held mismanagement are as follows: Not allowing director to function as director Reckless sanction and disbursement of loans. Serious violation of legal provisions Acting beyond authority of memorandum and articles. Directors do not take serious actions in case of corruption, embezzlement etc. Diversion of funds Operation of bank accounts by unauthorized persons.

Question 2.
Distinguish between the following:
(a) Oppression and mismanagement application and Class action suits. (June 2018, 4 marks)
Answer:
Oppression and Mismanagement Application:
Section 244 of the Companies Act, 2013 provides that the following members of a company have the right to apply in case of oppression and management referred to under Section 241 to the tribunal:
(a) in the case of a company having a share capital, not less than one hundred members of the company or not less than one -tenth of the total number of its members, whichever is less, or any member or members holding not less than one-tenth of the issued share capital of the company, subject to the condition that the applicant or applicants has or have paid all calls and other sums due on his Or their shares;

(b) in the case of a company not having a share capital, not less than one- fifth of the total number of its members:
The Tribunal has the power that on an application made to it in this behalf, waive all or any of the above mentioned requirements $o as to enable the members to apply under Section 241.

Class Action Suits:
Section 245 of the Companies Act, 2013, deal with Class action suits. It is provided that members, depositors or any class of them, may, if they are of the opinion that the management or conduct of the affairs of the company are being conducted in a manner prejudicial to the interests of the company or its members or depositors, file an application before the Tribunal on behalf of the members or depositors.
The requisite number of members is as under:
(a) in the case of a company having a share capital, not less than one hundred members of the company or not less than such percentage of the total number of its members as may be prescribed, whichever is less, or any member or members holding not less than such percentage of the issued share capital of the company as may be prescribed, subject to the condition that the applicant or applicants has or have paid all calls and other sums due on his or their shares;

(b) in the case of a company not having a share capital, not less than one- ‘ fifth of the total number of its members.
k Further, the requisite number of depositors shall not be less than one hundred depositors or not less than such percentage of the total number of depositors as may be prescribed, whichever is less, or any depositor or depositors to whom the company owes such percentage of total deposits of , the company as may be prescribed.

Question 3.
Comment on the following:
The NCLT or law will not interfere with the internal management of ‘ companies acting within their powers. (June 2012, 5 marks)
Answer:
1. The Principle of Majority:
Rule Majority must prevail is the principle of company management like any democratic set up, the majority has its way in a company though due provision must also be made for the protection of minority interest.

• This principle that the will of the majority should prevail and bind the minority is known as the principle of majority rule.
• The principle of majority rule was first given recognition in the case of Foss. Vs. Harbottle.

2 Fact of the Case:

• Two members of an incorporated company took legal proceeding against the directors of the company, charging them guilty of fraudulent acts resulting in loss to the company.
• The minority shareholders, therefore, decided to take an action for damages against the directors.
• The shareholders in general meeting by majority resolved not to take any action against the directors alleging that they were not responsible for the loss which has been incurred.
• The NCLT held that the actions were capable of confirmation by the majority.

A. General Law:
1. Act illegal or ultra vires:

• The Rule in Foss Vs. Harbottle applies only ultra vires where the act complained of is within the powers of the company. If act is ultra vires the company, the rule does not apply, no majority can sanctioned or confirm such an act and every shareholder is entitled to bring on action against the company and its officers in respect of it.
• Thus, every shareholder is entitled to sue for an injunction to restrain the ultra vires acts of the directors or the officers of the company.

2. Fraud on the minority:
Where the majority of a company members use their power to defraud or oppress the minority, their conduct is liable to be impeached even by a single shareholders.

3. Wrongdoers in control of the company:

• When the persons against whom the relief is sought themselves hold and control the majority of shares in the company and will not permit an action to be brought in the name of the company and shareholders may sue in their own names.
• Its reason is that if the majority of shareholders will not be given such right their grievance can never reach the NCLT because the wrongdoers themselves, being in control of company would not allow the company to sue.

4. Acts requiring a special resolution:
Sometimes the act or the articles of the company require acts to be done only by passing a special resolution at a general meeting of the company and therefore if the majority shareholders purport to do any act without passing a special resolution (i.e. by passing an ordinary resolution), anyone can bring an action to prevent the majority to do so.

5. Individual membership rights:
In case of infringement of the individual membership rights, every shareholder is entitled to bring an action in his own name. “If such a right is in question a single shareholder can, on principal, defy a majority consisting of all the other shareholders.”

Question 4.
“Shareholders democracy means the rule of shareholders, by the shareholders and for the shareholders in the corporate enterprise, to which the shareholders belong”. Comment on the above^and enumerate any five provisions of the Companies Act, 2013 which demonstrate the same. (Dec 2019, 5 marks)
Answer:
Democracy means the rule of people, by people and for people, in that context the shareholders democracy means the rule of shareholders, by the shareholders’, and for the shareholders’ in the corporate enterprise, to which the shareholders belong. Precisely it is rights to speak, congregates, and communicates with co-shareholders and to learn about what is going on in the company.
Recognizing the supreme authority of the shareholders’, the Companies Act, 2013 has given authority to them to appoint directors at the Annual General Meetings to direct, control, conduct and manage the business and affairs of the company.

Under the Companies Act, 2013 the powers have been divided between two segments:
one is the Board of Directors and the other is of shareholders. The Directors exercise their powers through meetings of Board of directors and shareholders exercise their powers through Annual General Meetings/ General Meetings. Although constitutionally all the acts relating to the company can be performed in General Meetings but most of the powers are delegated to the Board by virtue of the constitutional documents of the company viz. the Memorandum and Articles of Association.
The Companies Act, 2013 demarcates between the power of the directors as well as that of shareholders. The shareholders exercise their powers at the general meetings by way of ordinary/special resolutions. Some of the businesses which can be transacted at meetings of shareholders are as under:

• Alteration of Memorandum of Association and Articles of Association.
• Further issue of share capital.
• To transfer some portions of uncalled capital to reserve capital to be called up only in the event of winding up of the company.
• To reduce the share capital of the company.
• To shift the registered office of the company outside the state in which the registered office is situated at present.
• To decide a place other than the registered office of the company where the statutory books, required to be maintained may be kept.
• To appoint auditors.
• To approach Centra! Government for investigation into the affairs of the company.
• To allow Related Party Transaction.
• To allow a director, partner or his relative to hoid office or place of profit.
• Payment of commission of more than 1 % of the net profits of the company to a managing or a whoie time director or a manager.
• To make loans, to extend guarantee or provide security to other companies or make investment beyond the limit specified.
• To borrow money and to charge out the assets of the company to secure the borrowed money.
• To appoint directors.
• To remove directors.
• To increase or reduce the number of directors within the limits laid down in Articles of Association.
• To cancel, redeem debentures etc.

Question 5.
At a General Meeting of RigVed Ltd, a resolution was passed as an ordinary resolution, whereas it is required to be passed as a ‘special resolution’ under the Companies Act, 2013. Ved, an individual shareholder of the Company wants to bring a legal action on the Company, to restrain it on the subject matter of the said resolution. In background of a decided case law, evaluate whether the contention of Ved is tenable. (Dec 2021, 4 marks)
Answer:
The following are the similar relevant cases for the given situation:
A shareholder can sue if an act requires a special majority but is passed by a simple majority. Simple or rigid formalities are to be observed if the majority wants to give validity to an act which purports to impede the interest of minority. An individual shareholder has the right of action to restrain the company from acting on a special resolution to which the insufficient notice is served Bailliev. Oriental Telephone and Electric Co. Ltd., (1915) 1 Ch. 503 (C. A.); refer also NagappaChettiar v. Madras Race Club, 1 M.L.J. 662

Individual membership rights cannot be invaded by the majority of shareholders. He is entitled to all the rights and privileges appertaining to his status as a member. An individual shareholder can insist on the strict compliance with the legal rules and statutory provisions. Provisions in the memorandum and the articles are mandatory in nature and cannot be waived by a bare majority of shareholders [Salmon v. Quin andAztens, (1909) A.C. 442]. In Nagappa Chettiar v. Madras Race Club, (1949) 1 M.L.J. 662 at 667, it was observed by the Court that “An individual shareholder is entitled to enforce his individual rights against the company, such as, his right to vote, the right to have his vote recorded, or his right to stand as a director of a company at an election.
In view of the above case, it may be said that contention of Ved is tenable.

Question 6.
‘The shareholder’s democracy not only can play important role in stimulating the Board of Directors, raising Company’s performance but also ensuring that the community at large takes a greater interest in industrial progress.’ Comment. (Dec 2021, 4 marks)
Answer:
Democracy: It means the rule of the people, by the people and for the people, in that context, the shareholder’s democracy means the rule of shareholders, by the shareholders, and for the shareholders in the corporate enterprise, to which the shareholders belong.
Precisely, it is a right to speak, congregate, communicate with co-shareholders and to learn about what is going on in the company. Under the Companies Act, 2013, the powers have been divided between two segments:
One is the Board of Directors and the other is of shareholders.
The Directors exercise their powers through meetings of Board of Directors and shareholders exercise their powers through Annual General Meetings/Extraordinary General Meetings.
However, constitutionally, all the acts relating to the company can be performed in General Meetings, most of the powers in regard thereto are delegated to the Board of Directors by virtue of the constitutional documents of the company viz. the Memorandum of Association and Articles of Association.

It is a widely acclaimed fact that in any corporate enterprise, the shareholders are the owners.
But in fact, they are seldom able to exercise any ownership rights except to sometimes cast votes at General Meetings.
The members therefore, are only passive investors rather than active participants in the governance of the corporate process.
Still the directors, as per law, are answerable to the shareholders at least for two reasons, one the shareholders are directly concerned with the economic viability of the investee company thus to feel sure about the safety of their investment and secondly being the recognised owners of the company to enforce their rights to control the company as and when the company enters into contractual relationship with third persons thereby incurring greater obligations.
So, the shareholder’s democracy can play an important role in stimulating the Board of Directors, raising company performance and ensuring that the community at large takes a greater interest in industrial progress.
Recognising the supreme authority of the shareholders, the Companies Act, 2013 has given authority to them to appoint directors at the Annual General Meetings (AGM) to direct, control, conduct and manage the business and affairs of the company.

Question 7.
A is a minority shareholder who brought an action for damages against the Company and its directors on the ground that they have been negligent in selling a plant owned by the Company for ₹ 25 Lakh. A alleged that the real value of plant was about ? 70 Lakh. Evaluate based on decided case law(s), whether action taken by A will be maintainable in the Court. (June 2019, 5 marks)
Answer:
No, the action taken by “A” will not be maintainable in court on the mentioned ground. The management of company is based on the majority rule. Almost every question relating to the affairs of the company is required to be decided upon either by an ordinary Resolution or by a Special Resolution of shareholders.

In Pavlides v. Jensen (1956) Ch. 565, a minority shareholder brought an action for damages against three directors and against the company itself on the ground that they have been negligent in selling a mine owned by the company for £ 82,000, whereas its real value was about £ 10,00,000. It was held that the action was not maintainable. The judge observed,” It was open to the company, on the resolution of a majority of the shareholders to sell the mine at a price decided by the company in that manner, and it was open to the company by a vote of majority to decide that if the directors by their negligence or error of judgement has sold the company’s mine at an undervalue, proceedings should not be taken against the directors”.

Question 8.
A Shareholder of a Company brought an action for damages against the Company and its two Directors on the ground that they have been negligent in selling a property owned by the Company for ₹ 75 crore whereas its real value was ₹ 100 crore.
Is this suit maintainable? (Dec 2020, 4 marks)
Answer:
The principle of non-interference as laid down in Foss vs. Harbottle says no action can be brought by a member against the directors in respect of a wrong alleged to be committed by a company. The company itself is the proper party for such an action.
The general principle of company law is that every member holds equal rights with other members of the company in the same class.
The scale of rights of members of the same class must be held evenly for the smooth functioning of the Company.
In case of difference (s) among the members the issue is decided by a vote of majority since the majority of members are in an advantageous position to run the company according to their command, the minorities are often oppressed.

The company law provides for adequate protection when their rights are trampled by the majority.
Although, protection of minority is not generally available when the majority does anything in the exercise of the powers for internal administration of a Company, the courts will not usually interfere at the instant of the shareholders in matters of internal administration so long as they are acting within the powers conferred on them by the articles of the company.
The facts of the case asked are similar to the case in Pavlides vs. Jensen (1956) where the minority shareholders- brought an action for damages against three directors and against the company itself on the ground that they have been negligent in selling a mine owned by the company for £ 182,000 whereas its real value was £ 1000,000.

