CA Final – Page 10

Alternate Minimum Tax (AMT) – CA Final DT Question Bank

Leave a Comment / CA Final / By Raju / March 30, 2023 March 30, 2023

Alternate Minimum Tax (AMT) – CA Final DT Question Bank is designed strictly as per the latest syllabus and exam pattern.

Alternate Minimum Tax (AMT) – CA Final DT Question Bank

Question 1.
ABC LLP, a Limited Liability Partnership in India is engaged in development of Software and providing IT enabled services through two units, one of which is located in a notified SEZ in Chennai. The particulars relating to previous year 2020-21 furnished by the assessee are as follows:
Total Turnover : SEZ Unit ₹ 120 Lakhs and the other unit ₹ 100 Lakhs
Export Turnover : SEZ Unit ₹ 100 Lakhs and the other unit ₹ 60 Lakhs
Total Profit : SEZ Unit ₹ 50 Lakhs and the other unit ₹ 40 Lakhs The assessee has no other income during the year.

(i) Compute tax payable by ABC LLP for the A.Y. 2021-22
(ii) Will the amount of tax payable change, if ABC LLP is an overseas entity? [CA Final Nov. 2012] [4 Marks]
Answer:
(i) Computation of total income and tax liability of ABC LLP as per normal provisions of the Act for A.Y. 2021 -22

Computation of Adjusted total income and AMT of ABC LLP as per the provisions of section 115JC for A.Y. 2021-22

Since, the tax payable as per the normal provisions of the Act is less than the AMT payable, the adjusted total income shall be deemed to be the total income of ABC LLP and the tax payable for A.Y. 2021-22 shall be ₹ 17.32 Lakhs.

(ii) The provisions of AMT are also applicable to an overseas LLP. So there will be no change in above tax calculations.
Note: While computing the deduction u/s 10AA, it has been assumed that A.Y.2021-22 falls within first five year period commencing from the year of provision of services by the Unit in SEZ of ABC LLP and therefore, deduction @ 100% of the profit derived from export of such services has been provided.

Question 2.
Victory Polyfibres, a partnership firm, has earned a gross total income of ₹ 300 lakhs for the year ended 31-3-2021. There are no international transactions.

The above includes a profit of ₹ 220 lakhs from an industrial undertaking having a turnover of ₹ 80 crores. This is the fifth year and deduction under section 80-IB of the Income-tax Act is available to the extent of ₹ 200 lakhs.

There are some grey areas in the taxation workings and hence, the assessee is contemplating to file the return of income on 7.11.2021, after seeking clarifications from tax experts.

Advise the assessee-firm by working out the total income and tax pay able, where the return is filed on 31.10.2021 and when the same is filed on 07.11.2021.

What is the practical solution as regards obtaining clarifications, which might or might not have an impact on the total income?

Will it make any difference if the firm has entered into specified domestic transactions where aggregate of such transactions entered into by the firm in the previous year exceeds ₹ 20 crores and the firm file its return on 7.11.2021. [C4 Final May 2014] [10 Marks]
Answer:
As per sec. 80AC, while computing the total income of an assessee, if any deduction is admissible under Chapter VI-A under the heading “C”, no such deduction shall be allowed to him unless he furnishes a return of his income for such assessment year on or before the due date specified under section 139(1).

In the given question, since the turnover of the partnership firm has exceeded ₹ 100 lakhs in the previous year 2020-21, it would be subject to audit under section 44AB, in which case the due date of filing its return of income for A.Y. 2021-22 would be 31st October, 2021, as per section 139(1).

If the firm hires its return on 7-11-2021, it would be a belated return u/s 139(4). Consequently, as per section 80AC, deduction u/s 80-IB would not be available.

In such circumstances, ₹ 300 lakhs will be the total income of the firm.
The tax liability would be:

Computation of tax liability of the firm had it filed its return on or before the due date 31.10.2021

Computation of Alternate Minimum Tax payable

Since the regular income-tax payable by the firm is less than the alternate minimum tax payable, the adjusted total income” shall be deemed to be the total income of the firm for the P.Y. 2020-21 and it shall be liable to pay income-tax on such total income 18.5% Sec. II5JC(1)]. Therefore, the tax payable for A.Y. 202 1-22 would be:

Tax Credit for Alternate Minimum Tax [Section 115JD]

Practical solution regarding obtaining clarifications
The practical solution regarding obtaining clarifications would be to hie the return of income under section 139(1) on or before the due date 31.10.2021 and claim deduction under section 80-IB. In such a case, the firm can claim deduction of ₹ 200 lakhs under section 8Q IB.

Thereafter, consequent to the clarifications obtained, if any change is required, it can file a revised return under section 139(5) within 31.3.2022 (i.e., before the end of relevant assessment year) which would replace the original return filed under section 139(1).

If it is assumed that the firm has entered into specified domestic transactions and aggregate of such transactions entered into by the firm in the previous year exceeds ₹ 20 crores, then, the firm would have to hie a report under section 92E, in which case, the due date of filing of return would be 30.11.2021.

In such a case, the return hied on 07.11.2021 would be a return hied before the due date. If such an assumption is made, the computation j of tax liability as given in the Working Note above would form the first part of the answer vis-a-vis computation of tax liability had the return been hied on 7.11.2021

Question 3.
PQR LLP, a limited liability partnership set up a unit in Special Economic Zone (SEZ) in the financial year 2015-16 for production of washing machines. The unit fulfils all the conditions of Sec. 10AA. During the F.Y. 2018-19, it has also set up a warehousing facility in a district of Tamil Nadu for storage of agricultural produce. It fulfils all the conditions j of Sec. 35AD. Capital expenditure in respect of warehouse amounted to ₹ 75 lakhs (including cost of land ₹ 10 lakhs), the payment of which has been made by an account payee hank draft. The warehouse became operational with effect from 1st April, 2020 and the expenditure of ₹ 75 lakhs was capitalized in the books on that date. Relevant details for the F.Y. 2020-21 are as follows:

₹

Profit of unit located in SEZ

Export sales of above unit

Domestic sales of above unit

Profit from operation of warehousing facility (before considering deduction u/s 35AD)

40,00, 000

80,00,000

20,00,000

1,05,00,000

Compute income tax (including AMT u/s 115JC) payable by PQR LLP for A.Y. 2021-22. [CA Final Nov. 2015] [10 Marks]
Answer:
Sec. 115JC provides that, notwithstanding anything contained in this % Act, where the regular income-tax payable by a person, other than company, is less than the alternate minimum tax (AMT) payable for the previous year, the adjusted total income shall be deemed to be the total income of that person for such previous year and he shall be liable to pay income tax I on the adjusted total income at the rate of 18.5%.

Computation of Tax of PQR LLP for A.Y. 2021-22

Since the tax payable under normal provisions of the Act is less that the AMT payable, the adjusted total income shall be deemed to be the total income of POR LLP and the tax payable for AY. 2021-22 shall be ₹ 29,84,510.

Notes :
1. As per Sec. 35AD, any assessee, carrying on a ‘Specified business’ which includes, inter alia, setting up and operating a warehousing facility for storage of agricultural produce, may at his option claim 100% deduction of capital expenditure (other than land) incurred for such business by an account payee cheque drawn on bank or an account payee bank draft or use of ECS through a bank account.

