Students should practice Offences & Penalties – CS Executive Tax Laws MCQ Questions with Answers based on the latest syllabus.

Offences & Penalties – CS Executive Tax Laws MCQ Questions

Question 1.
As per section 234F of the Income-tax Act, 1961 maximum fee for failure to file the return of income before the 31 st day of December of the assessment year is
(A) ₹ 1,000
(B) ₹ 10,000
(C) ₹ 5,000
(D) ₹ 2,000 [Dec. 2015]
Answer:
(C) ₹ 5,000

Question 2.
The maximum penalty leviable for failure to get accounts audited or to furnish report u/s 44AB is
(A) ₹ 75,000
(B) ₹ 1,00,000
(C) ₹ 1,50,000
(D) ₹ 3,00,000 [Dec. 2015]
Answer:
(C) ₹ 1,50,000

Question 3.
Penalty for failure to collect tax at source, as a percentage of tax to be collected is –
(A) 25%
(B) 100%
(C) 75%
(D) 50% [Dec. 2016]
Answer:

Question 4.
When an assessee fails to furnish any information relating to a specified domestic transaction, the quantum of penalty as a percentage of the value of the transaction would be
(A) 2%
(B) 1%
(C) 5%
(D) 3% [Dec. 2016]
Answer:
(A) 2%

Question 5.
As per Section 271 A, failures to keep, maintain or retain books of account would attract a penalty of –
(A) ₹ 10,000
(B) ₹ 1,00,000
(C) ₹ 2,000
(D) ₹ 25,000 [Dec. 2016]
Answer:
(D) ₹ 25,000

Question 6.
Mr. Raj did not appear before the Assessing Officer in response to a notice issued under section 143(2). He repeatedly absented from appearing before the Assessing Officer.
How much could be the quantum of penalty the Assessing Officer could levy on Mr. Rajan for the failure?
(A) ₹ 2,000
(B) ₹ 5,000
(C) ₹ 10,000
(D) ₹ 20,000 June 2017]
Answer:
(C) ₹ 10,000

Question 7.
Penalty for failure to furnish report under section 92E is:
(A) ₹ 25,000
(B) 2% of the value of international transactions
(C) ₹ 1,00,000
(D) ₹ 1,50,000 [June 2017]
Answer:
(C) ₹ 1,00,000

Question 8.
Padmaja Traders a partnership firm with a turnover of ₹ 140 lakhs omitted to get the books of account audited under section 44AB.
The amount of penalty leviable for failure to get the accounts audited under section 4AB is:
(A) ₹ 10,000
(B) ₹ 70,000
(C) ₹ 1,50,000
(D) ₹ 20,000 [Dec. 2017]
Answer:
(B) ₹ 70,000

Question 9.
The amount specified in the notice of demand must be paid within days otherwise the assessee would be treated as assessee in default.
(A) 10
(B) 15
(C) 30
(D) 60 [Dec. 2017]
Answer:
(C) 30

Question 10.
Finance Act, 2017 has inserted the provision for charging of fees for delay in furnishing the return of income and as per this section, be the amount of fee payable for the return declaring income of ₹ 25 lakh to be filled by ‘X’ on 28th January 2021 instead of the due date of filing of return u/s 139(1) for A.Y. 2021-22:
(A) ₹ 1,000
(B) ₹ 5,000
(C) ₹ 10,000
(D) ₹ 3,000 [June 2018]
Hint:
Fee for default in furnishing return of income [Section 234F]: Where a person required to furnish a return of income u / s 13 9, fails to do so within the time prescribed time, he shall pay, by way of fee, a sum of
(a) ₹ 5,000, if the return is furnished on or before the 31st day of December of the assessment year;
(b) ₹ 10,000 in any other case.
However, if the total income of the person does not exceed ₹ 5,00,000, the fee payable shall not exceed ₹ 1,000.
Answer:
(C) ₹ 10,000

Question 11.
ABC Limited has filed its return of income for A.Y. 2021-22 as per section 139(1) but had failed to make the payment of tax on the returned income as per section 140A.
The return so filed by ABC Limited shall be treated as:
(A) A defective return u/s 139(9)
(B) A valid return
(C) A non-est return
(D) None of the above [June 2018]
Answer:
(B) A valid return

Question 12.
The Assessing Officer, while scrutinizing the return of an assessee, finds under-reporting of income for the reason of misreporting of facts of such income.
He can levy penalty on such under-reported income resulting from misreporting of income up to tax
payable on such under-reported or misreported income.
(A) 50%
(B) 100%
(C) 200%
(D) 300% [June 2018]
Answer:
(C) 200%

Question 13.
The maximum penalty leviable for underreporting of income which results from misreporting of income by the assessee is:
(A) Two hundred percent of the tax payable
(B) One hundred percent of the tax payable
(C) Fifty percent of the tax payable
(D) Three hundred percent of the tax payable [Dec. 2018]
Answer:
(A) Two hundred percent of the tax payable

Question 14.
Kadam sold vacant land for ₹ 15 lakh on 20th March 2021. The indexed cost of acquisition of the land is ₹ 12,00,000. He received ₹ 3 lakh being part of the sales consideration in cash and the balance through the Electronic Clearance System (ECS).
The AO can levy a penalty in such case on Kadam of an amount of:
(A) ₹ 12,00,000
(B) NIL
(C) ₹ 15,00,000
(D) ₹ 3,00,000 [June 2019]
Answer:
(D) ₹ 3,00,000

Question 15.
The total income of Ram is ₹ 4,90,000 and the due date of filing the return of income for A.Y. 2021-22 is 31st July 2021. The return by Ram shall be filed on 20th September 2021.
The late fee payable for late filing of return of income shall be:
(A) ₹ 1,000
(B) ₹ 5,000
(C) ₹ 10,000
(D) No late fee up to an income of ₹ 5 lakh [June 2019]
Answer:
(A) ₹ 1,000

Question 16.
The maximum amount of penalty for failure to get accounts audited required as per section 44AB of the Act from an accountant is:
(A) ₹ 1,50,000
(B) ₹ 1,00,000
(C) ₹ 50,000
(D) b% of turnover or gross receipts of the business or profession or ₹ 50,000. [June 2019]
Answer:
(A) ₹ 1,50,000

Question 17.
As per section 9A, an eligible offshore investment fund shall furnish within 90 days from the end of the financial year, a statement containing information relating to fulfillment of specified conditions and such other information or documents as may be prescribed. A penalty of to be levied, if the investment fund failed to comply with the requirements as per section 271 FAB.
(A) ₹ 1,00,000
(B) ₹ 500 per day
(C) ₹ 5,00,000
(D) ₹ 10,00,000 [Dec. 2019]
Answer:
(C) ₹ 5,00,000

Question 18.
The Assessing Officer while scrutinizing the return of an assessee finds under-reporting of income for the reason of misreporting of facts of such income and thus levied penalty on such under-reported income resulting from misreporting of income. The penalty to be imposed by the A.O. shall be at the rate of tax payable on such misreported income.
(A) 50%
(B) 100%
(C) 200%
(D) 300% [Dec. 2019]
Answer:
(C) 200%

FEMA – Current & Capital Account Transactions, Liberalized Remittance Scheme – Economic, Business and Commercial Laws Important Questions

Question 1.
Naresh, an Indian citizen, is interested in sending ₹ 10,000 to his sister residing in the USA as a birthday gift. Advice with reference to relevant provisions of the Foreign Exchange Management Act, 1999 and the rules
Answer:
Any person may sell or draw foreign exchange to or from an authorized person if such sale or Drawal is a current account transaction. However, such sell or draw foreign exchange can be made after complying with the Foreign Exchange Management (Current Account Transactions) Rules, 2000.

As per Rule 5 read with Liberalized Remittance Scheme, transactions p specified in Schedule III require approval of RBI. “Gift remittances” are covered in Schedule III. If the gift remittance exceeds US$ 2,50,000 prior f approval of RBI is required. In the given case, Naresh wants to remit ₹ 10,000 to his sister in the USA. If the rate of exchange is taken ₹ 65 per dollar then ₹ 10,000 = US$ 153.85. Since the amount to be remitted does not exceed US$ 2,50,000 prior approval of RBI is not required.

As per Liberalized Remittance Scheme, a resident individual can make a rupee gift to an NRI/PIO who is a relative of the resident individual by way of crossed cheque/electronic transfer.

Question 2.
Dinesh, an Indian citizen, wants to use his international debit card for the withdrawal of cash during his visit abroad. Advice with reference to relevant provisions of the Foreign Exchange Management Act, 1999 and the rules and regulations made thereunder. [Dec. 2009 (1 Mark)]
Answer:
Any person may sell or draw foreign exchange to or from an authorized person if such sale or Drawal is a current account transaction. However, such sell or draw foreign exchange can be made after complying with the FEM (Current Account Transactions) Rules, 2000.

As per Rule 7, the transactions do not require RBI approval if payment is made by a person by use of an International Credit Card, towards meeting expenses while such person is on a visit outside India. Thus, Dinesh can use his international debit card for the withdrawal of cash during his visit abroad.

Question 3.
Shyam, an Indian businessman, is interested in remitting US$ 8,000 for the purchase of a trademark/franchise in India. Advice with reference to relevant provisions of the Foreign Exchange Management Act, 1999 and the rules and regulations made thereunder. [Dec. 2010 (1 Mark)]
Answer:
As per Rule 5 of the FEM (Current Account Transactions) Rules, 2000, transactions specified in Schedule III require approval of RBI. “Remittance for purchase of trademark/franchise in India” is deleted from Schedule III. Thus, the transaction is permitted without prior approval of RBI.

Also if Shyam makes payment out of the Resident Foreign Currency account then also prior approval of RBI not required.

Question 4.
Rakesh, a person resident in India, is interested in extending an invitation to George, a person resident outside India, to stay as his guest while on a visit to India. Advice with reference to relevant provisions of the Foreign Exchange Management Act, 1999 and the rules and regulations made thereunder. [June 2011 (1 Mark)]
Answer:
There is no prohibition under the FEMA for making any payment in Indian rupee towards meeting expenses on account of boarding, lodging, and service-related thereto or travels to and from and within the India of a person resident outside who is on a visit to India. Thus, Rakesh can invite George, a person resident outside India, to stay as his guest while on a visit to India.

Question 5.
Anand desires to donate US$ 10,000 to Rotary International, an NGO in Chicago, USA. Advice with reference to relevant provisions of the Foreign Exchange Management Act, 1999 and the rules and regulations made thereunder. [June 2012 (1 Mark)]
Answer:
As per Rule 5 of the FEM (Current Account Transactions) Rules, 2000 read with Liberalized Remittance Scheme, transactions specified in Schedule III require approval of RBI. Drawal of foreign exchange for “gift & donation” is specified in Schedule III. If the foreign exchange to make a donation exceeds US$ 2,50,000 then prior approval of RBI is necessary. Therefore, Anand can obtain US $ 20,000 for making a donation to a charitable trust situated in South Korea without the prior approval of RBI.

Question 6.
Suresh desires to pay US$ 10,000 through an international credit card being the remittance out of lottery earnings. Advice with reference to relevant provisions of the Foreign Exchange Management Act, 1999 and the rules and regulations made thereunder. [June 2012 (1 Mark)]
Answer:
As per Rule 3 of the FEM (Current Account Transactions) Rules, 2000, transactions specified in Schedule I are totally prohibited. “Remittance out of lottery winnings” is specified in Schedule I. Thus, Suresh cannot pay US$ 10,000 being the remittance out of lottery earnings.

Question 7.
Write a short note on Current Account Transactions. [Dec. 2014 (3 Marks)]
Answer:
(a) Meaning of Current Account Transaction (Section 2(j):- The term current account transaction has been defined to mean a transaction other than a capital account transaction.

Current Account Transactions includes

• Payments are due in connection with foreign trade, other current business, services, and short-term banking and credit facilities in the ordinary course of business.
• Payments are due as interest on the loan and as net income from investments.
• Remittances for living expenses of parents, spouse, and children residing abroad.
• Expenses in connection with foreign travel, education, and medical care of parents, spouse, and children.

(b) Provision regarding Current Account Transactions [Section 5]: Any person may sell or draw foreign exchange to or from an authorized person if such sale or Drawal is a current account transaction. However, such sell or draw foreign exchange can be made after complying with the FEM (Current Account Transactions) Rules, 2000.

(c) Categories of Current Account Transaction: As per this rule current account transaction are divided into the following categories:

• Transaction for which Drawal of foreign exchange is prohibited. [Rule 3]
• Transaction for which foreign exchange can be drawn with prior approval of Central Government. [Rule 4]
• Transaction for which foreign exchange can be drawn with prior approval of RBI. [Rule 5]

Question 8.
How much foreign exchange is available to a person going abroad on emigration? [Dec. 2015 (3 Marks)]
Answer:
(a) As per Rule 5 of the Schedule II of the FEM (Current Account Transactions) Rules, 2000 read with Liberalized Remittance Scheme, the exchange facilities for emigration not exceeding US$ 2,50,000 do not require prior approval of RBI.

(b) As per Liberalized Remittance Scheme, a person wanting to emigrate can draw foreign exchange from AD Category-I & Category-II up to the amount prescribed by the country of emigration or US$ 2,50,000.

(c) Any remittance above the prescribed limit will require prior approval of RBI.

Question 9.
What are current account transactions under Foreign Exchange Management Act, 1999? [Dec. 2017 (5 Marks)]
Answer:
(a) Meaning of Current Account Transaction (Section 2(j):- The term current account transaction has been defined to mean a transaction other than a capital account transaction.

Current Account Transactions includes

• Payments are due in connection with foreign trade, other current business, services, and short-term banking and credit facilities in the ordinary course of business.
• Payments are due as interest on the loan and as net income from investments.
• Remittances for living expenses of parents, spouse, and children residing abroad.
• Expenses in connection with foreign travel, education, and medical care of parents, spouse, and children.

(b) Provision regarding Current Account Transactions [Section 5]: Any person may sell or draw foreign exchange to or from an authorized person if such sale or Drawal is a current account transaction. However, such sell or draw foreign exchange can be made after complying with the FEM (Current Account Transactions) Rules, 2000.

(c) Categories of Current Account Transaction: As per this rule current account transaction are divided into the following categories:

• Transaction for which Drawal of foreign exchange is prohibited. [Rule 3]
• Transaction for which foreign exchange can be drawn with prior approval of Central Government. [Rule 4]
• Transaction for which foreign exchange can be drawn with prior approval of RBI. [Rule 5]

Question 10.
Dr. Gupta, an Indian national, residing in Thailand and wanted to avail foreign exchange facility up to USD 2,00,000 only. Whether he can do so? Explain the relevant provisions of the Foreign Exchange Management Act, 1999 in this respect.
Answer:
Under the Liberalized Remittance Scheme (LRS), Authorized Dealers may freely allow remittances by resident individuals up to US$ 2,50,000 per Financial Year (April-March) for any permitted current or capital account transaction or a combination of both.

The above scheme is available to all resident individuals including minors.
Thus, Dr. Gupta, an Indian national can avail foreign exchange of US$ 2,00,000 by complying with the provisions of the above scheme.

Question 11.
Point out the prohibited transactions under the Liberalised Remittance Scheme. s [Dec. 2019 (4 Marks)]
Answer:
The remittance facility under the Liberalized Remittance Scheme is not available for the following:

• Remittance out of lottery winnings.
• Remittance of income from racing/riding etc. or any other hobby.
• Remittance for purchase of lottery tickets, banned/proscribed magazines, football pools, sweepstakes, etc.
• Payment of commission on exports made towards equity investment in Joint Ventures/Wholly Owned Subsidiaries abroad of Indian companies.
• Remittance of dividend by any company to which the requirement of dividend balancing is applicable.
• Payment of commission on exports under Rupee State Credit Route, except commission up to 10% of the invoice value of exports of tea and tobacco.
• Payment related to “Call Back Services” of telephones.
• Remittance of interest income on funds held in Non-Resident Special Rupee (Account) Scheme.

Question 12.
An Indian company intends to open a foreign currency account in India as well as outside India. Advice with reference to relevant provisions of the Foreign Exchange Management Act, 1999 and the rules and regulations made thereunder. [Dec. 2009 (1 Mark)]
Answer:
(a) Provision: As per Schedule I to the FEM (Permissible Capital Account Transactions) Regulations, 2000, a person resident in India may enter into capital account transactions specified in the Schedule. “Maintenance of foreign currency accounts in India and outside India by a person resident in India” is covered by Schedule I.

(b) Conclusion: Thus, an Indian company can open a foreign currency account in India as well as outside India.

Question 13.
Suresh, a person resident in India, desires to take a life insurance policy from a foreign insurance company, the yearly premium of which is US$ 25,000. Advice with reference to relevant provisions of the Foreign Exchange Management Act, 1999 and the rules and regulations made thereunder. [Dec. 2010 (1 Mark)]
Answer:
‘Insurance’ is a capital account transaction as commitments are for a very long period. As per Schedule I to the FEM (Permissible Capital Account Transactions) Regulations, 2000 a person resident in India may take an insurance policy from an insurance company outside India. As per RBI Circular, a life insurance policy can be taken having a yearly premium of up to US$ 25,000.

Thus, Jay, a person resident in India, can take a life insurance policy from a foreign insurance company with a yearly premium of US$ 25,000.

Question 14.
Karan, a person resident in India, borrows US$ 20,000 from his friend resident outside India. Advice with reference to relevant provisions of the Foreign Exchange Management Act, 1999 and the rules and regulations made thereunder. [June 2011 (1 Mark)]
Answer:
Taking a loan or borrowing amount by a person resident in India from a person resident outside India is a capital account transaction and covered by Schedule I of the FEM (Permissible Capital Account Transactions) Regulations, 2000. As per Regulation 4, subject to FEMA provisions, a resident individual may draw from an authorized person foreign exchange not exceeding US$ 2,50,000 per financial year for a capital account transaction specified in Schedule I.