It was held by the Judge that it was open to the company on the resolution of a majority of the shareholders to sell the mine at a price decided by the company and it is open to all the members of company by a vote of majority to decide that if the directors by their negligence or error of judgment has sold the company’s mine at an undervalue, proceedings should not be taken against the company.
Accordingly, unless the Shareholder is a holder of majority of the shareholding of the Company, the suit will not be maintainable.

Question 9.
The Company Secretary of a Company was allotted quarters during the tenure of his employment. He has retired on 31st March, 2019. As per the terms of his employment, he is required to vacate his quarters within one month of his ceasing to be in employment, i.e. by 30th April, 2019. He seeks one year to vacate the premises on the ground of his children’s education. The Company wants him to vacate as it has to allot it to the new Company Secretary. What would be your advice to the Company under the given circumstances? (Dec 2020, 4 marks)
Answer:
According to Section 452(1) of the Companies Act, 2013, if any officer or employee of a company:
(a) Wrongfully obtains possession of any property, including cash of the company; or
(b) having any such property including cash in his possession, wrongfully withholds it or knowingly applies it for the purposes other than those expressed or directed in the articles and authorised by this Act, he shall, on the complaint of the company or of any member or creditor or contributory thereof, be punishable with fine which shall not be less than one lakh rupees but which may extend to five lakh rupees.

• Further as per section 452(2), the Court trying an offence under sub-section (1) may also order such officer or employee to deliver up or refund, within a time to be fixed by it, any such property or cash wrongfully obtained or wrongfully withheld or knowingly misapplied, the benefits that have been derived from such property or cash or in default, to undergo imprisonment for a term which may extend to two years.

As per Companies (Amendment) Act, 2020

• In Section 452(2) of the Companies Act, 2013, the foliowing proviso has been inserted, namely:-
  “Provided that the imprisonment of such officer or employee, as the case may be, shall not be ordered for wrongful possession or withholding of a dwelling unit, if the court is satisfied that the company has not paid to that officer or employee, as the case may be, any amount relating to-
  (a) provident fund, pension fund, gratuity fund or any other fund for the welfare of its officers or employees, maintained by the company;
  (b) compensation or liability for compensation underthe Workmen’s Compensation Act, 1923 in respect of death or disablement.”
•  Accordingly, in this case, the company can file a case against the retired Company Secretary to deliver up the quarters within a time fixed by court.
• He may also be asked to pay reasonable rent to the company for staying beyond the specified period.
• The retired Company Secretary will have no option but to leave the quarters within the time fixed by the court.
• He will also be liable to pay, as may be decided by the court.
• Further, the Court may also order such officer or employee to undergo imprisonment for a term which may extend to two years.

Question 10.
Arun, an individual shareholder of M/s. BEL Ltd. is holding 2% of the voting rights. He made a complaint before the Adjudicating Authority that investments proposed to be made by the Company are without any adequate security and prayed for injunction to restrain the company from making such investments.
Whether Arun will succeed in his attempt? Explain with decided case law. (Aug 2021, 5 marks)
Answer:

• Where the directors representing the majority of shareholders perform an illegal or ultra vires, an individual shareholder has right to bring an action.”
• The majority of shareholders have no right to confirm an illegal or ultra vires transaction of the company.
• In this case a shareholder has the right to restrain the company by an order or injunction of the court from carrying out an ultra vires act.
  In Bharat Insurance Ltd. vs. Kanhya Lai, A.I.R. 1935 Lah. 792, the plaintiff was a shareholder of the Bharat Insurance Company. One of the objects of the company was “To advance money at interest on the security of land, houses, machinery and other property situated in India…”
• The plaintiff complained that “several investments had been made by the company directors on behalf of the company without adequate security and contrary to the provisions of the memorandum and hence, prayed for perpetual injunction to restrain it from making such investments”.
• The Court observed: “In all matters of internal management, the company itself is the best judge of its affairs and the Court should not interfere. But application of assets of a company is not a matter of internal management.
• As directors are acting ultra vires in the application of the funds of the company, a single member can maintain a suit” Therefore, in the above case, Arun will succeed in his attempt.

Question 11.
Omkar Infrastructure Ltd. was engaged in construction and development of infrastructure related projects. Due to the liquidity and other management issues the Company was making losses since last few years. The minority shareholders of the Company filed a class action suit in the Tribunal alleging that the affairs of the Company are being conducted in a manner prejudicial to the interest of the Company. The Tribunal passed an Order restraining the Company from taking action contrary to any resolution passed by the members. The Company failed to comply with Order passed by the Tribunal. Explain in brief, whether the Order passed by the Tribunal is justified and what legal consequences will the Company have to face in case of such non-compliance. (Dec 2021, 5 marks)
Answer:
Class Action: As per Section 245(1) of the Companies Act, 2013, such ’ number of members or depositors or any class of them, as are indicated in section 245(2) of the Act may, if they are of the opinion that the management or conduct of the affairs of the company are being conducted in a manner prejudicial to the interests of the company or its members or depositors, file an application before the NCLT on behalf of such members or depositors for seeking certain order mentioned therein. The said order that may be sought from Tribunal inter alia includes an order to restrain the company from taking action contrary to any resolution passed by the members.
Therefore, it can be end that the Order passed by the Tribunal is justified, as it is pas: ed in exercise of the specific authority conferred on the Tribunal u/s 245(1 )(f) of the Act.

As per section 245(7) of the Act, any company which fails to comply with an order passed by the Tribunal under this section shall be punishable with fine which shall not be less than ₹ 5 lakh but which may extend to ₹ 25 lakh and every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to three years and with fine which shall not be less than ₹ 25,000 but which may extend to one lakh rupees.
Further, Section 425 of the Companies Act, 2013, the Tribunal has also been conferred the same jurisdiction, powers and authority in respect of contempt of its Orders as conferred on High Court under the Contempt. of Courts Act, 1971.

Question 12.
The Articles of Association of Vraj Ltd. inter alia includes a provision “For obtaining a loan of more than rupees five crore from any bank, special resolution is necessary”. Due to business emergencies, on one occasion the Company obtained a bank loan of ₹ 5.5 crore from a Scheduled Bank by passing an ordinary resolution and completing the necessary documentation. Examine the validity of the act. (June 2022, 4 marks)

Question 13.
Discuss the Justification and advantages of the Rule in Foss v. Harbottle.
Answer:
Justification and Advantages of the Rule in Foss v. Harbottle
The justification for the rule laid down in Foss v. Harbottle is that the will of the majority prevails. On becoming a member of a company, a shareholder agrees to submit to the will of the majority. The rule really preserves the right of the majority to decide how the company’s affairs shall be conducted. If any wrong is done to the company, it is only the company itself, acting, as it must always act, through its majority, that can seek to redress and not an individual shareholder.

Moreover, a company is a person at law, the action is vested in it and cannot be brought by a single shareholder. Where there is a corporate body capable of filing a suit for itself to recover property either from its directors or officers or from any other person then that corporate body is the proper plaintiff and the only proper plaintiff [Gray v. Lewis, (1873) 8 Ch. Appl. 1035].
The main advantages that flow from the Rule in Foss v. Harbottle are of a purely practical nature and are as follows:
1. Recognition of the separate legal personality of company: If a company has suffered some injury, and not the individual members, it is the company itself that should seek to redress.

2. Need to preserve right of majority to decide: The principle in Foss v. Harbottle preserves the right of majority to decide how the affairs of the company shall be conducted. It is fair that the wishes of the majority should prevail.

3. Multiplicity of futile suits avoided: Clearly, if every individual member were permitted to sue anyone who had injured the company through a breach of duty, there could be as many suits as there are shareholders. Legal proceedings would never cease, and there would be enormous wastage of time and money.

4. Litigation at suit of a minority futile if majority does not wish it: If the irregularity complained of is one which can be subsequently ratified by the majority it is futile to have litigation about it except with the consent of the majority in a general meeting. In Mac Dougall v. Gardiner, (1875) 1 Ch. 13 (C.A.), the articles empowered the chairman, with the consent of the meeting, to adjourn a meeting and also provided for taking a poll if demanded by the shareholders. The adjournment was moved, and declared by the chairman to be carried; a poll was then demanded and refused by the chairman. A shareholder brought an action for a declaration that the chairman’s conduct was illegal. Held, the action could not be brought by the shareholder; if the chairman was wrong, the company alone could sue.

Application of Foss v. Harbottle Rule in Indian context – The Delhi High Court in ICICI v. Parasrampuria Synthetic Ltd. SSL, July 5, 1998 has held that an automatic application of Foss v. Harbottle Rule to the Indian corporate realities would be improper. Here the Indian corporate sector does not involve a large number of small individual investors but predominantly financial institutions funding atleast 80% of the finance. It is these financial institutions which provide entire funds for the continuous existence and corporate activities. Though they hold only a small percentage of shares, it is these financial institutions which have really provided the finance for the company’s existence and, therefore, to exclude them or to render them voiceless on an application of the principles of Foss v. Harbottle Rule would be unjust and unfair.

Question 14.
Explain the exception to the rule in Foss v. Harbottle.
Answer:
Exceptions to the Rule in Foss v. Harbottle
The rule in Foss v. Harbottle is not absolute but is subject to certain exceptions. In other words, the rule of supremacy of the majority is subject to certain exceptions and thus, minority shareholders are not left helpless, but they are protected by:
(a) the common law; and
(b) the provisions of the Companies Act.
The cases in which the majority rule does not prevail are commonly known as exceptions to the rule in Foss v. Harbottle and are available to the minority. In all these oases an individual member may sue for declaration that the resolution complained of is void, or for an injunction to restrain the company from passing it. The said rule will not apply in the following cases:
1. Ultra Vires Acts:
Where the directors representing the majority of shareholders perform an illegal or ultra vires act for the company, an individual shareholder has right to bring an action. The majority of shareholders have no right . to confirm an illegal or ultra vires transaction of the company. In such case a shareholder has the right to restrain the company by an order or injunction of the court from carrying out an ultra vires act.
In Bharat Insurance Ltd. v. Kanhya Lai, A.I.R. 1935Lah. 792, the plaintiff was a shareholder of the Bharat Insurance Company. One of the objects of the company was: “To advance money at interest on the security of land, houses, machinery and other property situated in India…” The plaintiff complained that “several investments had been made by the company without adequate security and contrary to the provisions of the memorandum and therefore, prayed for perpetual injunction to restrain it from making such investments”.

2. Fraud on Minority:
Where an act done by the majority amounts to a fraud on the minority; an action can be brought by an individual shareholder. This principle was laid down as an exception to the rule in Foss v. Harbottle in a number of cases. In Menierv. Hooper’s Telegraph Works, (1874) L.R. 9 Ch. App. 350, it was observed that it would be a shocking thing if the majority of shareholders are allowed to put something into their pockets at the expenses of the minority. In this case, the majority of members of company ‘A’ were also members of company ‘B’, and at a meeting of company ‘A’ they passed a resolution to compromise an action against company ‘B’, in a manner alleged to be favourable to company ‘B’, but unfavourable to company ‘A’. Held, the minority shareholders of company ‘A’ could bring an action to have the compromise set aside.

3. Wrongdoers in Control:
If the wrongdoers are in control of the company, the minority shareholders’ representative action for fraud on the minority will be entertained by the court [Cf. Birch v. Sullivan, (1957) 1 W.L.R. 1274]. The reason for it is that if the minority shareholders are denied the right of action, their grievances in such case would never reach the court, for the wrongdoers themselves, being in control, will never allow the company to sue [Par Jenkins L.J. in Edwards v. Halliwell, (1950) 2 All E.R. 1064, 1067].
In Glass v. Atkin (1967) 65 D.L.R. (2d) 501, a company was controlled equally by the two defendants and the two plaintiff. The plaintiff brought an action against defendants alleging that they had fraudulently converted the assets of the company for their own private use. The Court allowed the action and observed: “While the general principle was for the company itself to bring an action, where it had an interest, since the two defendants controlled the company in the sense that they would prevent the company from taking action.”