In this case, the payment for capital expenditure has been made by an account payee bank draft and therefore, deduction u/s 35AD shall be available. Also, where capital expenditure is incurred before commencement of the business, deduction shall be allowed to the extent it has been capitalised in the books of account on date of commencement by the assessee.

2. “Adjusted total income” shall be the total income as computed under the normal provisions of this Act as increased by:

deductions claimed under heading “C” in Chapter VI-A i.e. u/ss j 80-IA to 80RRB (other than sec. 80P); and
deduction claimed u/s 10AA (relating to unit in SEZ), if any; and
deduction claimed for specified business, if any, u/s 35AD as reduced by the amount of depreciation allowable u/s 32 as if no j deduction u/s 35AD was allowed on such assets.

Question 4.
M/s. ABC LLP is engaged in export of computer software from a Special Economic Zone. The net profit of the firm as per its Profit & Loss Account for the year ended 31.3.2021 was ₹ 250 lakhs after debit/credit of the following items:

Depreciation ₹ 20 lakhs
Remuneration to its working partners ₹ 200 lakhs
Interest provided on the current account balance of the partners @ 15% p.a. ₹ 15 lakhs
Advertisement in a souvenir published by a political party ₹ 2 lakhs

Additional Information:

The firm commenced business on 1.4.2018
Depreciation allowable as per Income Tax Rules is ₹ 25 lakhs
Payment of remuneration to working partners is authorized by the Partnership Deed
Brought forward business loss and depreciation from Asst. Year 2019 20 was ₹ 50 lakhs and ₹ 30 lakhs respectively.
The total export turnover of the firm was ₹ 25 crores. Amount of export turnover realized within six months was ₹ 15 crores.

Compute the tax payable by the firm u/s 115JC and the amount of tax credit allowed to be carried forward. Give working notes for your answer. [CA Final Nov. 2019 (Old Syllabus)] [8 Marks]
Answer:
Sec. 115JC provides that, notwithstanding anything contained in this 5 Act, where the regular income-tax payable by a person, other than company, is less than the alternate minimum tax (AMT) payable for the previous year, the adjusted total income shall be deemed to be the total income of that person for such previous year and he shall be liable to pay income tax on the adjusted total income at the rate of 18.5%.

Computation of Tax of M/s. ABC LLP for A.Y. 2021-22

Since, the tax payable under normal provisions of the Act is less than the AMT payable, the adjusted total income shall be deemed to be the total income of M/s ABC LLP and the tax payable shall for A.Y. 2021-22 shall be ₹ 36.20 lakhs.

Tax Credit for Alternate Minimum Tax [Section 15JD]

₹ in lakhs

Total tax payable for A.Y. 2021-22

Less: Regular income-tax payable

36.20

11.23

To be carried forward for set-off (upto a maximum of 15 assessment years *

24.97

Notes:
1. Expenditure incurred on advertisement published in the souvenir of registered political party shall be disallowed u/s 37(2B). However, it shall be allowed as a deduction from the gross total income of the assessee u/s 80GGC for the amount contributed by any mode other than cash. Therefore, deduction shall be available to the M/s. ABC ‘ LLP in respect of expenditure incurred on advertisement published j in the souvenir of registered political party u/s 80GGC.

2. Maximum remuneration allowable u/s 40(b).

?₹ in lakhs

On First ₹ 3 lakhs of book profits @ 90%

On balance ₹ 417 lakhs of book profits @ 60%

2.70

250.20

Total

252.90

Actual remuneration is ₹ 200 lakhs. Therefore, remuneration deductible shall be ₹ 200 Lakhs as it does not exceed the maximum limit u/s 40(b)

Taxation of Firms, LLP and AOP/BOI – CA Final DT Question Bank

Leave a Comment / CA Final / By Raju / March 30, 2023 March 30, 2023

Taxation of Firms, LLP and AOP/BOI – CA Final DT Question Bank is designed strictly as per the latest syllabus and exam pattern.

Taxation of Firms, LLP and AOP/BOI – CA Final DT Question Bank

Question 1.
PQR LLP has a profit of ₹ 500 Lakhs after charging interest on capital of one of its partners ‘P’ amounting to ₹ 10 Lakhs calculated at 15% p.a. as per the agreement, but before considering remuneration to partners. What is the maximum admissible amount of remuneration to partners assuming all the partners are working partners and remuneration is authorised by the LLP instrument? [CA Final Nov. 2010] [2 Marks]
Answer:
Maximum admissible remuneration allowable to working partners

Question 2.
A partnership firm consisting of three partners X, Y and Z is engaged in the business of selling toys.

Turnover of the business for the year ended 31.03.2021 amounts to ₹ 55 Lakhs. Bad Debts written off in the books are ₹ 75,000. Interest at 12% is provided to partner Z on his capital of ₹ 6 Lakhs as authorised by the partnership deed.

The firm had business loss of ₹ 50,000 and unabsorbed depreciation of ₹ 1,50,000 carried forward from A. Y. 2020-21. The firm opts for presumptive taxation u/s 44AD for A.Y. 2021-22.
(i) Compute the income of the firm chargeable under the head “Profits and Gains of Business or Profession”
(ii) What would be the liability for interest u/ss 234B and 234C, if the firm has not paid any advance tax? [CA Final Nov. 2011] [4 Marks]
Answer:
(i) Computation of income of the firm under the head ‘Profits and Gains of business or profession’

Note: As per section 44AD, all deductions allowable u/ss 30 to 38 shall be deemed to have been allowed in full and no further deduction shall be allowed. Therefore, no deduction shall be allowed for bad debts since the same is deductible u/s 36( 1)( vii) and unabsorbed depreciation since the same is deductible u/s 32(2), ‘

Further, deduction for payment of remuneration and interest to partners u/s 40(h) shall NOT be allowed from the presumptive income
u/s44AD.

(ii) Advance tax is payable even on incomes covered under the presumption income scheme. However, in such case, the advance tax is not to be paid in instalment but in one go, i.e. the whole advance tax related to such business is to be paid on or before 15lh March of the relevant Financial year.

Question 3.
The partnership deed of a firm does not specify the remuneration payable to each individual working partner but lays down the manner of fixing the remuneration as follows:

In case the book profits of the firm are up to ₹ 3 lakhs, then the partners would be entitled to remuneration up to ₹ 1.50 lakhs or 90% of book profits, whichever is more. In respect of balance book profits, it is 60%’. “Book profits” shall be computed as defined in section 40(h) of the Income-tax Act, 1961. In case there is a loss in a particular year, the partners shall not be entitled to any remuneration. Remuneration payable to the working partners should be credited to the respective accounts at the time of closing of the accounting year and the working partners shall be entitled to equal remuneration.

Can the firm claim deduction in respect of remuneration paid to the working partners? [CA Final May 2013] [4 Marks]
Answer:
The issue under consideration is whether, in a case where the partnership deed does not specify the amount of remuneration payable to each partner, but lays down the manner of fixing the remuneration, can payment of such remuneration be allowed as deduction.

