Corporate Insolvency Resolution Process, Liquidation & Winding-up: An Overview – Setting Up of Business Entities and Closure Important Questions

Question 1.
Distinguish between: Insolvency & Bankruptcy.
Answer:
Following are the main points of difference between insolvency and bankruptcy:

Points	Insolvency	Bankruptcy
Meaning	When an individual, corporation, or other organization cannot meet its financial obligations for paying debts as they are due it is called insolvency.	Bankruptcy occurs when Tribunal has determined insolvency, and given legal orders for it to be resolved.
Situation	Insolvency describes a situation where the debtor is unable to meet his obligations.	Bankruptcy is a legal scheme in which an insolvent debtor seeks relief.
Solvency	If Insolvency is resolved it leads to Solvency State which is positive	If Insolvency is not resolved it leads to bankruptcy in the case of individual and liquidation in the case of corporates
State or Conclusion	Insolvency is a state	Bankruptcy is conclusion

Question 2.
Write a short note on Insolvency Professional
Answer:
Insolvency Professional [Section 3(19)]: Insolvency professional means a person enrolled u/s 206 with an insolvency professional agency as its member and registered with the Insolvency & Bankruptcy Board of India (IBBI) as an insolvency professional u/s 207.

Work of Insolvency & Bankruptcy: The Insolvency & Bankruptcy Code, 2016 envisages a very big role for insolvency professionals. It is envisaged that most of the work relating to insolvency and bankruptcy will be handled by insolvency professionals.

Person: Since the word used is ‘person’, thus insolvency professional can I be only an individual, LLP, partnership firm, or a company.

Code of Conduct: The insolvency professional should follow the code of conduct as specified in Section 208(2) and in First Schedule to the IBBI (Insolvency Professional) Regulation, 2016.

Disciplinary Action: Disciplinary action against insolvency professional agency and insolvency professional can be initiated by the IBBI as per I provisions of sections 217 to 220 of the Code.

Question 3.
To which Corporate Debtors provisions relating to insolvency resolution and liquidation as contained in PART II of the Insolvency & Bankruptcy Code, 2016 applies.
Answer:
PART II (Sections 4 to 77) of the Insolvency & Bankruptcy Code, 2016 deals with insolvency resolution and liquidation for corporate persons. Application [Section 4]: Part II shall apply to matters relating to the insolvency and liquidation of corporate debtors where the minimum amount I of the default is Rs 100 lakh.

Question 4.
Who may initiate the corporate insolvency resolution process under the Insolvency & Bankruptcy Code, 2016?
Answer:
Persons who may initiate corporate insolvency resolution process [Section 6]: Where any corporate debtor commits a default, they may initiate corporate insolvency resolution process in respect of such corporate debtor.

• Financial Creditor
• Operational Creditor
• Corporate Debtor itself

Question 5.
Who shall not be entitled to make an application to initiate the corporate insolvency resolution process under the Insolvency & Bankruptcy Code, 2016?
Answer:
Persons not entitled to make application [Section 11]: Following persons shall not be entitled to make an application to initiate corporate insolvency resolution process, namely:

1. A corporate debtor undergoing a corporate insolvency resolution process.
2. A corporate debtor having completed the corporate insolvency resolution process 12 months preceding the date of making of the application.
3. A corporate debtor or a financial creditor who has violated any of the terms of resolution plan which was approved 12 months before the date of making of an application.
4. A corporate debtor in respect of whom a liquidation order has been made.

Question 6.
What is the time limit for completion of the corporate insolvency process under the Insolvency & Bankruptcy Code, 2016?
Answer:
Time-limit for completion of insolvency resolution process [Section 12]:
1. The corporate insolvency resolution process shall be completed within a period of 180 days from the date of admission of the application to initiate such a process.

2. The resolution professional shall file an application to the Adjudicating Authority to extend the period of the corporate insolvency resolution process beyond 180 days if instructed to do so by a resolution passed | at a meeting of the committee of creditors by a vote of 6696 of the voting shares.

3. On receipt of an application, if the Adjudicating Authority is satisfied that the subject matter of the case is such that the corporate insolvency resolution process cannot be completed within one hundred and eighty days, it may by order extend the duration of such process beyond one hundred and eighty days by such further period as it thinks fit, but not exceeding 90 days.

However, any extension of the period of the corporate insolvency resolution process under this section shall not be granted more than once.

Question 7.
Referring to the provisions of the Insolvency & Bankruptcy Code, 2016, answer the following:
1. Who appoints the interim resolution professional in a corporate insolvency resolution process?
Answer:
Appointment and tenure of the interim resolution professional [Section 16]:
The Adjudicating Authority shall appoint an interim resolution professional within 14 days from the insolvency commencement date.

2. What is the time limit for such an appointment?
Answer:
Where the application for corporate insolvency resolution process is made by a financial creditor or the corporate debtor, the resolution professional, as proposed respectively, shall be appointed as the interim resolution professional, if no disciplinary proceedings are pending against him.

3. What are the conditions in relation to such an appointment?
Answer:
Where the application for corporate insolvency resolution process is made by an operational creditor and –
(a) no proposal for an interim resolution professional is made, the Adjudicating Authority shall make a reference to the Board for the recommendation of an insolvency professional who may act as an interim resolution professional;

(b) a proposal for an interim resolution professional is made u/s 9(4), the resolution professional as proposed, shall be appointed as the interim resolution professional if no disciplinary proceedings are pending against him.

4. For what term interim resolution professional is appointed?
Answer:
The Board shall, within 10 days of the receipt of a reference from the Adjudicating Authority, recommend the name of an insolvency professional to the Adjudicating Authority against whom no disciplinary proceedings are pending.

The term of the interim resolution professional shall continue till the date of appointment of resolution professional u/s 22.

Question 8.
XYZ Ltd. was incorporated in the year 2015 in the State of Maharashtra. The Company was incorporated by a joint venture between QPR Ltd. & RSP Ltd. to manufacture five thousand electric cars in India. On completion of the venture the company intends to initiate a voluntary liquidation process under the Insolvency & Bankruptcy Code, 2016. The company has some debts but no such debt comes under the ‘default debt’ category. As a practicing professional in insolvency work, you are required to state the procedure to be followed such voluntary liquidation under the Insolvency & Bankruptcy Code, 2016.
Answer:
A corporate person who intends to liquidate itself voluntarily and has not committed any default may initiate voluntary liquidation.

Below is the brief procedure of voluntary liquidation of a corporate person under the Insolvency & Bankruptcy Code, 2016:

Step 1: Submission of declaration to ROC, stating that the company is able to pay its dues and is not being liquidated to default in debt.

Step 2: Pass special resolution for approving the proposal of voluntary liquidation and appointment of a liquidator, within 4 weeks of the aforesaid declaration. If a corporate person owes debts, approval of creditors having a 2/3rd majority would also be required.

Step 3: Public announcement inviting claims of all stakeholders, within 5 days of such approval, in the newspaper as well as on the website of the corporate person.

Step 4: Intimation to the ROC and the Board about the Approval, within 7 days of such Approval.

Step 5: Preparation of preliminary report about the capital structure, estimates of assets and liabilities, proposed plan of action, etc., and submission of the same to a corporate person within 45 days of such Approval.

Step 6: Verification of claims, within 30 days from the last date for receipt of claims and preparation of a list of stakeholders, within 45 days from the last date for receipt of claims.

Step 7: Opening of a bank account in the name of the corporate person followed by the words ‘involuntary liquidation’, in a scheduled bank, for the receipt of all money due to the corporate person.

Step 8: Sale of assets, recovery of monies due to corporate person, the realization of uncalled capital or unpaid capital contribution.

Step 9: Distribution of the proceeds from realization within 6 months from the receipt of the amount to the stakeholders.

Step 10: Submission of the final report by the liquidator to the corporate person, ROC, and the Board and application to the National Company Law

Step 11: Submission of NCLT order regarding the dissolution, to the concerned ROC within 14 days of the receipt of order.

Question 9.
RKG Infrastructure Ltd. was incurring continuous losses and its financial position went from bad to worse. Now’, the Company is undergoing a corporate resolution process. Dinesh who is one of the senior employees of the company has not been paid his salary for 3 months amounting to ₹ 4,50,000. He files an application for initiating the corporate insolvency resolution process with an Adjudicating Authority. Analyze and state whether Dinesh is entitled to make an application to initiate the corporate insolvency resolution process. [Dec. 2018 (5 Marks)]
Answer:
Facts of Case: RKG Infrastructure Ltd. was incurring continuous losses and its financial position went from bad to worse. Now, the Company is undergoing a corporate resolution process. Dinesh who is one of the senior employees of the company has not been paid his salary for 3 months amounting to ₹ 4,50,000. He files an application for initiating corporate insolvency resolution process with an Adjudicating Authority Provision: As per Section 4 of the Insolvency & Bankruptcy Code, 2016, if the corporate debt is more than RslOO lakh corporate insolvency resolution and liquidation process can be initiated.

As per Section 6, where any corporate debtor commits a default, a Financial Creditor, an Operational Creditor, or the Corporate Debtor itself may initiate the corporate insolvency resolution process in respect of such a corporate debtor.

As per section 5(20), an operational creditor includes a person to whom an operational debt is owed. As per section 5(21), operational debt includes means of a claim in respect of employment.

Conclusion: Thus, an employee of the company to whom a salary of more than Rs 100 lakh is due can initiate corporate insolvency process being an operational creditor of the company under the Insolvency & Bankruptcy Code, 2016 and therefore senior employee whose salary of Rs 4,50,000 is pending cannot alone file application of Corporate Insolvency Resolution Process.

Question 10.
Time-limit an extension of the period in Corporate Insolvency Resolution Process under Insolvency and Bankruptcy Code, 2016. Comment. [June 2019 (3 Marks)]
Answer:
Time-limit for completion of insolvency resolution process [Section 12]:
1. The corporate insolvency resolution process shall be completed within a period of one hundred and eighty days from the date of admission of the application to initiate such a process.

2. The resolution professional shall file an application to the Adjudicating Authority to extend the period of the corporate insolvency resolution process beyond one hundred and eighty days if instructed to do so by a resolution passed at a meeting of the committee of creditors by a vote of 66% of the voting shares.

3. On receipt of an application, if the Adjudicating Authority is satisfied that the subject matter of the case is such that the corporate insolvency resolution process cannot be completed within one hundred and eighty days, it may by order extend the duration of such process beyond one hundred and eighty days by such further period as it thinks fit, but not exceeding ninety days.

However, any extension of the period of the corporate insolvency resolution process under this section shall not be granted more than once.

4. It shall mandatorily be completed within a period of three hundred and thirty days from the insolvency commencement date including any extension of the period of CIRP granted under section 12 and the time taken in legal proceedings in relation to such resolution process of the corporate debtor.

Question 11.
Elaborate ‘Waterfall Arrangement’ under the Insolvency and Bankruptcy Code, 2016. [June 2019 (5 Marks)]
Answer:
Waterfall arrangement or waterfall payment scheme describes the order in which creditors are paid. In a debt context, it is used to describe the sonority of debt liabilities.

Section 53 of the Insolvency & Bankruptcy Code, 2016 provides for the manner of distribution of assets in case of liquidation and order of priority of distribution. This order of priority is also known as the “waterfall arrangement” since each category of persons comes in priority after the previous one.

Distribution of assets [Section 53]: Notwithstanding anything to the contrary contained in any law enacted by the Parliament or any State Legislature for the time being in force, the proceeds from the sale of the liquidation assets shall be distributed in the following order of priority and within such period and in such manner as may be specified, namely:
1. The insolvency resolution process costs and the liquidation costs paid in full.

2. The following debts which shall rank equally between and among the following:
(a) Workmen’s dues for the period of 24 months preceding the liquidation commencement date, and
(b) Debts owed to a secured creditor in the event such secured creditor has relinquished security in the manner set out in section 52.

3. Wages and any unpaid dues owed to employees other than workmen for the period of 12 months preceding the liquidation commencement date.

3. Financial debts owed to unsecured creditors.

5. The following dues shall rank equally between and among the following:
(a) any amount due to .the Central Government and the State Government including the amount to be received on account of the Consolidated Fund of India and the Consolidated Fund of a State, if any, in respect of the whole or any part of the period of two years preceding the liquidation commencement date;

(b) debts owed to a secured creditor for any amount unpaid following the enforcement of security interest.

6. Any remaining debts and dues.

7. Preference shareholders, if any; and

8. Equity shareholders or partners, as the case may be.
Any contractual arrangements between recipients with equal ranking, if disrupting the order of priority shall be disregarded by the liquidator.

The fees payable to the liquidator shall be deducted proportionately from the proceeds payable to each class of recipients and the proceeds to the relevant recipient shall be distributed after such deduction.

Question 12.
Yogendra is an allottee of a flat in a real estate project promoted by the company, but he has not been delivered flat as per the Agreement. He has approached you to know, whether he can make an application under the Insolvency and Bankruptcy Code, 2016, and in what status he can make an application. Also, brief the timelines for the Corporate Insolvency Resolution Process. [Dec. 2019 (5 Marks)]
Answer:
Facts of Case: Yogendra is an allottee of a flat in a real estate project promoted by the company, but he has not been delivered flat as per the Agreement. He has approached you to know, whether he can make an application under the Insolvency and Bankruptcy Code, 2016, and in what status he can make an application.

Provision: As per Section 5(7) of the Insolvency & Bankruptcy Code, 2016, a financial creditor means any person to whom a financial debt is owed and includes a person to whom such debt has been legally assigned or transferred.

As per Section 5(8)(/), financial debt includes any amount raised under the transaction, including any forward sale or purchase agreement, having the commercial effect of a borrowing.

Explanation to Section 5(8) clarifies that any amount raised from an allottee under a real estate project shall be deemed to be an amount having the commercial effect of a borrowing.

Conclusion: Thus, Yogendra being an allottee of a flat in a real estate project can make an application under the Insolvency & Bankruptcy Code, 2016 in the status of ‘financial creditor’.

Question 13.
ABC Ltd. has initiated insolvency proceedings against RS Ltd., for recovery of debt of ₹ 2.86 crores. ABC Ltd. intends to appoint Rahul, one of the employees of its statutory auditors, M/s ASA & Associates, Chartered Accountants, as its resolution professional. In the light of the statutory provisions, examine whether Rahul can be appointed as a resolution professional. [Dec. 2019 (3 Marks)]
Answer:
Facts of the case: ABC Ltd., has initiated insolvency proceedings against RS Ltd., for recovery of debt of ₹ 2.86 crores. ABC Ltd. intends to appoint Rahul, one of the employees of its statutory auditors, M/s ASA & Associates, Chartered Accountants, as its resolution professional

Provision: Resolution Professional [Section 5(27)]: Resolution professional means an insolvency professional appointed to conduct the corporate insolvency resolution process and includes an interim resolution professional.

Eligibility of criteria for appointing a person as insolvency professional is specified in Regulation 3 of the IBBI (Insolvency Resolution Process for Corporate Person) Regulations, 2016.

He should not be a related party or employee. He shall fulfill the criteria for appointment as an independent director. He should make a disclosure as specified in the Code of Conduct.

Conclusion: Keeping in view of the above provisions Rahul being an employee of ABC Ltd. cannot be appointed as the resolution professional.

Question 14.
Describe the procedure mentioned under Section 53 of Insolvency and Bankruptcy Code (IBC), 2016 for distribution of assets in case of liquidation. [Dec. 2019 (3 Marks)]
Answer:
Waterfall arrangement or waterfall payment scheme describes the order in which creditors are paid. In a debt context, it is used to describe the sonority of debt liabilities.

Section 53 of the Insolvency & Bankruptcy Code, 2016 provides for the manner of distribution of assets in case of liquidation and order of priority of distribution. This order of priority is also known as the “waterfall arrangement” since each category of persons comes in priority after the previous one.

Distribution of assets [Section 53]: Notwithstanding anything to the contrary contained in any law enacted by the Parliament or any State Legislature for the time being in force, the proceeds from the sale of the liquidation assets shall be distributed in the following order of priority and within such period and in such manner as may be specified, namely:
1. The insolvency resolution process costs and the liquidation costs paid in full.

2. The following debts which shall rank equally between and among the following –
(a) Workmen’s dues for the period of 24 months preceding the liquidation commencement date, and
(b) Debts owed to a secured creditor in the event such secured creditor has relinquished security in the manner set out in section 52.

3. Wages and any unpaid dues owed to employees other than workmen for the period of 12 months preceding the liquidation commencement date.

4. Financial debts owed to unsecured creditors.

5. The following dues shall rank equally between and among the following:
(a) any amount due to .the Central Government and the State Government including the amount to be received on account of the Consolidated Fund of India and the Consolidated Fund of a State, if any, in respect of the whole or any part of the period of two years preceding the liquidation commencement date;

(b) debts owed to a secured creditor for any amount unpaid following the enforcement of security interest.

6. Any remaining debts and dues.

7. Preference shareholders, if any; and

8. Equity shareholders or partners, as the case may be.
Any contractual arrangements between recipients with equal ranking, if disrupting the order of priority shall be disregarded by the liquidator.

The fees payable to the liquidator shall be deducted proportionately from the proceeds payable to each class of recipients and the proceeds to the relevant recipient shall be distributed after such deduction.