4. Resolution requiring Special Majority but is passed by a simple majority:
A shareholder can sue if an act requires a special majority but is passed by a simple majority. Simple or rigid, formalities are to be observed if the majority wants to give validity to an act which purports to impede the interest of minority. An individual shareholder has the right of action to restrain the company from acting on a special resolution to which the insufficient notice is served [Baillie v. Oriental Telephone and Electric Co. Ltd., (1915) 1 Ch. 503 (C.A.); refer also Nagappa Chettiarv. Madras Race Club, 1 M.L.J. 662].

5. Personal Actions
Individual membership rights cannot be invaded by the majority of shareholders. He is entitled to all the rights and privileges appertaining to his status as a member. An individual shareholder can insist on the strict compliance with the legal rules, statutory provisions. Provisions in the memorandum and the articles are mandatory in nature, and cannot be waived by a bare majority of shareholders [Salmon v. Quin and Aztens, (1909) A.C. 442]. In Nagappa Chettiar v. Madras Race Club* (1949) 1 M.L.J. 662 at 667, it was observed by the Court that “An individual shareholder is entitled to enforce his individual rights against the company, such as, his right to vote, the right to have his vote recorded, or his right to stand as a director of a company at an election.

6. Breach of Duty
The minority shareholder may bring an action against the company, where although there is no fraud, there is a breach of duty by directors and majority shareholders to the detriment of the company. In Daniels v. Daniels, (1978) 2 W.L.R. 73, the plaintiff, who were minority shareholders of a company, brought an action against the two directors of the company and the company itself. In their statement of the claim they alleged that the company, on the instruction of the two directors who were majority shareholders, sold the company’s land to one of the directors (who was the wife of the other) for £ 4,250 and the directors knew or ought to have known that the sale was at an under value. Four years after the sale, she sold the same land for £ 1,20,000. The directors applied for the statement of claim to be disclosed on reasonable cause of action or otherwise as an abuse of the process of the Court.

7. Prevention of Oppression and Mismanagement:
The minority shareholders are empowered to bring action with a view to preventing the majority from oppression and mismanagement. These are the statutory rights of the minority shareholders.

Shareholders’ Democracy Notes

Shareholders’ Democracy

• The concept of shareholders’ democracy in the present day corporate world denotes the shareholders’ supremacy in the governance of the business and affairs of corporate sector either directly or through their elected representatives.
• The Government of India, has been endeavouring to disperse the shareholdership as widely as possible to avoid concentration of
  ownership in few hands.
• Thus the shareholder1 democracy can play an important role in stimulating the Board of directors, raising company performance, and ensuring that the community at large takes a greater interest in industrial progress.
• Democracy means the rule of people, by people and for people. In that context the shareholders democracy means the rule of shareholders, by the shareholders’, and for the shareholders’ in the corporate enterprise, to which the shareholders belong.
• Precisely it is a right to speak, congregate, communicate with co-shareholders and to learn about what is going on in the company.

Majority Powers and Minority Rights:

• A company being an artificial person with no physical existence, functions through the instrumentality of the Board of directors who is guided by the wishes of the majority, subject, of course, to the welfare of the company as a whole.
• It is, therefore, a cardinal rule of company law that prima facie a majority of members of a company are entitled to exercise the powers of the company and generally to control its affairs. Member’s right to vote is recognised as right of property anCI the shareholder may exercise it as he thinks fit according to his choice and interest.
• A special resolution, for instance, requires a majority of 3/4,hs of those voting at the meeting and therefore, where the Act or the articles require a special resolution for any purpose, a three-fourth majority is necessary and a simple majority is not enough.
• The resolution of a majority of shareholders, passed at a duly convened and held general meeting, upon any question with which the company is legally competent to deal, is binding upon the minority and consequently upon the company.

The Principle of Non-inter-ference (Rule in Foss v. Harbottle):

• The general principle of company law is that every member holds equal rights with other members of the company in the same class.
• The scale of rights of members of the same class must be held evenly for smooth functioning of the company. In case of differdnce(s) amongst the members the issue is decided by a vote of the majority.
  Since the majority of the members are in an advantageous position to run the company according to their command, the minorities of shareholders are often oppressed.
• The company law provides for adequate protection for the minority shareholders when their rights are trampled by the majority.
• The basic principle of non-interference with the internal management of company by the Court is laid down in a celebrated case of Foss v. Harbottle 67 E.R. 189; (1843) 2 Hare 461 that no action can be brought by a member against the directors in respect of a wrong alleged to be committed to a company. The company itself is the proper party of such an action.

Exceptions to the rule in Foss v. Harbottle:
The rule in Foss v. Harbottle is not absolute but is subject to certain exceptions. In other words, the rule of supremacy of the majority is subject to certain exceptions and thus, minority shareholders are not left helpless, but they are protected by:
(a) the common law; and
(b) the provisions of the Companies Act.
The cases in which the majority rule does not prevail are commonly known as exceptions to the rule in Foss v. Harbottle and are available to the minority. In all these cases an individual member may sue for declaration that the resolution complained of is void, or for an injunction to restrain the company from passing it. The said rule will not apply in the following cases:

• Ultra Vires Acts
• Fraud on Minority
• Wrongdoers in Control
• Resolution requiring Special Majority but is passed by a simple majority
• Personal Actions
• Breach of Duty
• Prevention of Oppression and Mismanagement

Chapter 1 Types of Corporate Restructuring – Corporate Restructuring Insolvency Liquidation & Winding Up Notes is designed strictly as per the latest syllabus and exam pattern.

Types of Corporate Restructuring – Corporate Restructuring Insolvency Liquidation & Winding Up Study Material

Question 1.
Distinguish between ‘demerger’ and ‘slump sale’. (Dec 2015, 6 marks)
Answer:
Demerger: As per the Rules made under the Companies Act, ‘demerger’ in relation to companies means transfer, pursuant to scheme of arrangement by a ‘demerged company’ of its one or more undertakings to any ‘resulting company’ in such a manner as provided in Section 2(19AA) of the Income Tax Act, 1961, subject to the shares beingallotted by the ‘resulting company’ to the shareholders of the ‘demerged company’ against the transfer of assets and liabilities. Section 232 deals with mergers and amalgamation including demergers.

Slump Sale: Slump sale means the transfer of one or more undertaking as a result of the sale for a lump sum consideration without value being assigned to the individual assets and liabilities in such sales.

Both demerger and slump sale results in having of a division or undertaking,
but there are various differences which are as follows:

1. In case of slump sale, values are not assigned to individual assets and liabilities and the sale, of undertaking is for a lump sum consideration. Whereas in demerger, valuation of individual assets and liabilities are mandatory.
2. In case of demerger, the resulting company have to continue the business of transferred undertaking of demerged company, while it is not so in the case of slump sale.
3. Demerger unlike slump sale results into reorganization of capital.
4. In case of demerger, the shareholders of demerged company have to be issued shares of resulting company whereas in case of slump sale, the issue of shares does not take place.
5. In slump sale through amalgamation and merger, Ind AS 103 will be applicable.

Question 2.
Distinguish between merger and an acquisition (any three points). (June 2019, 3 marks)
Answer:

Merger	Acquisition
1. A merger occurs when two separate entities combine forces to create a new joint organization in which both are equal partners.	An acquisition refers to the purchase of one entity by another.
2. Old company cease to exist and a new company emerges.	A new company does not emerge.
3. It requires two companies to consolidate into a new entity with a new ownership and management structure.	It occurs when one company takes over all of the operational management decisions of another.
4. A transaction legally structured as a merger may give each party’s shareholders partial ownership and control of combined enterprise.	A transaction legally structured as an acquisition may have the effect of placing one party’s business under the indirect ownership of the other party’s shareholders.

Question 3.
(a) What is meant by ‘strategic alliance’ and its features?
(b) “A conglomerate merger is neither a type of horizontal merger nor a vertical merger. Discuss. (June 2012, 5 marks each)
Answer:
(a) Strategic alliance is a relationship between two or more parties to pursue a set of agreed upon goals or to meet a critical businesses continuing to remain Independent organisation.

Some of the features of strategic alliance are as follows:

1. It aims for a synergy where each partner hopes that the benefits from the alliance will be greater than those from individual efforts.
2. Alliance often involves technology transfer, economic specialisation, shared expenses, reduction in cost, etc.
3. It Is gain’ng importance In infrastructure sectors.
4. Strategic alliance aims at pooling the resources and facilitating innovative ideas and techniques while implementing large projects.
5. 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.

(b) Conglomerate merger is a merger between firms that are involved in totally unrelated business activities.

• The companies, which are merged are neither competitors nor complementaries.
• The business of these companies are neither horizontally nor vertically related to each other.
• Merging companies operate in unrelated markets.
• Conglomerate mergers are merger of different kinds of businesses under one flagship company.
• Thus conglomerate merger is neither a type of horizontal merger nor a vertical merger.

Question 4.
As per the provisions of the Companies Act, 2013 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. (Dec 2012, 5 marks)
Answer:
Demerger:
Section 2(19AA) prescribes certain conditions to be fulfilled, for demerger, which are as below:
(i) all the property of the undertaking, being transferred by the demerged company, immediately before the demerger, becomes the property of the resulting company by virtue of the demerger;

(ii) all the liabilities relatable to the undertaking, being transferred by the demerged company, immediately before the demerger, become the liabilities of the resulting company by virtue of the demerger;

(iii) the property and the liabilities of the undertaking or undertakings being transferred by the demerged company are transferred at values appearing in its books of account immediately before the demerger;

(iv) the resulting company issues, in consideration of the demerger, its. shares to the shareholders of the demerged company on a proportionate basis except where the resulting company itself is a shareholder of the demerged company;

(v) the shareholders holding not less than three-fourths in value of the shares in the demerged company (other than shares already held therein immediately before the demerger, or by a nominee for, the resulting company or, its subsidiary) become share-holders of the resulting company or companies by virtue of the demerger, otherwise than as a result of the acquisition of the property or assets of the demerged company or any undertaking thereof by the resulting company;

(vi) the transfer of the undertaking is on a going concern basis;

(vii) the demerger is in accordance with the conditions, if any, notified under sub-section (5) of section 72A by the Central Government in this behalf.

Slump Sale:
Slump sale means the transfer of one or more undertaking as a result of the sale for a lump sum consideration without values being assigned to the individual assets and liabilities in such sales.

Both demerger and slump sale results in hiving off a division or undertaking, but there are various differences which are as follows:

1. In case of slump sale, values are not assigned to individual assets and liabilities and the sale, of undertaking is for a lump sum consideration. Whereas in demerger, valuation of individual assets and liabilities are mandatory.
2. In case of demerger, the resulting company have to continue the business of transferred undertaking of demerged company, while it is not so in the case of slump sale.
3. Demerger unlike slump sale results into reorganization of capital.
4. In case of demerger, the shareholders of demerged company has to be issued shares of resulting company and in case of slump sale, the issue of shares does not take place.

Question 5.
(a) “Corporate restructuring aims to achieve certain predetermined objectives at corporate level.” Comment and explain how corporate restructuring would help bringing an edge over competitors.
(b) “In the modern business world, the strategic alliance and joint venture both have the same objective and end result, i.e., pooling of resources, technologies and expertise, etc. to increase the market share, to enter into a new business and so on.” Comment on this statement highlighting the basic differences between the two. (June 2013, 5 marks each)
Answer:
(a)

• ‘Corporate Restructuring’ is a term of wider importance and covers, in its ambit, the restructuring or reorganizing or financial restructuring of any organisation done in order to operate more effectively and efficiently.
• Objective of corporate restructuring:
  • Re – direction of the company and activities.
  • Risk reduction.
  • Deploying surplus cash from one business to another business.
  • Development of core-competencies.
• Corporate restructuring helps in bringing an edge over competitor. It aims at exploiting the strategic assets accumulated by a business i.e. natural monopolies, goodwill, etc.
• In order to drive a competitive force, corporate restructuring strategies such as merger and acquisitions exercise could be taken up that would bring an edge over competitors.

(b) Strategic Alliance:

• Alliance means an agreement between two or more organisation to cooperate with each other to accomplish their common goals and to seive for the benefits of both of them.
• It is an understanding between firms whereby resources capabilities and core competencies are combined to pursue mutual interests.

Joint Venture:

• Joint venture is a venture in which an enterprise is formed with participation in the ownership, control and management of minimum of two parties.
• In joint venture, a business enterprise is formed for profit in which parties of joint venture share responsibilities in an agreed manner, by providing risk capital, technology, trade mark & access to market, etc.