The High Court, in CITv. Anil Hardware Store (2010) (HP), held that where the manner of fixing the remuneration of the working partners has been ) specified in the partnership deed, the assessee-firm would be entitled to deduct the remuneration paid to such partners, subject to the limits specified under section 40(h)(v).

Therefore, in this case, since the partnership deed lays down the manner of quantifying the remuneration payable to working partners, the firm is entitled to claim deduction of remuneration paid to working partners, subject to the limits specified in section 40(b)(v).

Question 4.
A partnership firm consisting of three partners R, O, S, was engaged in the business of civil construction and received the following amount by way of contract receipts during the financial year 2020-21:

₹

Contract work for supply of labour

Value of material supplied by the Government

35,00,000

9,00,000

44,00,000

Each partner of the firm was entitled to draw ₹ 3,000 per month by way of salary as authorized by the partnership deed. Interest of ₹ 1,50,000 was also paid to partner ‘R’ on the capital of ₹ 6,00,000 contributed by him. The profit as per books of account before deduction of salary to partners and interest to partner ‘R’ is ₹ 3,00,000.

Compute the total income of the firm, applying the provisions of section 44AD, for assessment year 2021-22. Ignore the provision of AMT. [CA Final Nov. 2014] [8 Marfcs]
Answer:
As per Supreme Court in the case of Brij Bhusan Lai Parduman Kumar, materials supplied by contractee at a fixed cost to the Civil Construction Contractor shall not be included in the Gross Receipts or Turnover u/s 44AD of the Contractor for calculating the presumptive income @ 8%.

But the gross Receipts for Turnover purposes for applicability of section 44AD shall include even the value of material supplied by Contractee at a fixed cost to the Civil Construction Contractor.

Computation of Total Income

It is to be noted that in section 44AD, no deduction for interest and salaries 7 paid to partner as per section 40( b) shall be allowed from the presumptive 1 profit of 8%.

Note: As per sec. 40(b), Salary to partner is deductible as lower of the following:
(i) 90% of the first ₹ 3,00,000 of Book profit = 90% of (₹ 3,00,000 – ₹ 72,000 interest to partners) = 90% of ₹ 2,28,000 = ₹ 2,05,200; or
(ii) Remuneration actually paid (₹ 3,000 × 3 partners × 12 months) = ₹ 1,08,000

Thus, the assessee should not opt for section 44AD and declare his income as ₹ 1,20,000.

Question 5.
X & Co. a partnership firm consisting of three partners enhanced working partner salary from ₹ 25,000 per month for each partner to ₹ 50,000 per month for each partner. The increase in working partner salary was authorised by the deed of partnership.

The Assessing Officer during the course of assessment contended that remuneration paid to working partners @ ₹ 50,000 per month for each partner as excessive and applied Sec. 40A(2)(a) though the payment was within the statutory limit prescribed u/s 40(b)(v). Decide the correctness of action of the Assessing Officer. [CA Final Nov. 2015] [4 Marks]
Answer:
The issue under consideration is whether remun eration paid to working partners as per the partnership deed can be considered as unreasonable and excessive for attracting disallowance u/s 40A(2)(a) even though the same is within the limit prescribed u/s 40(b)(v).

The facts of the case are similar to the facts in CITv. Great City Manufacturing Co. (2013), where the Allahabad High Court observed that section 40( b) (v) prescribes the limit of remuneration to working partners, and deduction is allowable up to such limit while computing the business income. If the remuneration paid is within the ceiling limit provided u/s 40(b)(v), then, recourse to provisions of section 40A(2)(a) cannot be taken.

The Assessing Officer is only required to ensure that the remuneration is paid to the working partners mentioned in the partnership deed, the terms and conditions of the partnership deed provide for payment of such remuneration to the working partners and the remuneration is within the limits prescribed u/s’40(b)(v). If these conditions are complied with, then the Assessing Officer cannot disallow any part of the remuneration on the I ground that it is excessive.

Hence, applying the rationale of the Allahabad High Court ruling in this case, the increased remuneration which is authorized by the partnership ” deed and is within the limits specified u/s 40(b)(v) and paid to working . partners, cannot be disallowed by invoking the provisions of section 40A(2) (a). Therefore, the action of the A.O. is not correct.

Question 6.
Two brothers say, A and B inherited lands equally consequent to demise of their father. Subsequently, those lands were compulsorily acquired by d the State Government. Both A and B received compensation, enhanced compensation and interest on enhanced compensation. They admitted , these as income in their individual status. Now the A.O. wants to assess i income from compulsory acquisition of lands in the status of Association of Persons (AOP). Is the action of A.O. justified in law? [CA Final Nov. 2015] [4 Marks]
Answer:
The issue under consideration is whether in a case where land inherited by two brothers is compulsorily acquired by the State Government, the resultant capital gain would be assessed in the status of “Association of Persons” (AOP) or in their individual status.

The facts of the case are similar to the facts in CITv. Govindbhai Mamaiya (2014), where the Supreme Court held that the compensation received by co-owners on compulsory acquisition of land inherited by them will be i assessable in their respective hands and cannot be collectively assessed treating the said co-owners as Association of persons.

Thus, applying the above rationale, the income from compulsory acquisition of land inherited by the legal heirs, A & B, is taxable in their individual hands and not in the status of AOP. The proposed action of the Assessing Officer to assess such income in the status of AOP is, therefore, not justified in law.

Question 7.
ABC Private Ltd. was converted into a limited liability partnership (LLP) called ABC LLP on 01.07.2020. You are provided with the following particulars of ABC Private Limited as on 31.03.2021:

(i) Unabsorbed depreciation ₹ 13 lakhs.
(ii) Business loss ₹ 10 lakhs (relating to previous year 2013-14).
(iii) Unadjusted MAT credit under section 115JAA ₹ 8 lakhs.
(iv) Written down value of the assets as per section 43(6) of the Income-tax Act.
Plant and Machinery (15%) ₹ 10 lakhs (market value ₹ 15 lakhs)
Plant and machinery ₹ 50 lakhs (Cost) – deduction claimed under section 35AD
Building (10%) ₹ 20 lakhs (market value ₹ 30 lakhs)
(v) Cost of land (acquired in year 2004) ₹ 50 lakhs (market value ₹ 100 lakhs)
(vi) Expenditure on voluntary retirement incurred by the company during the previous year 2018-19 is ₹ 25 lakhs. The company has been allowed deduction of ₹ 5 lakhs each year for the previous year 2018-19 and previous year 2019-20 under section 35DDA.

Explain the tax treatment of each item stated above in the hands of LLP, assuming that the conversion satisfies all the conditions laid down in section 47(xiiib). [CA Final Nov. 2016] [5 Marks]
Answer:
Tax implications on conversion of company into LLP:
(i) As per section 72A(6A), ABC LLP would be able to carry forward the unabsorbed depreciation of ABC Pvt. Ltd. as on 31.3.2020 indefinitely for set-off against its income.

(ii) As per section 72A(6A), ABC LLP would be able to carry forward the business loss of ABC Pvt. Ltd. as on 31.3.2020 and set off against business income of the LLP for fresh period of 8 years.

(iii) As per section 115JAA, the credit for the MAT paid by ABC Pvt. Ltd. cannot be availed by the successor ABC LLP.