Question 15.
National Company Law Tribunal (NCLT) has passed an order for the Commencement of Corporate Insolvency Resolution Process (CIRP) of Dora Travels Ltd., one of its directors has approached you to know the effects of “Moratorium” upon the commencement of CIRP. [Dec. 2019 (3 Marks)]
Answer:
On commencement of the CIRP, the adjudicating authority passes an order declaring moratorium for prohibiting all of the following by virtue of section 14 of the Insolvency and Bankruptcy Code, 2016:
(a) Institution of suits or continuation of pending suits or proceedings against the corporate debtor including execution of any judgment, decree, or order in any court of law, tribunal, arbitration panel, or other authority.

(b) Transferring, encumbering, alienating, or disposing of by the corporate debtor any of its assets or any legal right or beneficial interest therein.

(c) Any action to foreclose, recover or enforce any security interest created by the corporate debtor in respect of its property including any action under SARFAESI Act, 2002.

(d) The recovery of any property by an owner or lessor where such property is occupied by or in the possession of the corporate debtor.

The order of moratorium shall have effect from the date of order till the completion of CIRP or date of approval of resolution plan or order of liquidation as the case may be.

Question 16.
Write a short note on Modes of winding-up. [June 2009 (4 Marks)]
Answer:
Meaning of Winding up: Winding up is the process of closing down the legal existence of a company or LLP. During this process, the assets of the entity are realized, its liabilities are paid off and any surplus is distributed amongst the contributors.

Company Act, 2013: Winding up is not defined in Companies Act, 2013
Under the Companies Act, 2013, the company may be wound up by any of the following modes:

• By the NCLT Le. compulsory winding-up
• Voluntary winding-up-Voluntary winding up is dealt with in Section 59 of the Insolvency and Bankruptcy Code, 2016
• Winding-up by the Central Government under summary procedure.

Section 271 of Companies Act, 2013 deals with winding up by Tribunal, and Section 272 of Companies Act, 2013 deals with who can file an application for winding up.

Question 17.
Distinguish between: Winding-up and Insolvency. [June 2010 (4 Marks)]
Answer:
Following are the main points of distinction between winding-up and insolvency:

Points	Winding-up	Insolvency
Meaning	Winding-up is a proceeding by means of which a company is dissolved and in the course of such dissolution its assets are collected, its debts are paid off out of the assets or from contributions by its members. If the surplus is still left, it is distributed among the members.	Insolvency is the inability of a debtor to pay debts as they fall due. A person is said to be insolvent when his liabilities exceed his assets and against whom Tribunal makes an order of adjudication.
Law	The law relating to winding-up is contained in the Companies Act, 2013 and Insolvency & Bankruptcy Code, 2016	The law relating to insolvency in India is contained in the Insolvency & Bankruptcy Code, 2016.
When	A company can be wound-up even if is Ímnanciallv sound e.g. voluntary winding-up.	A person can be adjudged insolvent only when he is unable to pay his liabilities.
Effect of proceedings	After completion of winding-up proceedings, the company is dissolved.	After completion of insolvency proceedings, the insolvent person is discharged from all his liabilities.

Question 18.
Who can present the petition for winding-up? [Dec. 2011 (6 Marks)]
Answer:
Petition for winding-up [Section 272(1)]: An application for the wind- ) ing-up of a company can be presented by following:

• Company itself.
• Any creditor or creditors, including any contingent or prospective creditor or creditors.
• Any contributory or Contributories.
• Any combination of company, creditors, or Contributories.
• Registrar of companies.
• Any person authorized by the Central Government.
• Central or State Government.

Question 19.
The terms ‘Winding-up’ and ‘Dissolution’ can be used interchangeably to denote cessation of the existence of a legal entity. [June 2019 (3 Marks)]
Answer:
The entire procedure for bringing about a lawful end to the life of a company is divided into two stages: ‘winding-up’ and ‘dissolution’. Wind-ing-up is the first stage in the process whereby assets are realized, liabilities are paid off and the surplus, if any, distributed among its members. Dissolution is the final stage whereby the existence of the company is withdrawn by the law.

Following are the main points of distinction between winding-up and dissolution:

Points	Winding-up	Dissolution
Meaning	Winding-up is a proceeding by means of which a company is dissolved and in the course of such dissolution its assets are collected, its debts are paid off out of the assets or from contributions by its members. If the surplus is still left, it is distributed among the members.	Dissolution brings an end to the company’s legal existence.
Stage	Winding-up precedes the dissolution. In other words, first, winding-up of state of affairs occurs and after winding-up and all other proceedings, the company is dissolved.	Dissolution is the final stage that leads to the corporate death of the company.
Effect	In winding-up, the assets are realized and liabilities are paid but, the corporate status of the company continues.	After dissolution, the corporate status of the company does not continue.
Liquidator	The liquidator can present the company in winding-up proceedings.	Once the order of dissolution is made, the liquidator cannot represent the company.
Proceedings	Any person can proceed against the company which is being wound up.	No proceedings can be started against the company which has been dissolved.
Order of Court	Winding-up proceedings can be started without the intervention of the Court.	Order of Court is essential for the dissolution of the company.

Question 20.
Yuvan Infra Ltd. is continuously making losses and the Directors of the Company are planning to voluntarily wind up the Company. As a Company Secretary advise on conditions and also advise them briefly on procedures for voluntary liquidation. [Dec. 2019 (5 Marks each)]
Answer:
Section 59(3) of the Insolvency & Bankruptcy Code prescribes the following conditions for voluntary liquidation.
1. A declaration by the majority of the directors of the company (in an affidavit) stating that they have made a full inquiry into the affairs of the company and formed an opinion that either the company has no debt or it will be able to pay its debts in full from the proceeds of assets to be sold in the voluntary liquidation.

2. Company is not being liquidated to defraud any person. The brief procedure of voluntary liquidation of a corporate person under IBC includes:

1. Submission of declaration that the company will be able to pay its dues and ¡s not being liquidated to defraud any person to ROC
2. Passing special resolution for approving the proposal of voluntary liquidation and appointment of liquidator
3. Public announcement inviting claims of all stakeholders
4. Intimation to the ROC and the Board about the approval
5. Preparation of preliminary report about the capital structure, estimates of assets and liabilities, proposed plan of action
6. Verification of claims
7. Opening of a bank account in the name of the corporate person followed by the words ‘involuntary liquidation’ in a scheduled bank
8. Sale of assets, recovery of monies due to corporate person, the realization of uncalled capital or unpaid capital contribution
9. Distribution of the proceeds from realization
10. Submission of the final report by the liquidator to the corporate per-son, ROC, and the Board and application to the National Company Law Tribunal (NCLT)
11. Submission of NCLT order regarding the dissolution.

Setting Up of Business Entities and Closure Questions and Answers

Civil Procedure Code, 1908 – Jurisprudence, Interpretation & General Laws Important Questions

Question 1.
Distinguish between: Decree & Order [Dec 2011 (4 Marks)]
Answer:
Following are the main points of distinction between decree and order:

Points	Decree	Order
When passed	A decree can only be passed in a suit originated by the presentation of a plaint.	Order can be passed in a suit originated by the presentation of a plaint, application, or petition.
Determination of a right	A decree contains the conclusive determination of a right.	The order may or may not finally determine a right.
Preliminary / Final	The decree may be final, preliminary, or partly preliminary partly final.	Order cannot be a preliminary order.
Number	In general, there can only be one decree or at the most one preliminary and one final decree in a suit.	There can be any number of orders in a suit.
Appeal	Every decree is appealable unless an appeal is expressly barred.	Only those orders which are specified as appealable in the code are appealable.
Second appeal	A second appeal may lie against a decree to a High Court on certain grounds.	There is no second appeal for orders.

Question 2.
Explain the Cause of actions under the Code of Civil Procedure, 1908. [June 2012 (4 Marks)]
Answer:
Cause of action means every fact that it would be necessary for the plaintiff to prove in order to support his right to the judgment of the Court. It means all the essential facts constituting the rights and their infringement.

It means every fact which will be necessary for the plaintiff to prove if traversed in order to support his right to the judgment.

Question 3.
Distinguish between: ‘Decree’ and ‘order’. [June 2014 (4 Marks)]
Answer:
Following are the main points of distinction between decree and order:

Points	Decree	Order
When passed	A decree can only be passed in a suit originated by the presentation of a plaint.	Order can be passed in a suit originated by the presentation of a plaint, application, or petition.
Determination of a right	A decree contains the conclusive determination of a right.	The order may or may not finally determine a right.
Preliminary / Final	The decree may be final, preliminary, or partly preliminary partly final.	Order cannot be a preliminary order.
Number	In general, there can only be one decree or at the most one preliminary and one final decree in a suit.	There can be any number of orders in a suit.
Appeal	Every decree is appealable unless an appeal is expressly barred.	Only those orders which are specified as appealable in the code are appealable.
Second appeal	A second appeal may lie against a decree to a High Court on certain grounds.	There is no second appeal for orders.

Question 4.
A suit was instituted by the Plaintiff Company alleging infringement by the Defendant Company for using the trade name of the medicine and selling the same in wrapper and carton of identical designs with the same color combination, etc., as that of Plaintiff Company. A subsequent suit was instituted in a different Court by the Defendant Company against the Plaintiff Company with similar allegations. In such a situation, advise the Plaintiff Company on the procedure adopted by the Courts. [Dec 2009 (5 Marks)]
Answer:
As per Section 10 of the Civil Procedure Code, 1908, if the suit is pending in one Court then another Court cannot take such suit in which matter is the same. The doctrine of res sub-judice is applicable in this case.

In the given case, the parties are the same in both suits, and the subject matter of both suits is also the same, the second suit would be barred by the application of the principle of res sub judice as per Section 10.

Question 5.
A suit was instituted by the Plaintiff Company alleging infringement by the
Defendant Company for using the trade name of the medicine and selling the same in wrapper and carton of identical designs with the same color combination, etc., as that of Plaintiff Company. A subsequent suit was instituted in a different Court by the Defendant Company against the Plaintiff Company with similar allegations. In such a situation, advise the Plaintiff Company on the procedure adopted by the Courts. [Dec 2012 (5 Marks)]
Answer:
As per Section 10 of the Civil Procedure Code, 1908, if the suit is pending in one Court then another Court cannot take such suit in which matter is the same. The doctrine of res sub-judice is applicable in this case.

In the given case, the parties are the same in both suits, and the subject matter of both suits is also the same, the second suit would be barred by application of the principal of res sub judice as per Section 10.

Question 6.
A suit was instituted by the plaintiff company alleging infringement by the defendant company by using the name of the medicine and selling the same in wrapper and carton of identical design with the same color combination, etc., as that of the plaintiff company. A subsequent suit was instituted in a different court by the defendant company against the plaintiff company with the same allegations. Can the decision be given by both the courts in the respective suits? [Dec 2014(6 Marks)]
Answer:
As per Section 10 of the Civil Procedure Code, 1908, if the suit is pending in one Court then another Court cannot take such suit in which matter is the same. The doctrine of res sub-judice is applicable in this case.

In the given case, the parties are the same in both suits, and the subject matter of both suits is also the same, the second suit would be barred by the application of the principal of res sub judice as per Section 10.

Question 7.
Discuss the doctrine of ‘Res Sub Judice’ under Section 10 of the Civil Procedure Code, 1908. [Dec 2018 (5 Marks)]
Answer:

1. If the suit is pending before one court then another court can’t make the suit in which the matter and parties are the same.
2. Conditions for applying the doctrine of res sub-judice:
   1. Two suits filed with the court at different times
   2. Matter in issue is directly and substantially in the former issue.
   3. Earlier suit is pending before court (not before the foreign court)
   4. Parties to the suits are the same
3. The objective of this doctrine is to avoid multiplicity of proceedings and to avoid contradictory judgment.

Question 8.
Discuss the doctrine of res judicata under section 11 of the Code of Civil Procedure, 1908. [Dec 2009 (5 Marks)]
Answer:
Res judicata [Section 11]: No Court shall try any suit or issue in which j the matter directly and substantially in issue has been directly and substantially | in issue in a former suit between the same parties, in a Court competent to try such subsequent suit or the suit in which such issue has been subsequently raised, and has been heard and finally decided by such Court.

In simple words, once a matter is finally decided by a competent Court, no party y can be permitted to reopen it in subsequent litigation.

Essential conditions of res judicata:

• The matter must be directly and substantially in issue in two suits.
• The prior suit should be between the same parties.
• Parties should have litigated under the same title.
• The court determined the earlier suit must be competent to try the 1 latter suit.
• The same question is directly and substantially in issue in the latter suit.

Question 9.
Anil was a trustee of a trust. After Anil’s death, Brij wrongfully takes possession of the trust property. Chandan, the son of Anil files a suit for recovery of possession of the property against Brij as the legal heir of Anil in his individual capacity. But Chandan did not succeed. Then Chandan files another suit for recovery of trust property against Brij in the capacity of the trustee as he was appointed as trustee after the death of Anil. Whether the second suit is barred by the doctrine of constructive res judicata? Explain. [June 2010(6 Marks)]
Answer:
As per Explanation IV to Section 11, any matter which might and ought to have been made the ground of defense or attack in such former suit shall be | deemed to have been a matter directly and substantially in issue in such suit. The doctrine of constructive Res Judicata prevents further suits from being filed for a matter that is at the core of a former suit. In this case, the two suits are filed by Chandan in two different capacities. Hence, the second suit is not barred.

Question 10.
Define res judicata and state the conditions of Sts application. [June 2011 (5 Marks)]
Answer:
Res judicata [Section 11]: No Court shall try any suit or issue in which j the matter directly and substantially in issue has been directly and substantially | in issue in a former suit between the same parties, in a Court competent to try such subsequent suit or the suit in which such issue has been subsequently raised, and has been heard and finally decided by such Court.

In simple words, once a matter is finally decided by a competent Court, no party y can be permitted to reopen it in subsequent litigation.

Essential conditions of res judicata:

• The matter must be directly and substantially in issue in two suits.
• The prior suit should be between the same parties.
• Parties should have litigated under the same title.
• The court determined the earlier suit must be competent to try the 1 latter suit.
• The same question is directly and substantially in issue in the latter suit.

Question 11.
Distinguish between: ‘Doctrine of res sub juice and ‘doctrine of Resjudicata’. [Dec 2013 (4 Marks)]
Answer:
Following are the main points of distinction between res sub-judice and res judicata:

Points	Res sub-judice	Res judicata
When applies	Res sub-judice applies to matter pending trial.	Res judicata applies to a matter adjudicated upon.
Bar	Res sub-judice bars the trial of a suit of the pending suit.	Res judicata bars the trial of a suit or an issue that has been decided in a former suit.
Section	Section 10 of the Civil Procedure Code, 1908 incorporates this rule.	Section 11 of the Civil Procedure Code, 1908 incorporates this rule.

Question 12.
Explain the difference if any, between ‘Res Judicata’ and ‘Res Sub-Judice’. [June 2019 (4 Marks)]
Answer:
Following are the main points of distinction between res sub-judice and res judicata:

Points	Res sub-judice	Res judicata
When applies	Res sub-judice applies to matter pending trial.	Res judicata applies to a matter adjudicated upon.
Bar	Res sub-judice bars the trial of a suit of the pending suit.	Res judicata bars the trial of a suit or an issue that has been decided in a former suit.
Section	Section 10 of the Civil Procedure Code, 1908 incorporates this rule.	Section 11 of the Civil Procedure Code, 1908 incorporates this rule.

Question 13.
A transport company has its head office in Delhi and branch offices at Chennai, Jaipur, and Mumbai. A dispute cropped up between Sam and the company in respect of a transaction made through the Chennai office. Sam files a suit in respect of this dispute against the company in a Court at Jaipur. How will the Court decide?
Or
A transport company has its head office in Kolkata and branch offices at Allahabad, Lucknow, and Puri. A dispute cropped up between Hassan and the transport company in respect of a transaction through the Allahabad office. Hassan files a suit in respect of this dispute against the company in a court at Puri. Is the court at Puri competent to decide this case? Give reasons. [June 2012 (5 Marks)]
Answer:
As per Section 20 of the Civil Procedure Code, 1908, subject to provision of Sections 15 to 19:
(a) Every suit shall be instituted in Court within the local limits of whose jurisdiction the defendant actually and voluntarily resides, or carries on business, or personally works for gain.

(b) If there is more than one defendant’s suit shall be instituted in Court within the local limits of whose jurisdiction any of the defendants, at the j time of the commencement of the suit actually and voluntarily resides, or carries on business, or personally works for gain. However, in such [ case the leave of the Court has to be taken or the defendants who do not | reside, or carry on business, or personally work for gain, acquiesce in j such institution.

(c) Suit can also be instituted where the cause of action, wholly or in part, arises.
Explanation: A corporation shall be deemed to carry on business at its sole § or principal office in India or, in respect of any cause of action arising at any place where it has also a subordinate office, at such place.

Accordingly, the suit filed in the Jaipur Court will be dismissed on account of jurisdiction.

The suit ought to have been filed in Court of:

• Chennai where the cause of action arisen or
• Delhi where the corporation has its principal office.