Therefore, Karan can borrow US$ 20,000 from his friend resident outside India.

Question 15.
Ram, a person resident in India, intends to invest ₹ 25,000 in foreign securities in a calendar year. Advice with reference to relevant provisions of the Foreign Exchange Management Act, 1999 and the rules and regulations made thereunder. [Dec. 2011 (1 Mark)]
Answer:
As per Schedule I to the FEM (Permissible Capital Account Transactions) Regulations, 2000 a person resident in India may enter into capital account transactions specified in the Schedule. “Investment by a person resident in India in foreign securities” is specified in Schedule I. Thus, Ram can invest Rs. 25,000 in foreign securities.

Question 16.
Jay, a person resident in India, desires to take a life insurance policy from a foreign insurance company, the yearly premium of which is US$ 25,000. Advice with reference to relevant provisions of the Foreign Exchange Management Act, 1999 and the rules and regulations made thereunder. [June 2013 (1 Mark)]
Answer:
The remittance facility under the Liberalized Remittance Scheme is not available for the following:

• Remittance out of lottery winnings.
• Remittance of income from racing/riding etc. or any other hobby.
• Remittance for purchase of lottery tickets, banned/proscribed magazines, football pools, sweepstakes, etc.
• Payment of commission on exports made towards equity investment in Joint Ventures/Wholly Owned Subsidiaries abroad of Indian companies.
• Remittance of dividend by any company to which the requirement of dividend balancing is applicable.
• Payment of commission on exports under Rupee State Credit Route, except commission up to 10% of the invoice value of exports of tea and tobacco.
• Payment related to “Call Back Services” of telephones.
• Remittance of interest income on funds held in Non-Resident Special Rupee (Account) Scheme.

Question 17.
Write a short note on Capital Account Transactions [June 2014 (3 Marks)]
Answer:
Capital Account Transactions defined: Capital account transactions have been defined to mean any transaction which alters the assets or liabilities including contingent liabilities, outside India of persons resident in India or assets or liabilities in India of a person resident outside India and includes the transactions specified in section 6(3).

Capital Account Transactions [Section 6]:

1. Any person may sell or draw foreign exchange to or from an authorized person for a capital account transaction.
2. RBI will govern capital account transaction involving Debt instruments (Section 6(2)
3. Central Government will govern capital account transaction involving Non-Debt Instruments [Section 6(2A)]
4. Debt instrument would be determined by CG in consultation with RBI [Section 6(7)]

List of Instruments: Ministry of Finance notified the list of Debt and Non-debt instruments.

Question 18.
Yogesh, a person resident in India, is desirous of taking a life insurance policy from a foreign insurance company, the yearly premium of which is US$ 25,000. Mention the provisions of the Foreign Exchange Management Act, 1999, and the FEMA Regulations in support of your answer. [June 2014 (5 Marks)}
Answer:
The remittance facility under the Liberalized Remittance Scheme is not available for the following:

• Remittance out of lottery winnings.
• Remittance of income from racing/riding etc. or any other hobby.
• Remittance for purchase of lottery tickets, banned/proscribed magazines, football pools, sweepstakes, etc.
• Payment of commission on exports made towards equity investment in Joint Ventures/Wholly Owned Subsidiaries abroad of Indian companies.
• Remittance of dividend by any company to which the requirement of dividend balancing is applicable.
• Payment of commission on exports under Rupee State Credit Route, except commission up to 10% of the invoice value of exports of tea and tobacco.
• Payment related to “Call Back Services” of telephones.
• Remittance of interest income on funds held in Non-Resident Special Rupee (Account) Scheme.

Question 19.
What are the classes of capital account transactions of a person resident of India? [Dec. 2015 (3 Marks)}
Answer:
As per Schedule I to the FEM (Permissible Capital Account Transactions) Regulations, 2000 a person resident in India may enter into the following type of capital account transactions:

• Investment by a person resident in India in foreign securities.
• Foreign currency loans raised in India and abroad by a person resident in India.
• Transfer of immovable property outside India by a person resident in India.
• Guarantees issued by a person resident in India in favor of a person resident outside India.
• Export, import, and holding of currency/currency notes.
• Loans and overdrafts (borrowings) by a person resident in India from a person resident outside India.
• Maintenance of foreign currency accounts in India and outside India by a person resident in India.
• Taking out of insurance policy by a person resident in India from an insurance company outside India.
• Loans and overdrafts by a person resident in India to a person resident outside India.
• Remittance outside India of capital assets of a person resident in India.
• Sale and purchase of foreign exchange derivatives in India and abroad and commodity derivatives abroad by a person resident in India.

Question 20.
Explain the permissible capital account transactions by an individual under the liberalized remittance scheme. [June 2019 (4 Marks)]
Answer:
Permissible capital account transactions by an individual under Liberalized Remittance Scheme (LRS) are as under:

1. Foreign Currency Account: Opening of foreign currency account abroad with a bank.
2. Immovable Property: Purchase of property abroad.
3. Investment: Making investments abroad
   (a) Acquisition and holding shares of both listed and unlisted overseas companies or debt instruments.
   (b) Acquisition of qualification shares of an overseas company for holding the post of Director.
   (c) Acquisition of shares of a foreign company towards professional services rendered or in lieu of Director’s remuneration.
   (d) Investment in units of Mutual Funds, Venture Capital Funds, unrated debt securities, promissory notes.
4. WOS/JV: Setting up WOS/JV outside India for bona fide business subject to the specified terms & conditions.
5. Loans: Extending loans including loans in Indian Rupees to NRIs who are relatives as defined in the Companies Act, 2013.

Question 21.
An Indian citizen resident outside India is interested in acquiring a house in Chennai and a farmhouse on the outskirts of Delhi. Advice with reference to relevant provisions of the Foreign Exchange Management Act, 1999 and the rules and regulations made thereunder. [June 2010 (1 Mark)]
Answer:
As per Rule 24 of the FEM (Non-Debt Instrument) Rules, 2019, a person resident outside India who is a citizen of India may acquire any immovable property in India other than agricultural/plantation/farmhouse.

Thus, an Indian citizen resident outside India can acquire a house in Chennai but he cannot acquire a farmhouse on the outskirts of Delhi

Question 22.
A person, the resident outside India, is interested to repatriate outside India the sales proceeds of an immovable property held in India. Advice with reference to relevant provisions of the Foreign Exchange Management Act, 1999 and the rules and regulations made thereunder. [June 2011 (1 Mark)]
Answer:
As per Rule 29 of the FEM (Non-Debt instrument) Rules, 2019, a person resident outside India or his successor shall not except with the prior permission of the RBI, repatriate outside India the sale proceeds of any immovable property.

Question 23.
Mohan, an Indian citizen resident outside India, intends to acquire immovable property in India. Advice with reference to relevant provisions of the Foreign Exchange Management Act, 1999 and the rules and regulations made thereunder. [Dec. 2011 (1 Mark)]
Answer:
As per Rule 24 of the FEM (Non-Debt Instrument) Rules, 2019, a person resident outside India who is a citizen of India may acquire any immovable property in India other than agricultural/plantation /farm house subject to the criteria and conditions provided in Rule 24 of FEM (Non-Debt Instrument) Rules, 2019.

Thus, an Indian citizen resident outside India can acquire a house in India.

Question 24.
Shyam, a non-resident Indian working in the USA intends to sell his ancestral house in India to a person resident in India. Advice with reference to relevant provisions of the Foreign Exchange Management Act, 1999 and the rules and regulations made thereunder. [Dec. 2012 (1 Mark)]
Answer:
As per Rule 24 of the FEM (Non-Debt Instrument) Rules, 2019, a person resident outside India who is a citizen of India may transfer any immovable property in India which is agricultural land, plantation, and farmhouse only to a person resident in India. If it is another immovable property then it can be transferred to a person resident in India, Non-Resident Indian (NRI), or Oversea Cardholder Indian.

Thus, Shyam, a non-resident Indian working in the USA can sell his ancestral house in India.

Question 25.
A Malaysian diplomat entered into an agreement with a real estate company in India to purchase non-agricultural land near New Delhi to establish a laboratory. Advice with reference to relevant provisions of the Foreign Exchange Management Act, 1999 and the rules and regulations made thereunder. [June 2013 (1 Mark)]
Answer:
As per Rule 27 of the FEM (Non-Debt Instrument) Rules, 2019, Foreign Diplomat may purchase or sell immovable property (other than agricultural land/plantation property/farm house) in India provided:

1. Clearance from the Government of India, Ministry of External Affairs is obtained for such purchase or sale, and
2. The consideration is paid out of funds remitted from abroad through the normal banking channels.

Thus, a Malaysian diplomat can enter into an agreement to purchase non-agricultural land to establish a laboratory subject to compliance with the above-stated provisions.

Question 26.
Alex, a foreign diplomat desires to buy immovable property in India. Is he permitted to do so? Give reasons in brief. [Dec. 2015 (3 Marks)]
Answer:
As per Rule 24 of the FEM (Non-Debt Instrument) Rules, 2019, a person resident outside India who is a citizen of India may acquire any immovable property in India other than agricultural/plantation /farm house subject to the criteria and conditions provided in Rule 24 of FEM (Non-Debt Instrument) Rules, 2019.

Thus, an Indian citizen resident outside India can acquire a house in India.

Question 27.
A person, a resident in India, wants to acquire immovable property outside India by way of a gift from a person who is resident outside India. Advice with reference to relevant provisions of the Foreign Exchange Management Act, 1999 and the rules and regulations made thereunder. [June 2011 (1 Mark)]
Answer:
By referring to the provision of Section 6(4) of the Foreign Exchange Management Act, 1999 and FEM(Acquisition and Transfer of Immovable property Outside India) Regulations, 2015 a person resident in India can acquire by way of gift or inheritance from a person resident outside India.

Question 28.
Discuss the regulations in respect of acquisition and transfer of immovable property outside India. Advice with reference to relevant provisions of the Foreign Exchange Management Act, 1999 and the rules and regulations made thereunder. [Dec. 2016 (5 Marks)]
Answer:
(a) Reference to provision:

1. Section 6(4) of the Foreign Exchange Management Act, 1999,
2. FEM (Acquisition and Transfer of Immovable Property Outside India) Regulations, 2015.

(b) Restriction on acquisition or transfer of immovable property outside India [Regulation 3]: No person resident in India shall acquire or transfer any immovable property situated outside India without general or special permission of the RBI.

(c) Acquisition and transfer of immovable property outside India [Reg-ulation 5]:
1. A person resident in India may acquire immovable property outside India
(a) By way of gift or inheritance from a person who is PRI and acquired on or before 8th July 1947 and continued to be held by him with the permission of RBI;
(b) By way of gift or inheritance from a person who was Resi-dent outside India;
(c) By way of purchase out of foreign exchange held in Resident Foreign Currency (RFC) account maintained in accordance with the FEM (Foreign Currency Accounts by a person resident in India) Regulations, 2015;
(d) Jointly with a relative who is a person resident outside India, provided there is no outflow of funds from India.

2. A person resident in India may acquire immovable property outside India, by way of inheritance or gift from a person resident in India who has acquired such property in accordance with the foreign exchange provisions in force at the time of such acquisition.

3. A company incorporated in India having overseas offices, may acquire immovable property outside India for its business and for residential purposes of its staff, in accordance with the direction issued by the Reserve Bank of India from time to time.

Explanation: ‘Relative’ in relation to an individual means husband, wife, brother or sister or any lineal ascendant or descendant of that individual.

Question 29.
How a person resident in India can hold, own, transfer or invest in any immovable property situated outside India. Comment. [June 2019 (5 Marks)]
Answer:
As per Rule 24 of the FEM (Non-Debt Instrument) Rules, 2019, a person resident outside India who is a citizen of India may acquire any immovable property in India other than agricultural/plantation /farm house subject to the criteria and conditions provided in Rule 24 of FEM (Non-Debt Instrument) Rules, 2019.

Thus, an Indian citizen resident outside India can acquire a house in India.

Question 30.
A company incorporated in the USA desires to establish its manufacturing unit in a special economic zone in India. Advice with reference to relevant provisions of the Foreign Exchange Management Act, 1999 and the rules and regulations made thereunder. [Dec. 2009 (1 Mark)]
Answer:
As per Regulation 3 of the FEM (Establishment in India of a branch office or a liaison office or a project office or any other place of business) Regulations, 2016, no person resident outside India shall open a branch office or a liaison office or a project office by whatever name called unless the prior permission of RBI is taken.

Exception: No approval shall be necessary from RBI for a company to establish a branch or unit in SEZ to undertake manufacturing and service activities if the conditions mentioned below are complied with.

1. Such branch is functioning in that sector where 100% FDI is allowed.
2. The branch comply with Chapter XXII of the Companies Act, 2013.
3. Such branch office functions on a stand-alone basis.

Thus, a company incorporated in the USA can open its branch in an SEZ in India subject to compliance with conditions mentioned in Regulation 3.

Question 31.
Indel Manufacturing Inc., a company incorporated outside India, engaged in software development, intends to open its branch in a special economic zone (SEZ) in India. Advice with reference to relevant provisions of the Foreign Exchange Management Act, 1999 and the rules and regulations made thereunder. [Dec. 2012 (1 Mark)]
Answer:
(a) Reference to provision:

1. Section 6(4) of the Foreign Exchange Management Act, 1999,
2. FEM (Acquisition and Transfer of Immovable Property Outside India) Regulations, 2015.

(b) Restriction on acquisition or transfer of immovable property outside India [Regulation 3]: No person resident in India shall acquire or transfer any immovable property situated outside India without general or special permission of the RBI.

(c) Acquisition and transfer of immovable property outside India [Reg-ulation 5]:
1. A person resident in India may acquire immovable property outside India
(a) By way of gift or inheritance from a person who is PRI and acquired on or before 8th July 1947 and continued to be held by him with the permission of RBI;
(b) By way of gift or inheritance from a person who was Resi-dent outside India;
(c) By way of purchase out of foreign exchange held in Resident Foreign Currency (RFC) account maintained in accordance with the FEM (Foreign Currency Accounts by a person resident in India) Regulations, 2015;
(d) Jointly with a relative who is a person resident outside India, provided there is no outflow of funds from India.

2. A person resident in India may acquire immovable property outside India, by way of inheritance or gift from a person resident in India who has acquired such property in accordance with the foreign exchange provisions in force at the time of such acquisition.

3. A company incorporated in India having overseas offices, may acquire immovable property outside India for its business and for residential purposes of its staff, in accordance with the direction issued by the Reserve Bank of India from time to time.

Explanation: ‘Relative’ in relation to an individual means husband, wife, brother or sister, or any lineal ascendant or descendant of that individual.

Question 32.
An Indian company engaged in software business intends to adjust the value of its exports towards the value of imported items. [Dec. 2010 (1 Mark)]
Answer:
Any arrangement involving adjustment of the value of goods imported into India against the value of goods exported from India shall require prior approval of the RBI.

Thus, an Indian company engaged in software business can adjust the value of its exports towards the value of imported items only by taking prior approval of the RBI.

Eg: Infosys exported software worth ₹ 50 crores and imported computers worth ₹ 100 crores. If they want to adjust ₹ 50 crores against ₹ 100 crores then need to take prior permission of RBI.

Question 33.
Naresh, an Indian citizen, enters into an agreement for the lease of machinery to a foreign party and intends to ship the machinery abroad. [Dec. 2010 (1 Mark)]
Answer:
Prior approval of the RBI is required for export of machinery, equipment, etc., on a lease, hire basis under agreement with the overseas lessee against a collection of lease rentals/hire charges and ultimate re-import.

Exporters should apply for necessary permission, through an AD Category-I, to the Regional Office concerned of the RBI, giving full particulars of the goods to be exported.

Thus, Naresh can enter into an agreement for the lease of machinery to a foreign party by taking prior approval of RBI.

Question 34.
Atul Ltd., an Indian company intends to export its software of the value of ₹ 15,000. Advice with reference to relevant provisions of the Foreign Exchange Management Act, 1999 and the rules and regulations made thereunder. [June 2012 (1 Mark)]
Answer:
As per Regulation 3 of the FEM (Export of Goods & Services) Regulations, 2000, in case of exports taking place through Customs manual ports, every exporter of software to any place outside India shall furnish to the specified authority, a declaration in one of the forms set out in the Schedule and supported by such evidence as may be specified, containing true and correct material particulars including the amount representing:

1. The full export value of the software.
2. If the full export value is not ascertainable at the time of export, the value which the exporter, having regard to the prevailing market conditions expects to receive on the sale of the software.
3. Declarations shall be executed in sets of such numbers as specified.
4. In respect of export of services to which none of the Forms specified in these Regulations apply, the exporter may export such services without furnishing any declaration but shall be liable to realize the amount of foreign exchange which becomes due or accrues on account of such export and to repatriate the same to India in accordance with the provisions of the Act.

Thus, Atul Ltd. can export its software of the value of ₹ 15,000 after compliance with the above-stated provisions.

Question 35.
Super Green Tea Ltd. intends to send its tea bags of the value of ₹ 50,000 as a gift to its foreign customers. Advice with reference to relevant provisions of the Foreign Exchange Management Act, 1999 and the rules and regulations made thereunder. [June 2012 (1 Mark)]
Answer:
As per Rule 3 of the FEM (Export of Goods & Services) Regulations, 2000, export of goods or services may be made without furnishing the declaration by way of gift of goods accompanied by a declaration by the exporter that they are not more than ₹ 5 lakh in value.

Thus, Super Green Tea Ltd. can send its tea bags of the value of ₹ 50,000 as a gift to its foreign customers.