(iv) As per Explanation 2Cto section 43(6), the actual cost of the block of assets in the case of ABC LLP would be the written down value of the block of assets of ABC Pvt. Ltd. on the date of conversion. The aggregate depreciation allowable to ABC Pvt. Ltd. and ABC LLP in the P.Y. 2020-21 cannot exceed the depreciation calculated at the prescribed rates as if the conversion had not taken place [Sixth proviso to section
32(1)(ii)].

The aggregate depreciation for the P.Y. 2020-21 shall be calculated as follows:
Plant & Machinery ₹ 1.50 lakh (15% of ₹ 10 lakh)
Building ₹ 2.00 lakh (10% of ₹ 20 lakh)
In this case, since the conversion took place on 1.7.2020, the depreciation has to be apportioned between the company and the LLP in proportion to the number of days the assets were used by them. In such a case, the depreciation allowable in the hands of ABC Pvt. Ltd. and ABC LLP would be calculated as given below:

Asset	In the hands of ABC Pvt. Ltd. (for 91 days)	In the hands of LLP (for 275 days)
Plant & machinery	1,50,000 × 91/365 = ₹ 37,397	1,50,000 × 274/365 = ₹ 1,12,603
Building	2,00,000 × 91/365 = ₹ 49,863	2,00,000 × 274/365 = ₹ 1,50,137

The written down value of assets as on 1.7.2020

Asset

WDV as on 1.7.2020

Plant and machinery

Building

₹ 10,00,000 – ₹ 37,397 = ₹ 9,62,603

₹ 20,00,000 – ₹ 49,863 = ₹ 19,50,137

In the hands of ABC LLP, the actual cost of plant and machinery in respect of which deduction has been claimed under section 35AD by ABC Pvt. Ltd., would be Nil [Explanation 13 to section 43(1)].

(v) The cost of acquisition of a non-depreciable asset, being land, in the hands of ABC LLP would be the cost for which ABC Pvt. Ltd. acquired it, ie., ₹ 50 lakh [Section 49(1)]

(vi) ABC LLP would be eligible for deduction of ₹ 5 lakh each for the remaining three years i.e., P.Y. 2020-21, P.Y. 2021-22 and RY 2022-23 as per section 35DDA(4A).

Question 8.
Ram, Rahim & Robert are equal partners of SSK & Co., which was formed w.e.f. 01.06.2020. The firm is an authorized dealer of watches manufactured by a reputed company. It reported Net Profit as per profit and loss account of ₹ 2,50,000 after debit/credit of the following items:

(i) Depreciation on generator and computers ₹ 1,10,000.

(ii) Working partners’ salary ₹ 30,000 p.m. for each partner. All the partners are working partners and the salary paid is authorized by the deed of partnership.

(iii) Interest on capital to partners @ 18% per annum. The total interest on capital of the firm debited to profit and loss account being ₹ 3,60,000.

(iv) Donation to registered political parties ₹ 80,000 by cash and ₹ 70,000 by electronic transfer.

(v) Monthly rent paid to partner Ram for use of his premises as godown ₹ 30,000 and it is occupied from 01.10.2020. The market rent for the premises is ascertained at ₹ 15,000 p.m. No tax was deducted at source on the rent paid.

(vi) Sponsorship fee for local Cricket tournament ₹ 4,00,000.

(vii) The firm incurred ₹ 5,00,000 by way of expenditure towards the cost of gold coins awarded to customers on the first day of their showroom inauguration. The cost of each gold coin was less than ₹ 10,000 and one coin was given for each of the buyers on that day selected through lucky dip. No tax was deducted at source on such gold coins given to the customers.

Additional information:
(i) Depreciation on tangible assets allowable u/s 32 is ₹ 2,37,500.
(ii) One registered trademark was acquired on 10.07.2020 for ₹ 3,00,000. The firm used the trademark w.e.f. 01.12.2020 since there was some dispute in title of the previous owner and was cleared through court decree only in November 2020.
(iii) The total turnover for the firm for the year ended 31.03.2021 was ₹ 80,00,000. Amount realized by cash ₹ 20,00,000 and the balance of sale proceeds were received through credit card/RTGS/NEFT before 31.03.2021.

You are required to compute the total income of the firm applying regular provisions and presumptive provisions contained in section 44AD of the Income-tax Act, 1961. Advise the procedural requirement on opting any of the provisions for the purpose of the Act. [CA Final May 2018 (Old Syllabus)] [70 Marks]
Answer:
Computation of Book Profit of SSK & Co. for Section 40(b)

	₹
Net Profit as per P&L A/c Add: Depreciation as per books Remuneration to working partners (₹ 30,000 × 10 months × 3 partners)	2,50,000 1,10,000 9,00,000
Interest to partners (in excess of allowed limit i.e. 12%)	1,20,000
Donation to political parties [Note 1]	1,50,000
Rent disallowed u/s 40A(2) [₹ 15,000 (₹ 30,000 – ₹ 15,000) × 6 months] [Note 2]	90,000
Sponsorship fee for local cricket tournament [Note 3]	NIL
Less: Depreciation as per IT Act	(2,37,500)
Depreciation on registered trademark [₹ 3,00,000 × 25% × 50%] [Note 5]	(37,500)
Book Profit for Section 40( h)	13,45,000

Maximum remuneration allowable u/s 40(b)

	₹
On first ₹ 3,00,000 of book profits @ 90%	2,70,000
On balance ₹ 10,45,000 of book profit @ 60%	6,27,000
Total	8,97,000

Actual remuneration to Working partners = ₹ 9,00,000 (₹ 30,000 × 3 partners) × 10 months
Therefore, the maximum remuneration deductible shall be ₹ 8,97,000.

Computation of Total Income of SSK & Co. as per regular provisions

Notes:
1. Donation made to registered political parties shall be disallowed u/s 37(2B) while computing business income. Therefore, ₹ 1,50,000 shall be added back while computing the income under the head “Profits and Gains from Business or Profession”. However, the said donation made by any mode other than cash shall be allowed as deduction from gross total income u/s 80GGC and ₹ 70,000, being the donation made by way of electronic transfer shall be allowed as deduction u/s 80GGC from gross total income.

2. As per section 40A(2), where the assessee incurs any expenditure for which the payment is made or is to be made to any specified person and the A.O is of the opinion that such expenditure is excessive or unreasonable having regard to the fair market value of the goods, services or facilities, then the A.O. shall disallow such expenditure to the extent he considers excessive or unreasonable.

Therefore, ₹ 90,000 (₹ 15,000 × 6), being the excess rent paid over the market value to the partner shall be disallowed. In respect of non-deduction of tax at source on the amount of rent paid to the partner Ram, section 194-1 provides that no tax is required to be deducted at source where the amount of rent paid does not exceed ₹ 2,40,000 during the financial year. Here, the amount of rent paid by SSK & Co. to partner Ram does not exceed ₹ 2,40,000 and therefore, there is no need to deduct tax at source and there will be no disallowance for non-deduction of tax at source.

3. Sponsorship fee paid for local cricket tournament shall be allowed as a deduction since the same was incurred for the promotion of the business of the firm and was incurred out of business expediency and therefore, is an allowable expenditure u/s 37.