Question 14.
A real estate company has its head office in Delhi and branch offices at Ahmedabad, Patna, and Indore. A dispute cropped up between Sourabh and the company in respect of a transaction through the Ahmedabad office. Sourabh files a suit in respect of this dispute against the company in a court at Patna. How will the court decide? [June 2014 (6 Marks)]
Answer:
As per Section 20 of the Civil Procedure Code, 1908, subject to provision of Sections 15 to 19:
(a) Every suit shall be instituted in Court within the local limits of whose jurisdiction the defendant actually and voluntarily resides, or carries on business, or personally works for gain.

(b) If there is more than one defendant’s suit shall be instituted in Court within the local limits of whose jurisdiction any of the defendants, at the j time of the commencement of the suit actually and voluntarily resides, or carries on business, or personally works for gain. However, in such [ case the leave of the Court has to be taken or the defendants who do not | reside, or carry on business, or personally work for gain, acquiesce in j such institution.

(c) Suit can also be instituted where the cause of action, wholly or in part, arises.
Explanation: A corporation shall be deemed to carry on business at its sole § or principal office in India or, in respect of any cause of action arising at any place where it has also a subordinate office, at such place.

Accordingly, the suit filed in the Jaipur Court will be dismissed on account of jurisdiction.

The suit ought to have been filed in Court of:

• Chennai where the cause of action arisen or
• Delhi where the corporation has its principal office.

Question 15.
Distinguish between: Set-off & Counter-claim [Dec 2010 (4 Marks)]
Answer:
Following are the main points of distinction between set-off & counter-claim:

Points	Set-off	Counter-claim
When passed	Set-off is a reciprocal acquittal of debts between the plaintiff and defendant.	A claim made by the defendant in a suit against the plaintiff is called counter-claim.
Nature	Set-off is a statutory defense to a plaintiff’s action.	Counter-claim is substantially a cross action.
Transaction	The claim of set-off need not originate from the same transaction. However, the claim of equitable set-off must originate from the same transaction.	Counter-claim need not arise out of the same transaction.
Claim	An equitable set-off is a claim by the defendant in defense that generally cannot exceed the plaintiff’s claim.	A counterclaim by the defendant may, however, exceed the plaintiff’s claim being in the nature of a cross-action.

Question 16.
Ram and Shyam sell wheat for ₹ 10,000 to Sohan and Mohan. Sohan sells cloth worth ₹ 12,000 to Shyam. Sohan files a suit against Shyam for recovery of the price of cloth. Shyam claims set-off of the cost of wheat in this suit. Will he succeed? [Dec 2010 (5 Marks)]
Answer:
No. As per Order 8, Rule 6, set-off is possible only when the parties to j both claims are the same. So, Shyam’s claims for set-off will not be allowed j by the Court.

Question 17.
Distinguish between: Set-off & Equitable Set-off [June 2012 (4 Marks)]
Answer:
Following are the main points of distinction between set-off & equitable i -set-off:

Points	Set-off	Equitable Set-off
Sum	The principal of set-off is applied in case of ascertained some of the money.	The principle of equitable set-off is applied in case of an unascertained sum of money.
Claim	The claim of set-off need not originate from the same transaction.	The claim of equitable set-off must originate from the same transaction.
Court’s discretion	Legal set-off can be claimed as a right by the defendant and the Court is bound to adjudicate upon the claim.	Equitable set-off cannot be claimed as a right but by Court’s discretion.
Limitation	In case of set-off, the amount claimed should not be time-barred.	The principle of equitable set-off may be applied even in the case of time-barred amounts.
Court fee	Court fee must be paid on set-off amount.	No court fee is required.

Question 18.
Distinguish between: Set-off & Counter-claim [June 2013 (4 Marks)]
Answer:
Following are the main points of distinction between set-off & counter-claim:

Points	Set-off	Counter-claim
When passed	Set-off is a reciprocal acquittal of debts between the plaintiff and defendant.	A claim made by the defendant in a suit against the plaintiff is called counter-claim.
Nature	Set-off is a statutory defense to a plaintiff’s action.	Counter-claim is substantially a cross action.
Transaction	The claim of set-off need not originate from the same transaction. However, the claim of equitable set-off must originate from the same transaction.	Counter-claim need not arise out of the same transaction.
Claim	An equitable set-off is a claim by the defendant in defense that generally cannot exceed the plaintiff’s claim.	A counterclaim by the defendant may, however, exceed the plaintiff’s claim being in the nature of a cross-action.

Question 19.
The Civil Court has the power to grant a temporary injunction, but for obtaining the same the plaintiff is required to satisfy the Court. Explain in brief. [June 2019 (4 Marks)]
Answer:
The Court may grant a temporary injunction to restrain any such act or make such other order for the purpose of staying and preventing the wasting, damaging, alienation or sale or removal or disposition of the property or dispossession of the plaintiff, or otherwise causing injury to the plaintiff in relation to any property in dispute in the suit; where it is proved by affidavit or otherwise:

1. that any property in dispute in a suit is in danger of being wasted, damaged, or alienated by any party to the suit, or wrongfully sold in execution of a decree, or
2. that the defendant threatens, or intends to remove or dispose of his property with a view to defrauding his creditors, or
3. that the defendant threatens to dispossess the plaintiff or otherwise cause injury to the plaintiff in relation to any property in dispute in the suit.

It would be necessary for the plaintiff to satisfy the Court that

1. substantial and irreparable harm or injury would be suffered by him if such temporary injunction (till the disposal of the suit) is not granted
2. the balance of convenience lies in his/her favor and
3. that such loss or damage or harm cannot be compensated by damages.

Question 20.
What do you understand by ‘set off’ and ‘counter-claim under the Civil Procedure Code, 1908? What is the effect of set-off? [Dec 2019 (4 Marks)]
Answer:
Set-off [Order 8, Rule 6]: Set-off is a reciprocal acquittal of debts between the plaintiff and defendant. It has the effect of extinguishing the plaintiff’s claim to the extent of the amount claimed by the defendant as a claim.

Where in a suit for the recovery of money the defendant claims to set-off against the plaintiff’s demand any ascertained sum of money legally recoverable by him from plaintiff and where both parties fill the same character, the defendant may, at the first hearing of the suit, but not afterward unless permitted by the Court, present a written statement containing the particulars of the debt sought to be set-off.

Counter-claim [Order 8, Rule 6A]: A defendant in a suit may, in addition to his right of pleading a set-off, set up by way of counter-claim against the claim of the plaintiff, any right or claim in respect of a cause of action accruing to the defendant against the plaintiff either before or after the filing of the suit but before the defendant has delivered his defense or before the time limited for delivering his defense has expired, whether such counter-claim is in the nature of the claim for damages or not.

Question 21.
Explain the rules relating to the delivery of summons by the court under the Code of Civil Procedure (Amendment) Act, 2002. [Dec 2012 (4 Marks)]
Answer:
Delivery of summons by Court [Order 5, Rule 9]:
1. Where the defendant resides within the jurisdiction of the Court in which the suit is instituted, or has an agent resident within that jurisdiction who is empowered to accept the service of the summons, the summons shall, unless the Court otherwise directs, be delivered or sent either to the proper officer, who may be an officer of a Court other than that in which the suit is instituted, to be served by him or one of his subordinates or to such courier services as are approved by the Court.

2. The services of summons may be made by delivering or transmitting a copy thereof by registered post acknowledgment due, addressed to the defendant or his agent empowered to accept the service or by speed post or by such courier services as are approved by the High Court or by the Court referred to in sub-rule (1) or by any other means to the transmission of documents (including fax message or electronic mail service) provided by the rules made by the High Court. However, the service of summons shall be made at the expenses of the plaintiff.

3. Where the defendant resides outside the jurisdiction of the Court in which the suit is instituted, and the Court directs that the service of summons on that defendant may be made by such mode of service of summons as is referred to in sub-rule (3) (except by registered post acknowledgment due), the provisions of rule 21 shall not apply.

4. When an acknowledgment or any other receipt purporting to be signed by the defendant or his agent is received by the Court or postal article containing the summons is received back by the Court with an endorsement purporting to have been made by a postal employee or by any person authorized by the courier service to the effect.

That the defendant or his agent had refused to take delivery of the postal article containing the summons or had refused to accept the summons by any other means specified in sub-rule (3) when tendered or transmitted to him, the Court issuing the summons shall declare that the summons had been duly served on the defendant.

However, where the summons was properly addressed, pre-paid, and duly sent by registered post acknowledgment due, the declaration shall be made notwithstanding the fact that the acknowledgment having been lost or mislaid, or for any other reason, has not been received by the Court within thirty days from the date of issue of summons.

5. Where the Court is satisfied that there is reason to believe that the person summoned is keeping out of the way for the purpose of avoiding service or that for any other reason the summons cannot be served in the ordinary way the Court shall order the service of the summons to be served by affixing a copy thereof in some conspicuous place in the Courthouse and also upon some conspicuous part of the house in which the person summoned is known to have last resided or carried on business or personally worked for gain, or in such other manner as the Court thinks fit.

Substituted Service [Order 5, Rule 20]: Where the defendant resides in another province, a summons may be sent for service in another state to such court and in such manner as may be prescribed by rules in force in that State.

The above provisions shall apply also to a summons to witnesses.

In the case of a defendant who is a public officer, servant of railways, or local authority, the Court may if more convenient, send the summons to the head of the office in which he is employed.

Service on Corporation [Order 29, Rule 2]: In the case of a suit being instituted against a corporation, the summons may be served:
(a) on the secretary or on any director, or other principal officers of the corporation or
(b) by leaving it or sending it by post addressed to the corporation at the registered office or if there is no registered office, then at the place where the corporation carries on business.

Service on Partnership Firm [Order 30, Rule 3]: Where persons are to be sued as partners in the name of their firm, the summons shall be served either:
(a) upon one or more of the partners or
(b) at the principal place at which the partnership business is carried on within India or upon any person having the control or management of the partnership business.

Where a partnership has been dissolved the summons shall be served upon every person whom it is sought to make liable.

Question 22.
Discuss in brief the main remedies available to a person against whom ex parte decree is passed. [June 2013 (5 Marks)]
Answer:
Where the plaintiff appears and the defendant does not appear before the Court, in spite of due service of summons, then the Court may proceed against the defendant ex parte.

An ‘Ex parte decrees a decree passed against a defendant in absentia. Despite service of summons, where on the date of hearing the only plaintiff does and a defendant does not appear the Court may hear the suit ex parte and pass a decree against the defendant.

A defendant has four remedies available if an ex-parte decree is passed against him:

• He may file an appeal against the ex-parte decree.
• He may file an application for review of the judgment.
• He may apply for setting aside the ex-parte decree.
• A suit can also be filed to set aside an ex-parte decree obtained by fraud but no suit shall lie for non-service of summons.

Question 23.
In a civil case what remedies are available for the defendant against whom an ex-parte decree has been passed by the court? [Dec 2018 (4 Marks)]
Answer:
Where the plaintiff appears and the defendant does not appear before the Court, in spite of due service of summons, then the Court may proceed against the defendant ex parte.

An ‘Ex parte decree is a decree passed against a defendant in absentia. Despite service of summons, where on the date of hearing the only plaintiff does and a defendant does not appear the Court may hear the suit ex parte and pass a decree against the defendant.

A defendant has four remedies available if an ex-parte decree is passed against him:

• He may file an appeal against the ex-parte decree.
• He may file an application for review of the judgment.
• He may apply for setting aside the ex-parte decree.
• A suit can also be filed to set aside an ex-parte decree obtained by fraud but no suit shall lie for non-service of summons.

Question 24.
Distinguish between: Review & Revision in civil law [Dec 2009 (4 Marks)]
Answer:
Following are the main points of distinction between review & revision:

Points	Review	Revision
Meaning	Any person considering himself aggrieved by a decree or order may apply for a review of judgment to the Court which passed the decree or order on any of the grounds as mentioned in Order 47 Rule 1.	The High Court may call for the record of any case which has been decided by any Court subordinate to such High Court and in which no appeal lies and in certain cases and may make such order as it thinks fit which is revision.
Court	Any Court, which passed the decree or made an order, can review the case.	The High Court can only do a revision of any case which has been decided by any Court subordinate to it.
By whom	The review can be made only on an application by an aggrieved party.	Revision power can be exercised by the High Court on an application or even suo moto.
Appeal	Review can be made even when an appeal lies to the High Court.	Revision power can be exercised by the High Court only in a case where no appeal lies to the High Court.
Grounds	The grounds for review are: (a) Discovery of new and important matter or evidence; (b) Mistake or error apparent on the face of the record; (c) Any other sufficient reason.	The conditions for revisions are: (a) A case must have been decided; (b) The Court which has decided the case must be a Court subordinate to the High Court; (c) The order should not be an appealable one;

Question 25.
Distinguish between: Review & Revision in civil law [June 2013 (4 Marks)]
Answer:

Points	Review	Revision
Meaning	Any person considering himself aggrieved by a decree or order may apply for a review of judgment to the Court which passed the decree or order on any of the grounds as mentioned in Order 47 Rule 1.	The High Court may call for the record of any case which has been decided by any Court subordinate to such High Court and in which no appeal lies and in certain cases and may make such order as it thinks fit which is revision.
Court	Any Court, which passed the decree or made an order, can review the case.	The High Court can only do a revision of any case which has been decided by any Court subordinate to it.
By whom	The review can be made only on an application by an aggrieved party.	Revision power can be exercised by the High Court on an application or even suo moto.
Appeal	Review can be made even when an appeal lies to the High Court.	Revision power can be exercised by the High Court only in a case where no appeal lies to the High Court.
Grounds	The grounds for review are: (a) Discovery of new and important matter or evidence; (b) Mistake or error apparent on the face of the record; (c) Any other sufficient reason.	The conditions for revisions are: (a) A case must have been decided; (b) The Court which has decided the case must be a Court subordinate to the High Court; (c) The order should not be an appealable one;

Question 26.
Distinguish between review and revision under the Civil Procedure Code 1908. [June 2019 (4 Marks)]
Answer:

Points	Review	Revision
Meaning	Any person considering himself aggrieved by a decree or order may apply for a review of judgment to the Court which passed the decree or order on any of the grounds as mentioned in Order 47 Rule 1.	The High Court may call for the record of any case which has been decided by any Court subordinate to such High Court and in which no appeal lies and in certain cases and may make such order as it thinks fit which is revision.
Court	Any Court, which passed the decree or made an order, can review the case.	The High Court can only do a revision of any case which has been decided by any Court subordinate to it.
By whom	The review can be made only on an application by an aggrieved party.	Revision power can be exercised by the High Court on an application or even suo moto.
Appeal	Review can be made even when an appeal lies to the High Court.	Revision power can be exercised by the High Court only in a case where no appeal lies to the High Court.
Grounds	The grounds for review are: (a) Discovery of new and important matter or evidence; (b) Mistake or error apparent on the face of the record; (c) Any other sufficient reason.	The conditions for revisions are: (a) A case must have been decided; (b) The Court which has decided the case must be a Court subordinate to the High Court; (c) The order should not be an appealable one;

Question 27.
Write a short note on Suits by or against corporations
Answer:
Signature or verification of pleading [Order 29, Rule 1]: In suits by or against a corporation, any pleading may be signed and verified on behalf of the corporation, by the secretary or by any director or other principal officer of the corporation who is able to depose to the facts of the case.

Service of summons [Order 29, Rule 2]: Subject to any provision regulating service of process, where the suit is against a corporation, the summons may be served.

• On the secretary or any director or other principal officer of the corporation or
• By leaving it or sending it by post addressed to the corporation at the registered office or if there is no registered office then at the place where the corporation carries on business.

Power of the Court to require personal attendance [Order 29, Rule 3]: The Court may at any stage of the suit, require the personal appearance of the secretary or any director or other principal officer of the corporation who may be able to answer material questions relating to the suit.

Question 28.
Discuss the law relating to suits by or against minors.
Answer:
A minor is a person:

1. who has not completed the age of 18 years and
2. for whose person or property a guardian has been appointed by a Court, for whose property is under a Court of Wards, the age of majority is completed at the age of 21 years.

Important points relating to suits by or against a minor:

1. Every suit by a minor shall be instituted in his name by a person who in such suit shall be called the next friend of the minor.
2. The next friend should be a person who is of sound mind and has attained majority.
3. The interest of the next friend is not averse to that of the minor.
4. Where the suit is instituted without a next friend, the defendant may apply to have the plaint taken off the file, with costs to be paid by the pleader or other person by whom it was presented.
5. Where the defendant is a minor the Court, on being satisfied with the fact of his minority, shall appoint a proper person to be guardian for the suit for such minor.
6. An order for the appointment of a guardian for the suit may be obtained upon application in the name and on behalf of the minor or by the plaintiff.
7. A person appointed as guardian for the suit for a minor shall unless his appointment is terminated by retirement, removal, or death, continues as such throughout all proceedings arising out of suit including proceedings in any appellate or revisional court and any proceedings in the execution of a decree.

Question 29.
A summary suit applies to a suit to prevent unreasonable obstruction by a defendant. [Dec 2013 (4 Marks)]
Answer:
A procedure by way of summary suit applies to suits upon a bill of exchange, Hundies, or promissory notes when the plaintiff desires to proceed under the provision of Order 37.