Question 36.
Discuss the provisions of the Foreign Exchange Management Act, 1999 relating to the export of goods and services without declaration. [Dec. 2013 (8 Marks)]
Answer:
As per Regulation 4 of the FEM (Export of Goods & Services) Regulations, 2000, export of goods/software may be made without furnishing the declaration in the following cases, namely:
(a) Trade Sample: Trade samples of goods and publicity material supplied free of payment.

(b) Personal effects of travelers: Personal effects of travelers, whether accompanied or unaccompanied.

(c) Ship’s Store: Ship’s stores, trans-shipment cargo, and goods supplied under the orders of Central Government or of such officers as may be appointed by the Central Government on this behalf or of the military, naval, or air force authorities in India for military, naval or air force requirements.

(d) Gifts of goods: By way of gift of goods accompanied by a declaration by the exporter that they are not more than ₹ 5 lakh in value.

(e) Aircrafts & its spare parts: Aircraft or aircraft engines and spare parts for overhauling and/or repairs abroad subject to their re-import into India after overhauling/repairs, within a period of 6 months from the date of their export.

(f) Goods imported on a re-export basis: Goods imported free of cost on a re-export basis.

(g) Goods permitted by the Development Commissioner of the SEZ, EHTP, STP, or FTZ: The following goods which are permitted by the Development Commissioner of the SEZ, EHTP, STP, or FTZ to be re-exported, namely:

• imported goods found defective, for the purpose of their replacement by the foreign suppliers/collaborators;
• goods imported from foreign suppliers/collaborators on a loan basis;
• goods imported from foreign suppliers/collaborators free of the cost found surplus after production operations.

(h) Export of goods by units in SEZ: Goods to be re-exported by units in SEZ, under intimation to the Development Commissioner of SEZ/ concerned Assistant or Deputy Commissioner of Customs.

(i) Replacement goods: Replacement goods exported free of charge in accordance with the provisions of Foreign Trade Policy in force, for the time being.

(j) Goods sent for testing: Goods sent outside India for testing subject to re-import into India.

(k) Sending of defective goods sent outside India for repair: Defective goods sent outside India for repair and re-import provided the goods are accompanied by a certificate from an authorized dealer in India that the export is for repair and re-import and that the export does not involve any transaction in foreign exchange.

(l) Exports specifically permitted by RBI: Exports permitted by the RBI, on an application made to it, subject to the terms and conditions if any, as stipulated in the permission.

Economic, Business and Commercial Laws Questions and Answers

Securities Market Intermediaries – Securities Laws and Capital Markets Important Questions

Question 1.
Write a short note on Custodian of Securities [Dec. 2008 (3 Marks)]
Answer:
Usually, large investors (particularly’ Foreign international investors do not keep the securities in their own custody and do not look after routine work in respect of securities. This work is handed over to Custodian for safe custody

A Custodian is a person who carries on the business of providing custodial services to the client. The custodian keeps the custody of the securities of the client.

A Custodian has to be registered with the SEBI under the SEBI (Custodian) Regulations, 1996.

Custodial services mean safekeeping of securities or goods or gold or gold-related instruments or title deeds of real estate assets and providing incidental services and include:
1. Maintaining accounts of securities or goods or gold or gold-related instruments or title deeds of real estate assets of a client.

2. Undertaking activities as a Domestic Depository in terms of the Companies (Issue of Indian Depository Receipts) Rules, 2004.

3. Collecting the benefits or rights accruing to the client in respect of securities or gold or gold-related instruments or title deeds of real estate assets.

4. Keeping the client informed of the actions taken or to be taken by the issuer of securities, having a bearing on the benefits or rights accruing to the client.

5. Maintaining and reconciling records of the services.

6. Undertaking activities as a Domestic Depository in terms of the Companies (Issue of IDRs) Rules, 2004.

7. Keeping the client informed of the actions taken or to be taken with respect to the goods held on its behalf.

Every custodian should have adequate facilities, sufficient capital and financial strength to manage the custodial services.

Question 2.
Distinguish between: Merchant Banker and Portfolio Manager [June 2010 (3 Marks)]
Answer:
Following are the main points of difference between merchant banker & portfolio manager:

Points	Merchant Banker	Portfolio Manager
Meaning	‘Merchant Banker’ means any person engaged in the business of issue management.	Portfolio manager means any person who pursuant to contract or arrangement with the client, advises or directs or undertakes on behalf of the client the management or administration of a portfolio of securities or the funds of the clients as the case may be.
Regulation	Merchant Bankers are regulated by the SEBI (Merchant Bankers) Regulations, 1992.	Portfolio Managers are regulated by the SEBI (Portfolio Managers) Regulations, 1993.
Type of intermediary	Merchant Bankers mostly acts as primary capital market intermediary.	Portfolio Managers are secondary capital market intermediary.
Acts on behalf of	Merchant Bankers act on behalf of the issuer company.	Portfolio Managers acts on behalf of their client ie. investors.
Nature of work	Merchant Bankers most of the work is to comply with the SEBI Act, 1992 and Rules and Regulations made thereunder.	Portfolio Managers has to handle the portfolio of his client and try to increase market value by buying, holding and selling securities.
Capital adequacy	The capital adequacy Merchant Banker is a net worth of not less than X 5 Crore.	The capital adequacy requirement for portfolio managers is a net worth of not less than X 2 Crore.

Question 3.
Write a short note on Portfolio Manager [Dec. 2010 (3 Marks)]
Answer:
Meaning of Portfolio: The term portfolio means a basket or combination of securities. Thus, if a person invests in more than security, he is creating a portfolio.

Meaning of Portfolio Manager: Portfolio manager means any person who pursuant to contract or arrangement with the client, advises or directs or undertakes on behalf of the client the management or administration of a portfolio of securities or the funds of the clients as the case may be.

There are two types of portfolio managers:
1. Discretionary portfolio manager: Discretionary portfolio manager is one who exercises any degree of discretion as to the investment or manage¬ment of the portfolio of the securities or the funds of the client.

2. Non-discretionary portfolio manager: Non-discretionary portfolio manager manages the funds with the discretion of the client.

A portfolio manager plays important role in deciding the best investment plan for an individual as per his income, age, and ability to undertake risks.

A portfolio manager makes aware his client regarding various investment tools available in the market and the benefits associated with each plan.

After the investment, the portfolio manager also advises his client whether to hold the security or sell as per the movement in the stock market.

A portfolio manager is responsible for designing customized investment solu-tions for the clients according to their financial needs.

Regulatory Framework: SEBI regulates the activities of ‘portfolio managers’ under the SEBI Act, 1992 and SEBI (Portfolio Managers) Regulations, 1993.

Question 4.
Write a short note on: Debenture Trustees [Dec. 2011 (4 Marks)]
Answer:
Since it is not possible for each debenture holder to execute security, ‘debenture trustee’ has to be appointed. Often, banks or financial institution are appointed as debenture trustee.

‘Debenture Trustee’ means a trustee of a trust deed for securing any issue of debentures of a body corporate. Thus, debenture trustees are appointed to protect the interest of debenture holders.

As per Section 71(2) of the Companies Act, 2013, appointment of debenture trustees is mandatory if a company wants to issue prospectus or make an of¬fer to public or its members exceeding 500. Such appointment must be made before issue of debentures.

The company shall appoint debenture trustees, after complying with the fol-lowing conditions:
1. Names of the debenture trustees shall be stated in letter of offer inviting subscription for debentures and also in all the subsequent notices or other communications sent to the debenture holders.

2. Before appointment a written consent from the debenture trustee shall be taken and a statement to that effect shall appear in the letter of offer.

3. The Board may fill any casual vacancy in the office of the trustee but while any such vacancy continues, the remaining trustee may act. When such vacancy is caused by the resignation of the debenture trustee, the vacancy shall only be filled with the written consent of the majority of the debenture holders.

4. Any debenture trustee may be removed from office before the expiry of his term only if it is approved by the holders of not less than 3/4th (75%) in value of the debentures outstanding, at their meeting.

Role and Functions of debenture trustees:

• Call for periodical reports from the issuer of debentures.
• Take possession of trust property in accordance with the provisions of the trust deed.
• Enforce security in the interest of the debenture holders.
• Ensure that the property charged to the debenture is available and adequate at all times to discharge the interest and principal amount payable in respect of the debentures.
• Property charged is free from any other encumbrances.
• Exercise due diligence to ensure compliance by the issuer company with the provisions of the Companies Act, 2013, the listing agreement or the trust deed.
• To take appropriate measures for protecting the interest of the debenture holders as soon as any breach of the trust deed or law comes to his notice.
• To ascertain that the debentures have been converted or redeemed as per applicable law.
• Inform the Board immediately of any breach of trust deed or provision of any law.
• Appoint a nominee director on the board of the body corporate when required.

Regulatory Framework: SEBI regulates the activities of ‘debenture trustees’ under the SEBI Act, 1992 and SEBI (Debenture Trustees) Regulations, 1993.

Eligibility for being debenture trustee [Regulation 7]: only following persons are entitled to act as a debenture trustee:

• A scheduled bank carrying on commercial activity or
• A public financial institution or
• An insurance company or
• Body corporate.

Capital Adequacy Requirement [Regulation 7A]: The capital adequacy requirement for debenture trustee is a net worth of not less than ₹ 2 Crore.

Question 5.
Explain briefly the role of the following in capital market.
(i) Merchant Bankers
Answer:
‘Merchant Banker’ means any person engaged in the business of issue management. Merchant Bankers are generally engaged in following activities:

• Making arrangements regarding selling buying or subscribing to securities.
• Acting as manager/consultant/advisor.
• Rendering corporate advisory services.

Merchant bankers are the key intermediary between the company and issue of capital.

(ii) Bankers to an issue [Dec. 2012 (2 X 2 = 4 Marks)]
Answer:
The Bankers to an issue are engaged in activities such as acceptance of applications along with application money from investors in respect of issues of capital and refund of application money.

Only ‘Scheduled Bank’ ie. banks approved by RBI and listed in Second Schedule can act as ‘Banker to an Issue’.

Bankers to the issue carry out all the activities of ensuring that the funds are collected and transferred to the Escrow Accounts.

Question 6.
What do you understand by ‘registrars to an issue? State the various activities carried out by registrars to an issue. [Dec. 2013 (4 Marks)]
Answer:
The Registrar to an Issue and Share Transfer Agents undertake the fol-lowing activities with respect to issue:
Pre-Issue Work

• Finalization of bankers to issue, list of branches, controlling and collecting branches.
• Design of application form, bank schedule, pre-printed stationery.
• Preparing and issuing detailed instructions on procedure to be followed by collecting and controlling branches.
• Arranging, despatch of application schedule for listing of applications to collecting and controlling branches.
• Placing of orders for and procuring pre-printed stationery.

During the issue:

• Collection of daily figure from bankers to the issue.
• Expediting despatch of applications, final certificate to the controlling branches.
• Collection of application along with final certificate and schedule pages from controlling branches of bankers to the issue.

Post-Issue Work:

• Informing Stock Exchange/SEBI and providing necessary certificates to Lead Manager on closure of issue.
• Preparing ‘Obligation of Underwriters statement’ in the event of under subscription and seeking extension from stock exchange for processing.
• Scrutiny of application received from bankers to issue.
• Numbering of application and banks schedule and batching them for control purposes.
• Transcribing information from documents to magnetic media for com¬puter processing.
• Reconciliation of number of applications, securities applied and money received with final certificate received from bank.
• Identify and reject applications having technical faults.
• Prepare statement for deciding basis of allotment by the company in consultation with the Stock Exchange.
• Finalizing basis of allotment after approval of the stock exchange.
• Seeking extension of time from SEBI.
• Allotment of shares on the formula derived by stock exchange (In the case of allotment to employee it shall be ensured that only full time employee actually on rolls are given the allotment on the basis of list of employees furnished under the signature of MD/Company Secretary).
• Obtaining certificate from auditors that the allotment has been made as per the basis of allotment.
• Preparation of reverse list, list of allottees and non-allottees as per the basis of allotment approved by stock exchange.
• Preparation of allotment register cum return statement register of mem-bers, index register.
• Preparation of list of brokers to whom brokerage is to be paid.

Question 7.
Investment Advisor provides guidance about financial obligations and investment. Comment on this statement and state the role of investment advisors in capital market. [June 2015 (5 Marks)]
Answer:
An investment adviser is an individual or a firm that is in the business of giving advice about securities to clients. For instance, individuals or firms that receive remuneration for giving advice on investing in stocks, bonds, mutual funds, or exchange traded funds are investment advisers. Some investment advisers manage portfolios of securities.

In terms of the SEBI (Investment Advisers) Regulations, 2013, a person cannot act as an investment adviser unless he has obtained a certificate of registration from the SEBI or he is specifically exempt.

The Applicant for grant of registration as an Investment Adviser should make an application to SEBI in Form A as provided in the Regulations along with all the necessary supporting documents.

Generally on receipt of application, the applicant will receive a reply from SEBI within one month. However, the time taken for registration depends on how the applicant fulfils all the registration requirements and provides the complete information in all respects.

Question 8.
“Merchant bankers are the key intermediary between the company and issue of capital.” Comment. [June 2016 (5 Marks)]
Answer:
‘Merchant Banker’ means any person engaged in the business of issue management. Merchant Bankers are generally engaged in following activities:

• Making arrangements regarding selling buying or subscribing to securities or
• Acting as manager/consultant/advisor or
• Rendering corporate advisory services Merchant bankers are the key intermediary between the company and issue of capital.

Making public issue of shares is a highly specialized, job which involves tremen¬dous and time bound work. Organizations undertaking this task are called as Merchant Bankers. Most of the leading banks and financial institutions have formed Merchant Banking Division’ specializing in this work. They have to register with SEBI and hence called Registered Merchant Bankers.

SEBI has little control over the companies making public issue as they are not registered with SEBI and SEBI does not have any legal powers to control them. Hence, SEBI casts all responsibility on Merchant Bankers in respect of public issue. Merchant Bankers are also known as Lead Managers.

Who can be a merchant banker: Only body corporate is allowed to function as merchant bankers.

Activities of Merchant Bankers: SEBI has advised that merchant bankers shall undertake only those activities which relate to securities market. These activities are;

• Managing of public issue of securities
• Underwriting connected with the aforesaid public issue management business
• Managing/Advising on international offerings of debt/equity ie. GDR, ADR, bonds and other instruments
• Private placement of securities
• Primary or satellite dealership of government securities
• Corporate advisory services related to securities market including take-overs, acquisition and disinvestment
• Stockbroking
• Advisory services for projects
• Syndication of rupee term loans
• International financial advisory services.

Regulatory Framework: SEBI regulates the activities of ‘merchant bankers’ under the SEBI Act, 1992 and SEBI (Merchant Bankers) Regulations, 1992.

Question 9.
‘Custodian of securities’ means any person who carries on or proposes to carry on the business of providing custodial services. [June 2016 (4 Marks)]
Answer:
Usually, large investors (particularly’ Foreign international investors do not keep the securities in their own custody and do not look after routine work in respect of securities. This work is handed over to Custodian for safe custody

A Custodian is a person who carries on the business of providing custodial services to the client. The custodian keeps the custody of the securities of the client.

A Custodian has to be registered with the SEBI under the SEBI (Custodian) Regulations, 1996.

Custodial services means safekeeping of securities or goods or gold or gold related instruments or title deeds of real estate assets and providing incidental services and includes –
1. Maintaining accounts of securities or goods or gold or gold related in-struments or title deeds of real estate assets of a client.

2. Undertaking activities as a Domestic Depository in terms of the Companies (Issue of Indian Depository Receipts) Rules, 2004.

3. Collecting the benefits or rights accruing to the client in respect of securi¬ties or gold or gold related instruments or title deeds of real estate assets.

4. Keeping the client informed of the actions taken or to be taken by the issuer of securities, having a bearing on the benefits or rights accruing to the client.

5. Maintaining and reconciling records of the services.

6. Undertaking activities as a Domestic Depository in terms of the Companies (Issue of IDRs) Rules, 2004.

7. Keeping the client informed of the actions taken or to be taken with respect to the goods held on its behalf.

Every custodian should have adequate facilities, sufficient capital, and financial strength to manage the custodial services.

Question 10.
Write a short note on Syndicate Member [Dec. 2017 (4 Marks)]
Answer:
Meaning of syndicate: Syndicate is a professional financial services group formed temporarily for the purpose of handling a large transaction that would be hard for the entities involved to handle individually. Syndication allows companies to pool their resources and share risks. There are several different types of syndicates, including underwriting syndicates, banking syndicates and insurance syndicates.

Example of ‘Underwriter Syndicate’: Underwriter syndicate is a temporary group of investment banks and broker-dealers who come together to sell new offerings of equity or debt securities to investors. The underwriter syndicate is formed and led by the lead underwriter for a security issue. An underwriter syndicate is usually formed when an issue is too large for a single firm to handle.

Syndicate in IPO: The Book Runner may appoint those intermediaries who are registered with the SEBI and who are permitted to carry on certain activities in relation to IPO as syndicate members. The syndicate members are mainly appointed to collect and entire the bid forms in a book built issue.

Role of ‘Syndicate Members’ in IPO Processing: Syndicate members are the broking houses responsible for distributing IPO applications, receiving filled applications from investors and timely update the data on the stock exchange j IPO shares bidding platform (NSE/BSE).

Question 11.
Write a short note on Portfolio Managers and Custodian [June 2018 (4 Marks)]
Answer:
Meaning of Portfolio Manager: Portfolio manager means any person who pursuant to contract or arrangement with the client, advises or directs or undertakes on behalf of the client the management or administration of a portfolio of securities or the funds of the clients as the case may be.

A portfolio manager plays important role in deciding the best investment plan for an individual as per his income, age, and ability to undertake risks.

A portfolio manager makes aware his client regarding various investment tools available in the market and benefits associated with each plan.