4. Expenditure incurred towards the cost of gold coins awarded to the customers on the first day of showroom inauguration shall be allow ed as deduction, since the same has been incurred for the purposes of business. As per sec. 194B, the person responsible for paying the winnings which are wholly in kind, shall before releasing the winnings ensure that the tax has been paid in respect of the winnings. However, no tax shall have to be deducted in case where the amount of winnings does not exceed ₹ 10,000. Here, the cost of each gold coin does not exceed ₹ 10,000 and therefore, SSK & Co. is not required to deduct tax at source. Since, no tax is required to be deducted, disallowance u/s 40(ia) shall not be attracted.

5. Since, the registered trademark has been put to use for less than 182 days during the previous year, only 50% of the normal depreciation shall be allowed as deduction.

Computation of Total Income of SSK & Co. as per presumptive income i.e. Sec. 44AD
Since, the turnover of SSK & Co. for the RY. 2020-21 is ₹ 80 lakhs, which does not exceed ₹ 2 crore, the firm is eligible to opt for presumptive tax scheme u/s 44AD

₹

Presumptive income u/s 44AD (₹ 60,00,000 × 6% + ₹ 20,00,000 x 8%)

Less: Deduction u/s 80GGC

5,20,000

70,000

Total Income

4,50,000

As per Sec. 44AD, all deductions allowable u/s 30 to 38 shall be deemed to have been allowed in full and no further deduction shall be allowed. Also, no deduction shall be allowed in respect of interest on capital and 1 remuneration to partners.

Further, the presumptive income shall be computed @ 696 instead of 896 where the amount of total turnover or gross receipts is received by an account payee cheque or account payee bank draft or use of electronic clearing system through a bank account during the previous year or before the due date specified u/s 139(1). Therefore, presumptive income in respect ₹ 60,00,000 of the sale proceeds received through credit card/RTGS/NEFT before 31.03.2021 shall be computed @ 696 and remaining ₹ 20,00,000 shall i be computed @ 8%.

If the firm wants to declare income of ₹ 3,78,000 as per the books of account, advance tax has to be paid in four instalments, in the absence of which interest liability-u/s 234C would be attracted in case of shortfall in each of the four instalments. However, if the firm declares the income of ₹ 4,50,000 on the basis of presumptive tax scheme u/s 44AD, advance tax has to be paid in one instalment in March, 2021 in the absence of which interest u/s 234C would be attracted only for one month.

Question 9.
Ram Manufactures LLP., engaged in manufacturing activity which is 2 liable for GST @ 18%. The firm consists of 4 equal partners who contributed ₹ 15 lakhs each as capital. The partnership deed authorises interest on capital @ 9% per annum besides working partner salary of ₹ 25,000 per month to each partner, as all of them are working partners.

A survey u/s 133A was conducted in the premises of the firm on 23.01.2021 and during the course of survey (a) bills and vouchers (each below ₹ 10,000 aggregating to ₹ 2,50,000 were found in the premises which were not recorded in the books of account; and (b) unaccounted stock of ₹ 10,50,000 was found in the premises on 23.01.2021.

Note: No effect was given in the books of account of the firm for the above said items even after the conclusion of survey.
The following issues are presented to you:

(i) Depreciation debited in the profit and loss account includes ₹ 3,00,000 representing depreciation on non-compete fee of ₹ 30,00,000 being the amount paid to a retired partner on 30.4.2018.
(ii) The firm allowed ₹ 4,00,000 as discount on goods sold to A & Co, a proprietary concern owned by one of the partners.
(iii) Depreciation debited to profit and loss account does not include depredation on the following:
(a) Plant & Machinery (new) acquired in November, 2020 and used during the year cost ₹ 23,60,000 (including GST @ 18%),
(b) Construction of one factory building was completed on 31^st December, 2020 and it was put to use w.e.f. 01.01.2021. The cost of construction admitted in the books was ₹ 40,90,000.
The firm availed loan from a bank for construction of the above said factory building on 20^th October, 2019. Interest payable details are as under:

Period

₹

From 20-10-2019 to 31-03-2020

From 01-04-2020 to 31-12-2021

From 01-01-2021 to 31-03-2021

2,00,000

7,00,000

4,20,000

No amount by way of loan interest was paid till ‘due date’ of filing the return of income prescribed u/s 139(1). The loan interest is not debited to profit and loss account and also not included in the cost of construction of the factory building.

The net profit of the firm for the year ended 31.03.2021 was ₹ 17,21,375 after deducting interest on capital and working partner salary.
You are requested to compute the total income of the firm by giving brief reasons for each of the item given above. [CA Final Nov. 2019 (New Syllabus)] [8 Marks]
Answer:
Computation of Total Income of Ram Manufactures LLP for the A. Y. 2021-22

Notes:
1. Since, interest on partner’s capital does not exceed 996, no disallowance shall be attracted u/s 40(h).

2. On payment of ₹ 30,00,000 as non-compete fee to a retired partner, no new asset is created and also the expenditure does not result in enduring benefit in the capital field, and therefore it is not capital in nature. Hence, depreciation is not allowable on such expenditure.
Alternatively: Non-compete fee would be treated as intangible asset and is eligible for depreciation as follows:

Since depreciation of ₹ 3,00,000 is already debited to profit and loss account, the difference of ₹ 1,21,875 (₹ 4,21,875 – ₹ 3,00,000) is to be deducted from business income.

3. Expenditure not recorded in the books of account to be treated as unexplained expenditure and would be deemed to be the income of Ram Manufactures LLP as per section 69C. It would be taxable @ 6096 plus surcharge @ 2596 plus health and education cess @ 496. Also, such unexplained expenditure would not be allowed as deduction under any head of income.

4. The unaccounted stock found during the survey in the premises shall be added to the net profits since, it will increase the profits.

5. No disallowance u/s 40A(2) shall be attracted in respect of discount allowed on goods sold to A & Co., a proprietary concern owned by one of the partners, since sec. 40A(2) shall be attracted only in cases where payment is made excessive or unreasonable. Here, no payment has been made but instead goods have been sold.

6. Calculation on Depreciation

Since, Ram Manufactures LLP is engaged in manufacturing activity which is liable for GST @ 18%, it is assumed that it will claimed input tax credit in respect of GST paid on plant and machinery acquired and therefore, depreciation shall not be allowed on GST component.

ICDSIX provides that the borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset shall be capitalized as part of the cost of that asset. Capitalization shall be commenced from the date on which funds were borrowed to the date when such asset is first put to use. Therefore, interest for the period 20.10.2019 to 31.12.2021 shall be capitalized to the cost of the factory.

Also, interest after the asset is first put to use shall not be allowed as deduction, since the same has not been paid till the due date of filing ROI u/s 139(1). Therefore, ₹ 4,20,000 shall not be allowed as deduction.

7. Maximum partner’s salary allowable u/s 40(b).

₹

On First ₹ 3,00,000 of book profits @ 90%

On balance ₹ 24,16,875 of book profits @ 60%

2,70,000

14,50,125

Total

17,20,125

Actual partner’s salary ₹ 12,00,000. Therefore, partner’s salary deductible shall be ₹ 12,00,000 as it does not exceed the maximum limit u/s 40(b).