Question 6.
Explain the provisions of buy-back under the Companies Act, 2013 with reference to Board resolution and shareholders’ resolution. What is the maximum quantum of buy-back allowed under the Act ? (Dec 20136, 9 marks)
Answer:
Board Resolution for Buy-Back of Shares:
Section 68(2) of Companies Act, 2013 specifically provides the maximum quantum of the buy back of securities through board resolution and special resolution.

• The board can authorise the buy-back of securities not exceeding 10% of the total paid-up equity capital and free reserves of the company.
• The resolution authorising buy-back should be passed at a meeting of the Board.
• Such resolution can not be passed by circulation or at a meeting of a committee of the Board.

Shareholders Resolution for Buy-Back of Shares:

• Special resolution is required to be passed by the shareholders.
• By passing special resolution, the shareholders can authorize the buy-back of securities not exceeding 25% of the total paid-up capital and free reserves of the company in that financial year.
• Unlisted company should obtain shareholder’s approval by passing the special resolution only at a duly convened general meeting.
• Listed company should obtain approval by postal ballot.

Maximum quantum of buy-back.
the following points are important for understanding the maximum quantum of buy-back:

• A company cannot buy-back more than 25% of its total paid-up capital and free reserves.
• Buy-back of equity shares in any financial year should not exceed 25% of the total paid-up equity capital of the company.
• By passing a board resolution, the Board can authorize the buy-back of securities not exceeding 10% the total paid-up equity capital and free reserves of the company.

Note:

• The aforesaid limit is to be applied not to the number of securities to be bought back but to the amount required for buy-back of such securities.
• A company may buy-back its entire (i.e. 100%) securities other than equity shares, viz. preference shares and any other securities as may be notified by the Central Government from time to time, in a financial year, subject to the overall limit of 25% of the total paid-up capital and free reserves of the company.

Question 7.
What is the legal protection available to creditors for protecting their interest in case of reduction of capital proposed by the company? (June 2014, 5 marks)
Answer:
After passing the special resolution for the reduction of capital, the company is required to apply to the Tribunal by way of petition for the confirmation of the resolution.

Where the proposed reduction of share capital involves either (i) diminution of liability in respect of unpaid share capital, or (ii) the payment to any shareholder of any paid-up share capital, or (iii) in any other case, if the Tribunal so directs, the following provisions shall have effect:

The creditors having a debt or claim admissible in winding up are entitled to object. To enable them to do so, the Tribunal will settle a list of creditors entitled to object. If any creditor objects, then either his consent to the proposed reduction should be obtained or he should be paid off or his payment be secured. The Tribunal, in deciding whether or not to confirm the reduction will take into consideration the minority shareholders and creditors.

Question 8.
ABC Ltd. has completed buy-back of equity shares on 30^th April, 2014. The company desires to make further issue of equity shares on 31^st August, 2014. Can the company proceed and allot further equity shares on 31^st August, 2014 assuming that all other requirements are complied with or will be complied with?

Will your answer be different, if the company desires to issue and allot on the very same day (i.e., 31^st August, 2014), preference shares instead of equity shares assuming that all other requirements are complied with or will be complied with? (Dec 2014, 5 marks)
Answer:
In the given case, ABC Ltd. has completed buy-back of equity shares on 30^th April, 2014.

The company desires to make further issue of equity shares on 31st August, 2014.

According to the provisions of Section 68(8) of Companies Act, when a CQ’Tipany completes a buy-back of its shares or other specified securities it shall not make a further issue of the same kind of shares or other securities including allotment of new shares within a period of six months except by way of a bonus issue or in the discharge of subsisting obligations such as conversion of warrants, stock option schemes, sweat equity or conversion of preference shares or debentures into equity shares.

As the six months is not over from the date of completion of buy-back, it cannot proceed and allot further equity shares on 31^st August, 2014.

Here the words “kind” and “Other” are very important, Kind must be understood as per Section 43. Section 43 says a company can have two kinds of shares (a) Equity shares (b) Preference shares. So company can issue preference shares on 31^st August, 2014 being not the same kind of shares.

Question 9.
Explain the concept of ‘vertical merger’ and differentiate between ‘forward integration’ and ‘backward integration’. (Dec 2014, 5 marks)
Answer:
Vertical Merger:

• Vertical Merger is one of the types of Merger.
• It is a merger which takes place upon the combination of two companies which are operating in the same industry but at different stages of production or distribution system.
• Vertical merger provides a way for total integration to those firms which are striving for owning of all phases of the production schedule together with the marketing network.

Forward Integration:
Forward integration may result if a company decides to take over the retailer or Customer Company.

Backward Integration:
If a company takes over its supplier/producers of raw material, then it may result in backward integration of its activities.

Question 10.
Good Earth Pvt. Ltd. wants to become a public listed company without opting for initial public offer (IPO). What is the best strategy available for the company? Distinguish the same from ‘strategic alliance’. (Dec 2014, 3 marks)
Answer:
Reverse merger is the opportunity for the unlisted companies to become public listed company, without opting for Initial Public offer (IPO). In this process the private company acquires the majority shares of public company, with its own name.

Strategic Alliance: Any agreement between two or more parties to collaborate with each other, in order to achieve certain objectives whiie continuing to remain independent organizations is called strategic alliance.

Question 11.
Comment on the following:
No offer of buy-back shall be made within a period of 180 days from the date of Board Meeting or meeting of shareholders, as the case may be, in respect of the preceding offer of buy-back. (June 2016, 3 marks)
Answer:
As per Section 68(2) of the Companies Act, 2013 no offer of buy-back under this sub section shall be made within a period of one year reckoned from the date of the closure of the preceding offer of buy-back, if any.

So period to be calculated from the date of the closure of the preceding offer of buy-back.

Question 12.
(a) “Corporate restructuring aims at different things at different times for different companies hut the single common objective in every restructuring exercise is to eliminate the disadvantages and combine the advantages.” Comment on the statement highlighting various needs for undertaking corporate restructuring. (Dec 2016) (5 marks)
(b) What do you understand by ‘over- capitalised’ company? Discuss the corrective measures required to be undertaken by an over-capitalised company. (5 marks)
Answer:
(a) The various needs for undertaking a Corporate Restructuring exercise are as follows:

1. To focus on core strengths, operational synergy and efficient allocation of managerial capabilities and infrastructure.
2. Consolidation and economies of scale by expansion and diversion to exploit extended domestic and global markets.
3. Revival and rehabilitation of a sick unit by adjusting losses of the sick unit with profits of a healthy company.
4. Acquiring constant supply of raw materials and access to scientific research and technological developments.
5. Capital restructuring by appropriate mix of loan and equity funds-to reduce the cost of servicing and improve return on capital employed.
6. In prove corporate performance to bring it at par with competitors by adopting the radical changes brought out by information technology.

(b) A company is said to be over-capitalized, if its earnings are not sufficient to justify a fair return on the amount for share capital and debentures that have been issued. Otherwise, it is said to be over capitalized when total of owned and borrowed capital exceeds its fixed and current assets i.e. when it shows accumulated losses on the assets side of the balance sheet.

Steps of restructuring by over-capitalised company

• Buy-back of shares by a company as per the provisions of Companies Act, 2013.
• Paying back surplus share capital to shareholders.
• Repayment of loans.
• Repayment of fixed deposits.
• Redemption of debentures

Question 13.
Elucidate the obligations of a merchant banker as per Regulation 25 of SEBI (Buy – back of Securities) Regulations, 2018. (Dec 2016, 5 marks)
Answer:
Regulation 20 provides that the merchant banker should ensure that:
(a) the company is able to implement the offer;
(b) the provision relating to escrow account has been made;
(c) firm arrangements for monies for payment to fulfil the obligations under the offer are in place;
(d) the public announcement of buy-back is made and the letter of offer has been filed in terms of the Regulations;
(e) the merchant banker should furnish to SEBI, a due diligence certificate which should accompany the draft letter of offer;

(f) the merchant, banker should ensure that the contents of the public announcement of offer as well as the letter of offer are true, fair and adequate and quoting the source wherever necessary;

(g) the merchant banker should ensure with compliance Section 68 of Companies Act, 2013, and Section 70 of Companies Act, 2013 and any other applicable laws or rules in this regard;

(h) upon fulfillment of all obligations by the company under the Regulations, the merchant banker should inform the bank with whom the escrow or special amount has been deposited to release the balance amount to the company and send a final report to SEBI in the specified form, within 15 days from the date of closure of the buy-back offer.

Question 14.
Comment on the following;
Circumstances which prohibit buy-back of shares or other specified securities under the Companies Act, 2013. (Dec 2016, 3 marks)
Answer:
Under Section 70 of the Companies Act, 2013, no company shall directly or indirectly purchase its own shares or other Securities;
through any subsidiary company including its own subsidiary companies;

through any investment company or group of investment companies.

if a default, is made by the company, in repayment of deposits accepted either before or after the commencement of the Act, interest payment thereon to any financial institution or banking company. However, the buy-back is not prohibited, if the default is remedied and a period of three years has lapsed-after such default ceased to subsist.

No company shall, directly or indirectly, purchase its own shares or other specified securities in case such company has not complied with the provision of Section 92 (Annual Return), 123 (Declaration of Dividend), 127 (Punishment for failure to distribute dividend) and Section 129 (Financial Statement).

Question 15.
(a) “Measuring the shareholders’ value” is the objective of Good Corporate Governance. Comment on the statement, how buy back of shares achieves it. (June 2017) (5 marks)
(b) Discuss “Strategic Alliance” and “Joint Venture” as corporate restructuring strategies. (5 marks)
Answer:
(a)
Corporate Governance is the application of best management practices, compliance of law in true letter and spirit and adherence to ethical standards for effective management and distribution of wealth and discharge of social responsibility for sustainable development of all stakeholders.

Shareholder value is the value delivered to shareholders because of management’s ability to grow sales, earnings and free cash flow over time and which depended upon good strategic decisions by the board of the directors of the company that invest the shareholders money into profitable projects that creates healthy returns.

If this value is created over the long term, the share price increases and the company can pay larger cash dividends to shareholders.

But this is possible when there is effective and good corporate governance in the company.

Thus the main objective of good corporate governance is always to measure and increase the ultimate shareholder’s value.

Buy back of securities is governed by Sec. 68 of Companies Act, 2013 and is one kind of a measure in which the capital of a overcapitalized company can be restructured.

Buy back of securities increases the EPS and RoE and also enable the shareholders to sell their securities at good price when the market prices of the securities are low. Buy back of securities enhances the reputation of the company and gives a message to all the stakeholders that company is enjoying rich amount of funds.

Thus a good corporate through buy back of securities by complying of the provisions of the companies act as well as SEBI BUY BACK REGULATIONS not only help the over capitalized companies to restructure its capital but also it increases the shareholders’ value too.

Question 16.
Examine and explain the following statement citing relevant provisions of laws:
The reduction of share capital can result in extinguishment of class of shares. (June 2017, 3 marks)
Answer:

• Reduction of capital means reduction of issued, subscribed and paid-up capital of the company.
• The need for reduction of capital may arise in various situations such as:
  • trading losses
  • heavy capital expenses and assets of reduced or doubtful value
  • original capital may either have become lost or a company may find that it has more resources than it can profitably employ
  • to adjust the relation between capital and assets.
• As per Sec. 66 of Companies Act, 2013, A company limited by shares or a company limited by guarantee and having a share capital may, if authorised by its articles, by special resolution, and subject to its confirmation by the tribunal on petition, reduce its share capital in any way and in particular:
• extinguish or reduce the liability on any of its shares in respect of the share capital not paid-up; or
• either with or without extinguishing or reducing liability on any of its shares,:
  • cancel any paid-up share capital which is lost or is unrepresented by available assets; or
  • pay off any paid-up share capital which is in excess of the wants of the company, alter its memorandum by reducing the amount of its share capital and of its shares accordingly.

In Seil Ltd., Re. (2008) 144 Com Cases 469: (2009) 89 SCL 434 (Del), a scheme of amalgamation and arrangement involved reduction of share capital by extinguishment of shares of a particular class. The reduction was approved by the majority of shareholders and creditors of the transferee company. The NCLT approved the reduction and extinguishment of a portion of share capital was held to be permissible as no one was prejudicially affected.