After the investment, portfolio manager also advise his client whether to hold the security or sell as per the movement in stock market.

A portfolio manager is responsible for designing customized investment solutions for clients according to their financial needs.

Regulatory Framework: SEBI regulates the activities of ‘portfolio managers’ under the SEBI Act, 1992 and SEBI (Portfolio Managers) Regulations, 1993.

Custodian of Securities:
Usually, large investors (particularly Foreign Institutional Investors) do not keep the securities in their own custody and do not look after routine work in respect of securities. This work is handed over to Custodian for safe custody.

A Custodian is a person who carries on the business of providing custodial services to the client. The custodian keeps the custody of the securities of the client.

A Custodian has to be registered with the SEBI under the SEBI (Custodian) Regulations, 1996.

Every custodian should have adequate facilities, sufficient capital, and financial strength to manage the custodial services.

Question 12.
Write a short note on: Registrar & Share Transfer Agent [June 2018 (4 Marks)]
Answer:
Registrar to an Issue: ‘Registrar to an Issue’ means the person appointed by a body corporate or any person or group of persons to carry on the following activities on its or his or their behalf i.e

• Collecting application for the investor in respect of an issue.
• Keeping a proper record of applications and monies received from investors or paid to the seller of the securities.
• Assisting body corporate or person or group of persons in determining the basis of allotment of the securities in consultation with the stock exchange.
• Finalizing the list of persons entitled to allotment of securities.
• Processing of allotment letters, refund orders or certificates, and other related documents in respect of the issue.

Thus, Registrar to an Issue do all processing of share applications form receipt g till the issue of shares/sending refund orders.

Regulatory Framework: SEBI regulates the activities of ‘Registrar to an Issue under the SEBI Act, 1992 and SEBI (Registrar to an Issue & Share Transfer Agents) Regulations, 1993.

Share Transfer Agent: Share Transfer Agent means:
1. Any person who on behalf of anybody corporate, maintains the records of holders of securities issued by such body corporate and deals with all matters connected with the transfer and redemption of its securities;

2. The department or division of a body corporate performing the activities as share transfer agents if at any time the total number of holders of its securities issued exceeds one lakh.

Regulatory Framework: SEBI regulates the activities of ‘Share Transfer Agents’ under the SEBI Act, 1992 and SEBI (Registrar to an Issue and Share Transfer Agents) Regulations, 1993.

Question 13.
Write short note on Bankers to an issue [Dec. 2018 (3 Marks)]
Answer:
The Bankers to an issue are engaged in activities such as acceptance of applications along with application money from investors in respect of issues of capital and refund of application money.

Only ‘Scheduled Bank’ Le. banks approved by RBI and listed in Second Schedule can act as ‘Banker to an Issue’.

Bankers to the issue carry out all the activities of ensuring that the funds are collected and transferred to the Escrow Accounts.

To carry on the activities as a banker to an issue, a person must obtain a certificate of registration from the SEBI. The SEBI grants registration on the basis of all the activities relating to banker to an issue in particular with reference to the following requirements:
1. The applicant has the necessary infrastructure, communication and data processing facilities and manpower to effectively discharge his activities.

2. The applicant/any of the directors of the applicant is not involved in any litigation connected with the securities market/has not been convicted of any economic offence.

3. The applicant is a scheduled bank and the grant of a certificate is in the interest of the investors.

A banker to an issue can apply for renewal of his registration 3 months before the expiry of the certificate.
Regulatory Framework: SEBI regulates the activities of ‘Bankers to an Issue’ under the SEBI Act, 1992 and the SEBI (Bankers to an Issue) Regulations, 1994.

Question 14.
Credit Rating Agencies may not be taking cognizance of information for delays in servicing debt obligations while reviewing its ratings. What are the material events requiring a review by the Credit Rating Agencies as per SEBI’s circular? [Dec. 2018 (5 Marks)]
Answer:
As per Master Circular for Credit Rating Agencies (CRA) [SEBI/HO/ MIRSD/DOP2/CIR/P/2018/76] CRAs have to be proactive in the early detection of defaults/delays in making payments. In this regard, CRAs are required to track the servicing of debt obligations for each instrument rated by them, ISIN-wise, and look for potential deterioration in financials which might lead to defaults/delays, particularly before/around the due date(s) for servicing of debt obligations, on the basis of monitoring of indicators including, but not restricted to, the following:

• Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) not being sufficient to meet even the interest payments for last 3 years.
• Deterioration in liquidity conditions of the Issuer.
• Abnormal increase in borrowing cost of the Issuer.
• Any other information indicating deterioration in credit quality/debt servicing capability of the Issuer.
• The CRA shall also monitor the Exchange website for disclosures made by the Issuer in this regard.

Material Events requiring a review:

CRAs shall carry out a review of the ratings upon the occurrence of or announce¬ment/news of material events including, but not restricted to, the following:

• Quarterly/Half-yearly/Annual results
• Merger/ Demerger/ Amalgamation/Acquisition
• Corporate debt restructuring, reference to BIFR, and winding-up petition filed by any party/creditors.
• Significant decline in share prices/bond prices of the issuer or group companies which is not linked to overall market movement.
• Significant increase in debt level or cost of debt of the issuer company.
• Losses, sharp revenue de-growth, etc. based on publicly disclosed financial statements, which are not in line with CRA’s earlier estimates.
• Granting, withdrawal, surrender, cancellation, or suspension of key licenses or regulatory approvals.
• Disruption/commencement/postponement of operations of any unit or division of the listed entity.
• Any attachment or prohibitory orders against the Issuer.
• Any rating action taken by an International Rating Agency with respect to rating assigned to the Issuer/Instruments issued by the Issuer.

Question 15.
Explain the provisions for compulsory internal audit of Registrars to an Issue/Share Transfer Agents (RTAs). [Dec. 2018 (5 Marks)]
Answer:
Efficient internal control systems and processes are pre-requisite for good governance. Governance being a dynamic concept requires constant evaluation and monitoring of the systems and processes. In the context of Capital Markets, capital markets intermediaries are an important constituent of the overall governance framework.

Being an important link between regulators, investors, and issuers, they are expected to ensure that their internal controls are so efficient that ensure effective investor service at all times and provide regulators comfort as to the compliance of regulatory prescription. It is in this direction that SEBI has authorized Practicing Company Secretaries to undertake an internal audit of various capital market intermediaries including Registrars to an Issue and Share Transfer Agent.

SEBI Circular dated 20.4.2018 provides for the compulsory audit which are discussed below:
1. All RTAs are required to carry out internal audit on annual basis by independent qualified Chartered Accountants or Company Secretaries or Cost and Management Accountants and Certified Information Systems Auditor (CISA) who don’t have any conflict of interest.

2. Eligibility of auditors for conducting the Internal Audit of the RTA
(a) The audit firm shall have a minimum experience of 3 years in the financial sector.
(b) An auditor shall be appointed for a maximum term of 5 years, with a cooling-off period of 2 years.

3. The audit shall cover all aspects of RTA operations including investor grievance redressal mechanism and compliance with the requirements stipulated in the SEBI Act, Rules and Regulations made thereunder, and guidelines/circulars issued by SEBI from time to time. The scope of the audit shall cover all issues concerning the functioning of RTA.

4. The report shall state the methodology adopted, deficiencies observed, and consideration of response of the management on the deficiencies.

5. The report shall include a summary of operations and of the audit, covering the size of operations, number of transactions audited and the number of instances where violations/deviations were observed while making observations on the compliance of any regulatory requirement.

6. The report shall comment on the adequacy of systems adopted by the RTAs for compliance with the requirements of regulations and guidelines issued by SEBI and investor grievance redressal.

7. The RTA shall submit a copy of report of the internal audit to Issuer Company within three months from the end of the financial year. Copy of the same shall also be preserved by the RTA.

8. The Governing Council (Le. Board of Directors, Board of Partners, prop-rietor etc. as applicable) of the RTA shall consider the report of the internal auditor and take steps to rectify the deficiencies, if any. The RTA shall send the Action Taken Report to Issuer Company within next one month and a copy thereof shall be maintained by the RTA.

9. The audit observations along with the corrective steps taken by the RTA shall be placed before the Board of Directors of the Issuer Company.

10. The Issuer Companies shall satisfy themselves regarding the adequacy of the corrective measures taken by the concerned RTA. If not satisfied with the corrective measures, Issuer Company may ask RTA to take more stringent corrective measures.

Question 16.
Write short note on Custodian of Securities [June 2019 (3 Marks)]
Answer:
Usually, large investors (particularly’ Foreign international investors do not keep the securities in their own custody and do not look after routine work in respect of securities. This work is handed over to Custodian for safe custody

A Custodian is a person who carries on the business of providing custodial services to the client. The custodian keeps the custody of the securities of the client.

A Custodian has to be registered with the SEBI under the SEBI (Custodian) Regulations, 1996.

Custodial services mean safekeeping of securities or goods or gold or gold-related instruments or title deeds of real estate assets and providing incidental services and include:
1. Maintaining accounts of securities or goods or gold or gold-related instruments or title deeds of real estate assets of a client.

2. Undertaking activities as a Domestic Depository in terms of the Companies (Issue of Indian Depository Receipts) Rules, 2004.

3. Collecting the benefits or rights accruing to the client in respect of securi¬ties or gold or gold related instruments or title deeds of real estate assets.

4. Keeping the client informed of the actions taken or to be taken by the issuer of securities, having a bearing on the benefits or rights accruing to the client.

5. Maintaining and reconciling records of the services.

6. Undertaking activities as a Domestic Depository in terms of the Companies (Issue of IDRs) Rules, 2004.

7. Keeping the client informed of the actions taken or to be taken with respect to the goods held on its behalf.

Every custodian should have adequate facilities, sufficient capital, and financial strength to manage the custodial services.

Question 17.
“SEBI has amended the provisions related to registration of Sub-Broker to act as a market intermediary”. Elucidate the statement and discuss the migration path for existing registered Sub-Brokers. [June 2019 (5 Marks)]
Answer:
SEBI in its meeting held on June 21, 2018, decided to discontinue Sub-Broker as an intermediary to be registered with SEBI.

In view of the same, the need for the category of Sub-Broker as a market intermediary may no longer be required. Therefore, it is decided that:
(a) No fresh registration shall be granted to any person as Sub-Broker. Any pending applications for registration as Sub-Brokers under process shall be returned to the concerned Stock Exchanges for onward transmission to the applicant.

(b) The registered Sub-Brokers shall have time till March 31, 2019 in order to migrate to act as an AP and/or Trading Member (TM). The Sub-Brokers, who do not choose to migrate into AP and/or TM, shall deem to have  surrendered their registration with SEBI as Sub-Broker, w.e.f. March 31, 2019.

(c) Consequent upon migration/deemed surrender, the certificate of regis¬tration granted to the Sub-Brokers by SEBI shall stand withdrawn.

(d) The migration path for existing registered Sub-Brokers, shall be as under:
1. In case of a registered Sub-Broker who is already approved to act as AP in Derivatives Segment of the Exchanges, he shall be registered with the Exchange to continue activities of Sub-Broker as an AP in Cash Segment.

2. In case of a registered Sub-Broker who is not approved by Stock Exchanges to act as AP in Derivatives Segment, Exchanges shall register them as AP in Cash Segment, to continue their operations without disruption.

3. The existing Sub-Broker has an option to become a Trading Mem¬ber, if the Sub-Broker meets the eligibility criteria prescribed under | Stock Exchange Bye-laws and SEBI Regulations and by complying j with these Regulations.

(e) All the existing sub-brokers shall be required to pay renewal fees to SEBI up to the financial year 2018-2019, and renewal fees paid by Sub-Broker for the financial years beyond 2018-2019 shall be refunded on receipt of a recommendation from the respective Stock Exchange.

(f) The Stock Exchanges shall put in place an appropriate process for surrender or migration of Sub-Broker to AP/TM.

Securities Laws and Capital Markets Questions and Answers

Debt Instruments and Deposits – Company Law Important Questions

Question 1.
What are the rights, powers, and disabilities of debenture trustees?
Or
With reference to the provisions of the Companies Act, 2013 and the rules framed thereunder, state the disqualifications for a Debenture Trustee. Ex¬plain whether the following persons can be appointed as Debenture Trustee?
(i) A relative of the whole-time director of the company.
(ii) A shareholder who has no beneficial interest. (June 2019) (5 marks)
Answer:
1. Section 71(6) read with Rule 18(3) of aforesaid rules provide that a debenture trustee shall take steps to protect the interests of the debenture holders and redress their grievances.

2. It shall be the duty of every debenture trustee to-
(a) satisfy himself that the letter of offer does not contain any matter which is inconsistent with the terms of the issue of debentures or with the trust deed;
(b) satisfy himself that the covenants in the trust deed are not prejudicial to the interest of the debenture holders;
(c) call for periodical status or performance reports from the company;
(d) communicate promptly to the debenture holders defaults, if any, with regard to payment of interest or redemption of debentures and action taken by the trustee, therefore;
(d) appoint a nominee director on the Board of the company in the event of:

• two consecutive defaults in payment of interest to the debenture holders; or
• default in the creation of security for debentures; or
• default in the redemption of debentures.

(e) inform the debenture holders immediately of any breach of the terms of issue of debentures or covenants of the trust deed;

3. The disqualifications for debenture trustees are as under as per Rule 18(2):
(a) Beneficially holds shares in the company;
(b) Is a promoter, director, or key managerial personnel or any other officer or an employee of the company or its holding, subsidiary, or associate company;
(c) Is beneficially entitled to money which is to be paid by the com¬pany otherwise than as remuneration payable to the debenture trustee;
(d) Is indebted to the company, or its subsidiary or its holding or associate company or a subsidiary of such holding company;
(e) Has furnished any guarantee in respect of the principal debts secured by the debentures or interest thereon;
(f) Has any pecuniary relationship with the company amounting to 2% or more of its gross turnover or total income or fifty lakh rupees or such higher amount as may be prescribed, whichever is lower, during the two immediately preceding financial years or during the current financial year;
(g) Is relative of any promoter or any person who is in the employment of the company as a director or key managerial personnel.

Question 2.
Ajay Limited borrowed INR 100 crore from Prem, without the authority confirmed on it by the articles of association. Later, the money borrowed by Ajay Limited was used by its Board of directors to pay off the lawful debts of the company. In this scenario, Prem, the lender seeks your advice for the recovery of his money. Advise him. (June 2012) (5 Marks)
Answer:
1. In T.R. Pratt. (BOM) Ltd. v. E.D. Sassoon and Co. Ltd., (1936) 6 Com Cases 90, there was no limit on the borrowing for business in the memorandum of the company. But the directors could not borrow beyond the limit of the issued share capital of the company without the sanction of the general meeting.

The directors borrowed money from the plaintiff beyond their powers. It was held that the money having been borrowed and used for the benefit of the principal either in paying its debts, or for its debts, or for its legitimate business, the company cannot repudiate its liability on the ground that the agent had no authority from the company to borrow. When these facts are established a claim on the footing of money had been received would be maintainable

2. It was also held that under the general principle of law when an agent borrows money for a principal without the authority of the principal, but if the principal takes benefit of the money so borrowed or when the money so borrowed have gone into the coffers of the principal, the law implies a promise to repay.

3. In that connection, it was observed that there appears to be nothing in the law that makes this principle inapplicable to the case of a joint-stock company and even in cases where the directors or the managing agent had borrowed money without there being authorization for the company, if it has been used for the benefit of the company, the company cannot repudiate its liability to pay.

4. Thus, Prem can recover the money borrowed by the director of Ajay Ltd. without any authority as money has been used to pay off the lawful debts of the Company.

Question 3.
Alok, the Managing Director of Yellow Limited, borrowed a large sum of money and misappropriated the same. Later, when the lender demanded his money, the company refused to repay, contending that the money borrowed by Managing Director was misappropriated by him and the company is not liable for repayment. Decide, giving reasons, whether the lender would succeed in recovering the money from the company. (June 2015) (4 marks)
Answer:
1. In V.K.R.S.T Firm v. Oriental Investment Trust Ltd., AIR 1944 Mad 532 under the authority of the company, its managing director bor-rowed large sums of money and misappropriated it. The company was held liable stating that where the borrowing is within the powers of the company, the lender will not be prejudiced simply because its officer has applied the loan to unauthorized activities provided the lender had no knowledge of the intended misuse.

Based on the above-mentioned decided case law, in the present case Alok, the Managing Director of Yellow Limited, borrowed a large sum of money and misappropriated the same. Later, when the lender demanded his money, the company refused to repay, contending that the money borrowed by Managing Director was misappropriated by him and the company is not liable for repayment is not tenable/legal.

Thus, the lender would succeed in recovering the money from the Company.

Question 4.
Distinguish Between: Redemption of shares and redemption of debentures. (June 2018) (4 marks)
Answer:
Following are the main points of difference between the redemption of shares and redemption of debentures:

Points	Redemption of Shares	Redemption of debentures
Nature	Redemption of preference shares is payment to the owner of the company.	Redemption of debentures amounts to the repayment of the loan as debenture holders are creditors of the company.
Conditions of Redemption	Preference shares can be issued for a maximum period of 20 years after which such preference shares must be redeemed as provided in Section 55.	Companies can issue redeemable as well as irredeemable debentures. Redeemable debentures are required to be redeemed within the period specified in the offer document while irredeemable debentures are redeemed only at the time of liquidation of the company.
Proceeds at the time of redemption	As per Section 55, preference shares shall be redeemed out of profits available for dividend or out of the proceeds of a fresh issue of shares.	Debenture can be redeemed only out of the profit of the company and not out of proceeds of a fresh issue of shares.
Nature of Reserves to which Transfer is made	Where preference shares are proposed to be redeemed out of the profits a sum equal to the nominal amount of the share should be transferred to the Capital Redemption Reserve Account.	When debentures are redeemed then an amount equal to the nominal value of debentures is transferred to General Reserve as per sound accounting policy. If the sinking fund is created then the balance of the sinking fund is transferred to the general reserve.