Order 37 provides for a summary procedure to respect certain suits. The object is to prevent unreasonable obstruction by a defendant.

The rules for the summary procedure are applicable to the following Courts.

• High Courts, City Civil Courts, and Small Courts.
• High Courts may restrict the operation of Order 37 by issuing a notifica¬tion in the Official Gazette.

The debt or liquidated demand in money payable by the defendant should arise on a written contract or on enactment or on a guarantee.

Institution of summary suits: Such suit may be instituted by presenting a plaint containing the following essentials:

• A specific averment to the effect that the suit is filed under this order.
• That no relief which does not fall within the ambit of this rule has been claimed.
• The inscription immediately below the number of the suit in the title of the suit that the suit is being established under Order 37 of the CPC.

Leave to defend: Order 37 Rule 3 prescribes the mode of service of summons etc. and leave to defend. The defendant is not entitled to defend the suit unless he enters an appearance within 10 days from the service of summons. Such leave to defend may be granted unconditional or upon such term as the Court or the judge may think fit.

However, such leave shall not be granted where.

• The court is satisfied that the facts disclosed by the defendant do not indicate that he has a substantial defense or that the defenses are frivolous or veracious, and
• The part of the amount claimed by the plaintiff and admitted by the defendant to be due from him is deposited by him in the Court.

The summary suit must be brought within one year from the date on which the debt becomes due and payable, whereas the period of limitation for suits for ordinary cases under negotiable instrument is three years.

Question 30.
‘Explain provisions of summary procedure’ including leave to defend 3 under Civil Procedure Code. [June 2019 (4 Marks)]
Answer:
A procedure by way of summary suit applies to suits upon a bill of exchange, Hundies, or promissory notes when the plaintiff desires to proceed under the provision of Order 37.

Order 37 provides for a summary procedure to respect certain suits. The object is to prevent unreasonable obstruction by a defendant.

The rules for the summary procedure are applicable to the following Courts.

• High Courts, City Civil Courts, and Small Courts.
• High Courts may restrict the operation of Order 37 by issuing a notification in the Official Gazette.

The debt or liquidated demand in money payable by the defendant should arise on a written contract or on enactment or on a guarantee.

Institution of summary suits: Such suit may be instituted by presenting a plaint containing the following essentials:

• A specific averment to the effect that the suit is filed under this order.
• That no relief which does not fall within the ambit of this rule has been claimed.
• The inscription immediately below the number of the suit in the title of the suit that the suit is being established under Order 37 of the CPC.

Jurisprudence, Interpretation & General Laws Questions and Answers

SEBI (Substantial Acquisition of Shares & Takeovers) Regulations, 2011 – Securities Laws and Capital Markets Important Questions

Question 1.
What do you understand by ‘Takeover’?
Answer:
The takeover means purchasing shares of the company with a view to take over management and control of a company. This is also called ‘Corporate Raid’ and the persona taking over is called ‘Corporate Raiders’.

Acquirer: A person who acquires shares directly or indirectly is called an acquirer. Target Company: The listed company whose shares are being acquired is called the target company.

Takeover: When the acquirer takes over control or management of the target company, it is termed as a takeover.
The takeover is an inorganic corporate growth device whereby one company acquires control over another company, usually by purchasing all or a majority of its shares.

The takeover of management and control of a company could take place in different modes. The management of a company may be acquired by acquiring the majority stake in the share capital of a company. A company may acquire shares of an unlisted company through what is called the acquisition under Sections 235 & 236 of the Companies Act, 2013. Where the shares of the company are closely held by a small number of persons, a takeover may be effected by agreement with the holders of those shares. However, where the shares of a company are widely held by the general public, it involves the process as set out in the SEBI (Substantial Acquisition of Shares & Takeovers) Regulations, 2011.

Question 2.
Discuss briefly the regulatory framework governing the ‘Takeovers’ in India.
Answer:
The legislation/regulations that mainly govern takeovers are as under:

• SEBI (Substantial Acquisition of Shares & Takeovers) Regulations, 2011.
• Companies Act, 2013.
• SEBI (Listing Obligations & Disclosure Requirements) Regulations, 2015. SEBI (Substantial Acquisition of Shares & Takeovers) Regulations, 2011 lays down the procedure to be followed by an acquirer for acquiring majority shares or controlling interest in another company.

As far as the Companies Act, 2013 is concerned; the provisions of Section 186 apply to the acquisition of shares through a Company. Sections 235 & 236 of the Companies Act, 2013 lays down legal requirements for purpose of the takeover of an unlisted company through the transfer of undertaking to another company.

As per Regulation 31 A(8) of the SEBI (Listing Obligations & Disclosure Requirements) Regulations, 2015, if any public shareholder seeks to re-classify itself as a promoter, such a public shareholder shall be required to make an open offer in accordance with the provisions of the SEBI (Substantial Acquisition of Shares & Takeovers) Regulations, 2011.

Question 3.
Briefly discuss provisions relating to compulsory acquisition of shares of minority shareholders. [Dec. 2015 (3 Marks)]
Answer:
The scheme may contain a proposal for the transfer of shares from Transferor Company to Transferee Company. If the proposal from the Transferee Company is approved by holders of 90% of shares of Transferor Company, the Transferee Company can compulsorily acquire shares of Transferor Company (who will be less than 10%). This provision has been made to ensure that minority shareholders do not block the sale when substantially majority has accepted the scheme. While calculating 90% shares, the shares already held by the Transferee Company or its nominee on the date of the offer will be excluded.

Reconstruction by the sale of shares: Reconstruction or amalgamation without NCLT procedure is possible u/s 235 by a takeover by the sale of shares. Selling shareholders get either compensation or shares of acquiring company. This procedure is rarely followed, as a sanction of shareholders holding 90% of the value of shares is required. This is difficult to obtain. Further, the route provided in Section 235 can be followed when creditors are not involved in reconstruction and their interests are not affected. Thus, these provisions are useful to acquire a small company or closely held company or where a holding company already holds 90% or more and wants to convert a subsidiary company into a wholly-owned subsidiary.

Power to acquire shares of shareholders dissenting from scheme or contract approved by the majority [Section 235]: Where a scheme or contract involving the transfer of shares or any class of shares in transferor company to transferee company approved by the holders of not less than 9/ 10th in value of the shares then transferee company may give notice to any dissenting shareholder that it desires to acquire his shares. While calculating 9/ 10th in value of the shares already held at the date of the offer by, or by a nominee of the transferee company or its subsidiary companies will be excluded.

Students should note that the approval of shareholders holding 90% of the value of shares is required and not 90% of the value of shareholders attending the meeting.

The offer shall remain open for a period of 4 months. Thus, any shareholder of the transferor company may agree to transfer his shares to the transferee company within a period of 4 months from the date of the offer.

Notice to any dissenting shareholder may be given by the transferee company within 2 months of the expiry of a period of 4 months during which the offer was open. Such notice has to be given in Form No. CAA-14.

“Dissenting shareholder” includes a shareholder who has not assented to the scheme or contract and any shareholder who has failed or refused to transfer his shares to the transferee company in accordance with the scheme or contract.

Right of a dissenting shareholder to make an application to the Tribunal: A dissenting shareholder may make an application within 1 month of receipt of notice to the Tribunal praying that acquisition of his shares should not be permitted.

However, if no such application is made by dissenting shareholders or application is rejected by the Tribunal then the transferee company shall be entitled to and bound to acquire those shares on the same terms on which shares of approving shareholders were transferred to the transferee company.

Procedure for acquiring shares by transferee company: The transferee company shall on the expiry of 1 month from the date on which the notice has been given, send a copy of the notice to the transferor company together with an instrument of transfer.

The instrument of transfer shall be executed:
(a) on behalf of the dissenting shareholder, by some person appointed by the transferor company and
(b) on behalf of the transferee company, by a person authorized by the transferee company.

The transferee company shall pay the consideration to the transferor company for acquiring shares of dissenting shareholders.

The transferor company shall:
(a) thereupon register the transferee company as the holder of those shares; and
(b) within 1 month of the date of such registration, inform the dissenting shareholders of the fact of such registration and of the receipt of the amount or other consideration representing the price payable to them by the transferee company.

Amount of consideration must be paid within 60 days to dissenting share-holders: Any sum received by the transferor company shall be paid into a separate bank account, and any such sum and any other consideration so received shall be held by the transferor company in trust for dissenting shareholders and shall be disbursed the consideration to the dissenting shareholders within 60 days.

Registration of Offer of Schemes involving the transfer of shares [Section 238]: In relation to every offer of a scheme or contract involving the transfer of shares or any class of shares in the transferor company to the transferee company j u/s 235

• Every circular containing such offer and recommendation to the members of the transferor company by its directors to accept such offer shall be accompanied by such information as set out in Form No. CAA-15.
• Every such offer shall contain a statement by or on behalf of the transferee company, disclosing the steps it has taken to ensure that necessary cash will be available.
• Every such circular shall be presented to the ROC for registration and no such circular shall be issued until it is so registered.

However, the ROC may refuse, for reasons to be recorded in writing, to register any such circular which does not contain the required information or which sets out such information in a manner likely to give a false impression and communicate such refusal to the parties within 30 days of the application.

An appeal shall lie to the Tribunal against an order of the ROC refusing to register any such circular and the said appeal shall be in Form No. NCLT-9 supported with an affidavit in Form No. NCLT-6.

The director who issues a circular which has not been presented for registration and registered shall be punishable with a line which shall not be less than ₹ 25,000 but which may extend to ₹ 5 lakh.

Question 4.
What disclosures are required to be made by an acquirer while acquiring the shares of another company? [Dec. 2013 (5 Marks)]
Answer:
The obligation to give the disclosures on the acquisition of certain limits | is only on the acquirer and not on the target company. Following disclosures j are required to be made:

Triggering Point	To and by whom	Time Period
Event-Based Disclosures
Acquisition of 5% or more shares or voting rights	To the Target Company and Stock Exchange by the Acquirer	Within 2 working days of: (a) Receipt of intimation of allotment of shares or (b) The acquisition of shares or voting rights.
Acquirer already holding 5% or more shares or voting rights On acquisition or disposal of 2% or more shares or voting rights.	To the Target Company and Stock Exchange by the Acquirer/Seller	Within 2 working days of such acquisition/disposal.
Continual Disclosures
Any person holding 25% or more shares or voting rights	Target Company & Stock Exchange by such person	Within 7 working days from the end of each financial year
Promoter/Person having control over the Target Company	Target Company & Stock Exchange by Promoter	Within 7 working days from the end of each financial year
Disclosure of Pledged or Encumbered Shares
On the encumbrance of shares by the promoter or person acting in Concert with him	Target Company & Stock Exchange by the promote	Within 7 working days from the date of creation of encumbrance.
On the invocation of or release of such encumbrance by the promoter	Target Company & Stock Exchange by the promoter	Within 7 working days from the date of invocation of encumbrance.

Question 5.
Write a short note on Conditional Offer [Dec. 2014 (4 Marks)]
Answer:
An offer in which the acquirer has stipulated a minimum level of acceptance is known as a conditional offer.

Conditional offer [Regulation 19]: An acquirer may make an open offer conditional as to the minimum level of acceptance. However, where the open offer is pursuant to an agreement, such agreement shall contain a condition to the effect that in the event the desired level of acceptance of the open offer is not received the acquirer shall not acquire any shares under the open offer and the agreement attracting the obligation to make the open offer shall stand rescinded.

Where an open offer is made conditional upon minimum level of acceptances, the acquirer and persons acting in concert with him shall not acquire, during the offer period, any shares in the target company except under the open offer and any underlying agreement for the sale of shares of the target company pursuant to which the open offer is made.

Question 6.
The disclosure requirements on the acquisition of shares of a listed target company beyond certain limits are only on the acquirer and not on the target company. [June 2015 (4 Marks)]
Answer:
The obligation to give the disclosures on the acquisition of certain limits is only on the acquirer and not on the target company. Following disclosures j are required to be made:

Triggering Point	To and by whom	Time Period
Event-Based Disclosures
Acquisition of 5% or more shares or voting rights	To the Target Company and Stock Exchange by the Acquirer	Within 2 working days of: (a) Receipt of intimation of allotment of shares or (b) The acquisition of shares or voting rights.
Acquirer already holding 5% or more shares or voting rights On acquisition or disposal of 2% or more shares or voting rights.	To the Target Company and Stock Exchange by the Acquirer/Seller	Within 2 working days of such acquisition/disposal.
Continual Disclosures
Any person holding 25% or more shares or voting rights	Target Company & Stock Exchange by such person	Within 7 working days from the end of each financial year
Promoter/Person having control over the Target Company	Target Company & Stock Exchange by Promoter	Within 7 working days from the end of each financial year
Disclosure of Pledged or Encumbered Shares
On the encumbrance of shares by the promoter or person acting in Concert with him	Target Company & Stock Exchange by the promote	Within 7 working days from the date of creation of encumbrance.
On the invocation of or release of such encumbrance by the promoter	Target Company & Stock Exchange by the promoter	Within 7 working days from the date of invocation of encumbrance.

Question 7.
Write a short note on the Escrow account [Dec. 2015 (4 Marks)]
Answer:
Escrow Account [Regulation 17]: Escrow Account means a bank account that is required to be opened by an acquirer who proposes to make a public announcement of an open offer. The Regulations have made detailed provisions regarding the Escrow Account.

Regulation 17(1) provides that not later than 2 working days prior to the date of the publication of the detailed public statement of an open offer for acquiring shares, the acquirer shall create an escrow account towards security for performance of his obligations and deposit in such escrow account specified amount.

The purpose of these provisions is to ensure that the acquirer has sufficient funds to pay the consideration under the offer and he has secured sufficient financial arrangement.

Timing of opening of account: The Acquirer shall open an escrow account at least 2 working days prior to the date of Detailed Public Statement.

Amount to be deposited:

The consideration payable under the Open Offer	Amount to be deposited in Escrow Account
On the first ₹ 500 Crore	An amount equal to 25% of the consideration
On the balance consideration	An additional amount equal to 10% of the balance consideration

Where an open offer is made conditional upon minimum level of acceptance, 100% of the consideration payable in respect of the minimum level of acceptance or 50% of the consideration payable under the open offer, whichever is higher, shall be deposited in cash in the escrow account.

In the case of indirect acquisitions where a public announcement has been made, an amount equivalent to 100% of the consideration payable in the open offer shall be deposited in the escrow account.

Increase in the amount of escrow [Regulation 17(2)]: If the Acquirer makes any upward revision in the open offer, whether by way of increase in offer price or of the offered size, then the Acquirer shall make corresponding increases to the amount kept in an escrow account prior to making such revision.

Mode of Deposit in Escrow Account [Regulation 17(3)]: The escrow account referred to above may be in the form of –
(a) Cash deposited with any scheduled commercial bank;
(b) Bank guarantee issued in favor of the manager to the open offer by any scheduled commercial bank; or
(c) Deposit of frequently traded and freely transferable equity shares or other freely transferable securities with appropriate margin.

Deposit of securities shall not be permitted in respect of indirect acquisitions.

Question 8.
Kind Enterprises Ltd. has decided to acquire a stake of up to 25% of the paid-up share capital of Excel Exams Ltd., which is a listed company and wants to proceed with a public offer pursuant to the provisions of the SEBI (Substantial Acquisition of Shares & Takeovers) Regulations, 2011. Prepare a Board note highlighting the general obligations of Kind Enterprises Ltd. [June 2015 (10 Marks)]
Answer:
Obligations of the acquirer [Regulation 25]:
1. Prior to making the public announcement of an open offer for acquiring shares, the acquirer shall ensure that firm financial arrangements have been made for fulfilling the payment obligations and that the acquirer is able to implement the open offer, subject to any statutory approvals for the open offer that may be necessary.

2. In the event the acquirer has not declared an intention in the detailed public statement and the letter of offer to alienate any material assets of the target company or of any of its subsidiaries whether by way of sale, lease, encumbrance, or otherwise outside the ordinary course of business, the acquirer, where he has acquired control over the target company, shall be debarred from causing such alienation for a period of 2 years after the offer period.

However, in the event the target company or any of its subsidiaries is required to alienate assets despite the intention to alienate not having been expressed by the acquirer, such alienation shall require a special resolution passed by shareholders of the target company, by way of a postal ballot and the notice for such postal ballot shall inter alia contain reasons as to why such alienation is necessary.

3. The acquirer shall ensure that the contents of the public announcement, the detailed public statement, the letter of offer, and the post-offer advertisement are true, fair, and adequate in all material aspects and not misleading in any material particular, and are based on reliable sources, and state the source wherever necessary.

4. The acquirer and persons acting in concert with him shall not sell shares of the target company held by them, during the offer period.

5. The acquirer and persons acting in concert with him shall be jointly and severally responsible for the fulfillment of applicable obligations under the regulations.

Question 9.
Write short note on Acquirer [Dec. 2016 (3 Marks)]
Answer:
“Acquirer” means any person who, directly or indirectly, acquires or agrees to acquire whether by himself, or through, or with persons acting in concert with him, shares or voting rights in, or control over a target company.

In simple words, a person who acquires shares/voting rights/control directly or indirectly of the target company with persons acting in concert is called ‘Acquirer’.