Question 17.
(a) “Corporate Restructuring aims at significant change in a Company’s business model, management team or financial structure to address challenges and increase shareholders’ value.” Elucidate the statement with relevance to business strategy. (Dec 2017) (5 marks)
(b) “Restructuring is resorted to in various forms with objectives such as profitability improvement, augmenting more resources, relief from competition and methods take the forms like acquisition, merger, takeover, leveraged buy outs, slump sale, overseas acquisitions etc.” Illustrate certain instances that have happened in India setting examples of benefits in Corporate Restructuring. (5 marks)
Answer:
(a)

• Corporate Restructuring is the process of significantly changing a company’s business model, management team orfinancial structure to address challenges and increase shareholder value.
• Restructuring may involve major layoffs or bankruptcy, though restructuring is usually designed to minimize the impact on employees, if possible.
• Restructuring may involve the company’s sale or a merger with another company.
• Companies use restructuring as a business strategy to ensure their long-term viability.
• Shareholders or creditors might force a restructuring if they observe the company’s current business strategies as insufficient to prevent a loss on their investments.
• The nature of these threats can vary, but common catalysts for restructuring involve a loss of market share, the reduction of profit margins or declines in the power of their corporate brand.

(b) Corporate restructuring is a process in which a company changes the organizational structure and processes of the business. The most common form of corporate restructuring are mergers/amalgamations, acquisitions/takeovers, financial restructuring, divestitures/ demergers and buyouts. Corporate Restructuring can also be resorted in any of the forms like slump sale, leveraged buy-out or even circumventing the restriction imposed under statutes or by regulators.

As a case of demerger the Cement division of L&T Ltd. resulted to Ultratech Cement Co. Ltd. that resulted in economies of scale and overall competitiveness, multifunctional synergies, combined resource pool, cross leverage financial strengths and increased capacity.

Tata Steel Ltd. acquired overseas Corns Group Pic. that improved the synergies to Tata Steel Ltd. that marshalled the resources for both, utilization of wide retail and distribution network, technology transfer and enhanced R&D capabilities. Transfer of undertaking for a lump sum consideration by Piramal Healthcare Ltd. to Abbott Healthcare Pvt. Ltd. with a non-compete clause is slump sale in terms of the Income-tax Act, 1961. Capital gains arising therefrom is taxed as long term if held for more than 3 years prior to transfer or as short term if held for less than 3 years.

Bharti Airtel Ltd. explored the strategy of leveraged buyout in acquiring Zain Africa International BV majorly financed through borrowed funds. For this purpose, special purpose vehicles are formed. Bharti Airtel structured acquisition through special purpose vehicles thus keeping its financials intact. However, as a guarantor for special purpose vehicles, Bharti Airtel assumes full responsibility.

Question 18.
(a) “Optimum capitalization is desired to maintain robust financial health of an enterprise.” Identify the symptoms of over capitalization or under capitalization. (Dec 2017) (3 marks)
(b) “Reduction of capital requires the approval of National Company Law Tribunal (NCLT) is a general perception.” Elucidate. (3 marks)
Answer:
(a) A company is said to be over-capitalized, if its earnings are not sufficient to justify a fair return on the amount of share capital and debentures that have been issued. Otherwise, it is said to be over capitalized when total of owned and borrowed capital exceeds its fixed and current assets i.e. when it shows accumulated losses on the assets side of the balance sheet.

If the owned capital of the business is much less than the total borrowed capital than it is said to be under capitalization. In other words the owned capital of the company is disproportionate to the scale of its operation and the business is dependent more upon borrowed capital.

Under capitalization may be the result of excess volume of trading and over capitalization may be due to insufficient volume of trading.

(b) As per section 66 of the Companies Act, 2013, sanction of the NCLT is required for effecting resolution for extinguishment or reduction of any paid-up share capital yet there are circumstances and provisions to reduce paid-up capital without necessity of approval by the Tribunal. Section 61 enables cancelling the unsubscribed shares without leave of the Tribunal. Also, surrender of shares by a shareholder, forfeiture of shares for non-payment of unpaid calls, redemption of preference shares and buy-back of shares in accordance with section 68 of the Act do not require sanction by Tribunal.

Question 19.
(a) “Global competition drives enterprises to become globally fit to face global challenges prompting them for corporate restructuring”. Elucidate. (June 2018) (5 marks)
(b) “Inorganic growth provides an organisation with an avenue for attaining accelerated growth as compared to the organic growth in general”. Comment on the statement. (5 marks)
(c) “Inability to pay debts was generally a ground for moving an application for winding up of a Company under the Companies Act, 1956. But such a ground no longer exists under the Companies Act, 2013”. State the circumstances which compel a company to be wound up under the Companies Act, 2013. (5 marks)
Answer:
(a)

• Corporate restructuring activities such as merger, acquisitions, takeovers, demergers, hive off etc. enables an enterprise to achieve economies of scale, global competitiveness, right size, and a host of other benefit including reduction of cost of operations and administration.
• A merger or amalgamation is capable of offering various financial synergies and benefits such as eliminating financial constraints, deployment of surplus cash, enhancing debt capacity and lowering the cost of financing.
• Thus, global competition drives enterprises to become globally fit to face global challenges prompting them for corporate restructuring.

(b) Inorganic growth provides an organization with an avenue for attaining accelerated growth enabling it to skip few steps on the growth ladder. Restructuring through mergers, amalgamations etc., constitute one of the most important methods for securing inorganic growth.

Inorganic growth is the rate of growth of business by increasing output and business reach by acquiring new businesses by way of mergers, acquisitions and take-overs and other corporate restructuring strategies that may create a change in the corporate entity.

Inorganic growth strategies like mergers, acquisitions, takeovers and spinoffs are regarded as important engines that help companies to enter new markets, expand customer base, cut competition, consolidate and grow in size quickly, employ new technology with respect to products, people and processes. Thus, the inorganic growth strategies are regarded as fast track corporate restructuring strategies for growth.

(c) Inability to pay debts: Insolvency and Bankruptcy Code, 2016 has substituted section 271 of the Companies Act, 2013. Section 271 of the Companies Act, 2013, before its substitution by the Insolvency and Bankruptcy Code, 2016, provided the seven grounds for winding up by Tribunal. Now two ground have been deleted as below:

• if the company is unable to pay its debts
• if the Tribunal has ordered the winding up of the company under Chapter XIX.

Circumstances in which Company may be Wound up by Tribunal
if the company has, by special resolution, resolved that the company be wound up by the Tribunal

if the company has acted against the interests of the sovereignty and integrity of India, the security of the State, friendly relations with foreign States, public order, decency or morality

if on an application made by the Registrar or any other person authorised by the Central Government by notification under this Act, the Tribunal is of the opinion that the affairs of the company have been conducted in a fraudulent manner or the company was formed for fraudulent and unlawful purpose or the persons concerned in the formation or management of its. affairs have been guilty of fraud, misfeasance or misconduct in connection therewith and that it is proper that the company be wound up

if the company has made a default in filing with the Registrar its financial statements or annual returns for immediately preceding five consecutive financial years

if the Tribunal is of the opinion that it is just and equitable that the company should be wound up.

Question 20.
What corrective measures a Company can take to restructure its internal finance having noticed symptoms of either under capitalization or over capitalization? (June 2048, 3 marks)
Answer:
Some of the corrective measures for over capitalization includes the following:
(a) Buy back of its own shares.
(b) Paying back surplus share capital to shareholders.
(c) Repaying of loans to Financial Institutions, Banks, Fixed deposit of public if any.
(d) Redemption of debentures, bonds etc.
(e) Redemption of preference shares, if any.

An under-capitalized company may restructure its capital by taking one or more of the following corrective steps:

1. Injecting more capital whenever required either by resorting to rights issue/preferential issue or additional public issue.
2. Resorting to additional borrowings from financial institutions, banks, other companies etc.
3. Issuing debentures, bonds, etc. or
4. Inviting and accepting fixed deposits from directors, their relatives, business associates and public.

Question 21.
“Corporate Restructuring is an inorganic growth strategy that significantly changes a company’s business model, management team or financial structure to address challenges and increase shareholders’ value”. Elucidate the statement with different options of Corporate Restructuring. (Dec 2018, 5 marks)
Answer:
Inorganic growth provides an organization with an avenue for attaining accelerated growth enabling it to skip few steps on the growth ladder. Restructuring through mergers, amalgamations etc., constitute one of the most important methods for securing inorganic growth.

Inorganic growth is the rate of growth of business by increasing output and business reach by acquiring new businesses by way of mergers, acquisitions and take-overs and other corporate restructuring strategies that may create a change in the corporate entity.

Inorganic growth strategies like mergers, acquisitions, takeovers and spinoffs are regarded as important engines that help companies to enter new markets, expand customer base, cut competition, consolidate and grow in size quickly, employ new technology with respect to products, people and processes.

Thus, the inorganic growth strategies are regarded as fast track corporate restructuring strategies for growth.

Question 22.
The unpalatable or inevitable recession can also be a key factor to trigger Mergers/Takeovers – how far is it proved true? (Dec 2018, 5 marks)
Answer:
Acquisition and Mergers were identified as one of the key factor to overcome economic recession, conducted a research on corporates during world economic recession as to how they adopt strategies to survive during the recession and to succeed subsequently.

This research focused primarily on 13 companies that were established members of the Global Fortune 500 index. They were the examples of organisations that have adapted, survived, and prospered during recessionary periods. All of the companies studied achieved dramatic increases in growth and profitability during the period of economic downturn or in the following recovery period. These companies were chosen because they exhibit characteristics and strategies that enabled them to achieve success from difficult economic periods. The study has identified seven key factors to have greatest impact on firms’ ability to emerge strongly from recessionary periods.

Among other key factors, they have identified acquisitions and strategic alliances as a key factor to overcome economic recession to strengthen, re-focus, and position the company for increased growth and profitability.

The study identified that companies also made acquisitions to access new markets, products, technologies, customers and talent at an accelerated pace.

Question 23.
Enumerate certain circumstances that necessitates financial restructuring, being part of Internal Corporate Restructuring. (Dec 2018, 3 marks)
Answer:
A company is required to balance between its debt and equity in its capital structure and the funding of the resulting deficit.
When, during the life time of a company, any of the.following situations arise, the Board of Directors of a company is compelled to think and decide on the company’s restructuring:

1. necessity for injecting more working capital to meet the market demand for the company’s products or services;
2. when the company is unable to meet its current commitments;
3. when the company is unable to obtain further credit from suppliers of raw materials, consumable stores, bought-out components etc. and from other parties like those doing job work for the company.
4. when the company is unable to utilise its full production capacity for lack of liquid funds.

Financial restructuring of a company involves rearrangement of its financial structure so as to make the company’s finances more balanced.

Question 24.
“Circumstances or reasons that prompt or motivate Management to resort to Corporate Restructuring” – Briefly analyse the phrase giving or citing certain noted mergers or demergers during the last couple of years. (June 2019, 5 marks)
Answer:
Broadly speaking, management is prompted to resort to corporate restructuring either for financial or other reasons. Financial reasons could be to reduce risk; increase operating efficiency; improve access to financial market; or to avail tax benefits.

Other reasons could be to expand marketing and management capabilities; explore new products for development; avail synergistic benefits; or revive a sick company. Insolvency and Bankruptcy Code, 2016 has created one more window to submit resolution plan in a Corporate Insolvency Resolution Process.

Restructuring aims at improving the competitive position of an individual business and maximizing its contribution to corporate objectives. It also aims at exploiting the strategic assets accumulated by a business i.e., monopolies, goodwill, exclusivity through licensing, etc. to enhance the competitiveness advantages. Thus, restructuring helps in bringing an edge over competitors.

Prominent mergers/demergers or acquisitions that took place recently are Flipkart acquiring Myntra, Asian Paints acquiring Ess Ess Bathroom products, RIL acquiring Network 18, Merck acquiring Sigma, Sun Pharma absorbing Ranbaxy; Tata Power acquiring PT Arutimin Indonesia, Reliance Industries demerger, Whitbread pic. demerged Costa Coffee and Sintex demerger.

Question 25.
Mergers and acquisitions have one common goal of creating synergy that makes the value of the combined companies greater than the sum of the parts – Analyse briefly to focus on the visible benefits of such combinations. (June 2019, 5 marks)
Answer:
All mergers and acquisitions (M&A) have one common goal, i.e., they are all meant to create synergy that makes the value of the combined companies greater than the sum of the two parts. The success of a merger or acquisition depends on whether this synergy is achieved or not. Synergy may be in the form of revenue enhancement and cost savings. By merger, the companies expect to reap the following benefits:

1. Becoming bigger: Many companies use M&A to grow in size and leapfrog their rivals. While it can take years or decades to double the size of a company through organic growth, this can be achieved much more rapidly • through mergers or acquisitions, i.e., through inorganic growth.