Question 5.
Provision of section 73 is not applicable to guarantee companies and Section 8 companies (that is association not for profit). (June 2009) (5 marks)
Answer:
Proviso to Section 73(1) read with Rule 1(3) of the Companies (Acceptance of Deposits) Rules, 2014:
The provisions under Sections 73 to 76 of the Companies Act, 2013 and the Companies (Acceptance of Deposits) Rules, 2014 shall apply to all companies except:

• a banking company and
• a non-banking financial company as defined in the Reserve Bank of India Act, 1934 and
• a housing finance company registered with the National Housing Bank established under the National Housing Bank Act, 2013; and
• such other company as the Central Government may, after consultation with the Reserve Bank of India, specify on this behalf.

Question 6.
The Board of directors of Green Field Limited decides to accept deposits, from the public at a compound interest rate of 12% per annum. Examining the provisions of the Companies Act, 2013, advise whether the Board can go ahead with its proposal. (June 2016) (4 marks)
Answer:
Ceiling on the rate of interest on deposits [Rule 3(6)]:
No company or any eligible company shall invite or accept or renew any deposits carrying a rate of interest or pay brokerage at a rate exceeding the maximum rate of interest or pay brokerage at a rate exceeding the maximum rate of interest or brokerage prescribed by the RBI for acceptance of deposits by non-banking financial companies

Thus, Green Field Ltd. can accept deposits at the compound interest rate provided that the rate of interest should not exceed the rate prescribed by the RBI for acceptance of deposits by non-banking financial companies.

Question 7.
Issue of unsecured debentures by a company to another company, where the debentures have an option for compulsory conversion into equity share within seven years, cannot be termed as deposits. (December 2016) (5 marks)
Answer:
1. According to the Section 2(31) of the Act read with Rule 2(c)(ix) of Companies (Acceptance of Deposits) Rides, 2014, ‘deposit’ includes any receipt of money by way of deposit or loan or in any other form by a company, but does not include any amount raised by the issue of bonds or debentures secured by a first charge or a charge ranking pari passu with the first charge on any assets referred to in Schedule III of the Act excluding intangible assets of the company or bonds or debentures compulsorily convertible into shares of the company within 10 years.

2. The exclusion essentially signifies that a secured debenture, regardless of its tenure or convertibility, shall be exempt from the purview of de-posits.

3. However, the non-convertible unsecured debentures would be considered as deposits.

4. According to Rule 2(c)(vi) of the Companies (Acceptance of Deposits) Rules, 2014, excludes from deposits any amount received by a company from any other company.

Thus, the issue of unsecured debentures by a company to another company, where the debentures have an option for compulsory conversion into equity share within seven years, cannot be termed as deposits under Companies (Acceptance of Deposits) Rules, 2014

Question 8.
Define the term ‘deposits’ and list out the receipts of money which are not considered deposits. (December 2016) (8 marks)
Answer:
According to the Section 2(31) of the Act read with Rule 2(1) (c) of Companies (Acceptance of Deposits) Rules, 2014, ‘deposit’ includes any receipt of money by way of deposit or loan or in any other form by a company, but does not include:
1. any amount received from the Central Government or a State Government, or any amount received from any other source whose repayment is guaranteed by the Central Government or a State Government or any amount received from a local authority, or any amount received from a statutory authority;

2. any amount received from foreign Governments, foreign/international banks, multilateral financial institutions, foreign government-owned de¬velopment financial institutions, foreign export credit agencies, foreign collaborators, foreign bodies corporate and foreign citizens, foreign authorities, or persons resident outside India subject to the provisions of Foreign Exchange Management Act, 1999;

3. any amount received as a loan or facility from any banking company or from the State Bank of India or any of its subsidiary banks or from a banking institution notified by the Central Government;

4. any amount received as a loan or financial assistance from Public Financial Institutions, regional financial institutions, Insurance Companies, or Scheduled Banks;

5. any amount received against the issue of commercial paper or any other instrument issued in accordance with the guidelines or notification issued by the Reserve Bank of India;

6. any amount received by a company from any other company;

7. any amount received and held pursuant to an offer made in accordance with the provisions of the Act towards a subscription to any securities, including share application money or advance towards allotment of securities pending allotment, so long as such amount is appropriated only against the amount due on allotment of the securities applied for:
(a) If the securities for which application money or advance for such securities was received cannot be allotted within 60 days from the date of receipt of the application money or advance for such securities and such application money or advance is not refunded to the subscribers within 15 days from the date of completion of 60 days, such amount shall be treated as a deposit under these rules. For the purpose of this rule any adjustment of the amount for any other purpose will not be treated as a refund;

(b) Any adjustment of the amount for any other purpose shall not be treated as a refund.

8. any amount received from a person who, at the time of the receipt of the amount, was a director of the company. The director from whom money is received, furnishes to the company at the time of giving the money, a declaration in writing to the effect that the amount is not being given out of funds acquired by him by borrowing or accepting loans or deposits from others;

9. any amount raised by the issue of bonds or debentures secured by a first charge or a charge ranking pari passu with the first charge on any assets referred to in Schedule III of the Act excluding intangible assets of the company or bonds/debentures compulsorily convertible into shares of the company within ten years. If such bonds or debentures are secured by the charge of any assets referred to in Schedule in of the Act excluding intangible assets, the number of such bonds or debentures shall not exceed the market value of such assets as assessed by a registered valuer.

10. any amount received from an employee not exceeding his annual salary, under a contract of employment with the company in the nature of non-interest bearing security deposit;

11. any non-interest bearing amount received or held in trust;

12. any amount received in the course of or for the purposes of the business of the company:
(a) as an advance for the supply of goods or provision of services provided that such advance is appropriated against supply of goods or provision of services within a period of three hundred and sixty-five days from acceptance of such advance. In case of any advance which is the subject matter of any legal proceedings before any court of law, the said time limit of three hundred and sixty Eve days shall not apply.

(b) as advance, accounted for in any manner whatsoever, received in connection with consideration for property under an agreement or arrangement, provided that such advance is adjusted against the property in accordance with the terms of agreement or arrangement.

(c) as a security deposit for the performance of the contract for the supply of goods or provision of services.

(d) as advance received under long-term projects or for the supply of capital goods except those covered under item (b) above.

(e) as an advance towards consideration for providing future services in the form of a warranty or maintenance contract as per writ¬ten agreement or arrangement, if the period for providing such services does not exceed the period prevalent as per common business practice or five years, from the date of acceptance of such service whichever is less;

(f) as an advance received and as allowed by any sectoral regulator or in accordance with directions of Central or State Government;

(g) as an advance for a subscription towards publication, whether in print or in electronic to be adjusted against receipt of such publications;

If the amount received under (a) (b) and (d) above becomes refundable (with or without interest) because the company accepting the money does not have the necessary permission or approval to deal in the goods or properties or services for which the money is taken, the amount received shall be deemed to be a Deposit under these rules.
Explanation: For the purpose of sub-clause the amount shall be deemed to be deposits on the expiry of 15 days from the date they become due for refund.

Question 9.
A private limited company can accept deposits from its member under the provisions of the Companies Act, 2013. (June 2018) (4 marks)
Answer:
1. As per Section 2(68) of the Companies Act, 2013 a private company means a company, which has a minimum paid-up capital as may be prescribed, and by its articles:
(a) Restricts the right to transfer its shares;
(b) Limit the number of its members to 200 excluding past and present employees; who are/was also a member.
(c) prohibits any invitation to the public to subscribe to any securities.

2. A private company may issue debentures to any number of persons.

3. The only condition is that an invitation to the public to subscribe for debenture is prohibited.

Thus, A private company can only accept deposits from its members only and not from the public.

Question 10.
A single fixed deposit holder, after marriage, applied for adding the name of his wife as joint holder. The company refused to do so. Comment (June 2011) (4 marks)
Answer:
1. Rule 2(1 )(d) under Chapter V defines depositor as under ‘Depositor’ means-

1. any member of the company who has made a deposit with the company in accordance with subsection (2) of section 73 of the Act, or
2. any person who has made a deposit with a public company in accordance with section 76 of the Act.

2. As per Rule 3(2), where depositors so desire, deposits may be accepted in joint names not excluding three, with or without any of the clauses namely, “Jointly”, “Either or Survivor”, “First named or Survivor”, “Anyone or Survivor”.

Thus, the company cannot refuse to add the name of the wife of the deposit holder.

Question 11.
Shine Well Limited has accepted deposits from the public under the Companies (Acceptance of Deposits) Rules, 2014. The company now decided to repay some of its deposits before maturity. Can the company do so? If yes, what are the conditions attached there too? (June 2011) (4 marks)
Answer:
Rule 15: General provisions regarding premature repayment of deposits:
When a company makes repayment of deposits, on the request of the depositor, after the expiry of a period of 6 months from the date of such deposit, the rate of interest payable on such deposit shall be reduced by 196.

Thus, on request of the depositor Shine Ltd. can repay the deposits before the maturity but interest payable on such deposit shall be reduced by 1%.

Question 12.
Sun-beam Limited failed to pay interest on repayment of deposits. One depositor approached the consumer forum with the request to issue an order against the company for payment of interest on deposits. The company contended that the consumer forum was not a proper authority to issue search directions Advice the company suitably. (December 2014) (8 marks)
Answer:
1. In Neela Raje v. Amogh industries [RP No. 409 of 1992 dated 26.8.1993,84012 CLA 90 (NCDRC)], the National Commission was faced with a query as to whether a complaint lodged in regard to the failure to pay interest on repayment of the principal amount on the maturity of a deposit by a Company could be entertained by a consumer forum.

2. The commission pointed out that after the Amendment Act, 1993, a consumer forum can direct payment of amounts due to a depositor under the provisions of Section 14 of the Consumer Protection Act, 1986.
Thus, the contention of Sun-beam Ltd. is not valid.

Question 13.
Prism Limited has accepted rupees INR 10 lakh as an advance towards the supply of goods to certain parties. As per the agreement/the company will supply the goods after two years from the date of deposit. Letter on, internal auditors qualified their report on the ground that the company has violated the provisions of the Companies Act, 2013. Directors explained that this is required to complete the order. Examining the relevant provisions of the
Companies Act, 2013, state whether the explanation given by the directors is justified. (June 2016) (4 marks)
Answer:
1. According to Section 2(31) of the Companies Act, 2013,
‘Deposit’ includes any receipt of money by way of deposit or loan or in any other form by a company but does not include such categories of amount as may be prescribed in consultation with the RBI.

2. As per Rule 2(c), (xii) (a) of the Companies (Acceptance of Deposit) Rules, 2014, the deposit does not include any amount received in the course of or for the purpose of the Business of the company as an advance for the supply of goods or provision of services provided that such advance is appropriated against supply of goods or provision of services within a period of 365 days from acceptance of such advance.

3. As per facts given in the case Prism Ltd. has accepted INR 10 lakh as an advance towards the supply of goods to certain parties.

4. As per the agreement, the company will supply the goods after two years from the date of deposit.

Thus, the company has accepted advance for more than 365 days for the supply of goods, and hence it is ‘Deposit’ as per Section 2(31) read with Rule 2(l)(c) (xii)(d) of the Companies (Acceptance of Deposit) Rules, 2014. The Company has defaulted in accepting deposit without complying with the provision and hence remark passed by the internal auditor is correct and explanation given by the director is not sufficient.

Question 14.
Fun and Frolic Limited has received INR 5,00,000 from its Promoters as an unsecured loan in pursuance of the stipulation of credit facilities from the Bank. Can the company accept the unsecured loan? What would be your answer if the company has repaired in full its amount of credit facility and after such repayment, the company continues this unsecured loan? Referring to the provisions of the Companies Act, 2013. Advice the company (June 2018) (4 marks)
Answer:
1. As per Rule 2(l)(c), (xiii) of the Companies (Acceptance of Deposits) Rules, 2014, the deposit does not include any amount brought in by the promoters of the company by way of an unsecured loan in pursuance of the stipulation of any lending financial institution or a bank subject to fulfillment of the following conditions:-

2. the loan is brought in pursuance of the stipulation imposed by the lending institutions on the promoters to contribute such finance; and

3. the loan is provided by the promoters themselves or by their relatives or by both.
The exemption under this sub-clause shall be available only till the loans of financial institutions or banks are repaid and not thereafter.

4. As per the facts given in the case, Fun and Frolic Limited has received INR 5,00,000 from its Promoters as an unsecured loan in pursuance of the stip¬ulation of credit facilities from the Bank. Such unsecured loan will not be treated as a deposit as per Rule 2(1) (c)(xiii) of the Companies (Acceptance of Deposits) Rules, 2014.

However, after repayment of the credit facility if the company continues the unsecured loan of its promoter then it will be treated as a deposit.

Secured Irredeemable Debentures

Question 15.
A public company may issue secured irredeemable debentures. Comment December 2018) (5 marks)
Answer:
1. A Debenture, in which no time is fixed for the company to pay back the money, is an irredeemable debenture. The debenture holder cannot demand payment as long as the company is a going concern and does not make default in making payment of the interest. But all debentures, whether redeemable or irredeemable become payable on the company going into liquidation.

However, after the commencement of the Companies Act, 2013, now a company can now issue perpetual or irredeemable debentures.

2. Term of issue of debentures: An issue of secured debentures may be made, provided the date of its redemption shall not exceed 10 years from the date of issue.

However, the following classes of companies may issue secured debentures for a period exceeding 10 years but not exceeding 30 years:

1. Companies engaged in setting up of infrastructure projects;
2. Infrastructure Finance Companies;
3. Infrastructure Debt Fund Non-Banking Financial Companies;
4. Companies permitted by a Ministry or Department of the Central Government or by RBI or by the NHB or by any other statutory authority to issue debentures for a period exceeding 10 years. Hence, irredeemable debentures cannot be issued.

Question 16.
A private company and a banking company can freely accept deposits. (June 2019) (5 marks)
Answer:

1. A private company can accept deposits only from its members and not from the public.
2. As per the Proviso to Section 73(1) read with Rule 1(3) of the Companies (Acceptance of Deposits) Rules, 2014, excludes Banking Companies, NBFC, Housing Finance Company registered with NHB, and any other company specified by the government in this regard from the provisions relating to the deposit.

In the case of a private company. The Company cannot freely accept deposits from the public; it can accept deposits only from its members and not from the public.

In the case of banking companies: The Banking Company can accept deposits freely from the public in its ordinary course of business.

CS Executive Company Law Questions and Answers

Procedure of Conversion of Business Entities – Setting Up of Business Entities and Closure Important Questions

Question 1.
State the provisions relating to the conversion of the company as contained in the Companies Act, 2013.
Answer:
Name Clause: Section 13: Approval of the Central Government is not necessary if the change relates to the addition or deletion of the word ‘Private’ to the name of the company consequent to the conversion of a private company into a public company and vice versa.

Section 14: Alteration of Articles for conversion of a private company to a public company and vice versa [Section 14]: Subject to the provisions of the Act and the conditions contained in its memorandum, if any, a company may, by a special resolution, alter its articles including alterations having the effect of conversion of:
(a) a private company into a public company; or
(b) a public company into a private company:

Where a company being a private company alters its articles in such a manner that they no longer include the restrictions and limitations which are required to be included in the articles of a private company under the Act, the company shall, as from the date of such alteration, cease to be a private company.

Central Government approval: Any alteration having the effect of conversion of a public company into, a private company shall not be valid unless it is approved by an order of the Central Government on an application made in such form and manner as may be prescribed.

Filing of altered copy: Every alteration of the articles and a copy of the order of the Central Government approving the alteration shall be filed with the Registrar, together with a printed copy of the altered articles, within a period of 15 days in such manner as may be prescribed, who shall register the same.

Conversion of companies already registered [Section 18]:

• MOA and AOA: A company of any class registered under the Act may convert itself as a company of other classes by alteration of MOA and AOA of the company.
• Application to Registrar: Where the conversion is required, the Registrar shall on an application made by the company, after satisfying that the required provisions have been complied with, close the former registration of the company and after registering the documents, issue a certificate of incorporation in the same manner as its first registration.
• Existing Debt, liabilities, Obligations and Contracts: The registration of a company shall not affect any debts, liabilities, obligations, or contracts incurred or entered into, by or on behalf of the company before conversion, and such debts, liabilities, obligations, and contracts may be enforced in the manner as if such registration had not been done.

Question 2.
Tuff Ltd. is a private limited company, which was registered in the year 2001. After 20 years of existence as a private company, the said company now wants to convert itself into a public limited company. Is it possible? If yes, explain the procedure to be adopted to give effect to the decision of the Board of directors of the company. [Dec. 2009 (6 Marks)]
Answer:
Procedure for conversion of private company into a public company:
The following procedure for conversion of a private company into a public company is applicable:
1. Board Meeting: Convene a Board Meeting to take necessary decisions to fix the time, place, and agenda for convening a General Meeting of members. Also, authorize the Company Secretary or Director of the company to issue a notice of the meeting.

2. Issue notice of general meeting: Issue Notice of the General Meeting to all Members, Directors, and the Auditors of the company in accordance with the provisions of Section 101.

3. Hold General Meeting: At the general meeting members will pass a special resolution to amend the Name Clause in the MOA by removing the word ‘Private’.

4. The general meeting must also pass a special resolution deleting from its articles the restricting clauses of a private company. Similarly, all other clauses in the articles which apply to a private company should be deleted and those which apply to public companies should be inserted such as increasing the number of shareholders to at least 7 and the number of directors to at least 3. These resolutions will be passed clause by clause.