Persons acting in concert [Regulation 2(q)]: Persons acting in concert means –
1. Persons who, with a common objective or purpose of acquisition of shares or voting rights in, or exercising control over a target company, pursuant to an agreement or understanding, formal or informal, directly or indirectly co-operate for the acquisition of shares or voting rights in, or exercise of control over the target company.

2. The persons falling within the following categories shall be deemed to be persons acting in concert with other persons within the same category unless the contrary is established:

1. A company, its holding company, subsidiary company, and any company under the same management or control;
2. A company, its directors, and any person entrusted with the management of the company;
3. Directors of companies referred to in clauses (1) and (2) and associates of such directors;
4. Promoters and members of the promoter group;
5. Immediate relatives;
6. A mutual fund, its sponsor, trustees, trustee company, and asset management company;
7. A collective investment scheme and its collective investment management company, trustees and trustee company;
8. A venture capital fund and its sponsor, trustees, trustee company, and asset management company;
9. an alternative investment fund and its sponsor, trustees, trustee company, and manager;
10. [Deleted]
11. A merchant banker and its client, who is an acquirer;
12. A portfolio manager and its client, who is an acquirer;
13. Banks, financial advisors, and stockbrokers of the acquirer, or of any company which is a holding company or subsidiary of the acquirer, and where the acquirer is an individual, of the immediate relative of such individual. However, this clause shall not apply to a bank whose sole role is that of providing normal commercial banking services or activities in relation to an open offer under these regulations;
14. An investment company or fund and any person who has an interest in such investment company or fund as a shareholder or unit holder having not less than 10% of the paid-up capital of the investment company or unit capital of the fund, and any other investment company or fund in which such person or his associate holds not less than 10% of the paid-up capital of that investment company or unit capital of that fund. However, nothing contained in this clause shall apply to the holding of units of mutual funds registered with the SEBI.

Explanation: “Associate” of a person means –
(a) Any immediate relative of such person;
(b) Trusts of which such person or his immediate relative is a trustee;
(c) Partnership firm in which such person or his immediate relative is a partner; and
(d) Members of Hindu undivided families of which such person is a coparcener.

Question 10.
Regulation 10 of the Takeover Code provides an automatic exemption from the applicability of making open offers. [Dec. 2016 (2 Marks)]
Answer:
Regulation 10 of the SEBI Takeover Regulations, 2011 provides for automatic exemptions from the applicability of making Open Offer to the shareholders of the Target Company in respect of certain acquisitions subject to the compliance of certain conditions specified therein.

Further Regulation 11 of SEBI Takeover Regulations, 2011 provides the provisions whereby the acquirer can apply to SEBI for availing the exemption from the Open Offer obligations and the Target Company can apply for relaxation from strict compliance with any procedural requirement relating to Open Offer as provided under Chapters III and IV of the Regulations.

Some of the exemptions provided in Regulation 10 along with their conditions for exemption are as follows:

Acquisition pursuant to inter .se transfer of shares amongst qualifying persons, being,:

1. immediate relatives;
2. persons named as promoters in the shareholding pattern filed by the target company in terms of the listing regulations or these regulations for not less than three years prior to the proposed acquisition;
3. a company, its subsidiaries, its holding company, other subsidiaries of such – holding company, persons holding not less than 50% of the equity shares of such company, other companies in which such persons hold not less than 50% of the equity shares, and their subsidiaries subject to control over such qualifying persons being exclusively held by the same persons;
4. persons acting in concert for not less than 3 years prior to the proposed acquisition and disclosed as such pursuant to filings under the listing regulations.

Note: The list of exemptions provided in Regulation 10 is much more; considering the marks of the question only some of the clauses are given.

Question 11.
A competitive bid is an offer made by a person other than the acquirer who has made the first public announcement. [Dec. 2016 (2 Marks)]
Answer:
A competitive bid is an offer made by a person, other than the acquirer who has made the first public announcement.

A public announcement is an announcement made in the newspapers by the acquirer primarily disclosing his intention to acquire shares of the target company from existing shareholders by means of an open offer.

Switching of acceptances between different offers is possible. The shareholder has the option to withdraw acceptance tendered by him up to 3 working days prior to the date of closure of the offer.

To enable the shareholders to be in a better position to decide as to which of the subsisting offers is better and also not to cause last-minute decisions/ confusions, the offer price and size are effectively frozen for the last 7 working days prior to the closing date of the offers. Shareholders may wait till the commencement of that period to be aware of upward revisions in the offer price and size of the offers.

Question 12.
Write a short note on: Creeping acquisition limit [June 2017 (4 Marks)]
Answer:
Creeping acquisition limit: An acquirer who holds 25% or more but less than maximum permissible non-public shareholding of the Target Company, can acquire such additional shares as would entitle him to exercise more than 5% of the voting rights in any financial year ending March 31 only after making a Public Announcement to acquire minimum 26% shares of Target Company j from the shareholders through an Open Offer.

Question 13.
Explain the Modes of Payment to the shareholders of the Target Company on the acquisition of shares hy the acquirer under SEBI (Substantial Acquisition of Shares & Takeovers) Regulations, 2011. [June 2019 (4 Marks)]
Answer:
As per Regulation 9(1) of the SEBI (Substantial Acquisition of Shares & Takeovers) Regulations, 2011, the offer price may be paid:
(a) in cash;
(b) by issue, exchange, or transfer of listed shares in the equity share capital of the acquirer or of any person acting in concert;
(c) by issue, exchange, or transfer of listed secured debt instruments issued by the acquirer or any person acting in concert with a rating not inferior to investment grade as rated by a credit rating agency registered with the SEBI;
(d) by issue, exchange, or transfer of convertible debt securities entitling the holder thereof to acquire listed shares in the equity share capital of the acquirer or of any person acting in concert; or
(e) a combination of the mode of payment of consideration stated in clauses (a) to (d).

Question 14.
An acquirer, holding 25% or more but less than maximum permissible non-public shareholding of the Target Company can acquire such additional shares as would entitle him to exercise more than 5% of the voting rights in any financial year. Explain the statement indicating the creeping acquisition limit for making an open offer by an acquirer. [June 2019 (4 Marks)]
Answer:
Acquisition of more than 5% shares or voting rights in a financial year [Creeping Acquisition]: An acquirer along with PACs holds 25% or more but less than the maximum permissible non-public shareholding in a target company,
can acquire additional shares in the target company as would entitle him to exercise more than 5% of the voting rights in any financial year beginning April 1, only after making a public announcement of making an open offer to acquire the shares.

Note: Students should note that Takeover Regulations do not apply to acquisition up to 5% of shares per financial year – called ‘creeping acquisition’ till the acquirer reaches a stake of 7596. This is permissible to those whose holding is more than 25% but less than 75%. Such acquisition may be direct or indirect

Suppose the target company had 1,00,000 shares. The acquirer is already holding 31,000 shares and he intends to acquire further 5,000 shares per financial year, he can do so and Takeover Regulations will not be applicable. However, if he wants to acquire 5,001 shares then Takeover Regulations will be applicable and before acquiring such 5,001 shares he will have to make an open offer.

Question 15.
An unlisted public company (“Acquirer”) doing business of exporting steel and is a part of the Promoter Group of Maurya Hotels (India) Ltd. (MHIL), a company listed on the stock exchange. In view of improving its efficiency, MHIL is planning to restructure its group. The Acquirer has agreed to enter into a scheme of arrangement where the shares held by the promoter group companies (eight companies) will be transferred to it. Post-merger, the shareholding of the Acquirer in the Company will increase from 2% to 24%. However, the overall promoter shareholding will remain unchanged. You, being practicing company secretary, appointed as a consultant by the Acquirer, answer the following:
(i) Will the transfer of shares trigger an obligation to make an open offer under the SEBI (SAST) Regulations on the Acquirer?
(ii) What are the disclosure requirements under the SAST Regulations, if any, that the parties to the scheme will have to comply with? [June 2019 (5 Marks)]
Answer:
Acquisition of 25% or more shares or voting rights: An acquirer, who along with PACs holds less than 25% shares or voting rights in a target company and agrees to acquire shares or acquires shares which would entitle him to exercise 25% or more or voting rights in a target company, will need to make a public announcement of making an open offer to acquire the shares before acquiring such additional shares.

As per Regulation 10 of the SEBI (Substantial Acquisition of Shares & Takeovers) Regulations, 2011, acquisitions shall be exempt from the obligation to make an open offer under Regulation 3 when their acquisition pursuant to inter .se transfer of shares amongst qualifying persons, being persons named as promoters in the shareholding pattern filed by the target company in terms of the listing regulations or Takeover Regulations for not less than 3 years prior to the proposed acquisition.

As per facts given in the case, an unlisted public company (acquirer) proposes to increase its holding 2% to 24% by acquiring the shares of other promoters, which do not trigger provisions of obligation to make an open offer in terms of Regulation 3 read with Regulation 10 of the Takeover Regulations.

Disclosure: The Acquirer and promoter group companies will be required to make a disclosure of change in shareholding under Regulation 29(2) of the Takeover Regulations. According to Regulation 29(3), the disclosure should be made within 2 working days of such acquisition to the Company at its registered office and to stock exchanges where the shares of the Company are listed.

Note: Students should note that when the acquirer agrees to acquire 25% or more shares or voting rights in a target company he has to make an open offer to acquire further 26% shares of the target company. [Regulation 3 read with Regulation 7]

Suppose the target company had 1,00,000 shares. The acquirer is already holding 21,000 shares and he intends to acquire further 4,000 shares, he cannot acquire further 4,000 shares unless he makes an open offer to acquire another 26,000 shares from the public.

The reason for a stipulation to offer to purchase 26% shares from the public is that shareholders who may not approve the new management should have a chance to get out of his investment in the company at a fair price. The offer is restricted to 26% as if many shareholders offer to sell the shares, the acquirer may not have enough financial strength to purchase all shares offered.

Question 16.
Draft a suitable Board resolution with respect to takeover for the following:
(i) Offer by offeror company and
(ii) Authorization to invest in the shares of investee company [June 2011 (4 Marks)]
Answer:
Offer by Offeror Company:
“Resolved That an offer be made, to the persons who are the members of___________ Ltd. as on___________for acquisition of___________equity shares of ₹ 10 each representing a___________% of the total issued capital of the___________Ltd.

Resolved Further That above said offer shall remain open till___________at a price of ₹___________each.

Resolved Further That shares be accepted even if such shares in the aggregate are less than the limit mentioned above and in case shares offered to exceed the limit, the company shall have an option to accept or reject the same in consultation with the concerned authorities and offer will be accepted according to the order in which they are received and full shareholding of the members accepting the offer be acquired subject to an abovementioned limit.”

Authorization to invest in the shares of Investee Company:
“Resolved That pursuant to Section 186 and other applicable provisions if any, of the Companies Act, 2013 and authorization gave by the members of the company at their meeting held on___________unanimous consent of the Board of Directors be and is hereby given to invest up to equity shares of XYZ Ltd. at a price of ₹___________each.”

Question 17.
Sharad who is a promoter of Grow Good Ltd. holds 20% of the paid-up share capital of the company. The shares of the company are listed on National Stock Exchange Ltd. Sharad would like to pledge his shares for obtaining a loan. State the requirements for disclosure of pledged shares under the SEBI (Substantial Acquisition of Shares & Takeovers) Regulations, 2011. [June 2011 (8 Marks)]
Answer:
Disclosure of encumbered shares [Regulation 31]:

1. The promoter of every target company shall disclose details of shares in such target company encumbered by him or by persons acting in concert | with him in such form as may be specified.
2. The promoter of every target company shall disclose details of any invocation of such encumbrance or release of such encumbrance of shares j in such form as may be specified.
3. The required disclosures shall be made within 7 working days from the creation or invocation or release of encumbrance, as the case may be to
   (a) Every stock exchange where the shares of the target company are listed and
   (b) The target company at its registered office.

Question 18.
Explain the provisions relating to ‘escrow account’ under the SEBI (Substantial Acquisition of Shares & Takeovers) Regulations, 2011. [June 2011 (7 Marks)]
Answer:
Escrow Account [Regulation 17]: Escrow Account means a bank ac- f count which is required to be opened by an acquirer who proposes to make a public announcement of an open offer. The Regulations have made detailed provisions regarding the Escrow Account.

Regulation 17(1) provides that not later than 2 working days prior to the date of the publication of the detailed public statement of an open offer for acquiring shares, the acquirer shall create an escrow account towards security for performance of his obligations and deposit in such escrow account specified amount.

The purpose of these provisions is to ensure that the acquirer has sufficient funds to pay tire consideration under the offer and he has secured sufficient financial arrangement.

Timing of opening of account: The Acquirer shall open an escrow account at least 2 working days prior to the date of Detailed Public Statement.

Amount to be deposited:

The consideration payable under the Open Offer	Amount to be deposited in Escrow Account
On the first ₹ 500 Crore	An amount equal to 25% of the consideration
On the balance consideration	An additional amount equal to 10% of the balance consideration

Where an open offer is made conditional upon minimum level of acceptance, 100% of the consideration payable in respect of the minimum level of acceptance or 50% of the consideration payable under the open offer, whichever is higher, shall be deposited in cash in the escrow account.

In the case of indirect acquisitions where a public announcement has been made, an amount equivalent to 100% of the consideration payable in the open offer shall be deposited in the escrow account.

Increase in the amount of escrow [Regulation 17(2)]: If the Acquirer makes any upward revision in the open offer, whether by way of increase in offer price or of the offered size, then the Acquirer shall make corresponding increases to the amount kept in an escrow account prior to making such revision.

Mode of Deposit in Escrow Account [Regulation 17(3)]: The escrow account referred to above may be in the form of –
(a) Cash deposited with any scheduled commercial bank;
(b) Bank guarantee issued in favor of the manager to the open offer by any scheduled commercial bank; or
(c) Deposit of frequently traded and freely transferable equity shares or other freely transferable securities with appropriate margin.

Deposit of securities shall not be permitted in respect of indirect acquisitions.

Composition and other conditions of the escrow account [Regulation 17(4) to (7)]:
1. In the event of the escrow account is created by way of a bank guarantee or by deposit of securities, the acquirer shall also ensure that at least 1% of the total consideration payable is deposited in cash with a scheduled commercial bank as a part of the escrow account.

2. For such part of the escrow account as is in the form of a cash deposit with a scheduled commercial bank, the acquirer shall while opening the account, empower the manager to the open offer to instruct the bank to issue a banker’s cheque or demand draft or to make payment of the amounts lying to the credit of the escrow account, in accordance with requirements under these regulations.

3. For such part of the escrow account as is in the form of a bank guarantee, such bank guarantee shall be in favor of the manager to the open offer and shall be kept valid throughout the offer period and for an additional period of 30 days after completion of payment of consideration to shareholders who have tendered their shares in acceptance of the open offer.

4. For such part of the escrow account as is in the form of securities, the acquirer shall empower the Manager to the open offer to realize the value of such escrow account by sale or otherwise, and if there is any shortfall in the amount required to be maintained in the escrow account, the Manager shall be liable to make good such shortfall.

5. The Manager to the open offer shall not release the escrow account until the expiry of 30 days from the completion of payment of consideration to shareholders who have tendered their shares in acceptance of the open offer, save and except for the transfer of funds to the special escrow account.

6. In the event of non-fulfillment of obligations by the acquirer the SEBI may direct the Manager to forfeit the escrow account or any amounts lying in the special escrow account, either in full or in part.

7. The escrow account deposited with the bank in cash shall be released only in the following manner –
(a) The entire amount to the acquirer upon withdrawal of the offer. In the event the withdrawal is pursuant to Regulation 23(l)(c), the Manager to the open offer shall release the escrow account upon receipt of confirmation of such release from the SEBI;

(b) For transfer of an amount not exceeding 90% of the escrow account, to the special escrow account in accordance with Regulation 21.

(c) To the acquirer, the balance of the escrow account after transfer of cash to the special escrow account, on the expiry of 30 days from the completion of payment of consideration to shareholders who have tendered their shares in acceptance of the open offer, as certified by the manager to the open offer;

(d) The entire amount to the acquirer upon the expiry of 30 days from the completion of payment of consideration to shareholders who have tendered their shares in acceptance of the open offer, upon certification by the manager to the open offer, where the open offer is for exchange of shares or other secured instruments;

(e) The entire amount to the Manager, in the event of forfeiture for non-fulfillment of any of the obligations, for distribution in the following manner, after deduction of expenses of registered market intermediaries associated with the open offer:

1. 1 /3rd of the escrow account to the target company;
2. l/3rd of the escrow account to the Investor Protection & Education Fund established under the SEBI (Investor Protection & Education Fund) Regulations, 2009; and
3. 1 /3rd of the escrow account to be distributed pro-rata among the shareholders who have accepted the open offer.

Question 19.
Draft a suitable Board resolution for the opening of an escrow account. [Dec. 2011 (4 Marks)]
Answer:
Board resolution for Opening of an Escrow Account:
Resolved That an Escrow Account be opened with Bank and ₹_________ be deposited in the said account.
Resolved Further That M/s_________Merchant Banker, be and is hereby authorized to operate the above-said account and the Bank be and is hereby authorized to act on the instructions given by M/s_________, Merchant Banker, in relation to the operation of a bank account.”