2. Domination: Companies also engage in M&A to dominate their respective sector/industry. However, since a combination of two behemoths may result in a potential monopoly, such a transaction may have to face regulatory challenges.

3. Tax benefits: Companies also use M&A for tax purposes, although this may be an implicit rather than an explicit motive.

4. Economies of scale: Mergers also translate into improved economies of scale which refers to reduced costs per unit that arise from increased total output of a product.

5. Acquiring new technology: To stay competitive, companies need to stay on top of technological developments and their business applications. By buying a smaller company with unique technologies, a large company can maintain or develop a competitive edge.

6. Improved market reach and industry visibility: Companies buy other companies to reach new markets and increase their revenues and earnings. A merger may expand two companies’ marketing and distribution channels thereby giving new sales opportunities. A merger can also improve a company’s standing in the investment community, i.e., bigger firms often have an easier time raising capital than smaller ones.

Question 26.
You are the Company Secretary of PQR Ltd. The Board of the company is opting for reduction in the share capital of the company without seeking the approval of the Tribunal. How would you advise the Board? (Dec 2019, 5 marks)
Answer:
Cases which amount to reduction of share capital but where no approval/confirmation by the Tribunal is necessary:
(a) Surrender of shares: ‘Surrender of shares’ means the surrender of shares already issued, to the company, by the registered holder of shares. Where shares are surrendered to the company, whether by way of settlement of a dispute or for any other reason, it will have the same effect as a transfer in favour of the company and amount to a reduction of capital. But if, under any arrangement, such shares, instead of being surrendered to the company, are transferred to a nominee of the company then there will be no reduction of capital [Collector of Moradabady. Equity Insurance Co. Ltd., (1948) 18 Com Cases 309: AIR 1948 Oudh 1971 Surrender may be accepted by the company under the same circumstances where forfeiture is justified. It has the effect of releasing the shareholder whose surrender is accepted for further liability on shares.

The Companies Act, 2013 contains no provision for surrender of shares. Thus, surrender of shares is valid only when Articles of Association provide for the same and:

1. where forfeiture of such shares is justified; or
2. when shares are surrendered in exchange for new shares of same nominal value. Both forfeiture and surrender lead to termination of membership. However, in the case of forfeiture, it is at the initiative of company and in the case of surrender it is at the initiative of member or shareholder.

(b) Forfeiture of shares: A company may if authorised by its articles, forfeit shares for non-payment of calls and the same will not require confirmation/approval of the Tribunal.

(c) Diminution of capital: Where the company cancels shares which have not been taken or agreed to be taken by any person.

(d) Redemption of redeemable preference shares.

(e) Buy-back of its own shares.

Question 27.
It is said that ‘corporate restructuring’ always has motives. Elaborate on the ‘financial motives’ that are prevalent? (Dec 2020, 5 marks)
Answer:
Financial Motives behind Corporate Restructuring include the following:

• To reduce risk
• To increase operating efficiency
• To improve access to financial markets
• To obtain tax benefits.
• For a manufacturing unit the operating efficiency is of utmost importance but for lenders like Banks, Financial Institutions and NBFCs, the disbursement risk is the greatest as a wrong judgment shall create a Non-performing asset. Risk has many forms and any one can be a cause for concern for the lenders.
• For newly set-up companies desiring to expand, modernize and grow, the access to financial markets is essential and for this the generation of ideas is important which in future should be able to generate and sustain revenue. Tax savings is the target for all corporate entities.

Question 28.
‘Buy-back strategy’ is nowadays being adopted by leading corporate bodies. Mention one case that has happened recently specifying the benefits of buy-back? (Dec 2020, 5 marks)
Answer:
Corporate giants like Infosys Ltd, Wipro, TCS etc., also resorted to buy-back of securities:

Advantages of buy-back

• It is an alternative mode of reduction in capital without requiring approval of the National Company Law Tribunal
• To improve the earnings per share
• To improve return on capital, return on net worth and to enhance the long-term shareholders value
• To provide an additional exit route to shareholders when shares are undervalued or thinly traded
• To enhance consolidation of stake in the company
• To prevent unwelcome takeover bids
• To return surplus cash to shareholders
• To achieve optimum capital structure
• To support share price during periods of sluggish market condition
• To serve the equity more efficiently.

Question 29.
Is External Reconstruction superior to Internal Reconstruction ? (Dec 2020, 3 marks)
Answer:
In ‘Internal Reconstruction’, the assets are re-valued, liabilities are negotiated, and losses suffered are written-off by reducing the paid-up value of shares and/ or varying the rights attached to different classes of shares.

Internal Reconstruction (IR) is considered to be superior to External Reconstruction(ER) since the exercises undertaken in IR requires an in-depth analysis and remedies instead of giving up in ER in the form of merger or acquisition and losing identity.

In many a case, Internal Reconstruction does not require approvals from Courts or tribunals that may require conducting meetings of classes of shareholders and creditors, except in a case of reduction of paid up capital.

Question 30.
“Safeguarding the interest of creditors is considered while sanctioning reduction of capital under Section 66 of the Companies Act, 2013”. Comment and analyse briefly. (Aug 2021, 5 marks)
Answer:
In case the proposed reduction of capital involves diminution of liability in respect of unpaid capital or payment of any paid-up capital to any shareholder or in any other case, the Tribunal permits the creditors to object to such proposal.

The Tribunal while granting sanction of the proposed reduction will take into consideration interest of- creditors and minority shareholders. In the process, notices will be given to the Government, Registrar of Companies, Securities and Exchange Board of India (in case of listed companies) and the creditors to submit objections within three months of application.

There is no limitation on the power of the Court to confirm the reduction except that it must first be satisfied that all the creditors entitled to object to the reduction have either consented or been paid or secured [British and American Trustee and Finance Corpn. v. Couper, (1894) AC 399, 403 : (1991-4) All ER Rep 667].

Question 31.
HIJ Entertainment LLP desires to amalgamate as transferor with LMN Exhibitors Ltd. Is it permissible? (Aug 2021, 3 marks)
Answer:
Yes, it is permissible as was held in the Matter of Scheme of Amalgamation between Real Image LLP v. Qube Cinema Technologies Private Limited.

The National Company Law Tribunal, Chennai Bench in the order dated 11.06.2018 held that, “.. .the legislative intent behind enacting both the LLP Act, 2008 and the Companies Act, 2013 is to facilitate the ease of doing business and create a desirable business atmosphere for companies and…

“For this purpose, both the Acts have provided provisions for merger or amalgamation of two or more LLPs and companies,” noted the NCLT bench.

“If the intention of Parliament is to permit a foreign LLP to merge with an Indian company, then it would be wrong to presume that the Act prohibits a merger of an Indian LLP with an Indian company.

“Thus, there does not appear any express legal bar to allow/ sanction merger of an Indian LLP with an Indian company,”

National Company Law Tribunal, Chennai Bench taking such view decided by order dated 11th June 2018. The counsels submitted that Sections 60 to 62 of LLP Act and Sections 230 to 234 of the Companies Act, empowers National Company Law Tribunal to sanction a scheme put by the applicant entities. The Bench noted that there is no express legal bar to permit or sanction merger of Indian LLP with an Indian Company.

Question 32.
‘Divestiture is normally used to mobilize resources for core business or businesses of the company by realizing value of non-core business assets’. Explain the statement with reasons for Divestitures. Also state one example. (Dec 2021, 5 marks)
Answer:
Divestiture means selling or disposal of assets of the company or any of its business undertakings/divisions, usually for cash (or for a combination of cash and debt) and not against equity shares to achieve a desired objective, such as greater liquidity or reduced debt burden. Divestiture is normally used to mobilize resources for core business or businesses of the company by realizing value of non-core business assets.

For example: XYZ Ltd. is the parent of a food company, a car company, and a clothing company. If XYZ Ltd. wishes to go out of the car business, it may divest the business by selling it to another company, exchanging it for another asset, or closing down the car company.

Reasons for Divestitures

1. Huge divisional losses
2. Continuous negative cash flows from a particular division
3. Difficulty in integrating the business within the company
4. Unable to meet the competition
5. Better alternatives of investment
6. Lack of technological upgradations due to non-affordability
7. Lack of integration between the divisions
8. Legal”pressures

E.g. Nestle is selling its US chocolate business, which includes brands such as BabyRuth, Butterfinger, and Crunch to Ferrero for US$2.8 billion. The deal is part of Nestle’s strategy to sell underperforming brands and refocus on healthier products and fast-growing markets.

Question 33.
Discuss Split-ups and Split-offs in corporate restructuring. (Dec 2021, 3 marks)
Answer:
Splits involve dividing the company into two or more parts with an aim to maximize profitability by removing stagnant units from the mainstream business. Splits can be of two types, Split-ups and Split-offs.

Split-ups : It is a process of reorganizing a corporate structure whereby all the capital stock and assets are exchanged for those of two or more newly established companies resulting in the liquidation of the parent corporation. Split-offs: It is a process of reorganizing a corporate structure whereby the capital stock of a division or subsidiary of corporation or of a newly affiliated company is transferred to the stakeholders of the parent corporation in exchange for part of the stock of the latter. Some of the shareholders in the parent company are given shares in a division of the parent company which is split off in exchange for their shares in the parent company.

Question 34.
“One of the ways of Corporate Restructuring is through market restructuring.” Explain with some recent corporate examples as to how this type of restructuring is undertaken. (June 2022, 5 marks)

Question 35.
An unlimited company can reduce the share capital of the company in a manner specified in the Article of Association of the company without confirmation of NCLT.” Comment. List out certain situations where no confirmation of Tribunal is necessary for reduction of capital. (June 2022, 5 marks)

Question 36.
Constitution of National Company Law Tribunal (NCLT) and National Company Law Appellate Tribunal (NCLAT) has provided various new opportunities for Practicing Company Secretaries (PCS) which were not available earlier. Briefly enumerate the scope of services for PCS under NCLT and NCLAT regime. (June 2022, 3 marks)

Question 37.
What are “Equity Carve-Outs”? Explain with suitable examples. (June 2022, 3 marks)

Question 38.
X Ltd. is a listed company and holds 100% equity of Y Ltd. Y Ltd. holds 15% equity in Z Inc., USA as on 31^st March, 2014. Due to the poor performance of Z Inc., USA, Boards of directors of X Ltd. and Z Inc., USA in their meeting held on 20^th May, 2014 approved merger of Z Inc., USA with X Ltd. with effect from 1^st April, 2014. The scheme of merger was filed with the Hon’ble High Court of Delhi pursuant to sections 230-232. The Registrar of Companies (ROC) has raised objections that sanction of the scheme of merger would result in the buy back by the X Ltd. of shares of its subsidiary Z Inc., USA and would thereby violate the provisions of Section 19 and Section 68 of Companies Act, 2013. Comment whether the objection raised by the ROC is sustainable in the Tribunal of law. (June 2014, 5 marks)
Answer:
This case is similar to that of Himachal Telematics Ltd. v7 Himachal Futuristic Communications Ltd. (1996) 86 Comp Cas 325 (Del) in which a scheme of amalgamation was to be undertaken. However, the transferee company had a subsidiary which was holding shares of the transferor company. An objection was raised that the sanction of the scheme of amalgamation would result in the buying back by the transferee company of shares of its subsidiary and would thereby violate the provisions of Section 19 and 68 of the Companies Act, 2013. Dealing with the argument regarding violation of Section 68 of Companies Act, 2013, it was held that no violation would result as a consequence of sanctioning the scheme of amalgamation as the transferee company was not buying any of its own shares.

Question 39.
(a) Brown Ltd. committed certain defaults in repayment of deposits. Subsequently, the said defaults were remedied and a period of 30 months has lapsed after such defaults ceased to subsist.

Brown Ltd. desires to purchase its own shares. Do you think Brown Ltd. is entitled to proceed with the proposed buy-back of shares?
Give reasons for your answer quoting the relevant provisions applicable to the issue under consideration. (June 2015, 5 marks)

(b) The paid-up capital of Cool Ltd. as on 31^st March, 2014 is ₹ 10 crore and its free reserves as on the same date was ₹ 10 crore. Cool Ltd+ proposes to buy-back its shares for a value upto 15% of its paid-up capital.

State whether the Board of Cool Ltd. can approve buy-back of company’s shares upto 15% of the paid-up capital under the provisions of the Companies Act, 2013. (5 marks)
Answer:
(a) In the given case, Brown Ltd. committed certain defaults in repayment of deposits.