Securities Contract (Regulation) Act, 1956 and SCR Rules, 1957 – CA Final Law Study Material

Leave a Comment / CA Final / By Murali / March 29, 2023 May 10, 2023

Securities Contract (Regulation) Act, 1956 and SCR Rules, 1957 – CA Final Law Study Material is designed strictly as per the latest syllabus and exam pattern.

Securities Contract (Regulation) Act, 1956 and SCR Rules, 1957 – CA Final Law Study Material

Question 1.
A company Cookies Private Limited has two shareholders, Mr. Rock and Mr. Salt. Mr. Rock decides to sell his part of shares in Cookies Private Limited to another company, Crispy Private Limited for a specified monetary consideration. How should Mr. Rock proceed to document the transaction so as to make it legally binding on both the parties? [RTP-May 18]
Answer:
Requirement as to Share Purchase Agreement:
Such an understanding of transfer of the shares of Mr. Rock to Crispy Private Limited shall be recorded in Share Purchase Agreement, which is a legally binding contract, and lists down all the terms and conditions which are relevant to the sale of shares.

A Share Purchase Agreement (commonly known as SPA) is an agreement that sets out the terms and conditions relating to the sale and purchase of shares in a company. Such an agreement principally outlines the following:
(a) the exact description of shares, i.e. the number of shares, price per share, premium amount, if any;
(b) the conditions that must be satisfied before the sale takes place;
(c) the date on which the sale will be completed;
(d) the manner in which the transfer will be made;
(e) any indemnities or protections available to the parties;
(f) the representations and warranties made by either party; and
(g) the conditions upon which the agreement will terminate.

Question 2.
Mr. Vivaan is having 400 shares of M/s Travel Everywhere Limited and the current price of these shares in the market is INR100. Vivaan’s goal is to sell these shares in 6 months’ time. However, he is worried that the price of these shares could fall considerably, by then. At the same time, Vivaan doesn’t want to sell off these shares today, as he conjectured that the share price might appreciate in the near future. How should Mr. Vivaan protect his security and reduce the risk of loss on the share price? [RTP-May 18, MTP-Oct. 19, May 20]
Answer:
Suggestive ways to protect the security and reduce the risk of loss on share price:

Suggestive way to protect the security and reduce the risk of loss on share price is to opt for a ‘Option’ derivative contract. Options are contracts, through which a seller giver the buyer, a right, but not the obligation, to buy or sell a specified number of shares at a pre-determined price, within a set time period. These contracts are essentially derivatives, since they derive their value from an underlying security on which the option is based. With options, one can tailor his position according to his own situation and stock market outlook.

In this case, Vivaan may opt for ‘Option’ derivative contract. However, it is not obligatory for him to hold the terms of the agreement, since he has an ‘option’ to exercise the contract. For example, if the current market price of the share is ₹ 100 and he buy an option to sell the shares to Mr. X at ₹ 200 after 3 month, so Vivaan bought a put option.

Now, if after 3 months, the current price of the shares is ₹ 215, Mr. Vivaan may opt not to sell the shares to Mr. X and instead sell them in the market, thus making a profit of ₹ 115. Had the market price of the shares after three months would have been ₹ 80, Mr. Vivaan would have obliged the option contract and sold those shares to Mr. X, thus making a profit, even though the current market price was below the contracted price.

Question 3.
Mr. Veer a newly entered investor in the field of securities business seeks your advice on the investments to be made in securities of large Companies for long term purposes. With this object in view, he wants to know the meaning of the following terms commonly used in any stock exchange.
(i) Derivative
(ii) Option in securities
(iii) Spot delivery contract.
Advise suitably.
Or
Explain the meaning of the following terms used in the Securities Contracts (Regulation) Act, 1956:
(i) Option in Securities
(ii) Spot delivery contract. [May 17 (4 Marks)]
Or
Define the term “Derivative” as appearing in the Securities Contracts (Regulation) Act, 1956. [May 19 – New Syllabus (2 Marks)]
Answer:
Meaning of Terms:
(i) Derivatives: Sec.2(ac) of Securities Contracts (Regulation) Act, 1956 defines the term derivative so as to include:
(A) a security derived from a debt instrument, share, loan, whether secured or unsecured, risk instrument or contract for difference or any other form if security;
(B) a contract which derives its value from the prices, or index of prices, of underlying securities;
(C) Commodity derivatives;
(D) Such other instruments as may be declared by the C.G. to be derivatives.

(ii) Option in Securities: Sec. 2(d) of Securities Contracts (Regulation) Act, 1956 defines the term Option in Securities so as to means a contract for the purchase or sale of a right to buy or sell, or a right to buy and sell, securities in future, and includes a teji, a mandi, a teji mandi, a galli, a put, a call or a put and a call in securities.

(iii) Spot Delivery contract: Sec. 2(f) of Securities Contracts (Regulation) Act, 1956 defines the term spot delivery contract so as to mean a contract which provides for—

(a) Actual delivery of securities and the payment of a price therefor either on the same day as . the date of the contract or on the next day, the actual period taken for the despatch of the securities or the remittance of money therefor through the post being excluded from the computation of the period aforesaid if the parties to the contract do not reside in the same town or locality;

(b) Transfer of securities by the depository from the account of a beneficial owner to the account of another beneficial owner when such securities are dealt with by a depository.

Question 4.
Explain the meaning of the term “Demutualisation” used under the Securities Contracts (Regulation) Act, 1956. (May 18 – New Syllabus (3 Marks)]
Answer:
Meaning of Demutualisation:

Section 2 (ab) defines the term demutualisation as the segregation of ownership and management from the trading rights of the members of a recognised stock exchange in accordance with a scheme approved by the SEBI.

Demutualisation of stock exchanges was made mandatory by the Central Government in 2003, to end the broker’s control over the exchanges. Post that the access to trading became a matter of contract with the stock exchange, wherein the dealers were just operating as users or participants. The stock exchanges, which were previously operating as an unorganised sector, started acting a service provider to market intermediaries and listed companies, after adopting the scheme of demutualisation.

India’s two largest demutualised stock exchanges are the National Stock Exchange and Bombay Stock Exchange. Its shareholders are largely the state-owned banks.

Question 5.
Rampur Stock Exchange wants to get itself recognized. Explain:
(a) Who enjoys the power to recognize stock exchange?
(b) What information will have to be provided with the application for recognition?
Answer:
(a) Power to recognize stock exchange:
As per Sec. 3 of the Securities Contracts (Regulation) Act, 1956, power to recognize Stock Exchange vests with Central Government. However, Central Government has delegated the powers to SEBI.

(b) Information to be provided along with application for recognition:
As per Sec. 3 of the Securities Contracts (Regulation) Act, 1956, every application made to SEBI shall be accompanied by a copy of the bye laws and the rules relating in general to the constitution of the stock exchange and in particular, to
(a) the governing body of such stock exchange, its constitution and powers of management and the manner in which its business is to be transacted;
(b) the powers and duties of the office bearers of the stock exchange;
(c) the admission into the stock exchange of various classes of members, the qualifications for membership, and the exclusion, suspension, expulsion and re-admission of members therefrom or there into.
(d) the procedure for the registration of partnerships as members of the stock exchange in cases where the rules provide for such membership; and the nomination and appointment of authorised representatives and clerks.