5. Filing forms File Form No. MGT-14 with ROC for passing special resolution within 30 days. For effecting the conversion of a private company into a public company, the application shall be filed in Form No. INC-27 with fee.

6. Register: On receipt of the order, the documents will be filed with the ROC along with a copy of the revised Articles and the ROC will register the same.

7. On registration by the ROC the process will be complete.

Question 3.
BS & Co. Ltd. is registered as a public company. The shareholding pattern of the company is as under:

Category	Nos.
Directors and their relatives	144
Employees	72
Ex-employees (shares were allotted when they were employees)	36
Twenty four couples holding shares jointly in the name of husband & wife (24 × 2)	48
Others	24
	324

The Board of Directors of the Company proposes to convert it into a private company. Advise the Board of directors about the steps to be taken for conversion into a private company including a reduction in the number of members, if necessary, as per the Companies Act, 2013. [Dec. 1998 (10 Marks)]
Answer:
As per Section 2(68), a private company means a company, which has a minimum paid-up capital as may be prescribed, and by its articles:
(a) Restricts the right to transfer its shares;
(b) Limits the number of its members to 200 excluding past and present employee;
(c) Prohibits any invitation to the public to subscribe for any security. Note: Joint holders of shares should be treated as a single member. The words ‘Private Ltd.’ must be added at the end of its name by a private limited company.

In the given case, the existing members will be counted as follows for the purpose of converting into a private company.

Category	Reason	Nos.
Directors & their relatives	–	144
Employees	Present employees will be excluded	–
Ex-employees	Past employees will be excluded	–
Twenty four couples	Joint holders of shares should be treated as a single member.	24
Others	–	24
		192

Since the numbers of members are below 200 there is no need to reduce the number of members.

Procedure for conversion of public company into a private company: The following procedure for conversion of a public company into a private company is applicable:
1. Board Meeting: Convene a Board Meeting to take necessary decision to fix the time, place, and agenda for convening a General Meeting of members. Also, authorize the Company Secretary or Director of the company to issue a notice of the meeting.

2. Hold General Meeting: At the general meeting members will pass a special resolution to amend the Name Clause in the MOA by removing the word ‘Private’.

3. Special Resolution: The general meeting must also pass a special resolution inserting in articles the restricting clauses of a private company. Similarly, all other clauses in the articles which do apply to a private company should be added such as limiting the number of shareholders to 200 and those which apply to public companies should be deleted. These resolutions will be passed clause by clause.

4. Filing with ROC: File Form No. MGT-14 with ROC for passing special resolution within 30 days.

5. Application to Central Government: Application will be made to the Central Government in Form No. INC-27 within 3 months for approval to the various resolutions passed converting the public company into a private company. [After the commencement of the Companies (.Amendment) Ordinance, 2019 application for such conversion shall be made to Central Government instead of Tribunal]

6. Filing order with ROC: On receipt of the order of the Central Government the documents will be filed with the Registrar along with a copy of the revised Articles and the Registrar will register the same.

7. Registration of Conversion: On registration by the Registrar the process will be complete.

Question 4.
An unlisted Public Ltd. The company is having 220 members, 5 directors and is having public deposits of ₹ 5 crores and shareholders deposits of ₹ 3 crores (paid-up capital is ₹ 1 crore and free reserves ₹ 1 crore, and Bank Loan ₹ 2 crores) is proposing to convert it into a Private Ltd. Company. Mention conditions to be satisfied before conversion of the Company into Private Ltd. Also list out important procedures to comply for such conversion. [Dec. 2019 (5 Marks)]
Answer:
Precondltjon for conversion of public company into a private company.

Pre-conditions to be examined for conversion of a public company into a private company are as under:

1. members to be reduced below 200 (presently 220)
2. public deposits-to be repaid in full (presently 5 crores)
3. shareholders deposits/1oan should not exceed 100% of paid-up capital and free reserves and share premium (presently 3 crores) subject to fulfillment of conditions provided in MCA notification dated 13th June 2017.

In this case, the company has a paid-up capital of 1 crore and free reserves of 1 crore Le. total of 2 crores which is the maximum limit of exempted deposit from shareholders for private limited company. Hence, 1 crore needs to be repaid to shareholders before conversion.

According to sectións 13 and 14 of the Companies Act, 2013 read with rule 33 and rule 41 of the Companies (Incorporation) Rules, 2014, a public company can be converted into a private company only after obtaining its shareholders’ appàa1 by way of passing a special resolution in general meeting.

Apart from this, the Other important procedures to comply with are:

• Calling of Board, meeting.
• General meeting
• Advertisement in Newspaper
• Filing of copy of the special resolution with the ROC
• Filing of application for conversion with RD
• Order of RD approving the conversion
• Filing of the order of RD with ROC
• Certificate from ROC

Question 5.
QPR an association of persons registered as a non-profit company under section 8 of the Companies Act, 2013. The association is considering the possibility of converting itself into a private company or public company so that it can start commercial activities. Referring to the provisions of the Companies Act, 2013 advice whether it is possible to do so. Can such Section 8 company be converted into One Person Company? Explain in detail various provisions applicable for such conversion.
Answer:
Restriction of alteration of MOA and conversion into other companies [Section 8(4)]: A company registered u/s 8 shall not alter the provisions of its memorandum or articles except with the previous approval of the Central Government. [These powers have been delegated to Regional Directors MCA Notification Dated 19th December 2016

A company registered u/s 8 may convert itself into the company of any other kind only after complying with prescribed conditions as may be prescribed.

Section 8 company cannot be converted to One Person Company (OPC). Conditions for conversion of a company registered u/s 8 company of any other kind [Rule 21 of the Companies (Incorporation) Rules, 2014]:
1. Special resolution at a general meeting: A company registered u/s 8 which intends to convert itself into a company of any other kind shall pass a special resolution at a general meeting for approving such conversion. The explanatory statement annexed to the notice convening the general meeting shall set out in detail the reasons for opting for such conversion.

2. Copy of resolution with ROC: A certified true copy of the special resolution along with a copy of the Notice convening the meeting including the explanatory statement shall be filed with the Registrar in Form No. MGT-14 along with the fee.

3. Application to Regional Director: The company shall file an application in Form No. INC-18 with the Regional Director with the fee along with a certified true copy of the special resolution and a copy of the Notice convening the meeting including the explanatory statement for approval for converting itself into a company of any other kind and the company shall also attach the proof of serving of the notice served to all the authorities mentioned in Rule 22(2).

4. Copy of RD to be filed with ROC: A copy of the application with annexure as filed with the Regional Director shall also be filed with the Registrar.

Question 6.
Explain the provisions for the conversion of Person Company (OPC) into a Public or Private Company.
Answer:
There are two ways by which OPC can be converted into a private company or a public company. OPC can convert itself voluntarily into a private company or public company as per section 18 of the Companies Act, 2013. However, in certain circumstances, it has to mandatorily convert itself into a private company or public company.

Provisions relating to the mandatory conversion are discussed below:
OPC to convert itself into a public or private company in certain cases [Rule 6 of Companies (Incorporation) Rules, 2014]:
1. Where the paid-up share capital of an OPC exceeds ₹ 50 lakh and its average annual turnover during the relevant period exceeds ? 2 Crore, it shall cease to be entitled to continue as OPC.

2. Such OPC shall be required to convert itself, within 6 months of the date of increase in its paid-up share capital or turnover.

3. The OPC shall alter its MOA & AOA by passing a resolution to give effect to the conversion and to make necessary changes incidental thereto.

The OPC shall within a period of 60 days from the date of conversion give notice to the ROC in Form No. INC-5 informing that it has ceased to be OPC and that it is now required to convert itself into a private or public company.

4. OPC can get itself converted into a private or public company after increasing the minimum number of members and directors to 2 or a minimum of 7 members and 2 or 3 directors and by maintaining the minimum paid-up capital as per requirements of the Act.

Question 7.
Mr. Ram who is the sole member and director of the Ram One Person Company Ltd. desires to convert OPC voluntarily into a private company limited. As a Practicing Company Secretary advise Mr. Ram In respect of the proposed conversion and procedure required to be followed in this regard under the Companies Act, 2013.
Answer:
The procedure of voluntary conversion of OPC into Private Company:
1. Board Meeting: Convene a meeting of Board Meeting. The main agenda for the board meeting would be

• To discuss with directors that Company wants to convert OPC into a Private Limited Company.
• Pass Board Resolution for an increase in No. of Directors. (Minimum 2 Directors)
• Pass a board resolution to get in-principal approval of Directors for increase shareholder of the Company. (Minimum 2 Shareholders)
• Pass Resolution to get shareholders’ approval for Alteration in MOA & AOA of Company.

2. Extraordinary General Meeting

• There is no need to hold EGM by OPC, it shall be sufficient if, in case of OPC
• The resolution is communicated by the member of the company and entered into the minutes books would be sufficient

3. Filing with ROC: File Form INC 6 and Form NorMGT-14 along with the following documents will be filed with ROC:

• Altered copy of MOA & AOA.
• Certified copy minutes of board and general meeting for the required board and shareholder resolution.
• No objection certificate from the creditors of a company for con-version of OPC into a private company.
• Latest Audited Balance Sheet and the Profit and Loss Account.
• Other documents may be required for giving effect to the conversion process.

4. Certificate of Incorporation: On receipt of the documents if the Registrar gets satisfied regarding the compliance with the prescribed procedure he shall register the documents and issue the fresh Certificate of Incorporation.

Question 8.
Laksliya Pvt. Ltd. has two directors on its Board Ramdas and Parag. They are the only shareholders in the company. Due to a health problem, Parag wants to transfer his shares to the Ramdas and it was decided that Ramdas will continue the company as OPC. As a Practicing Company Secretary advise Ramdas regarding the procedure to be adopted for converting the private company into OPC keeping in view the provisions of the Companies Act, 2013 and the Rules made thereunder.
Answer:
The procedure for conversion of private company into OPC is as follows:
1. Notice of board meeting: Issue notice of board meeting for a transfer of shares of Parag to Ramdas and converting the private company into OPC.

2. Board Meeting: In a Board Meeting necessary decision will be taken regarding time, place, and agenda for convening a General Meeting of members and issue of notice along with the explanatory statement.

3. NOC from creditors: No objection certificate will be obtained from members and creditors for converting the private company into OPC.

4. Hold General Meeting and Special resolution: On the appointed date General Meeting will be held and a special resolution will be passed considering the following matters:

• Change of name by deleting words “Private Company” and adding the words “One Person Company”.
• Altering the clauses of MOA and AOA relating to private company j and inserting the various clauses that are applicable to OPC.

5. Filing of Forms with ROC: Form No. MGT-14 along with the following documents will be filed with ROC:

• Altered copy of MOA & AOA.
• Certified copy minutes of board and general meeting for the required board and shareholder resolution.
• No objection certificate from the creditors of a company for conversion OPC into a private company.
• Latest Audited Balance Sheet and the Profit and Loss Account.
• Certificate from CA that average annual turnover does not exceed ₹ 2 Crore or paid-up share capital does not exceed ₹ 50 lakh.
• Other documents may be required for giving effect to the conversion process.

6. Application for conversion: File an application in Form No. INC-6 for conversion of private company into OPC along with the following documents, namely:
(a) A declaration from the director of the company by way of an affidavit confirming that all members and creditors of the company have given their consent for conversion, the paid-up share capital company is ₹ 50 lakhs or less or average annual turnover is less than ₹ 2 Crore, as the case may be.
(b) List of members and list of creditors.
(c) Latest Audited Balance Sheet and the Profit and Loss Account.
(d) Copy of No Objection letter of secured creditors.

7. Duty of ROC: On receipt of the documents if the Registrar gets satisfied regarding the compliance of prescribed procedure he shall register the documents and issue the fresh Certificate of Incorporation.

Question 9.
Is it possible to convert LLP or partnership firms into private or public companies? If yes, discuss the provisions relating to this in detail.
Answer:
Often a business is started as a Partnership Firm or LLP. If the business grows, partners may decide to convert it into Company.

As per Section 366 of the Companies Act, 2013 any partnership firm, limited liability partnership, co-operative society, society or any other business entity formed under any other law for the time being in force can convert itself into Company.

Certificate of Registration [Section 367]: On compliance with the requirements with respect to registration, and on payment of prescribed fees, the Registrar shall certify under his hand that the Firm, LLP, Society applying for registration is incorporated as a company under the Act, and in the case of a limited company that it is limited and thereupon the Company shall be so incorporated.

Vesting of property on registration [Section 368]: On conversion all property, movable and immovable, belonging to or vested in Firm, LLP, Society at the date of its registration, shall, on such registration, pass to and vest in the company as incorporated under the Act for all the estate and interest of the company therein.

Saving of existing liabilities [Section 369]: The registration of a company shall not affect its rights or liabilities in respect of any debt or obligation incurred, or any contract entered into, by, to, with, or on behalf of, the Firm, LLP, Society before registration.

Continuation of Pending Legal Proceedings [Section 370]: All suits and other legal proceedings were taken by or against the Firm, LLP, Society, which are pending at the time of the registration as a company, maybe continued in the same manner as if the registration had not taken place.

Obligations of Firm/LLP/Society Registering as Company [Section 374]: Every Firm/LLP/Society which is seeking registration as a Company shall:
1. Ensure that secured creditors of the company, prior to its registration, have either consented to or have given their no objection to converting Firm/LLP/Society into the company.

2. Publish in a newspaper, advertisement one in English and one in vernacular language in such form as may be prescribed giving notice about registration, seeking objections and address them suitably.

3. File an affidavit, duly notarized, from all the members or partners to provide that in the event of registration, necessary documents or papers shall be submitted to the registering or other authority with which the Firm /LLP/Society was earlier registered, for its dissolution as a partnership firm, LLP, co-operative society, society or any other business entity, as the case may be.

4. Comply with such other conditions as may be prescribed.
However, upon registration, as a company LLP incorporated under the Limited Liability Partnership Act, 2008 shall be deemed to have been dissolved under that Act without any further act or deed.

Question 10.
Briefly discuss the provisions relating to the conversion of a Private Company into LLP.
Answer:
A Private Company may convert itself into LLP by complying with the provisions of Section 56 read with Schedule III of the LLP Act, 2008.

These provisions are discussed below:
Conversion from private company Into limited liability partnership [Section 56]: A private company may convert into LLP in accordance with the provisions of Chapter X of the LiP Act and the Third Schedule.

Provisions of the Third Schedule:
Eligibility for conversion of private companies into limited liability partnership:

1. A company may convert into LLP by complying with the requirements as to the conversion set out in the Schedule.
2. A company may apply to convert into LLP in accordance with the Schedule if and only if:
   (a) there. is no security interest in its assets subsisting or in force at the time of application.
   (b) the partners of the LLP to which it converts comprise all the shareholders of the company and no one else; and
   (c) upon such conversion, the company, its shareholders, the LLP into which the company has converted and the partners of that LLP shall be bound by the provisions of the Schedule that are applicable to them.

Statements to be filed: A company may apply to convert into LLP by filing with the Registrar:
1. A statement by all its shareholders in such form and manner to be accompanied by such fees as the Central Government may prescribe, containing the following particulars, namely:
(a) the name and registration number of the company; and
(b) the date on which the company was incorporated.

2. Incorporation document and statement referred to in Section 11.
Registration of conversion: On receiving the documents for conversion, the Registrar shall, register the documents and issue a certificate of registration in such form as the Registrar may determine stating that the LLP is, on and from the date specified in the certificate, registered under the Act. The LLP shall, within 15 days of the date of registration, inform the concerned Registrar of Companies with which it was registered about the conversion and of the particulars of the LLP in such form and manner as the Central Government may prescribe.

Registrar may refuse to register: If the Registrar is not satisfied with the particulars or other information furnished for conversion of Company into LLP he may refuse to register the same. However, an appeal may be made before the Tribunal in case of refusal of registration by the Registrar.

Effect of registration: On and from the date of registration specified in the certificate of registration:
(a) there shall be a limited liability partnership by the name specified in the certificate of registration registered under the Act;

(b) all tangible (movable or immovable) and intangible property vested in the company, all assets, interests, rights, privileges, liabilities, obligations relating to the company, and the whole of the undertaking of the company shall be transferred to and shall vest in the limited liability partnership without further assurance, act or deed; and

(c) the company shall be deemed to be dissolved and removed from the records of the Registrar of Companies.

Question 11.
Parachute Coconut Oil Manufacturing Ltd. an unlisted public company desires to convert itself into a Limited Liability Partnership. You are working as Company Secretary in the company. The Board of Directors of the company has requested you to submit a detailed note showing the procedure to be adopted for the conversion of the company into LLP. Also, state whether it is possible to convert Listed Company into LLP?
Answer:
Univ Private Company and Unlisted Public Company can be directly converted into LLP by complying with the provisions of the LLP Act, 2008.

Procedure for conversion of Company into LLP:
1. Board meeting: Convene a Board Meeting to take necessary decisions to fix the time, place, and agenda for convening a General Meeting of members. Also, authorize the Company Secretary or Director of the company to issue a notice of the meeting.

2. Name Availability: Confirm availability of proposed name of LLP by using Form RUN-LLP (Reserve Unique Name) on the MCA site.

3. Draft LLP Agreement: Draft of limited liability partnership agreement considering provisions of the Schedule of the LLP Act, 2008. It is not necessary to have the LLP Agreement signed at the time of incorporation, as the details of the same can be filed in Form No. 3 within 30 days of incorporation/conversion.

4. E-Filing of Incorporation Documents: File Form No. FiLLiP with ROC along with the following attachments:

• Proof of Address of Registered office of LLP.
• Subscription sheet signed by the promoters. (Notice of Consent & Appointment of Designated Partners with their personal details).
• Detail of partner/designated partner of LLP.