Resolved Further That Mr._________, Director of the company, be and is hereby authorized to collect and communicate the same to_________Bank, the names and specimen signatures of the person authorized by M/s._________, Merchant Banker, to operate the above-said bank account.”

Question 20.
Draft a suitable Board resolution for the appointment of a merchant banker by an acquirer under the SEBI (Substantial Acquisition of Shares & Takeovers) Regulation, 2011. [Dec. 2012 (5 Marks)]
Answer:
Board Resolution for the appointment of a Merchant Banker:
‘Resolved That M/s_________being Category-I Merchant Banker be and is hereby appointed as Merchant Banker for the aforesaid public offer, on the terms and conditions as contained in the draft letter of appointment placed before the meeting duly initialed by the Chairman for the purpose of identification, for making the public i ; announcement of the takeover offer in the newspapers, forward the same to the SEBI, Stock Exchange(s) and to the target company and to draft the Letter of Offer to be sent to the shareholders of_________, target company in accordance with the SEBI
(Substantial Acquisition of Shares & Takeover) Regulations, 2011”.

Question 21.
Explain ‘open offer thresholds’ under the SEBI (Substantial Acquisition of Shares & Takeovers) Regulations, 2011. [June 2013 (5 Marks)]
Answer:
Open offer thresholds [Regulation 3]: The following are the threshold g limits for the acquisition of shares/voting rights, beyond which an obligation to % make an open offer is triggered.

Acquisition of 25% or more shares or voting rights: An acquirer, who along with PACs holds less than 25% shares or voting rights in a target company and agrees to acquire shares or acquires shares which would entitle him to exercise 25% or more or voting rights in a target company, will need to make a public announcement of making an open offer to acquire the shares before acquiring such additional shares.

Note: Students should note that when the acquirer agrees to acquire 25% or more shares or voting rights in a target company he has to make an open offer to acquire further 26% shares of the target company. regulation 3 read with Regulation 7]

Suppose the target company had 1,00,000 shares. The acquirer is already holding 21,000 shares and he intends to acquire further 4,000 shares, he cannot acquire further 4,000 shares unless he makes an open offer to acquire another 26,000 shares from the public.

The reason for a stipulation to offer to purchase 26% shares from the public is that shareholders who may not approve the new management should have a chance to get out of his investment in the company at a fair price. The offer is restricted to 26% as if many shareholders offer to sell the shares, the acquirer may not have enough financial strength to purchase all shares offered.

Acquisition of more than 5% shares or voting rights in a financial year [Creeping Acquisition]: An acquirer along with PACs holds 25% or more but less than the maximum permissible non-public shareholding in a target company, can acquire additional shares in the target company as would entitle him to exercise more than 5% of the voting rights in any financial year beginning April 1, only after j making a public announcement of making an open offer to acquire the shares.

Note: Students should note that Takeover Regulations do not apply to acquisition up to 5% of shares per financial year – called ‘creeping acquisition’ till the acquirer reaches a stake of 75%. This is permissible to those whose holding is more than 25% but less than 75%. Such acquisition may be direct or indirect.

Suppose the target company had 1,00,000 shares. The acquirer is already holding 31,000 shares and he intends to acquire further 5,000 shares per financial year, he can do so and Takeover Regulations will not be applicable. However, if he wants to acquire 5,001 shares then Takeover Regulations will be applicable and before acquiring such 5,001 shares he will have to make an open offer.

Question 22.
What do you understand by ‘mandatory bid’ and when it is necessary? Describe briefly. [June 2013 (5 Marks)]
Answer:
A mandatory bid is a bid that is compulsorily required to be made as per the provisions of the SEBI (SAST) Regulations, 2011 where the acquirer intends to acquire shares or voting rights beyond threshold limits specified in Regulations 3, 4 & 5.

It is governed by Regulations 3, 4 & 5 of the SEBI (SAST) Regulations, 2011.

When mandatory bid can be made: The open offer for acquiring shares to be made by the acquirer and persons acting in concert with him shall be for at least 26% of total shares of the target company, as of 10th working day from the closure of the tendering period.

Question 23.
The SEBI (Substantial Acquisition of Shares & Takeovers) Regulations, 2011 provide some mechanism for automatic exemption from making ‘mandatory offer’ other than the inter .se transfer among the promoters. Briefly state four such situations. [June 2013 (4 Marks)]
Answer:
Exemptions from the open offer: Exemption maybe:

• Automatic Exemption [Regulation 10]
• Exemption by SEBI [Regulation 11]

Regulation 10 provides for automatic exemptions from the applicability of making an Open Offer to the shareholders of the Target Company in respect of certain acquisitions subject to the compliance of certain conditions specified therein.

As per Regulation 11, the SEBI may for reasons recorded in writing, grant exemption from the obligation to make an open offer for acquiring shares subject to such conditions as the SEBI deems fit to impose in the interests of investors in securities and the securities market.

The SEBI may for reasons recorded in writing, grant a relaxation from strict compliance with any procedural requirement subject to such conditions as the SEBI deems fit to impose in the interests of investors in securities and the I securities market.

Some situations where an automatic exemption applies:

1. Acquisition pursuant to a resolution plan approved u/s 31 of the Insolvency and Bankruptcy Code, 2016.
2. The acquisition is pursuant to the provisions of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002.
3. The acquisition is pursuant to the provisions of the SEBI (Delisting of Equity Shares) Regulations, 2009.
4. Acquisition by way of transmission, succession, or inheritance.
5. Acquisition of voting rights or preference shares carrying voting rights arising out of the operation of the Companies Act, 2013.

Question 24.
Mention the factors which make a company vulnerable to takeover bids. [Dec. 2014 (5 Marks)]
Answer:
Some of the factors which make a company vulnerable to takeover bids are as follows:

• Low stock price with relation to the replacement cost of assets or their potential earning power.
• A highly liquid balance sheet with large amounts of excess cash, a valuable securities portfolio, and significantly unused debt capacity.
• Good cash flow in relation to current stock prices.
• Subsidiaries and properties which could be sold off without significantly impairing cash flow.
• Relatively small stockholdings under the control of incumbent management.

A combination of these factors can simultaneously make a company an attractive proposition or investment opportunity and facilitate its financing.

Question 25.
What are the obligations of the committee of independent directors of the target company with regard to providing reasoned recommendations on the open offer being made by the acquirers? [Dec. 2014 (5 Marks)]
Answer:
As per Regulation 26(7), the committee of independent directors shall provide its written reasoned recommendations on the open offer to the shareholders of the target company and such recommendations shall be published in such form as may be specified, at least 2 working days before the commencement of the tendering period, in the same newspapers where the public announcement of the open offer was published, and simultaneously, a copy of the same shall be sent to –

1. The SEBI;
2. All the stock exchanges on which the shares of the target company are listed, and the stock exchanges shall forthwith disseminate such information to the public; and
3. The manager to the open offer, and where there are competing offers, to the manager to the open offer for every competing offer.

Question 26.
Amilo Exports Ltd., a listed company has opened an escrow account in connection with acquiring another company. The company wants your opinion on the release of the amount from the escrow account. Comment. [Dec. 2014 (3 Marks)]
Answer:
As per Regulation 17 of the SEBI (Substantial Acquisition of Shares & Takeovers) Regulations, 2011, the escrow account deposited with the bank in cash shall be released only in the following manner:
(a) The entire amount to the acquirer upon withdrawal of the offer. In the event the withdrawal is pursuant to Regulation 23(l)(c), the Manager to the open offer shall release the escrow account upon receipt of confirmation of such release from the SEBI;

(b) For transfer of an amount not exceeding 9096 of the escrow account, to the special escrow account in accordance with Regulation 21.

(c) To the acquirer, the balance of the escrow account after transfer of cash to the special escrow account, on the expiry of 30 days from the completion of payment of consideration to shareholders who have tendered their shares in acceptance of the open offer, as certified by the manager to the open offer;

(d) The entire amount to the acquirer upon the expiry of 30 days from the completion of payment of consideration to shareholders who have tendered their shares in acceptance of the open offer, upon certification by the manager to the open offer, where the open offer is for exchange of shares or other secured instruments;

(e) The entire amount to the Manager, in the event of forfeiture for non-fulfillment of any of the obligations, for distribution in the following manner, after deduction of expenses of registered market intermediaries associated with the open offer:

1. 1 /3rd of the escrow account to the target company;
2. 1 /3rd of the escrow account to the Investor Protection & Education Fund established under the SEBI (Investor Protection & Education Fund) Regulations, 2009; and
3. 1/3rd of the escrow account to be distributed pro-rata among the shareholders who have accepted the open offer.

Question 27.
In terms of the SEBI (Substantial Acquisition of Shares & Takeovers) Regulations, 2011, ‘offer period’ and ‘tendering period’ are one and the same. Comment. [June 2015 (3 Marks)]
Answer:
Offer period and tendering period: The term ‘offer period’ pertains to the period starting from the date of the event triggering open offer till completion of payment of consideration to shareholders by the acquirer or withdrawal of the offer by the acquirer as the case may be.

The term ‘tendering period’ refers to the 10 working days period falling within the offer period, during which the eligible shareholders who wish to accept the open offer can tender their shares in the open offer.

Tenure of tendering period [Regulation 18(8)]: The tendering period shall start not later than twelve working days from the date of receipt of comments from the SEBI under Regulation 16(4) and shall remain open for 10 working days.

Tendered shares shall not be withdrawn [Regulation 18(9)]: Shareholders who have tendered shares in acceptance of the open offer shall not be entitled to withdraw such acceptance during the tendering period.

Question 28.
The acquirer can opt-out of the open offer process at any point in time by informing the stock exchange wherein the shares of the target company are listed and furnishing a copy of the communication to the target company. Comment. [June 2015 (3 Marks)]
Answer:
In Nirma Industries Ltd. v. Securities & Exchange Board of India, the Supreme Court has held that an open offer for acquiring shares in Target Company once made cannot be withdrawn except in cases where it specifically allowed to withdraw under the SEBI (Substantial Acquisition of Shares & Takeovers) Regulations, 2011.

Thus, the acquirers should make a ‘Public Offer’ only after the most careful consideration and must ensure that it is able to implement the offer. Referring to Regulation 27, the Supreme Court observed that a public offer once made could not be withdrawn except in the circumstances provided in the said Regulation which had to be construed strictly.

Question 29.
Revision of offer price can be made by the acquirer upward but that can be exercised only in the event of there being a competing offer. Comment. [June 2015 (3 Marks)]
Answer:
Revision of offer price [Regulation 18(4) & (5)]: Irrespective of whether a competing offer has been made, an acquirer may make upward revisions to the offer price, to the number of shares sought to be acquired under the open offer, at any time prior to the commencement of the last 1 working day before the commencement of the tendering period.

In the event of any revision of the open offer, whether by way of an upward revision in offer price or of the offered size, the acquirer shall:
(a) make corresponding increases to the amount kept in an escrow account prior to such revision;
(b) make an announcement in respect of such revisions in all the newspapers in which the detailed public statement pursuant to the public announcement was made; and
(c) simultaneously with the issue of such an announcement, inform the SEBI, all the stock exchanges on which the shares of the target company are listed, and the target company at its registered office.

Question 30.
The acquisition of shares resulting from invocation of pledges by a public financial institution is exempt from open offer obligation. Comment. [June 2015 (3 Marks)]
Answer:
Regulation 10 of the SEBI (Substantial Acquisition of Shares and Take-overs) Regulations, 2011 provides for automatic exemptions from the applicability of making Open Offer to the shareholders of the Target Company in respect of certain acquisitions subject to the compliance of certain conditions specified therein.

As per Regulation 10, acquisition in the ordinary course of business by Invocation of pledge by Scheduled Commercial Banks or Public Financial Institutions as a pledgee is covered in general exemption and hence given statement is correct.

Question 31.
How is the open offer price for the acquisition of shares of a listed target company whose shares are frequently traded determined? [June 2015 (5 Marks)]
Answer:
Offer Price [Regulation 8(1)]: The open offer for acquiring shares under Regulation 3, 4, 5, or 6 shall be made at a price not lower than the price determined in accordance with Regulation 8(2) or (3).

Determination of offer price – direct acquisition [Regulation 8(2)]: In the case of direct acquisition of shares or voting rights in, or control over the target company, and indirect acquisition of shares or voting rights in, or control over the target company where the parameters referred to in Regulation 5(2) are met, the offer price shall be the highest of –
(a) The highest negotiated price per share of the target company for any acquisition under the agreement attracting the obligation to make a public announcement of an open offer.

(b) The volume-weighted average price paid or payable for acquisitions, whether by the acquirer or by any person acting in concert with him in the last 52 weeks before the date of the public announcement.

(c) The highest price paid or payable for any acquisition, whether by the acquirer or by any person acting in concert with him in the last 26 weeks before the date of the public announcement.

(d) The volume-weighted average market price of such shares for a period of 60 trading days immediately preceding the date of the public announcement as traded on the stock exchange where the maximum volume of trading in the shares of the target company are recorded during such period, provided such shares are frequently traded.

(e) Where the shares are not frequently traded, the price determined by the acquirer and the manager to the open offer taking into account valuation parameters including, book value, comparable trading multiples, and such other parameters as are customary for valuation of shares of such companies.

(f) The per-share value computed under Regulation 8(5), if applicable.

Determination of offer price – indirect acquisition [Regulation 8(3)]: In the case of indirect acquisition of shares or voting rights in, or control over the target company, where the parameter referred to in Regulation 5(2) are not met, the offer price shall be the highest of –
(a) The highest negotiated price per share of the target company for any acquisition under the agreement attracting the obligation to make a public announcement of an open offer.

(b) The volume-weighted average price paid or payable for any acquisition, whether by the acquirer or by any person acting in concert with him, during the 52 weeks immediately preceding the earlier of, the date on which the primary acquisition is contracted, and the date on which the intention or the decision to make the primary acquisition is announced in the public domain.

(c) The highest price paid or payable for any acquisition, whether by the acquirer or by any person acting in concert with him, during the 26 weeks immediately preceding the earlier of, the date on which the primary acquisition is contracted, and the date on which the intention or the decision to make the primary acquisition is announced in the public domain.

(d) The highest price paid or payable for any acquisition, whether by the acquirer or by any person acting in concert with him, between the earlier of, the date on which the primary acquisition is contracted, and the date on which the intention or the decision to make the primary acquisition is announced in the public domain, and the date of the public announcement of the open offer for shares of the target company.

(e) The volume-weighted average market price of the shares for a period of 60 trading days immediately preceding the earlier of, the date on which the primary acquisition is contracted, and the date on which the intention or the decision to make the primary acquisition is announced in the public domain, as traded on the stock exchange where the maximum volume of trading in the shares of the target company are recorded during such period, provided such shares are frequently traded.

(f) The per-share value computed under Regulation 8(5).

Question 32.
Aspire Ltd. is the target company in respect of which an acquirer made an open offer for the acquisition of shares and the open offer has commenced. Dreams Ltd. is the subsidiary of Aspire Ltd. Dreams Ltd. signed the loan agreements with financial institutions for major capital expenditure for its expansion project and started withdrawing the loan amount during the open offer period. The said borrowings are clearly within the ordinary course of its business.

No approval was taken by Aspire Ltd. from its shareholders nor did Dreams Ltd. obtain the approval from its shareholders. The internal auditors have opined that the target company has violated the provisions of the SEBI (Substantial Acquisition of Shares & Takeovers) Regulations, 2011 as no approval was obtained by the shareholders of the target company for the borrowings affected.

The statutory auditors have agreed with the views of the internal auditors and pointed out that the target company Aspire Ltd. has failed in its obligations that are required to be complied with during the offer period in terms of the SEBI (Substantial Acquisition of Shares & Takeovers) Regulations, 2011 as approval of its members by way of a special resolution through the mechanism of the postal ballot was not obtained. Moreover, they maintained that Dreams Ltd. borrowed money for its expansion program when the open offer of the target company was on and therefore Dreams Ltd. violated the provisions of the SEBI (Substantial Acquisition of Shares & Takeovers) Regulations, 2011.
State in clear terms whether there is a violation of the provisions of the SEBI (Substantial Acquisition of Shares & Takeovers) Regulations, 2011 by Aspire Ltd. or Dreams Ltd. [June 2015 (6 Marks)]
Answer:
As per Regulation 26(2) of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011, during the offer period, unless the approval of shareholders of the target company by way of a special resolution by postal ballot is obtained, the board of directors of either the target company or any of its subsidiaries shall not affect any material borrowings outside the ordinary course of business.

It is clearly stated in facts of a given case that – “borrowings are clearly within the ordinary course of its business “and hence Aspire Ltd. or its subsidiary Dreams Ltd. had not violated any provisions of the SEBI (Substantial Acquisition of Shares & Takeovers) Regulations, 2011 and views of the internal and statutory auditor that there is a violation of Regulations is not correct.