Question 6.
Referring to the provisions of the Securities Contracts (Regulation) Act, 1956: The C.G. has granted recognition to a Stock Exchange. To what conditions may such a recognition be subject to?
Answer:
Condition subject to which stock exchange is being recognized:
As per Sec. 4(2) of the Securities Contracts (Regulation) Act, 1956, the conditions which the C.G. may prescribe for the grant of recognition to the stock exchanges may include, among other matters, conditions relating to:

the qualifications for membership of stock exchanges;
the manner in which contracts shall be entered into and enforced as between members;
the representation of the C.G. on each of the stock exchange by such number of persons not exceeding 3 as the C.G. may nominate in this behalf; and
the maintenance of accounts of members and their audit by chartered accountants whenever such audit is required by the C.G.

Question 7.
Working of City Stock Exchange Association Ltd., is not being carried on by its governing Board in public interest. On receipt of representations from various investors and Investors’ Association, the Central government is thinking to withdraw the recognition granted to the said Stock Exchange. You are required to state the procedure for withdrawal of such recognition as per the provisions of Securities Contracts (Regulation) Act, 1956 in this regard. Also state the effect of such withdrawal on the contracts outstanding on the date of withdrawal.
Or
The Central Govt, has formed its opinion on certain grounds that the recognition granted to a Stock-Exchange be withdrawn. Examining the provisions of the Securities (Contracts) Regulation Act, 1956, explain the procedure that must be followed by the Central Govt, to give effect to the above. Also state whether any such withdrawal of recognition shall affect the validity of the contracts already entered into by Stock-Exchange before withdrawal of recognition. [Nov. 10 (5 Marks)]
Or
The Delhi Stock Exchange Ltd. was granted recognition by SEBI. SEBI received compliant alleging that the said stock exchange is indulging in fraudulent activities. SEBI is of the opinion that the recognition granted should be withdrawn m the interest of trade and public. State the provisions to withdraw the recognition under the Securities Contracts (Regulation) Act, 1956.
Examine the validity of the contracts entered by the stock exchange prior to such withdrawal order. [May 18 – New Syllabus (6 Marks)]
Answer:
Withdrawal of Recognition of Stock Exchange:

As per Section 5 of Securities Contracts (Regulation) Act, 1956, recognition of a stock exchange may be withdrawn if the C.G./SEBI is of the opinion that the recognition granted to a stock exchange under the provisions of this Act, should, in the interest of the trade or in the public interest, be withdrawn.

In this case the C.G./SEBI may serve on the governing body of the stock exchange, a written notice that the C.G./SEBI is considering the withdrawal of the recognition for the reasons stated in the notice and after giving an opportunity to the governing body to be heard in the matter, the C.G./SEBI may withdraw by notification in the Official Gazette, the recognition granted to the stock exchange.

Validity of Contracts:

Sec. 5 provides that withdrawal of recognition shall not affect the validity of any contract entered into or made before the date of the notification.

SEBI may, after consultation with the stock exchange, make such provision as it deems fit in the notification of withdrawal or in any subsequent notification similarly published for the due performance of any contracts outstanding on that date.

Question 8.
‘X’ Stock Exchange Limited was granted recognition by Securities and Exchange Board of India (SEBI). The stock brokers of the Stock Exchange did not pay much heed to the concept of governance and focused on increasing their wealth and snubbed the protection of investors. Their activities were against the interest of the trade and general public.
(i) Examine whether the Central Government/SEBI has the power to withdraw the recognition granted to ‘X’ Stock Exchange Limited under the provisions of Securities Contracts (Regulation) Act, 1956?
(ii) Whether a person can be a member of an unrecognized Stock Exchange for the purpose of performing any contracts in Securities? [Nov. 19 – New Syllabus (4 Marks), RTP-Nov. 20]
Answer:
(i) Withdrawal of Recognition of Stock Exchange:

Conclusion: C.G./SEBI has power to withdraw the recognition granted to Stock Exchange.

(ii) Membership of unrecognized Stock Exchange:
’ As per Sec. 19 of the SCRA, 1956, no person shall, except with the permission of the Central
Government or SEBI, organise or assist in organising or be a member of any stock exchange (other than a recognised stock exchange) for the purpose of assisting in, entering into or performing any contracts in securities.
Hence, to be a member of an unrecognized Stock exchange, permission of CG or SEBI is required.

Question 9.
Ms. Ashmita D’Sou/.a recently graduated from National Law School, Bangalore and made her parents proud. While working on one of her assignments, she got really interested in knowing about the securities and gained expertise in the day-to-day working of financial markets. Meanwhile, her father got a wonderful opportunity at work to move to Germany and the whole family is very excited to make the move and settle there.

Ashmita, along with her family applied for residence there and also gained the citizenship of Germany. She got married to a German, named Vincent, and they both came to India to start a career. After working with Ashmita on a couple of assignments, Vincent got interested to become a member of the Chennai Stock Exchange, Chennai. Discuss, whether Vincent or Ashmita can become a member of the stock exchange, stating the provisions of Securities Contract Regulations in India. [MTP-March 18]
Answer:
Membership of recognised stock exchange:

Rule 8 of the Securities Contract (Regulations) Rules, 1957 details the qualifications for becoming the member of a recognised stock exchange.

Rule 8(3) prescribes that the persons that can be admitted as the members of the recognised stock exchange and mentions that no person who is a member at the time of application for recognition or subsequently admitted as a member if he ceases to be a citizen of India.

Conclusion: Ashmita cannot become the member of the Chennai Stock Exchange since she ceased to be a citizen of India, as she has gained the citizenship of Germany.

Mr. Vincent cannot be elected as the member of the recognised stock exchange since he is not a citizen of India. However, the governing body of the Chennai Stock Exchange may take the prior approval of SEBI, in case they are interested in electing Vincent as a member of the stock exchange.

Question 10.
Mr. G applied to be appointed as a member in the place of his brother Mr. Kumar, who was financial analyst (who met with an accident) in Bombay stock exchange. Governing body of the Stock exchange finds him to be eligible as member, considering him a close relative of Mr. Kumar. Rather experience and knowledge of Mr. G was not in alliance with the required skill for the conduct of business in securities. Determine the validity as to the appointment of the Mr. G in the Stock exchange with the reference to the provisions of the SCRA, 1956. [MTP-Aug. 18]
Answer:
Membership of recognised stock exchange:

Rule 8 of the Securities Contracts (Regulation) Rules, 1957 details the qualifications for becoming the member of a recognised stock exchange.

As per Rule 8, no person eligible for admission as a member under Rule 8(1) shall be admitted as a member unless he succeeds to the established business of a deceased or retiring member who is his father, uncle, brother or any other person who is, in the opinion of the governing body, a close relative.

It is also provided that the rules of the stock exchange may authorise the governing body to waive compliance with any of the foregoing conditions if the person seeking admission is in respect of means, position, integrity, knowledge and experience of business in securities, considered by the governing body to be otherwise qualified for membership.

Conclusion: Though Mr. G was brother of Mr. Kumar, but was not eligible due to lack of his experience and knowledge in the business of securities.