Subsequently, the said defaults were remedied and a period of 30 months has elapsed after such defaults ceased to subsist.

Under Section 70 of the Companies Act, 2013, no company shall directly or indirectly purchase its own shares or other specified securities if a default is made by the company, in the repayment of deposits, interest payment thereon. However, the buy-back is not prohibited, if the default is remedied and a period of three years has lapsed after such default ceased to subsist.

In the above case, since three years has not lapsed after default ceased to subsist, Brown Ltd. is not entitled to proceed with the proposed buy-back of shares.

(b)

• Board of Directors can approve buy-back up to 10% of the total paid-up equity capital and free reserves of the company.
• Shareholders by a special resolution can approve buy-back up to 25% of the total paid-up capital and free reserves of the company.
• In the given case, Cool Ltd. proposes to buy-back its shares for a value upto 15% of its paid-up capital.
• Paid-up capital of Cool Ltd. is ₹ 10 crore
• Free reserves of Cool Ltd. is ₹ 10 crore
• Cool Ltd. proposes to buy-back its shares for a value upto 15% of its paid-up capital, (i.e. 15% of 10 crore = 1.5 crore) which is very well within the limits of Board of Directors approval which is 10% of paid-up equity capital and free reserves (i.e. 10% of 20 crore = 2 crore).
• Hence, Board of Directors of Cool Ltd. can approve the buy-back of , shares.

Question 40.
Hardnut Ltd. wants to buy-back its equity shares. The company has equity share capital of ₹ 100 crore (face value of ₹ 10 fully paid-up) and free reserves of ₹ 200 crore. Partly paid equity shares are ₹ 60 crore. Preference share capital of face value ₹ 100 fully paid is ₹ 40 crore. The company seeks your opinion about the quantum of shares that can be (June 2015, 5 marks)
Answer:
Equity Share : ₹ 100 crore
Free Reserves : ₹ 200 crore
Partly paid equity shares : ₹ 60 crore
Preference shares capital : ₹ 40 crore

Maximum amount upto which board can approve buy-back of shares is 10% of total paid up equity capital & free reserves of the company.

In this case matrix Ltd. has a paid up equity capital = ₹ 160 crore and Free Reserves = ₹ 200 crore .Total = ₹ 360 crore.

Maximum amount board can approve buy-back of shares
= 10% of ₹ 360 crore
= ₹ 36 crore

Maximum amount upto which the shareholders can approve buy-back of shares is 25% of paid up capital & free reserves.
In this case, total paid up capital & free reserves
= (₹ 100 crore + ₹ 60 crore + ₹ 40 crore + ₹ 200 crore)
= ₹ 400 crore
Shareholders can approve upto 25% of ₹ 400 crore = ₹ 100 crore
Buy-back of equity shares should not exceed 25% of total paid up equity capital of the company in any financial year.

So, equity shares can be bought back maximum to the extent of 25% of (₹ 100 crore – ₹ 60 crore) = ₹ 40 crore

Question 41.
XYZ Ltd. is going for reduction of capital, but the Board of directors of the company expects objection from some of the creditors of the company. The Board seeks your opinion as a company secretary with respect to this matter. Express your opinion in light of the provisions of Companies Act, 2013. (June 2019, 5 marks)
Answer:
After passing the special resolution for the reduction of capital, XYZ Ltd. has to apply to the National Company Law Tribunal (NCLT) for the confirmation of resolution under Section 66 of the Companies Act, 2013. Where the proposed reduction of share capital involves either (i) diminution of liability in respect of unpaid share capital, or (ii) the payment to any shareholder of any paid-up share capital, or (iii) in any other case, if the Tribunal so directs, the following provisions shall have effect:

The creditors having a debt or claim admissible in winding-up are entitled to object. To enable them to do so, the Tribunal will settle a list of creditors entitled to object. If any creditor objects, then either his consent to the proposed reduction should be obtained or he should be paid off or his payment be secured. The Tribunal, in deciding whether or not to confirm the reduction will take into consideration the rights of the creditors.

The Tribunal shall give notice of every application made, to it to the Central Government, Registrar of Companies and to the Securities and Exchange Board of India, in the case of listed companies, and the creditors of the company and shall take into consideration the representations, if any, made to it by Central Government, Registrar, the Securities and Exchange Board and the creditors within a period of three months from the date of receipt of the notice.

If no representation has been received from them within the said period, it shall be presumed that they have no objection to the reduction.

Provided that no application for reduction of share capital shall be sanctioned by the Tribunal unless the accounting treatment, proposed by the company for such reduction is in conformity with the accounting standards specified in Section 133 of the Companies Act, 2013 or any other provision of the Act and a certificate to that effect by the company’s auditor has been filed with the Tribunal.

There is no limitation on the power of the Tribunal to confirm the reduction except that it must first be satisfied that all the creditors entitled to object to the reduction have either consented or been paid or secured [British and American Trustee and Finance Corporation v. Couper (1894)].

When exercising its discretion, the Tribunal must ensure that the reduction is fair and equitable.

Question 42.
XYZ Ltd. is a company listed on the National Stock Exchange. The latest audited financial position of XYZ Ltd. is as under: (Dec 2019)
(Amount in ₹ crore)
Paid up equity capital : 442
Free Reserves : 20,347
Total secured and unsecured debts : 1,275

The company intends to buy-back its fully paid up equity shares of ₹ 5 each not exceeding 2,05,85,000 equity shares at ₹ 950 per equity share payable in cash for aggregate consideration not exceeding ₹ 1,955.57 crore.

Examine whether the above buy-back offer through tender route can be approved by the Board of Directors, keeping in view the provisions of the relevant SEBI Regulations and Companies Act, 2013. (5 marks)
Answer:
Quantum of Buy-back (Section 68 of the Companies Act, 2013)
(a) Board ot directors can approve buy-back up to 10% of the total paid-up equity capital and free reserves of the company and such buy-back has to be authorized by the board by means of a resolution passed at the meeting.

(b) Shareholders by a special resolution can approve buy-back up to 25% of the total paid-up capital and free reserves of the company. In respect of any financial year, the shareholders can approve by special resolution up to 25% of total equity capital in that year.

The ratio of the aggregate of secured and unsecured debts owed by the company after buy-back should not be more than twice the paid-up capital and its free reserves i.e. the ratio shall not exceed 2:1.

In the instant case, since the paid-up equity capital and free reserves is ₹ 20,789 crore as per the latest audited financials, the Board can authorize through a resolution passed at its meeting the buy-back of shares totaling ₹ 1,955.57 crore, which is less than the prescribed 10% limit.

After the buy-back scheme for ₹ 1955.57 crore has been fully completed, the company’s reserves would drop to ₹ 18401.72 crore and its paid-up equity capital would drop by ₹ 10.29 crore to ₹ 431.71 crore. Hence, its paid up capital and free reserves after buy-back would drop to ₹ 18833.43 crore. Thus, the debt-equity ratio after buy-back scheme has been fully completed would be 0.068, which is less than the stipulated 2:1.

Hence, XYZ Ltd. can proceed with the proposed buy-back scheme by passing a resolution passed at the Board meeting.

Question 43.
What is ‘start-up company’?
Answer:
‘Start-up Company’ means a private company incorporated under the Companies Act, 2013 or Cornpanies Act, 1956 and recognised as such in accordance with notification number G.S.R. 127 (E), dated, the 19th February, 2019 issued by the Department for Promotion of Industry and Internal Trade.

Question 44.
What are the provisions related to merger of start-up companies as per Rule 25(1 A) of the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016 ?
Answer:
According to the Amendment Rules, Rule 25(1 A) of the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016 read as under:

“A scheme of merger or amalgamation under section 233 of the Act may be entered into between any of the following class of companies, namely:-

1. two or more start-up companies; or
2. one or more start-up company with one or more small company:

“Start-up Company” means a private company incorporated under the Companies Act, 2013 or Companies Act, 1956 and recognised as such in accordance with notification number G.S.R. 127 (E), dated the 19th February, 2019 issued by the Department for Promotion of Industry and Internal Trade.”

Types of Corporate Restructuring Notes

Corporate Restructuring
Corporate restructuring is the process of significantly changing a company’s business model, management team or financial structure to address challenges and increase shareholder value.
Corporate restructuring is an inorganic growth strategy.

Need and scope of Corporate restructuring

• To enhance shareholders value
• Orderly redirection of the firms activities
• Deploying surplus cash from one business to finance profitable growth in another
• Exploiting inter-dependence among present or prospective businesses
• Risk reduction
• Development of core-competencies
• To obtain tax advantages by merging a loss-making company with a profit-making company
• To have access to better technology
• To become globally competitive
• To increase the market share

Motives behind Corporate Restructuring
Financial:

• To reduce risk
• To increase operating efficiency
• To improve access to financial markets
• To obtain tax benefits

Others:

• To expand marketing and management capabilities
• To allow new products development
• To provide synergistic benefits
• To revive a sick company

Types of Restructuring
Financial restructuring – Financial restructuring deals with restructuring of capital base and raising finance for new projects. Financial restructuring helps a firm to revive from the situation of financial distress without going into liquidation.

Market and Technological Restructuring – Market Restructuring involves decisions with respect to the product market segments where the company plans to operate on its core competencies and technological restructuring occurs when a new technology is developed that changes the way an industry operates. Joint Venture, Strategic Alliances, Franchising are some of the examples of market and technological restructuring

Organisational Restructuring – Organizational Restructuring involves establishing internal structures and procedures for improving the capability of the personnel in the organization to respond to changes.

Commonly applied tools of Corporate Restructuring

1. Mergers
2. Acquisitions
3. Amalgamation
4. Consolidations
5. Tender offers
6. Purchase of assets

Merger
A merger is a legal consolidation of two entities into one entity which can be merged together either by way of amalgamation or absorption or by formation of a new company.

‘Merger’ is the fusion of two or more companies, whereby the identity of one or more is lost resulting in a single company whereas ‘Amalgamation’ signifies the blending of two or more undertaking into one undertaking, blending enterprises loses its identity forming themselves into a separate legal identity.

Types of merger
Horizontal Merger – Horizontal Merger is a merger between companies selling similar products in the same market and in direct competition and share the same product lines and markets. It decreases competition in the market. The main objectives of horizontal merger are to benefit from economies of scale, reduce competition, achieving monopoly status and control of the market.

Vertical Merger – Vertical Merger is a merger between companies in the same industry, but at different stages of production process. In another words, it occurs between companies where one buys or sells something from or to the other.

Conglomerate Merger – Conglomerate merger is a merger between two companies that have no common business areas. It refers to the combination of two firms operating in industries unrelated to each other. Congeneric Merger – Congeneric merger is a merger between two or more businesses which are related to each other in terms of customer groups, functions or technology e.g., combination of a computer system manufacturer with a UPS manufacturer.

Acquisition
Acquisition occurs when one entity takes ownership of another entity’s stock, equity interests or assets. It is the purchase by one company of controlling interest in the share capital of another existing company. Even after the takeover, although there is a change in the management of both the firms, companies retain their separate legal identity. The companies remain independent and separate; there is only a change in control of the companies. When an acquisition is ‘forced’ or ‘unwilling’, it is called a takeover.

Difference between a Merger and an Acquisition
A merger occurs when two separate entities, usually of comparable size, combine forces to create a new, joint organization in which both are equal 1 partners whereas an acquisition refers to the purchase of one entity by another (usually, a smaller firm by a larger one)

In Merger old company cease to exist and a new company emerges whereas in acquisition a new company does not emerge Merger requires f two companies to consolidate into a new entity with a new ownership and management Structure whereas acquisition occurs when one company takes over ail of the operational management decisions of another If the takeover is friendly, it is called merger. If the takeover is hostile, it is called as an acquisition

Amalgamation
Amalgamation is defined as the combination of one or more companies into a new entity. It includes:

1. Two or more companies join to form a new company
2. Absorption or blending of one by the other

Consolidation
A consolidation creates a new company. Stockholders of both companies approve the consolidation, and subsequent to the approval, receive common equity shares in the new firm.

Tender Offer
One company offers to purchase the outstanding stock of the other firm at a specific price.

Acquisition of Assets
In a purchase of assets, one company acquires the assets of another company.

Management Buyout
A management buyout (MBO) is a transaction where a company’s management team purchases the assets and operations of the business they manage.