Question 33.
Sameer, an acquirer along with persons acting in concert (PACs) is holding 23% shares in Purpleberry Ltd. (a BSE listed company). Now, he intends to acquire 3% additional equity shares in Purpleberry Ltd. through the secondary market in the current financial year. He is acquiring less than 5% shares in the financial year and is of the view that he need not make an open offer to the public. Give your opinion regarding the need to make an open offer to the public. [Dec. 2015 (5 Marks)]
Answer:
As per Regulation 3 of the SEBI (Substantial Acquisition of Shares and ) Takeovers) Regulations, 2011, an acquirer, who along with PACs holds less than | 25% shares or voting rights in a target company and agrees to acquire shares I or acquires shares which would entitle him to exercise 25% or more shares or voting rights in a target company, will need to make a public announcement i of making an open offer to acquire the shares before acquiring such additional shares.

Sameer, an acquirer along with persons acting in concert (PACs) is holding 23% shares in Purpleberry Ltd. and intends to acquire 3% additional equity shares which will entitle him to exercise 25% or more shares or voting rights
in Purpleberry Ltd. and thus he will have made a public announcement of making an open offer to acquire another 26% shares as required by the SEBI (Substantial Acquisition of Shares & Takeovers) Regulations, 2011.

Question 34.
The voting rights of Vaibhav Pharma Ltd. (VPL) which is one of the promoter company of Poorvi Adhesive Ltd. (PAL) has increased beyond 75% of the total paid-up capital of the company due to the buy-back of shares by PAL pursuant to section 68. The SEBI issued a show-cause notice to VPL alleging that they had to make a public announcement to acquire shares from the shareholders of the company and by not doing so they have violated provisions of the SEBI (Substantial Acquisition of Shares & Takeovers) Regulations, 2011. Give your comments. [Dec. 2015 (5 Marks)]
Answer:
As per Regulation 10(3) of the SEBI (Substantial Acquisition of Shares & Takeovers) Regulations, 2011 provides that – “an increase in voting rights in a target company of any shareholder beyond the limit attracting an obligation to make an open offer pursuant to buy-back of shares by the target company shall be exempt from the obligation to make an open offer provided such shareholder reduces his shareholding such that his voting rights fall to below the threshold referred to Regulation 3(1) within 90 days from the date of the closure of the said buy-back offer”.

Further Regulation 10(4)(c) of the said regulations, any increase in voting rights in a target company of any shareholder pursuant to buy-back of shares shall be exempt from the obligation to make an open offer under Regulation 3(2) provided that:

1. such shareholder has not voted in favor of the resolution authorizing the buy-back of securities u/s 68 of the Companies Act, 2013;
2. in the case of a shareholder resolution, voting is by way of the postal ballot;
3. where a resolution of shareholders is not required for the buy-back, such shareholder, in his capacity as a director or any other interested director has not voted in favor of the resolution of the board of directors of the target company authorizing the buy-back of securities u/s 68 of the Companies Act, 2013; and
4. the increase in voting rights does not result in an acquisition of control by such shareholders over the target company.

Considering the above discussion, the increase in voting rights of Vaibhav Pharma Ltd. in Poorvi Adhesive Ltd. due to the buy-back of shares pursuant to Section 68 is covered under the general exemption and hence Vaibhav Pharma Ltd. need not comply with provisions relating to the making of the open offer. However, Vaibhav Pharma Ltd. should comply with the conditions subject to which such exemption is available.

Question 35.
In the event of forfeiture of the amount lying in the escrow account, the acquirer shall be paid one-third of the amount forfeited in terms of Regulation 17(7) of SEBI (Substantial Acquisition of Shares & Takeovers) Regulations, 2011. [June 2016 (3 Marks)]
Answer:
Regulation 17 requires the acquirer to open an escrow account as a security for the performance of his obligations in terms of the public offer. The merchant banker is required to confirm that the financial arrangements are in place for fulfilling the obligations.

The amount will be used for timely fulfillment of the obligations or disposed of off as provided in Regulation 17. This is a strong deterrent against frivolous takeover offers and secures the interest of the public shareholders.

Thus, safeguards provided to shareholders in the takeover process can be summarized as follows:
1. Acquirer, before making a public announcement has to open an Escrow Account.

2. Merchant Banker to confirm adequate financial arrangements.

3. In case of failure of the acquirer to make payment, Merchant Banker to • distribute proceeds as under:

• 1 /3rd of the escrow account to the target company.
• 1 /3rd of the escrow account to the Investor Protection & Education Fund.
• 1/3rd of the escrow account to be distributed pro-rata among the shareholders who have accepted the open offer.

The Merchant Banker is required to ensure that the rejected documents which | are kept in the custody of the Registrar/Merchant Banker are sent back to the | shareholder through Registered Post.

Question 36.
An offer in which the acquirer has stipulated a minimum level of acceptance is known as a ‘conditional offer’. Comment. [June 2016 (3 Marks)]
Answer:
An offer in which the acquirer has stipulated a minimum level of acceptance is known as a conditional offer.

Conditional offer [Regulation 19]: An acquirer may make an open offer conditional as to the minimum level of acceptance. However, where the open offer is pursuant to an agreement, such agreement shall contain a condition to the effect that in the event the desired level of acceptance of the open offer is not received the acquirer shall not acquire any shares under the open offer and the agreement attracting the obligation to make the open offer shall stand rescinded.

Where an open offer is made conditional upon minimum level of acceptances, the acquirer and persons acting in concert with him shall not acquire, during the offer period, any shares in the target company except under the open offer and any underlying agreement for the sale of shares of the target company pursuant to which the open offer is made.

Question 37.
Explain the term ‘persons acting in concert (PACs) with reference to SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011. [June 2016 (5 Marks)]
Answer:
“Acquirer” means any person who, directly or indirectly, acquires or agrees to acquire whether by himself, or through, or with persons acting in concert with him, shares or voting rights in, or control over a target company.

In simple words, a person who acquires shares/voting rights/control directly or indirectly of the target company with persons acting in concert is called ‘Acquirer’.

Persons acting in concert [Regulation 2(q)]: Persons acting in concert means:
1. Persons who, with a common objective or purpose of acquisition of shares or voting rights in, or exercising control over a target company, pursuant to an agreement or understanding, formal or informal, directly or indirectly co-operate for the acquisition of shares or voting rights in, or exercise of control over the target company.

2. The persons falling within the following categories shall be deemed to be persons acting in concert with other persons within the same category unless the contrary is established:

1. A company, its holding company, subsidiary company, and any company under the same management or control;
2. A company, its directors, and any person entrusted with the management of the company;
3. Directors of companies referred to in clauses (z) and (it) and associates of such directors;
4. Promoters and members of the promoter group;
5. Immediate relatives;
6. A mutual fund, its sponsor, trustees, trustee company, and asset management company;
7. A collective investment scheme and its collective investment management company, trustees and trustee company;
8. A venture capital fund and its sponsor, trustees, trustee company, and asset management company;
9. an alternative investment fund and its sponsor, trustees, trustee company, and manager;
10. [Deleted]
11. A merchant banker and its client, who is an acquirer;
12. A portfolio manager and its client, who is an acquirer;
13. Banks, financial advisors, and stockbrokers of the acquirer, or of any company which is a holding company or subsidiary of the acquirer, and where the acquirer is an individual, of the immediate relative of such individual. However, this clause shall not apply to a bank whose sole role is that of providing normal commercial banking services or activities in relation to an open offer under these regulations;
14. An investment company or fund and any person who has an interest in such investment company or fund as a shareholder or unit holder having not less than 10% of the paid-up capital of the investment company or unit capital of the fund, and any other investment company or fund in which such person or his associate holds not less than 10% of the paid-up capital of that investment company or unit capital of that fund. However, nothing contained in this clause shall apply to the holding of units of mutual funds registered with the SEBI.

Explanation: “Associate” of a person means –
(a) Any immediate relative of such person;
(b) Trusts of which such person or his immediate relative is a trustee;
(c) Partnership firm in which such person or his immediate relative is a partner; and
(d) Members of Hindu undivided families of which such person is a coparcener.

Question 38.
‘General exemptions’ under regulation 10 and ‘Exemption by SEBI’ under regulation 11 of SEBI (Substantial Acquisition of Shares & Takeovers) Regulations, 2011 are one and the same. Comment. [June 2016 (5 Marks)]
Answer:
Exemptions from the open offer: Exemption maybe – 4- Automatic Exemption [Regulation 10]
Exemption by SEBI [Regulation 11]:
Regulation 10 provides for automatic exemptions from the applicability of making an Open Offer to the shareholders of the Target Company in respect of certain acquisitions subject to the compliance of certain conditions specified therein.

As per Regulation 11, the SEBI may for reasons recorded in writing, grant exemption from the obligation to make an open offer for acquiring shares subject to such conditions as the SEBI deems fit to impose in the interests of investors in securities and the securities market.

The SEBI may for reasons recorded in writing, grant a relaxation from strict compliance with any procedural requirement subject to such conditions as the SEBI deems fit to impose in the interests of investors in securities and the securities market.

Considering the above discussion it is incorrect to say that ‘General Exemp-tions’ under regulation 10 and ‘Exemption by SEBI’ under regulation 11 of SEBI (Substantial Acquisition of Shares & Takeovers) Regulations, 2011 are one and the same.

Question 39.
An open offer can be withdrawn under the SEBI (Substantial Acquisition of Shares & Takeovers) Regulations, 2011. Comment. [Dec. 2016 (3 Marks)]
Answer:
In Nirma Industries Ltd. v. Securities & Exchange Board of India, the Supreme Court has held that an open offer for acquiring shares in Target Company once made cannot be withdrawn except in cases where it specifically allowed to withdraw under the SEBI (Substantial Acquisition of Shares & Takeovers) Regulations, 2011.

Thus, the acquirers should make a ‘Public Offer’ only after the most careful consideration and must ensure that it is able to implement the offer. Referring to Regulation 27, the Supreme Court observed that a public offer once made could not be withdrawn except in the circumstances provided in the said Regulation which had to be construed strictly.

Question 40.
What are the obligations of the committee of independent directors of the target company with regard to providing reasoned recommendations on the open offer being made by the acquirers? [June 2017 (5 Marks)]
Answer:
As per Regulation 26(7), the committee of independent directors shall provide its written reasoned recommendations on the open offer to the shareholders of the target company and such recommendations shall be published in such form as may be specified, at least 2 working days before the commencement of the tendering period, in the same newspapers where the public announcement of the open offer was published, and simultaneously, a copy of the same shall be sent to –

1. The SEBI;
2. All the stock exchanges on which the shares of the target company are listed, and the stock exchanges shall forthwith disseminate such information to the public; and
3. The manager to the open offer, and where there are competing offers, to the manager to the open offer for every competing offer.

Question 41.
What is a “Voluntary Offer” as per Regulation 6 of the SEBI (Substantial Acquisition of Shares & Takeovers) Regulations, 2011? [June 2017 (5 Marks)]
Answer:
Voluntary Offer [Regulation 6(1)]: An acquirer, who together with persons acting in concert with him, holds shares or voting rights in a target company entitling them to exercise 2596 or more but less than the maximum permissible non-public shareholding (i.e. 7596), shall be entitled to voluntarily make a public announcement of an open offer for acquiring shares subject to their aggregate shareholding after completion of the open offer not exceeding the maximum permissible non-public shareholding.

However, where an acquirer or PAC has acquired shares of the target company in the preceding 52 weeks without attracting the obligation to make a public announcement of an open offer, he shall not be eligible to voluntarily make a public announcement of an open offer for acquiring shares.

It is to be noted that during the offer period such acquirer shall not be entitled to acquire any shares otherwise than under the open offer.

Question 42.
Scheme of reconstruction pursuant to an order of a competent authority does not trigger open offer under SEBI (Substantial Acquisition of Shares & Takeovers) Regulations, 2011. Comment. [Dec. 2017 (4 Marks)]
Answer:
Regulation 10 of the SEBI (Substantial Acquisition of Shares & Takeovers) j Regulations, 2011 had provided general exemption to acquisition pursuant to a scheme of arrangement involving the target company as a transferor company or as a transferee company, or reconstruction of the target company, including amalgamation, merger or demerger, pursuant to an order of a Tribunal or a competent authority under any law or regulation, Indian or foreign. Thus, provisions relating to open offers under SEBI (Substantial Acquisition of Shares & Takeovers) Regulations, 2011 are not applicable in such cases.

Question 43.
What is a Voluntary Offer in acquiring shares in another company? State the restriction in terms of the SEBI (Substantial Acquisition of Shares & Takeovers) Regulations, 2011? [Dec. 2017 (3 Marks)]
Answer:
Voluntary Offer [Regulation 6(1)]: An acquirer, who together with persons acting in concert with him, holds shares or voting rights in a target company entitling them to exercise 2596 or more but less than the maximum permissible non-public shareholding (i.e. 7596), shall be entitled to voluntarily make a public announcement of an open offer for acquiring shares subject to their aggregate shareholding after completion of the open offer not exceeding the maximum permissible non-public shareholding.

However, where an acquirer or PAC has acquired shares of the target company in the preceding 52 weeks without attracting the obligation to make a public announcement of an open offer, he shall not be eligible to voluntarily make a public announcement of an open offer for acquiring shares.

It is to be noted that during the offer period such acquirer shall not be entitled to acquire any shares otherwise than under the open offer.

Securities Laws and Capital Markets Questions and Answers

SEBI (Share Based Employee Benefits) Regulations, 2014 – Securities Laws and Capital Markets Important Questions

Question 1.
Explain the provisions of the Companies Act, 2013 for the issue of shares to employees under a scheme of employees stock option.
Answer:
Employee Stock Option [Section 2(37)]: Employee stock option means the option given to the whole-time directors, officers, or employees of a company, which gives such directors, officers, or employees the benefit or right to purchase or subscribe at a future date, the securities offered by the company at a pre-determined price.

As per Section 62(2) of the Companies Act, 2013, a company can offer shares to employees under a scheme of employees stock option by passing a special resolution and complying with specified conditions.

A listed company issuing employee stock options has to comply with the provisions of the SEBI (Share Based Employee Benefits) Regulations, 2014.

An unlisted company issuing employee stock options has to comply with the provisions of Rule 12 of the Companies (Share Capital & Debentures) Rules, 2014.

For the purpose of Section 68(2) and Rule 12, ‘employee’ means:
(a) A permanent employee of the company who has been working in India or outside India or
(b) A director of the company, whether a whole-time director or not but excluding an independent director or
(c) An employee of a subsidiary, in India or outside India, or of a holding company of the company but does not include:

1. An employee who is a promoter or a person belonging to the promoter group or
2. A director who either himself or through his relative or through anybody corporate, directly or indirectly, holds more than 10% of the outstanding equity shares of the company.

However, in the case of a startup company, the conditions mentioned in sub-clauses (1) and (2) shall not apply up to 5 years from the date of its incorporation or registration.

Question 2.
What disclosures are required to be made in the ‘Directors Report’ for ESOS & ESPS? [June 2009 (5 Marks)]
Answer:
The Board of Directors is required to disclose the following details in relation to ESOS & ESPS in the Director’s Report:

• Options granted
• Pricing formula
• Options vested
• Options exercised
• Total number of shares arising as a result of the exercise of the option
• Options lapsed
• Variation of terms of options
• Money realized by exercise of options
• Total number of options in force
• Employee-wise details of options
• Diluted Earnings Per Share (DEPS)
• Weighted-average exercise prices and weighted-average fair values of options

A description of the method and significant assumptions used during the year to estimate the fair values of options, including the following weighted-average information:

• Risk-free interest rate
• Expected life
• Expected volatility
• Expected dividends and
• Price of the underlying share in the market at the time of option grant.

Question 3.
What do you understand by ‘Stock Appreciation Rights Schemes’ (SARs)? Explain with a suitable example.
Answer:
Stock appreciation rights (SARs) are additional compensation given to employees that are based on any increases in the price of company stock over a predetermined period of time. Employees benefit when the stock price rises, and are unaffected when the stock price declines. SARs can improve upon the stock option concept since there is no requirement for employees to pay for the exercise price of the stock. The payouts under a SARs plan are usually in cash, though the plan can be reconfigured to allow for payments in stock.

Example: An employee is granted 1,000 SARs, which cover any appreciation in the stock’s market price over the next 3 years. Suppose the current price is ₹ 225 per share.

If at the end of 3 years, the stock price rises to ₹ 250 per share. Consequently, the employee receives payment of ₹ 25,000 (1,000 SARs × ₹ 25 price increase per share).

Alternatively, the employee can be offered 100 shares for appreciation in the price of the stock. (25,000 4- 250)

Question 4.
How the various share-based employees benefit schemes can be implemented under the SEBI (Share Based Employee Benefits) Regulations, 2014?
Answer:
Implementation of schemes [Regulation 3(1)]: A company may implement share-based employees benefit schemes either:
(a) directly or
(b) by setting up an irrevocable trust(s).

However, if the scheme is to be implemented through a trust the same has to be decided upfront at the time of taking approval of the shareholders for setting up the schemes:

If the scheme involves secondary acquisition or gift or both, then it is mandatory for the company to implement such schemes through a trust.

Question 5.
Whether It is possible to implement several employees benefit schemes under a single trust? Also, state the essentials of such trust.
Answer:
Several schemes through single trust [Regulation 3(2)]: A company may implement several schemes as permitted under these regulations through a single trust.

Such single trust shall keep and maintain proper books of account, records, and documents, for each such scheme so as to explain its transactions and to disclose at any point of time the financial position of each scheme and in particular give a true and fair view of the state of affairs of each scheme.