5. Application for Conversion: File application for conversion in Form No. 18 with the following attachments:

• Statement of shareholders.
• Incorporation Documents & Subscribers Statements in Form No.
• Statement of Assets and Liabilities of the company duly certified as true and correct by the auditor.
• NOC from Income Tax authorities and Copy of acknowledgment of latest income tax return.
• Approval from any other body/authority as may be required.
• Particulars of pending proceedings from any Court/Tribunal etc.

6. Certificate of Incorporation: If all documents filed and information provided is in order and the Registrar is satisfied that all procedural compliance is duly effected he will issue a certificate of registration. The Certificate of Registration issued shall be the conclusive evidence of conversion of the LLP.

Setting Up of Business Entities and Closure Questions and Answers

Important Aspects of Primary Market & Secondary Marke – Securities Laws and Capital Markets Important Questions

Question 1.
Distinguish between: Primary Market & Secondary Market [Dec 2008 (3 Marks)]
Answer:
Following are the main points of distinction between primary & secondary market:

Points	Primary Market	Secondary Market
Meaning	The primary market is that part of the capital markets that deals with the issuance of new securities. Companies, governments or public sector institutions can obtain funding through the sale of new shares or bond issue. The primary market is the market where the securities are sold for the first time.	The secondary market, also known as the aftermarket, is the financial market where previously issued securities and financial instruments such as stock, bonds, options, and futures are bought and sold.
Contract	Primary market deals with new is¬sue hence there is a contract between issuer and investor.	Secondary market deals with previously issued securities and financial instruments there is a contract between two investors.
Issue/ Transfer	In a primary issue, the securities are issued by the company directly to investors.	In a secondary market, the securities are exchanged between two investors.
Intermediary	In the primary market, important intermediaries are Lead Merchant Banker, Merchant Banker, under¬writers, Issue House etc.	In a secondary market, important intermediaries are Depository Participants, Brokers, Sub-Brokers and Registrar & Share Transfer Agents.
Regulation	Issue through primary market comes under Companies Act, 2013 & SEBI (Issue of Capital & Disclosure Requirements) Regulations, 2018.	The secondary market is regulated through the Companies Act, 2013, Securities Contracts (Regulation) Act, 1956&other regulations made by the SEBI.

Question 2.
Distinguish between: Initial Margin & Maintenance Margin [June 2009 (4 Marks)]
Answer:
Initial Margin: Initial margin means the minimum amount, calculated as a percentage of the transaction value, to be placed by the client, with the broker, before the actual purchase. The broker may advance the balance amount to meet full settlement obligations.

In simple words, the initial margin is the percentage of a stock price that you are required to have in your account when purchasing that stock on margin.

Maintenance Margin: Maintenance margin means the minimum amount, calculated as a percentage of the market value of the securities, calculated with respect to the last trading day’s closing price, to be maintained by the client with the broker.

In other words, a maintenance margin is the required amount of securities an investor must hold in his account if he either purchases shares on margin or if he sells shares short. If an investor’s margin balance falls below the set maintenance margin, the investor would then need to contribute additional funds to the account or liquidate stocks in the account to bring the account | back to the initial margin requirement. This request is known as a margin call.

Question 3.
Write a short note on Margin Trading [Dec. 2009 (2 Marks)]
Answer:
Margin trading is buying stocks without having the entire money to do it. The exchanges have an institutionalized method of buying stocks without having the capital through the futures market.

For example, if you were to buy 2,000 shares of say Company A, which trades at ₹ 300, you will need about t 6 lakh. But if you buy a futures contract of that company, which comprises 2,000 shares, you only need to pay a margin of 15%. So, by putting ₹ 90,000, you can get an exposure of ₹ 6 lakh.

The same operation can also be executed through margin trading. Here, the trader will buy 2,000 shares, which are partly funded by the broker, and the rest by the trader.

The percentage of margin funding may range between 50% to 90%, depending on the broker and his relationship with the client. The broker, in turn, funds his line of credit from a bank and keeps the shares in his account with any profit/loss going to the client.

Question 4.
Write a short note on Rolling Settlement [Dec. 2009 (4 Marks)]
Answer:
Under rolling settlement, all trades executed on a trading day are settled X days later. This is called ‘T+X’ rolling settlement, where ‘T’ is the trade date and ‘X’ is the number of business days after the trade date on which settlement takes place. The rolling settlement prevailing in India is T+2, implying that the outstanding positions at the end of the day ‘T’ are compulsorily settled 2 days after the trade date.

The rolling settlement was first introduced in India by OTCEI.
SEBI introduced T+5 rolling settlement in the equity market from July 2001. Subsequently shortened the settlement cycle to T+3 from April 1, 2002. After having gained experience of T+3 rolling settlement, it was felt appropriate to further reduce the settlement cycle to T+2 thereby reducing the risk in the market and protecting the interest of investors. As a result, SEBI, as a step towards the easy flow of funds and securities, introduced T+2 rolling settlement in the Indian equity market from 1st April 2003.

Question 5.
Discuss the various functions of Price Monitoring [Dec. 2009 (5 Marks)]
Answer:
Price monitoring is mainly related to the price movement or abnormal fluctuation in prices or volumes. The functioning of the Price Monitoring is broadly divided into the following activities:

• On-Line Surveillance
• Off-Line Surveillance
• Derivative Market Surveillance
• Investigations
• Surveillance Actions
• Rumour Verification
• Pro-active Measures

Question 6.
“Primary market is of great significance to the economy.” Comment. [June 2010 (4 Marks)]
Answer:
The primary market is that part of the capital markets that deals with the issuance of new securities. Companies, governments or public sector institutions can obtain funding through the sale of new shares or bond issue, f The primary market is the market where the securities are sold for the first time. Therefore, it is also called the New Issue Market.

Features of Primary Markets:

• This is the market for new long term equity capital.
• In a primary issue, the securities are issued by the company directly to investors.
• The company receives the money and issues new security certificates to the investors.
• Primary issues are used by companies for the purpose of setting up a new business or for expanding or modernizing the existing business.
• The primary market performs the crucial function of facilitating capital formation in the economy.

The primary market is of great significance to the economy of a country. It is through the primary market that funds flow for productive purposes from investors to entrepreneurs. The latter use the funds for creating new products and rendering services to customers in India & abroad. The Strength of the economy of a country is gauged by the activities of the stock exchanges. The primary market creates and offers the merchandise for the secondary market.

Question 7.
Distinguish between: Book Closure and Record Date [Dec. 2010 (3 Marks)]
Answer:
Book closure is the periodic closure of the “Register of Members & Transfer Books”, to take a record of the shareholders to determine their entitlement to dividends or bonus or right shares or other rights pertaining to shares.

Closing “Register of Members & Transfer Books” every time is not possible. In such a case, the recorded date is fixed and informed to a stock exchange in advance.

The record date is the date on which the records of a company are closed for the purpose of determining the stockholders who are entitled to dividends, bonus or right shares or other rights.

In case of a record date, the company does not close its register of security holders. The record date is the cutoff date for determining the number of registered members who are eligible for corporate benefits.

A company may close the register of members for a maximum of 45 days in a year and for not more than 30 days at any one time. [Section 91 of the Companies Act, 2013]

Book closure becomes necessary for the purpose of paying a dividend, making rights issue or bonus issue. The listed company is required to give notice of book closure in a newspaper at least 7 days before the commencement of the book closure. The members whose names appear in the register of members on the last date of book closure are entitled to receive the benefits of dividend, right shares or bonus shares as the case may be.

The minimum time gap between the two book closures and/or record dates would be at least 30 days.

Question 8.
Explain briefly: Surveillance at BSE [Dec. 2010 (2 Marks)]
Answer:
The main objective of the surveillance function of the Stock Exchange is to –

• To promote market integrity
• Monitor price and volume movements (volatility)
• Detecting potential market abuses
• Managing default risk by taking necessary actions timely.

All the instruments traded in the equity segment of the Cash and Derivative market come under the Surveillance umbrella of BSE.

Surveillance activities at the Stock Exchange are divided broadly into two major segments:

• Price Monitoring and
• Position Monitoring.

Question 9.
What is ‘application supported by blocked amount’ (ASBA)? Briefly explain the ASBA process. [Dec. 2010 (5 Marks)]
Answer:
“Application Supported by Blocked Amount” means an application containing an authorization to Self Certified Syndicate Bank to block the application money in a bank account for subscribing to a public or rights issue.

ASBA Process: In ASBA investor submits an application physically or electronically to the bank with whom the bank account to be blocked is maintained. Such a bank is called “Self Certified Syndicate Bank” (SCSB). The bank then blocks the application money on the basis of the authorization.

The application money remains blocked till the finalisation of the basis of allotment or till the withdrawal/failure of the issue.

Thereafter, the application data uploaded by the bank in the electronic bidding system through a web-enabled interface provided by the Stock Exchanges.

Once the basis of finalized allotment, the Registrar to the Issue sends a request to the bank for unblocking the accounts and to transfer the requisite amount to the issuer’s account.

In case of withdrawal or failure of the issue, the amount shall be unblocked by the bank on receipt of information from the pressure merchant bankers.

Question 10.
Discuss briefly the different surveillance system adopted by the stock exchanges. [June 2011 (4 Marks)]
Answer:
Online Surveillance: One of the most important tools of surveillance is the Online Real-Time Surveillance system which was commissioned in 1999.

The system has a facility to generate the alerts online, in real-time, based on certain preset parameters like –

• price and volume variations in scrips,
• members taking unduly large positions not commensurate with their financial position or
• having large concentrated positions in one or few scrips, etc.

An alert is a measure of abnormal behaviour. An Alert occurs in the surveillance system when a metric behaves significantly differently from its benchmark. The alerts generated by the system are analyzed and corrective action based on preliminary investigations is taken in such cases. The system also provides a facility to access trades and orders of members.

Off-Line Surveillance: The Off-Line Surveillance system comprises various reports based on different parameters and scrutiny thereof.

• High /Low difference in prices
• % change in prices over a week/fortnight/month
• Top N scrips by turnover
• Trading in infrequently traded scrips
• Scrips hitting new high/low

The surveillance actions or investigations are initiated in the scrips identified from the above-stated reports.

Question 11.
Distinguish between: Book Closure and Record Date [Dec. 2011 (3 Marks)]
Answer:
Book closure is the periodic closure of the “Register of Members & Transfer Books”, to take a record of the shareholders to determine their entitlement to dividends or bonus or right shares or other rights pertaining to shares.

Closing “Register of Members & Transfer Books” every time is not possible. In such a case, the recorded date is fixed and informed to the stock exchange in advance.

The record date is the date on which the records of a company are closed for the purpose of determining the stockholders who are entitled to dividends, bonus or right shares or other rights.

In case of a record date, the company does not close its register of security holders. The record date is the cutoff date for determining the number of registered members who are eligible for corporate benefits.

A company may close the register of members for a maximum of 45 days in a year and for not more than 30 days at any one time. [Section 91 of the Companies Act, 2013]

Book closure becomes necessary for the purpose of paying a dividend, making rights issue or bonus issue. The listed company is required to give notice of book closure in a newspaper at least 7 days before the commencement of the book closure. The members whose names appear in the register of members on the last date of book closure are entitled to receive the benefits of dividend, right shares or bonus shares as the case may be.

The minimum time gap between the two book closures and/or record dates would be at least 30 days.

Question 12.
Write a short note on ASBA [Dec. 2011 (4 Marks)]
Answer:
“Application Supported by Blocked Amount” means an application containing an authorization to Self Certified Syndicate Bank to block the application money in a bank account for subscribing to a public or rights issue.

If an investor is applying through ASBA, his application money shall be debited; from the bank account only if his application is selected for allotment after the basis of allotment is finalized.

It is a supplementary process of applying in IPO, Right Issues and FPO made through book building route and co-exists with the current process of using cheque as a mode of payment and submitting applications. ASBA is stipulated by SEBI and available from most of the. banks operating in India.

Benefits of ASBA:
The investor need not pay the application money by cheque rather block his bank account to the extent of the application money, thus continue to earn interest on application money.

The investor does not have to bother about refunds, as in ASBA only an amount proportionate to the securities allotted is taken from the bank account when his application is selected for allotment after the basis of allotment is finalised.

The application form is simpler.

The investor deals with the known intermediary ie. his own bank.

No loss of interest, since the application amount is not debited to the savings account on the application.

Since the amount is available in the account, it is considered for the calculation of the Average Quarterly Balance (ABQ).

Customer can revise or withdraw the bid before the end of the issue in the prescribed format with the bank, j Eligibility of Investors: An Investor is eligible to apply through the ASBA process if:

• He is a “Resident Retail Individual Investor”.
• He is bidding at cut-off, with a single option as to the number of shares bid for.
• He is applying through the blocking of funds in a bank account with the bank.
• He has agreed not to revise his bid.
• He is not bidding under any of the reserved categories.

Question 13.
Stock exchanges are virtually the nerve centre of the capital market. Comment. [Dec. 2012 (4 Marks)]
Answer:
The secondary market comprises stock exchanges that provide a platform for the purchase and sale of securities by investors. The trading platforms of stock exchanges are accessible only through brokers and trading of securities is confined only to stock exchanges.

The stock exchanges are the exclusive centres for trading in securities and the trading platform of exchange is accessible only to brokers. The regulatory framework heavily favours the recognized stock exchanges by almost banning trading activity outside the stock exchanges.

The stock market ensures free marketability, negotiability and price discharge. For these reasons the stock market is referred to as the nerve centre of the capital market, reflecting the economic trend as well as the hopes, aspirations and apprehensions of the investors.

Question 14.
Distinguish between: Initial Margin & Maintenance Margin [June 2013 (4 Marks)]
Answer:
Initial Margin: Initial margin means the minimum amount, calculated as a percentage of the transaction value, to be placed by the client, with the broker, before the actual purchase. The broker may advance the balance amount to meet full settlement obligations.

In simple words, the initial margin is the percentage of a stock price that you are required to have in your account when purchasing that stock on margin.

Maintenance Margin: Maintenance margin means the minimum amount, calculated as a percentage of the market value of the securities, calculated with respect to the last trading day’s closing price, to be maintained by the client with the broker.

In other words, a maintenance margin is the required amount of securities an investor must hold in his account if he either purchases shares on margin or if he sells shares short. If an investor’s margin balance falls below the set maintenance margin, the investor would then need to contribute additional funds to the account or liquidate stocks in the account to bring the account | back to the initial margin requirement. This request is known as a margin call.

Question 15.
Explain briefly: Circuit breakers [June 2013 (3 Marks)]
Answer:
What is a circuit: Circuits are of two types – circuit for an index and for a stock. So, if an index or the price of a stock increases or declines beyond a specified threshold it is said to have entered into a circuit. SEBI specifies this threshold as a percentage of the prior day’s closing figures.

Circuit breaker for an Index: Circuit breakers are applied only on equity and equity derivative markets. Whenever the major stock indices like BSE SENSEX and Nifty cross the threshold level, SEBI rules require that the trading at the stock exchange be stopped for a certain period of time beginning from half an hour to even an entire day. The time frame for which trading is stopped depends upon the time and amount of movement in the indices. The idea is to allow the market to cool down and resume trading at normal levels. The thresholds are implemented stage wise.

Question 16.
Distinguish between: Book Closure and Record Date [Dec. 2013 (3 Marks)]
Answer:
Book closure is the periodic closure of the “Register of Members & Transfer Books”, to take a record of the shareholders to determine their entitlement to dividends or bonus or right shares or other rights pertaining to shares.

Closing “Register of Members & Transfer Books” every time is not possible. In such a case recorded date is fixed and informed to the stock exchange in advance.

The record date is the date on which the records of a company are closed for the purpose of determining the stockholders who are entitled to dividends, bonus or right shares or other rights.

In case of a record date, the company does not close its register of security holders. The record date is the cutoff date for determining the number of registered members who are eligible for corporate benefits.

A company may close the register of members for a maximum of 45 days in a year and for not more than 30 days at any one time. [Section 91 of the Companies Act, 2013]

Book closure becomes necessary for the purpose of paying a dividend, making • rights issue or bonus issue. The listed company is required to give notice of book closure in a newspaper at least 7 days before the commencement of the book closure. The members whose names appear in the register of members on the last date of book closure are entitled to receive the benefits of dividend, right shares or bonus shares as the case may be.

The minimum time gap between the two book closures and/or record dates would be at least 30 days.

Question 17.
Write a short note on Online Surveillance by stock exchange [June 2014 (3 Marks)]
Answer:
Online Surveillance: One of the most important tools of surveillance is the Online Real-Time Surveillance system which was commissioned in 1999.

The system has a facility to generate the alerts online, in real-time, based on certain preset parameters like –

• price and volume variations in scrips,
• members taking unduly large positions not commensurate with their financial position or
• having large concentrated positions in one or few scrips, etc.

An alert is a measure of abnormal behaviour. An Alert occurs in the surveillance system when a metric behaves significantly differently from its benchmark. The alerts generated by the system are analyzed and corrective action based on preliminary investigations is taken in such cases. The system also provides a facility to access trades and orders of members.

Question 18.
Distinguish between: Listed Securities & Permitted Securities [June 2015 (3 Marks)]
Answer:
Securities traded in the stock exchanges can be classified as under:
1. Listed Cleared Securities: The securities admitted for dealing on the stock exchange after complying with all the listing requirements and placed by the SEBI on the list of cleared securities are known as listed cleared securities.

Securities of companies, which have signed the Listing Agreement with BSE, arc traded as “Listed Securities”. Almost all securities traded in the equity segment fall in this category.

2. Permitted Securities: The security listed on one stock exchange, when permitted to be traded by some other stock exchange where it is not listed is called permitted security. Such permission is given if suitable provisions exist in the regulations of the concerned stock exchanges.