Demerger
It is a business strategy in which a single business is broken into components, either to operate on their own, to be sold or to be dissolved. ‘ A demerger allows a large company, such as a conglomerate, to split off its various brands to invite or prevent an acquisition, to raise capital by selling off components that are no longer part of the business’s core product line, or to create separate legal entities to handle different operations.

Demerger is an arrangement whereby some part / undertaking of one company is transferred to another company which operates completely separate from the original company. Shareholders of the original company are usually given an equivalent stake of ownership in the new company.

Types of Demerger
Divestiture – Divestiture means selling or disposal of assets of the company or any of its business undertakings/divisions, usually for cash

Spin-offs – The shares of the new entity are distributed to the shareholders of the parent company on a pro-rata basis.

Splits/divisions – Splits involve dividing the company into two or more parts with an aim to maximize profitability by removing stagnant units from the mainstream business. Splits can be of two types, Split-ups and Split-pffs. Equity Carve-Outs – Equity carve-outs are referred to a percentage of shares of the subsidiary company being issued to the public.

Slump Sale
The transfer of the undertaking concerned as going concern is called “Slump sale”. Slump sale is one of the methods that are widely used in India for corporate restructuring where the company sells its undertaking.

The main reasons of slump sale are generally undertaken in India due to following reasons:

• It helps the business to improve its poor performance.
• It helps to strengthen financial position of the company.
• It eliminates the negative synergy and facilitates strategic investment.
• It helps to seek tax and regulatory advantage associated with it.

Business Sale / Divestiture
Divestiture means selling or disposal of assets of the company or any of its business undertakings/ divisions, usually for cash (or for a combination of cash and debt) and not against equity shares to achieve a desired objective, such as greater liquidity or reduced debt burden. Divestiture is normally used to mobilize resources for core business or businesses of the company by realizing value of non-core business assets.

Joint Venture
A joint venture (JV) is a business or contractual arrangement between two or more parties which agree to pool resources for the purpose of accomplishing a specific task may be a new project or any other business activity. In a joint venture (JV), each of the participants is responsible for profits, losses and costs associated with it. Company enters into a joint venture when it lacks required knowledge, human capital, technology or access to a specific market that is necessary to be successful in pursuing the project on its own.

Equity- based joint ventures is a type of joint venture in which two or more parties set-up a separate legal company to act as the vehicle for carrying out the project.

Non-equity joint ventures also known as cooperative agreements, seek technical service arrangements, franchise, brand use agreements, management contracts, rental agreements, or one-time contracts, e.g., for construction projects, non-equity arrangements in which some companies are in need of technical services or technological expertise than capital.

Strategic Alliance
strategic alliance is an arrangement between two companies that have decided to share resources to undertake a specific, mutually beneficial project. It is an excellent vehicle for two companies to work together profitably. It can help companies develop and exploit the unique strengths. Organizations get an opportunity to widen customer base or utilize the surplus capacity.

Reverse Merger
A reverse merger is a merger in which a private company becomes a public company by acquiring it. It saves a private company from the complicated process and expensive compliance of becoming a public company. Instead, it acquires a public company as an investment and converts itself into a public company.

However, there is another angle to the concept of a reverse merger. When a weaker or smaller company acquires a bigger company, it is a reverse merger. In addition, when a parent company merges into its subsidiary or a loss-making company acquires a profit-making company, it is alsotermed as a reverse merger.

The reason for reverse merger are:

• To carryforward tax losses of the smaller firm, this allows the combined entity to pay lower taxes. Tax savings under Income Tax Act, 1961.
• Economies of scale of production
• Marketing network
• To protect the trademark rights, licence agreements, assets of small/loss making company

Financial Restructuring
Corporate financial restructuring is any substantial change in a company’s financial structure, or ownership or control, or business portfolio, designed to increase the value of the firm, i.e., debt and equity restructuring. Internal reconstruction of a company is the simplest form of financial restructuring.

Debt Restructuring
It involves a reduction of debt and an extension of payment terms or change in terms and conditions, which is less expensive. It is nothing but negotiating with bankers, creditors, vendors. It is the process of reorganizing the whole debt capital of the company. It involves the reshuffling of the balance sheet items as it contains the debt obligation of the company. Debt capital of the company includes secured long term borrowing, unsecured long-term borrowing, and short term borrowings.

Equity Restructuring
It is a process of reorganizing the equity capital. It includes a reshuffling the shareholders capital and the reserves that are appearing on the balance sheet. Restructuring equity means changing how the firm’s residual cash flows are divided and distributed among the firms shareholders, with the goal of increasing the overall market value of the firms common stock. The following comes under equity restructuring:

• Alteration of share capital
• Reduction of share capital
• Buy-back of shares

Alteration of Share capital
Alteration’of share capital means increase or decrease in or rearrangement / of share capital as permitted in Articles of Association.
Five ways of alteration of share capital:

• increase its authorised share capital by such amount as it thinks expedient
• convert all or any of its fully paid-up shares into stock, and reconvert that stock into fully paid-up shares of any denomination
• sub-divide its shares, or any of them, into shares of smaller amount
• cancel shares which, at the date of the passing of the resolution in that behalf, have not been taken or agreed to be taken by any person

Reduction of Share Capital
Capital Reduction is the process of decreasing a company’s shareholder’s equity through share cancellations and share repurchases. The reduction of share capital means reduction of issued, subscribed and paid up share capital of the company.

Modes of Reduction of Capital
A company limited by shares or a company limited by guarantee and having a share capital may, if authorised by its articles, by special resolution, and subject to its confirmation by the Tribunal on petition, reduce its share capital in any way and in particular:

(a) extinguish or reduce the liability on any of its shares in respect of the share capital not paid-UR; or
(b) either with or without extinguishing or reducing liability on any of its shares,—

1. cancel any paid-up share capital which is lost or is unrepresented by available assets; or
2. pay off any paid-up share capital which is in excess of the wants of the company, Reduction of capital without sanction of the Tribunal

The following are cases which amount to reduction of share capital but where no confirmation by the Tribunal is necessary:

1. Surrender of shares – “Surrender of shares” means the surrender of shares already issued, to the company, by the registered holder of shares.
2. Forfeiture of shares – A company may if authorised by its articles, forfeit shares for non-payment of calls and the same will not require confirmation of the Court.
3. Diminution of capital – Where the company cancels shares which have not been taken or agreed to be taken by any person .
4. Redemption of redeemable preference shares.
5. Buy-back of its own shares.

Creditors’ right to object to reduction – The creditors having a debt or claim admissible in winding-up are entitled to object. To enable them to do so, the Tribunal will settle a list of creditors entitled to object.

Confirmation *nd registration – Section 66(3) of the Companies Act, 2013 states that if the Tribunal is satisfied that either the creditors entitled to object have consented to the reduction, or that their debts have been determined, discharged, paid or secured, it may confirm the reduction of share capital on such terms and conditions as it deems fit.

Conclusiveness of certificate for reduction of capital – Where the Registrar had issued his certificate confirming the reduction, the same was held to be conclusive although it was discovered later that the company had no authority under its articles to reduce capital [Re Walkar & Smith Ltd., (1903) 88 LT 792 (Ch D)]. Similarly, in a case where the special resolution for reduction was an invalid one, but the company had gone through with the reduction, the reduction was not allowed to be upset [Ladies’s Dress Assn, v. Puibrook, (1900) 2 QB 376].

Buy-Back
According to Section 68(1) of the Companies Act, 2013, a company whether public or private, may purchase its own shares or other specified securities (hereinafter referred to as “buy-back”) out of:

1. its free reserves; or
2. the securities premium account; or
3. the proceeds of any shares or other specified securities.

Modes of Buy-Back Tender Offer
In tender offer, the company makes an offer to buy a certain number of shares/securities at a specific price directly from security holders on proportionate basis.

Open Market Purchase
In open market purchase, the company acquires a certain number of shares. Fixes a price cap and buy for any price up to the upper limit.

Advantages of buy-back

• It is an alternative mode of reduction in capital without requiring approval of the National Company Law Tribunal
• To improve the earnings per share
• To improve return on capital, return on net worth and to enhance the long-term shareholders value
• To provide an additional exit route to shareholders when shares are undervalued or thinly traded
• To enhance consolidation of stake in the company
• To prevent unwelcome takeover bids
• To return surplus cash to shareholders
• To achieve optimum capital structure
• To support share price during periods of sluggish market condition
• To serve the equity more efficiently.

Legal provisions for Buy-Back
The primary requirement is that the articles of association of the company should authorise buy-back.

Board of directors can approve buy-back up to 10% of the total paid-up equity capital and free reserves of the company and such buyback has to be authorized by the board by means of are solution passed at the meeting.

Shareholders by a special resolution can approve buy-back up to 25% of the total paid-up capital and free reserves of the company, in respect of any financial year, the shareholders can approve by special resolution up to 25% of total equity capital in that year.

The ratio of the aggregate of secured and unsecured debts owed by the company after buy-back should not be more than twice the paid-up capital and its free reserves i.e. the ratio shall not exceed 2:1.

No offer of buy-back under this sub-section shall be made within a period of one year reckoned from the date of the closure of the preceding offer of buy-back, if any.

The notice of the meeting at which the special resolution is proposed to be passed shall be accompanied by an explanatory statement stating full and complete disclosure of all material facts

Filing Declaration of Solvency with SEBI/ROC

The offer for buy-back shall remain open for a period of not less thanl 5 days and not exceeding 30 days from the date of dispatch of the letter of offer

Payment of consideration/returning of share certificates – within 7 days

Every buy-back shall be completed within a period of one year from the date of passing of the special resolution, or as the case may be, the resolution passed by the Board.

When a company completes a buy-back of its shares or otner specified securities it shall not make a further issue of the same kind of shares or other securities including allotment of new shares under clause (a) of sub-secticr. (1) of section 62 or other specified securities within a period of six months except by way of a bonus issue or in the discharge of subsisting obligations such as conversion of warrants, stock option schemes, sweat equity or conversion of preference shares or debentures into equity shares.

A company shall, after the completion of the buy-back under this section, file with the Registrar and the Securities and Exchange Board (incase of listed companies) a return containing such particulars relating to the buy-back within thirty days

Circumstances prohibiting buy back
Under Section 70 of the Companies Act, 2013, no company shall directly
or indirectly purchase its own shares or other specified securities—

1. through any subsidiary company including its own subsidiary companies;
2. through any investment company or group of investment companies; or
3. if a default, is made by the*company, in the repayment of deposits accepted either before or after the commencement of this Act. However, the buy-back is not prohibited, if the default is remedied and a period of three years has lapsed after such default ceased to subsist.

Income tax Aspect on buy back
Section 46A of the Income-tax Act, 1961 provides that any consideration received by a security holder from any company on buy back shall be chargeable to tax on the difference between the cost of acquisition and the value of consideration received by the security holder as capital gains.

Buy-Back procedure for Listed Securities
All the listed companies are required to comply with SEBI (Buy Back of Securities) Regulations,- 2018, in addition to the provisions of the Companies Act, 2013. These regulations broadly cover the following aspects:

1. Special resolution and its additional disclosure requirements.
2. Methods of buy back including buy back through reverse book building, . from existing shareholders through tender offer, etc.
3. Filing of offer documents, public announcement requirements.
4. Offer procedure/opening of escrow account, etc.
5. General obligations of company, merchant banker, etc.

Methods of Buy-Back
According to Regulation 4 of the Regulations, a company may buy back its own shares or other specified securities by any one of the following methods:
(a) from the existing shareholders or other specified securities holders on a proportionate basis through the tender offer;
(b) from the open market through:

1. book-building process
2.  stock exchange

(c) from odd-lot holders.

Escrow account for Buy-Back
(a) the company shall, as and by way of security for performance of its obligations under the Regulations, on or before the opening of the offer, deposit in an escrow account the sum as specified in clause (b)

(b) the escrow amount shall be payable in the following manner:

1. if the consideration payable does not exceed ₹ 100 crores – 25 per cent of the consideration payable;
2. if the consideration payable exceeds ₹ 100 crores – percent upto ₹ 100 crores and 10 percent there after;

Extinguishing of bought-back securities (Regulation 11)
The company shall extinguish and physically destroy the security certificates so bought back ¡n the presence of a Registrar to issue or the Merchant Banker and the Statutory Auditor within fifteen days of the date of acceptance of the shares or other specified securities. The company shall also ensure that all the securities bought-back are extinguished within seven days, of expiry of buy-back period.