Requirements for trust deeds [Regulation 3(3)]: SEBI may specify the minimum provisions to be included in the trust deed under which the trust is formed.

Trust deed and any modifications thereto shall be mandatorily filed with the stock exchange in India where the shares of the company are listed.

Question 6.
Which employees are eligible to participate in employees’ share-based benefit schemes? What type of procedural compliance is required when such nominee directors participate in such schemes?
Answer:
Eligibility [Regulation 4]: An employee shall be eligible to participate in the schemes of the company as determined by the compensation committee.

Explanation: Where such employee is a director nominated by an institution as to its representative on the board of directors of the company:
1. The contract or agreement entered into between the institution nominating its employee as the director of a company, and the director so appointed shall, inter alia, specify the following:
(a) whether the grants by the company under its schemes can be accepted by the said employee in his capacity as director of the company;

(b) that grant if made to the director, shall not be renounced in favor of the nominating institution; and

(c) the conditions subject to which fees, commissions, other incentives, etc. can be accepted by the director from the company.

1. The institution nominating its employee as a director of a company shall file a copy of the contract or agreement with the said company, which shall, in turn, file the copy with all the stock exchanges on which its shares are listed.
2. The director so appointed shall furnish a copy of the contract or agreement at the first board meeting of the company attended by him after his nomination.

Question 7.
Examining the provisions of the SEBI (Share Based Employee Benefits) Regulations, 2014, answer the following:
(i) In which cases the company can make variations in the schemes?
(ii) What procedure has to be followed to make such variations?
(iii) In which cases the company may re-price the Options, SAR, or Shares?
Answer:
Variation of Terms of the schemes [Regulation 7]:
1. The company shall not vary the terms of the schemes in any manner, which may be detrimental to the interests of the employees. However, the company shall be entitled to vary the terms of the schemes to meet any regulatory requirements.

2. The company may by special resolution in a general meeting vary the terms of the schemes offered pursuant to an earlier resolution of the general body but not yet exercised by the employee provided such variation is not prejudicial to the interests of the employees.

3. The provisions of Regulation 6 shall apply to such variation of terms as they apply to the original grant of the option, SAR, shares, or other benefits, as the case may be.

4. The notice for passing the special resolution for variation of terms of the schemes shall disclose full details of the variation, the rationale, therefore, and the details of the employees who are beneficiaries of such variation.

5. A company may reprice the options, SAR, or shares, as the case may be which are not exercised, whether or not they have been vested if the schemes were rendered unattractive due to falling in the price of the shares in the stock market.

However, the company ensures that such re-pricing shall not be detrimental to the interest of the employees, and approval of the shareholders in general meetings has been obtained for such re-pricing.

Question 8.
Discuss briefly listing of shares issued pursuant to any employees share-based benefit scheme under the SEBI (Share Based Employee Benefits) Regulations, 2014.
Answer:
Listing [Regulation 10]: In case a new issue of shares is made under any scheme, shares so issued shall be listed immediately in any recognized stock exchange where the existing shares are listed. Such listing is subject to the following conditions:

• The scheme is in compliance with these regulations.
• A statement as specified by SEBI is filed and the company has obtained in-principle approval from the stock exchanges.
• As and when an exercise is made, the company notifies the concerned stock exchange as per the statement as specified by SEBI in this regard.

Question 9.
Write a short note on Accounting policies for employees share-based benefits
Answer:
Accounting Policies [Regulation 15]:
1. Any company implementing any of the share-based schemes shall follow the requirements of the ‘Guidance Note on Accounting for Employee share-based Payments’ or Accounting Standards as may be prescribed by the ICAI from time to time, including the disclosure requirements prescribed therein.

2. Where the existing Guidance Note or Accounting Standard does not prescribe accounting treatment or disclosure requirements for any of the schemes covered under these regulations then the company shall comply with the relevant Accounting Standard as may be prescribed by the ICAI from time to time.

Question 10.
Examining the provisions of the SEBI (Share Based Employee Benefits) Regulations, 2014, answer the following:
(i) Is any pricing norms are applicable for ESOS?
(ii) What is the minimum vesting period for ESOS?
(iii) Whether shares issued pursuant to ESOS are subject to a lock-in period?
(iv) Whether an employee has the right to receive the dividend in respect of the option granted to him?
Answer:
Administration and implementation of ESOS [Regulation 16]: The ESOS shall contain the details of the manner in which the scheme will be implemented and operated.

No ESOS shall be offered unless the disclosures, as specified by SEBI are made by the company to the prospective option grantees.

Pricing of exercise price in ESOS Scheme [Regulation 17]: The company granting an option to its employees pursuant to ESOS will have the freedom to | determine the exercise price subject to conforming to the accounting policies.

Vesting Period [Regulation 18(1)]: There shall be a minimum vesting period of 1 year in the case of ESOS. However, in the case where options are granted by a company under an ESOS in lieu of options held by a person under an ESOS in another company that has merged or amalgamated with that company, the period during which the options granted by the transferor company were held by him shall be adjusted against the minimum vesting period for transferee company.

Lock-in period for shares under ESOS Scheme [Regulation 18(2)]: The Company may specify the lock-in period for the shares issued pursuant to the exercise of the option.

Rights of the option holder [Regulation 19]: The employee shall not have the right to receive any dividend or to vote or in any manner enjoy the benefits of a shareholder in respect of option granted to him, till shares are issued upon exercise of the option.

A consequence of failure to exercise option [Regulation 20]: The amount payable by the employee at the time of grant of option:
(a) may be forfeited by the company if the option is not exercised by the employee within the exercise period or
(b) maybe refunded to the employee if the options are not vested due to non-fulfillment of conditions relating to vesting of option as per the ESOS.

Question 11.
As a company secretary of listed company advise the board of directors of your company various steps to be taken for implementation of Employees Stock Option Purchase Scheme.
Answer:
Procedure for issuing ESOP by a Listed Company

• Hold a Board Meeting to consider and approve ESOP and the formation of the Compensation Committee.
• The compensation committee shall plan to draft the scheme of ESOP.
• Hold Board Meeting to adopt the final scheme, appoint the Merchant banker and approve the notice of the General Meeting for shareholders approval.
• Hold General Meeting for approval of shareholders.
• Make an application to the stock exchange for obtaining in-principle approval of the stock exchange.
• Issue of letter of the grant of an option to the eligible employees along with the letter of acceptance of option.
• On receipt of the letter of acceptance of the option along with upfront payment (if any), the employee issue the option certificates.
• After the expiry of the vesting period, not less than one year the options shall vest in the employee. At that time, the Company shall issue a letter of vesting along with the letter of exercise of options.
• Receive letter of exercise from the employees.
• Hold a Board Meeting at a suitable interval during the exercise period for allotment of shares on options exercised by the option grantee.
• Dispatch of letter of allotment along with the share certificates or credit the shares so allotted with the Depositories.
• Make an application to the Stock exchange for the listing of the shares so allotted.

Question 12.
Write a short note on Employees Stock Purchase Scheme (ESPS) [Dec 2010 (4 Marks)]
Answer:
“Employee stock purchase scheme or ESPS” means a scheme under which a company offers shares to employees, as part of a public issue or otherwise, or through a trust where the trust may undertake secondary acquisition for the purposes of the scheme.

In simple words, under the Employees Stock Purchase Scheme (ESPS), employees are given an option to purchase shares on the spot at a discounted price.

Important provisions relating to ESPS are summarized below:

• The companies are free to determine the price of shares to be issued under an ESPS.
• Shares issued under an ESPS shall be locked in for a minimum period of one year from the date of allotment.
• If ESPS is part of a public issue and the shares are issued to employees at the same price as in the public issue, the shares issued to employees pursuant to ESPS shall not be subject to lock-in.

Question 13.
Write a short note on Employees Stock Option [June 2011 (4 Marks)]
Answer:
“Employee stock option scheme or ESOS” means a scheme under which a company grants an employee ‘stock option’ directly or through a trust.

It is the option given to employees of a company, which gives such employees the benefit or right to purchase or subscribe at a future date, the securities offered by the company at a pre-determined price.

Example: X Ltd. grants its employee a right to subscribe 1,000 shares at ₹ 50 when its market price is ₹ 140. An employee can exercise such right after 2 years.

If after two years the price of the share is ₹ 180, the employee will exercise the option and can take 1,000 shares at ₹ 50. Assume that there is no lock-in period and the employee decides to sell the shares immediately. Total benefit to employee is ₹ 1,30,000 [(180 – 50) × 1,000].

If after two years the price of shares is ₹ 40 then the employee will not exercise the option as he will lose his money. Thus, ESOS is ‘option’ but not ‘obligation’.

Question 14.
Write a short note on Employees Stock Purchase Scheme (ESPS) [Dec 2012 (4 Marks)]
Answer:
“Employee stock purchase scheme or ESPS” means a scheme under which a company offers shares to employees, as part of a public issue or otherwise, or through a trust where the trust may undertake secondary acquisition for the purposes of the scheme.

In simple words, under the Employees Stock Purchase Scheme (ESPS), employees are given an option to purchase shares on the spot at a discounted price.

Important provisions relating to ESPS are summarized below:

• The companies are free to determine the price of shares to be issued under an ESPS.
• Shares issued under an ESPS shall be locked in for a minimum period of one year from the date of allotment.
• If ESPS is part of a public issue and the shares are issued to employees at the same price as in the public issue, the shares issued to employees pursuant to ESPS shall not be subject to lock-in.

Question 15.
Distinguish between: Employees Stock Option Scheme & Employees Stock Purchase Scheme [Dec 2012 (4 Marks)]
Answer:
Following are the main points of difference between ESOS & ESPS:

Points	Employees Stock Option Scheme	Employees Stock Purchase Scheme
Meaning	“Employee stock option scheme or ESOS” means a scheme under which a company grants an employee ‘stock option’ directly or through a trust.	An employee stock purchase scheme or ESPS means a scheme under which a company offers shares to employees, as part of a public issue or otherwise, or through a trust where the trust may undertake secondary acquisition for the purposes of the scheme.
Purchase of shares	Under ESOS employees are given an option to purchase shares at a later date ie. after the vesting period.	Under ESPS employees are given an option to purchase shares on the spot at a discounted price.
Lock-in	The company may specify the lock-in period for the shares issued pursuant to the exercise of the option.	Shares issued under an ESPS shall be locked in for a minimum period of 1 year from the date of allotment.
Public issue	ESOS has to be approved separately by the company in general meetings by passing a special resolution. It cannot be part of a public issue.	Shares under ESPS can be issued as a part of a public issue.
Vesting period	The minimum vesting period for ESOS is one year.	No vesting periods for ESPS as shares are offered on the spot.
Compensation Committee	A company has to constitute a Compensation Committee for administration & superintendence of the ESOS.	There is no such requirement for ESPS.

Question 16.
The option to participate in ESOS is not open for all employees of the company. Comment. [Dec 2013 (4 Marks)]
Answer:
As per the SEBI (Share Based Employee Benefits) Regulations, 2014 employees which get covered as per Regulation 2(1)(f) are eligible to participate in the scheme.

Employee [Regulation 2( 1)(f)]: Employee means:

1. A permanent employee of the company who has been working in India or outside India or
2. A director of the company, whether a whole-time director or not but excluding an independent director or
3. An employee as defined in clause (1) or (2) of a subsidiary, in India or outside India, or of a holding company of the company but does not include:
   (a) An employee who is a promoter or a person belonging to the promoter group or
   (b) A director who either himself or through his relative or through any body corporate, directly or indirectly, holds more than 10% of the outstanding equity shares of the company.

Thus, it is correct to say that the option to participate in ESOP/ESPS is not open for all employees of the company.

Question 17.
What is an employee stock option plan? Explain the importance of such plans in modern times. [Dec 2017 (5 Marks)]
Answer:
Employee Stock Option Plan (ESOP) or Employee Stock Option Scheme (ESOS) is a plan or scheme under which the company grants employee stock options. Employee stock option is a contract that gives the employees of the enterprise the right, but not the obligation, for a specified period of time to purchase or subscribe to the shares of the company at a fixed or determinable price which is generally lower than the prevailing market price of its shares.

The importance of these plans lies in the following advantages which accrue to both the company and the employees:

• Stock options provide an opportunity for employees to participate and contribute to the growth of the company.
• The stock option creates long-term wealth in the hands of the employees.
• They are important means to attract, retain and motivate the best available talent for the company.
• It creates a common sense of ownership between the company and its employees.

Question 18.
Explain the Stock Appreciation Rights Scheme (SARS). [Dec 2018 (5 Marks)]
Answer:
Stock appreciation rights (SARs) are additional compensation given to employees that are based on any increases in the price of company stock over a predetermined period of time. Employees benefit when the stock price rises, and are unaffected when the stock price declines. SARs can improve upon the stock option concept since there is no requirement for employees to pay for the exercise price of the stock. The payouts under a SARs plan are usually in cash, though the plan can be reconfigured to allow for payments in stock.

Example: An employee is granted 1,000 SARs, which cover any appreciation in the stock’s market price over the next 3 years. Suppose the current price is ₹ 225 per share.

If at the end of 3 years, the stock price rises to ₹ 250 per share. Consequently, the employee receives payment of ₹ 25,000 (1,000 SARs × ₹25 price increase per share).

Alternatively, the employee can be offered 100 shares for appreciation in the price of the stock. (25,000 4- 250)

Question 19.
Answer the following with reference to the Companies (Share Capital and Debentures) Rules, 2014, as to whether these are the eligible employees under Employee Stock Option? (Yes/No with reasons)
(i) Ankit is a permanent employee deputed in the USA for a specific project.
(ii) Smart Ltd. is an independent company.
(iii) Anil is a promoter and employee.
(iv) Aneesh is a director holding 11% of the outstanding equity shares of the company.
(v) If it is a Start-up company, will the situation be the same in (iii) & (iv) above? [Dec 2018(5 Marks)]
Answer:
As per Section 62(2) of the Companies Act, 2013, a company can offer S shares to employees under a scheme of Employees Stock Option by passing a special resolution and complying with specified conditions.

A listed company issuing employee stock options has to comply with the provisions of the SEBI (Share Based Employee Benefits) Regulations, 2014.

An unlisted company issuing employee stock options has to comply with the provisions of Rule 12 of the Companies (Share Capital & Debentures) Rules, 2014.

For the purpose of Section 68(2) and Rule 12, ‘Employee’ means:

• A permanent employee of the company who has been working in India or outside India.
• A director of the company, whether a whole-time director or not but excluding an independent director.
• An employee of a subsidiary, in India or outside India, or of a holding company of the company but does not include:
  1. An employee who is a promoter or a person belonging to the promoter group or
  2. A director who either himself or through his relative or through any body corporate, directly or indirectly, holds more than 10% of the outstanding equity shares of the company.

However, in the case of a startup company, the conditions mentioned in sub-clauses (z) and (ii) shall not apply up to 5 years from the date of its incorporation or registration.

Considering the above provisions and definition of ‘employee’ as given in Rule 12 j of the Companies (Share Capital & Debentures) Rules, 2014, the answer to the given problem is as under:

1. Ankit being a permanent employee is covered by the definition of ‘employee’ and hence eligible for benefits under the Employees Stock Option Scheme.
2. Smart Ltd. being a company is not covered by the definition of ‘employee’ and hence not eligible for benefits under the Employees Stock Option Scheme.
3. Anil being a promoter is not covered by the definition of ’employee’ and hence not eligible for benefits under the Employees Stock Option Scheme,
4. Aneesh is a director and he holds more than 10% shares; he is not covered by the definition of ‘employee’ and hence not eligible for benefits under the Employees Stock Option Scheme.
5. If the company is a Start-up Company then Anil and Aneesh will be eligible for benefits under the Employees Stock Option Scheme.

Question 20.
Your Board of directors is contemplating to take-up the agenda to issue ESOS in the next meeting. Being a Company Secretary, advise your Board of directors about a brief procedure for issuing securities under SEBI Employees Stock Option Scheme (ESOS) by a listed Company. [June 2019 (5 Marks)]
Answer:
Procedure for issuing ESOP by a Listed Company

• Hold a Board Meeting to consider and approve ESOP and the formation of the Compensation Committee.
• The compensation committee shall plan to draft the scheme of ESOP.
• Hold Board Meeting to adopt the final scheme, appoint the Merchant banker and approve the notice of the General Meeting for shareholders approval.
• Hold General Meeting for approval of shareholders.
• Make an application to the stock exchange for obtaining in-principle approval of the stock exchange.
• Issue of letter of the grant of an option to the eligible employees along with the letter of acceptance of option.
• On receipt of the letter of acceptance of the option along with upfront payment (if any), the employee issue the option certificates.
• After the expiry of the vesting period, not less than one year the options shall vest in the employee. At that time, the Company shall issue a letter of vesting along with the letter of exercise of options.
• Receive letter of exercise from the employees.
• Hold a Board Meeting at a suitable interval during the exercise period for allotment of shares on options exercised by the option grantee.
• Dispatch of letter of allotment along with the share certificates or credit the shares so allotted with the Depositories.
• Make an application to the Stock exchange for the listing of the shares so allotted.

Securities Laws and Capital Markets Questions and Answers