Example: Suppose, Company X is listed on BSE. If another stock exchange like OTCEI allows trading of securities of Company X, then securities of Company X is known as permitted security for other stock exchange i.e. OTCEI.

Similarly, if any security is not listed on BSE but BSE allows the security to trade on BSE, such security is known as permitted security.

Question 19.
Stock market indices are the barometer of stock markets. [Dec. 2015(3 Marks)]
Answer:
A modern stock exchange is like a supermarket where various securities can be bought and sold. It is well regulated and computerized. It is efficient, transparent and market-oriented.

Stock exchange provides easy marketability to securities of a company.

The capital market and in particular the stock exchange is referred to as the barometer of the economy. The government’s policy is so moulded that the creation of wealth through products and services is facilitated and surpluses and profits are channelised into productive uses through capital market operations. Reasonable opportunities and protection are afforded by the Government through special measures in the capital market to get new investments from the public and the Institutions and to ensure their liquidity.

Question 20.
Distinguish between: Listed Securities & Permitted Securities [June 2017 (3 Marks)]
Answer:
The main objective of the surveillance function of the Stock Exchange is to –

• To promote market integrity
• Monitor price and volume movements (volatility)
• Detecting potential market abuses
• Managing default risk by taking necessary actions timely.

All the instruments traded in the equity segment of the Cash and Derivative market come under the Surveillance umbrella of BSE.

Surveillance activities at the Stock Exchange are divided broadly into two major segments:

• Price Monitoring and
• Position Monitoring.

Question 21.
What do you understand by “Application Supported by Blocked Amount” (ASBA)? How does it work in Initial Public Offer (IPO)? Describe. [June 2018 (5 Marks)]
Answer:
“Application Supported by Blocked Amount” means an application containing an authorization to Self Certified Syndicate Bank to block the application money in a bank account for subscribing to a public or rights issue.

ASBA Process: In ASBA investor submits an application physically or electronically to the bank with whom the bank account to be blocked is maintained. Such a bank is called “Self Certified Syndicate Bank” (SCSB). The bank then blocks the application money on the basis of the authorization.

The application money remains blocked till the finalisation of the basis of allotment or till the withdrawal/failure of the issue.

Thereafter, the application data uploaded by the bank in the electronic bidding system through a web-enabled interface provided by the Stock Exchanges.

Once the basis of finalized allotment, the Registrar to the Issue sends a request to the bank for unblocking the accounts and to transfer the requisite amount to the issuer’s account.

In case of withdrawal or failure of the issue, the amount shall be unblocked by the bank on receipt of information from the pressure merchant bankers.

Question 22.
Write short notes: Book Closure and Record Date [Dec. 2018 (3 Marks)]
Answer:
Book closure is the periodic closure of the “Register of Members & Transfer Books”, to take a record of the shareholders to determine their entitlement to dividends or bonus or right shares or other rights pertaining to shares.

Closing “Register of Members & Transfer Books” every time is not possible. In such a case, the recorded date is fixed and informed to the stock exchange in advance.

The record date is the date on which the records of a company are closed for the purpose of determining the stockholders who are entitled to dividends, bonus or right shares or other rights.

In case of a record date, the company does not close its register of security holders. The record date is the cutoff date for determining the number of registered members who are eligible for corporate benefits.

A company may close the register of members for a maximum of 45 days in a year and for not more than 30 days at any one time. [Section 91 of the Companies Act, 2013]

Book closure becomes necessary for the purpose of paying a dividend, making rights issue or bonus issue. The listed company is required to give notice of book closure in a newspaper at least 7 days before the commencement of the book closure. The members whose names appear in the register of members on the last date of book closure are entitled to receive the benefits of dividend, right shares or bonus shares as the case may be.

The minimum time gap between the two book closures and/or record dates would be at least 30 days.

Question 23.
What is meant by the Block deal? How is it being executed in the Stock Exchange? [Dec. 2018 (5 Marks)]
Answer:
SEBI had issued guidelines outlining a facility of allowing Stock Exchanges to provide a separate trading window to facilitate the execution of large trades. The Exchanges have introduced a new block window mechanism for the block trades from January 1, 2018.

1. Session Timings:
(a) Morning Block Deal Window: This window shall operate between 8:45 AM to 9:00 AM.

(b) Afternoon Block Deal Window: This window shall operate between 2:05 PM to 2:20 PM.

• In the block deal, the minimum order size for the execution of trades in the Block deal window shall be ₹ 10 Crore.
• The orders placed shall be within ±1% of the applicable reference price in the respective windows as stated above.
• The stock exchanges disseminate the information on block deals such as the name of the scrip, name of the client, the number of shares bought/ sold, traded price, etc. to the general public on the same day, after the market hours.

Question 24.
Write short notes on Key difference between WPI & CPI [June 2019 (3 Marks)]
Answer:
Following are the main points of distinction between wholesale price index & consumer price index:

Points	Wholesale Price Index	Consumer Price Index
Meaning	Wholesale Price Index (WPI), amounts to the average change in prices of commodities at the wholesale level.	Consumer Price Index (CPI) indicates the average change in the prices of commodities, at the retail level.
Published by	Wholesale Price Index (WPI) is computed by the Office of the Economic Adviser in the Ministry of Commerce & Industry, Government of India.	CPI for Industrial Workers (IW) & CPI for Agricultural Labourers (AL)/Rural Labourers (RL) are compiled and released by the Labour Bureau in the Ministry of Labour and Employment. CPI (Rural/Urban/Combined compiled and released by the Central Statistics Office (CSO) in the Ministry of Statistics and Programme Implementation.
No. of items	There are total of 676 items in WPI.	The number of items in the CPI basket includes 448 in rural and 460 in urban.
Focuses on	WPI focuses on the prices of goods traded between business houses.	CPI focuses on the prices of goods purchased by consumers.
Coverage	WPI covers all goods including intermediate goods transacted in the economy.	CPI covers only consumer goods and consumer services
Measurement of Inflation	WPI measures inflation at the first stage of the transaction.	CPI measures inflation at the final stage of the transaction.

Question 25.
Write short note on Basis of SENSEX [June 2019 (3 Marks)]
Answer:
The Sensex is primarily an index reflecting the Bombay Stock Exchange (BSE). The Sensex comprises 30 prominent stocks derived from all key sectors which are traded actively in the exchange. Thus, Sensex truly reflects the movement of the Indian stock markets.

Calculation Methodology for Sensex: Like the other major financial indexes of the world, Sensex has also shifted to the ‘Free Float market capitalization’ methodology to determine its figures with effect from the year 2003. The level of the index is a direct reflection of the performance of the 30 selected key stocks in the market.

Free-float market capitalization is defined as that proportion of total shares issued by the company that are readily available for trading in the market. It generally excludes promoters’ holding, government holding, strategic holding and other locked-in shares that will not come to the market for trading in the normal course. So, simply put, free-float market capitalization is the proportion j of total shares available for trading to the general public.

Question 26.
Write short note on Bulk Deal [June 2019 (3 Marks)]
Answer:
A bulk deal is a trade, where the total quantity bought or sold is more than 0.5% of the number of equity shares of a listed company.

Bulk deal can be transacted by the normal trading window provided by brokers j throughout the trading hours in a day. Bulk deals are market-driven and take place throughout the trading day.

The stockbroker, who facilitates the trade, is required to reveal to the stock exchange about the bulk deals on a daily basis.

Bulk orders are visible to everyone. If the bulk deal happens through a single trade, it should be notified to the exchange immediately upon the execution of the order. If it happens through multiple trades, it should be notified to the exchange within one hour from the closure of the trading.

Question 27.
Dhruv has purchased 1000 shares ₹ 80 per share of a company. Did he want to pay ₹ 5,000 in cash and balance through bank transfer to a stockbroker? As a Company Secretary advise Dhruv by referring to SEB regulation/ circular. [June 2019 (5 Marks)]
Answer:
SEBI Circular [SEBI/HO/MIRSD/DOP/CIR/P/2018/113] dated July 12, 2018 deals with “discontinuation of acceptance of cash by Stock Brokers”. The circular makes the following clarification regarding the mode of payment by the client to the stockbrokers.
1. The government of India has promoted various means for the transfer/receipt of funds through digital mode for encouraging a cashless economy. Financial institutions/Banks have introduced various modes of electronic payment facility including mobile banking, Unified Payment Interface (UPI) etc.

2. In view of the various modes of payment through electronic means available today, it is directed that Stock Brokers shall not accept cash from their clients either directly or by way of cash deposit to the bank account of a stockbroker.

3. All payments shall be received/made by the stockbrokers from/to the clients strictly by account payee crossed cheques/demand drafts or by way of direct credit into the bank account through electronic fund transfer, or any other mode permitted by the RBI. The stockbrokers shall accept cheques drawn only by the clients and also issue cheques in favour of the clients only, for their transactions. Stock Brokers shall not accept cash from their clients either directly or by way of cash deposit to the bank account of a stockbroker.

Considering the above provisions of the SEBI Circular, Dhruv cannot pay some consideration in cash to a stockbroker. He is advised to pay to his broker by way of account payee crossed cheque/demand draft or by way of direct credit into the bank account through electronic fund transfer, or any other mode permitted by the RBI.

Securities Laws and Capital Markets Questions and Answers

Introduction To MCA-21 and Filing in XBRL – Company Law Important Questions

Question 1.
Write a short note on Digital Signature Certificate. (December 2010) (4 marks)
Or
Who are all the persons required to obtain “Digital Signature Certificates” (DSCs)? (June 2019) (3 marks)
Answer:
1. A digital signature is the electronic signature duly issued by a certifying authority that shows the authority of the person signing the same. It is an electronic equivalent of a written signature.

2. Every user who is required to sign an e-form for submission with MCA is required to obtain a Digital Signature Certificate.

3. For MCA-21, the following four types of users are identified as users of Digital Signatures and are required to obtain digital signature certificate:

• MCA (Government) Employees.
• Professionals (Company Secretaries, Chartered Accountants, Cost Accountants and Lawyers) who interact with MCA and companies in the context of Companies Act
• Authorized signatories of the Company including Managing Director, Directors, Manager or Secretary.
• Representatives of Banks and Financial Institutions.

Question 2.
Distinguish between: Pre-scrutiny and Check Form. (June 2013) (4 marks)
Answer:
Pre-scrutiny:

1. Pre-scrutiny is a functionality that is used for checking whether certain core aspects are properly filled in the e-Form.
2. The user has to make the necessary attachments in PDF format before submitting the e-Form for pre-scrutiny. Pre-scrutiny is done after this affix digital signature.
   Check Form:
3. By clicking “Check Form”, the user will be in a position to find out whether the mandatory fields in an e-Form are duly held in.
   For example, if the user enters alphabets in the “Date of Appointment of Director” field, he/she will be asked to correct the entered information.
4. If the size of the e-Form including attachment is of bigger size then the attachment may be filed through an addendum.

Question 3.
Distinguish between informational services and approval services register of the company for categories of e-forms. (June 2016) (4 marks)
Answer:

Basis of Distinction	Informational Services	Approval Services
Meaning	Informational Services cover those forms which are to be filed with ROC for information purposes, in compliance with the provisions of the Companies Act.	Ministry of Corporate Affairs, Regional Directors & Registrar of Companies are empowered to accord approval or to give any direction in relation to certain matters. Such services are known as approval services.
Example	Forms relating to the following informational services are required to be filed: Consent and withdrawal of consent of persons charged as officers in default. Voluntary Reporting of Corporate Social Responsibility (CSR) Resolutions and agreements Notice of address of the place where books of account are kept. Information in relation to any offer of scheme or contract involving the transfer of shares or any class of shares in the transferor company to the transferee company. Order received from Court or Tribunal.	ROC Approval is required in the following cases: Extension of the time period for holding AGM. Holding AGM at a place other than registered address. Declaring of Company as defunct Extension of the period of annual accounts. The amalgamation of Companies. Compounding of offenses.

Question 4.
Distinguish between XBRL tags and XBRL taxonomy. (June 2018) (4 marks)
Answer:
1. XBRL Tagging is the process by which any financial data is tagged with the most appropriate element in an accounting taxonomy (a dictionary of accounting terms) that best represents the data in addition to tags that facilitate identification/classification (such as enterprise, reporting period, reporting currency, unit of measurement, etc.).

2. All XBRL reports use the same taxonomy, numbers associated with the same element are comparable irrespective of how they are described by those releasing the financial statements. XBRL taxonomy is a dictionary of widely accepted accounting terms that conform to a GAAP (US GAAP, UK GAAP, IFRS, etc.).

Question 5.
Discuss the following:
1. Front Office represents the interface of the corporate and public users with the MCA 21 system.
Answer:
Front Office:

• The major components involved in this comprehensive e-governance project are the front office and back office.
• Front Office represents the interface of the corporate and public users with the MCA-21 system. This comprises of Virtual Front Office and Registrar’s Front Office.

2. For MCA-21, four types of users are identified as users of digital signature. (IIT) SMART Governance. (December 2008) (4 + 3 + 3 = 10 marks)
Answer:
Four types of users are identified as users of digital signature:
1. For MCA-21, the following four types of users are identified as users of Digital Signatures and are required to obtain a digital signature certificate:

• MCA (Government) Employees.
• Professionals (Company Secretaries, Chartered Accountants, Cost Accountants, and Lawyers) who interact with MCA and companies in the context of the Companies Act.
• Authorized signatories of the Company including Managing Director, Directors, Manager, or Secretary.
• Representatives of Banks and Financial Institutions.

3. SMART Governance:
1. Electronic Governance is the application of Information Technology to the Government’s functioning in order to bring about Simple, Moral, Accountable, Responsive, and Transparent (SMART) Governance.

2. E-governance is a highly complex process requiring the provision of hardware, software, networking, and reengineering of the procedures for better delivery of services.

3. MCA project was launched as a flagship initiative of the Ministry of Corporate Affairs (MCA). MCA-21 has resulted in improved proce¬dures for better delivery of services by the Ministry of Corporate Affairs.

4. MCA-21 is an ambitious e-governance initiative of the Government of India that builds on the Government’s vision of National e-gover¬nance in the country.

Question 6.
Briefly explain the following terms used under e-filing:
1. Pre-fill.
Answer:
Pre-fill:
Pre-fill is functionality in an e-Form that is used for filling automatically, the requisite data from the system without repeatedly entering the same.

For example, by entering the CIN of the company, the name and registered office address of the company shall automatically be pre-filled by the system without any fresh entry.

2. Attachment
Answer:
Attachment:

• An attachment refers to a document that is sent as an enclosure with an e-Form by means of an attached file.
• The objective of the attachment is to provide details relevant to the e-Form for processing. While some attachments are optional, some are mandatory in nature.
• The attachments to an e-Form have to be in Adobe PDF format only and My MCA portal has a facility to convert any document format to PDF format. My MCA portal does not accept big attach¬ments and the users are advised to keep the attachment size to a minimum.

3. Check Form
Answer:
Check Form:

• By clicking “Check Form”, the user will be in a position to find out whether the mandatory fields in an e-Form are duly held in. For example, if the user enters alphabets in the “Date of Appointment of Director” field, he/she will be asked to correct the entered infor¬mation.
• If the size of the e-Form including attachment is of bigger size then the attachment may be filed through an addendum.

4. Pre-scrutiny (June 2009) (2 × 4= 8 marks)
Answer:
Pre-scrutiny:

• Pre-scrutiny is a functionality that is used for checking whether certain core aspects are properly filled in the e-Form.
• The user has to make the necessary attachments in PDF format before submitting the e-Form for pre-scrutiny.
• After this affix digital signature.

Question 7.
What is the general structure of the e-filing process under MCA-21? (June 2011) (4 marks)
Or
What is the general structure of the e-filing process under MCA 21? (June 2013) (4 Marks)
Answer:
The basic pre-requisite structure requirement for e-Filing:
1. Digital Signature Certificate (DSC) of either Class 2 or Class 3 signing certificate category issued by a licensed Certifying Authority (CA) needs to be obtained for e-Filing on the MCA Portal.

2. Digital Signatures are legally admissible in a Court of Law, as provided under the provisions of IT Act, 2000. The Certifying Authorities are au¬thorized to issue a Digital Signature Certificate with a validity of one or two years.

3. The minimum system requirements for e-filing on MCA-21 are as under:

• Any computer or laptop
• An efficient operating system
• Latest Browser
• Adobe Reader from version 9.4 to version 10.1.4
• Scanner (above 300-600 DPI) for converting the attachments in the PDF format; and
• Java Runtime Environment (JRE) updated version.

Question 8.
Filing financial statements in XBRL mode and by using XBRL taxonomy is mandatory for certain companies. Discuss referring to the provi¬sions of the Companies Act, 2013. Comment (December 2018) (3 marks)
Answer:
1. Filing of financial statements with the registrar in XBRL Format (Rule 3 of the Companies (Filing of Documents and Forms in Extensible Business Reporting Language) Rules, 2015):

The following class of companies has to file their Balance Sheet, Profit & Loss A/C and other documents with the registrar using the Extensible Business Reporting Language (XBRL) namely:

1. All Companies having listed with any Stock Exchange in India and their Indian Subsidiaries.
2. All Companies having paid-up capital of rupees 5 crores or above.
3. All companies having a turnover of rupees 100 crores or above.
4. All Companies are required to prepare their financial statements in accordance with Companies (Indian Accounting Standards) Rules, 2015.

2. The companies which have filed their financial statements shall continue to file their financial statements and other documents though they may not fall under the class of companies specified therein succeeding years.

3. The Companies in Banking, Insurance, Power Sectors, and Non-Banking Financial Companies are exempted for Extensible Business Reporting Language (XBRL) filing.

Thus, Prudent General Insurance Company Ltd. being an insurance company is not required to file their Balance Sheet and Profit & Loss Account in XBRL.

CS Executive Company Law Questions and Answers