Question 11.
The Securities and Exchange Board of India received serious complaints against Mr. Satyanarayan, a member of Mavli Stock Exchange. State as to what powers can be exercised by the Securities and Exchange Board of India to make enquiries and to take action in this matter, under the provisions of the Securities Contracts (Regulation) Act, 1956? [May 13 (6 Marks)]
Answer:
Powers of SEBI to make inquiries and to take action:

As per Sec. 6(3) of Securities Contracts (Regulation) Act, 1956, SEBI, if it is satisfied that it is in the interest of the trade or in the public interest so to do, may, by order in writing:

(a) call upon a recognised stock exchange or any member thereof to furnish in writing such information or explanation relating to the affairs of the stock exchange or of the members in relation to the stock exchanges as SEBI may require; or

(b) appoint one or more persons to make an inquiry in relation to the affair of the governing body of a stock exchange and submit a report of the result of such inquiry to SEBI within specified time or in relation to the affairs of any of the members of a stock exchange, direct the governing body to make the inquiry and submit its report to SEBI.

In case of adverse findings, SEBI can direct Mavli Stock Exchange to take disciplinary action against Mr Satyanarayan, such as fine, expulsion from membership, suspension from membership for a specified period and any other penalty of a like nature not involving the payment of money.

Question 12.
In public interest; HEM Stock Exchange Limited was issued an order by the Stock Exchange Board of India to produce certain information and explanation relating to its operation in writing. The management of the stock exchange were reluctant to part with such information with SEBI and approached you to seek your advice in the following matters:
(i) Duty of HEM Stock Exchange Limited to furnish periodic returns to SEBI;
(ii) Power of SEBI to ask for the information asked as stated above, over and above the periodic returns;
(iii) Period for which the Stock Exchange is required to maintain the books of account which may be inspected by SEBI;
(iv) Duty of the Stock Exchange and the persons dealing with the stock exchange with regard to the information sought for by SEBI.
Advise them referring to the relevant provisions of the Securities Contracts (Regulation) Act, 1956. [May 18 – Old Syllabus (4 Marks), RTP – Nov. 18]
Answer:
Powers of SEBI to call for periodical returns, etc:
(i) As per Sec. 6(1) of the Securities Contracts (Regulation) Act, 1956, every recognised stock exchange shall furnish to the SEBI such periodical return relating to its affairs as may be prescribed. These Returns contain information on current affairs of the Exchange including volume and value of transactions, short deliveries, important decisions taken by Board etc.

(ii) As per Sec. 6(3) of the Securities Contracts (Regulation) Act, 1956, SEBI may call for information and explanation from the member.

(iii) As per Sec. 6(2) of the Securities Contracts (Regulation) Act, 1956, every recognised stock exchanges and every member thereof shall maintain and preserve for such periods not exceeding 5 years such books of account as prescribed and these books may be inspected by SEBI at any point of time.

(iv) As per Sec. 6(4) of the Securities Contracts (Regulation) Act, 1956, every Director, Manager, Secretary or officer of the Exchange; every member of such stock exchange; if the member of the stock exchange is a firm, every partner, manager, secretary or other officer of the firm and every other person or body of persons who has had dealings in the course of business with any of the persons mentioned above whether directly or indirectly, is bound to provide information to Enquiry officer or SEBI representative who are looking into the affairs of the Exchange.

Question 13.
PQR Ltd. is holding 33% of the paid-up equity capital of Koya Stock Exchange. The company ap: points MNL Ltd. as its proxy who is not a member of the Koya Stock Exchange, to attend and vote at the meeting of the stock exchange. Examine whether the Koya Stock Exchange can restrict the appointment of MNL Ltd. as proxy for PQR Ltd. and further restrict, the voting rights of PQR Ltd. in the Koya Stock Exchange. [MTP – Oct. 18, RTP-May 20]
Or
Examine with reference to the provisions of the Securities Contracts (Regulation) Act, 1956 whether it is possible for City Stock Exchange Limited, a company incorporated under the Companies . Act, 1956 and a recognized Stock Exchange, to insist that its members should appoint only other members as their proxies to attend and vote at the meeting of the Stock Exchange.
Answer:
Power of recognised stock exchange to make rules restricting voting rights, etc.:

As per Sec. 7A of the Securities (Contracts) Regulation Act, 1956, a recognised stock exchange may make rules or amend any rules made by it to provide for all or any of the following matters, namely:
(a) the restriction of voting rights to members only;
(b) the regulation of voting rights in respect of any matter placed before the stock exchange at any meeting so that each member may be entitled to have one vote only, irrespective of his share of the paid-up equity capital;
(c) the restriction on the right of a member to appoint another person as his proxy to attend and vote at a meeting of the stock exchange.

Conclusion: Koya Stock Exchange can restrict the appointment of MNL Ltd., as proxy and can also restrict the voting rights of PQR Ltd., if rules of the exchange so provide. If it is not so provided, rules may be amended and after getting approval of the C.G. regarding amendment, these rights can be exercised.

Question 14.
SEBI is of the opinion that in the interest of investors it is desirable to amend the rules of XYZ Stock Exchange prohibiting the appointment of the broker-member as President of the stock exchange. Explain with reference to the provisions of the Securities Contracts (Regulation) Act, 1956 whether it is possible for SEBI to amend the rules of the Stock Exchange if the rules are not amended by the stock exchange.
Answer:
Power of Central Government/SEBI to direct rules to be made or to make rules:

Sec, 8 of the Securities Contracts (Regulation) Act, 1956 empowers the SEBI to issue written order directing all or any of the recognized stock exchanges to make any rules or to amend any rules already made within 2 months from the date of the order in respect of matters specified in section 3(2).

One of the matters specified in Sec. 3 (2) is the governing body of stock exchange, its constitution and powers of management and the manner in which its business is to be transacted.

Hence, SEBI is empowered to direct the Stock Exchange in respect of prohibition of broker-member being appointed as president of the stock exchange.

If stock exchange fails or neglects to comply with any order made by SEB1 within 2 months, SEBI may itself make the rules made, either in the form prepared in the order or with such modifications thereof as may be agreed to between the stock exchange and SEBI. The amended rules should be published in the Gazette of India and also in the Official Gazette of the State in which the principal office of the recognized stock exchange is situated. After such publication, the rules will be valid, as if they had been made or amended by the stock exchange itself.

Question 15.
The management of Rainpur Stock Exchange desires to transfer its duties and functions to a clearing corporation. Advise the management oi the said stock exchange about the extent of control which may be exercised by the clearing corporation under the Securities Contracts (Regulation) Act, 1956.
Answer:
Clearing Corporation:
Sec. 8A of the Securities (Contracts) Regulation Act, 1956 provides that a recognised stock exchange may, with the prior approval of SEBI, transfer the duties and functions of a clearing house to a clearing corporation, being a company incorporated under the Companies Act for the purpose of –

the periodical settlement of contracts and differences thereunder;
the delivery of, and payment for, securities;
any other matter incidental to, or connected with, such transfer.

Every clearing corporation shall, for the purpose of transfer of the duties and functions of a clearing house to a clearing corporation make bye-laws and submit the same to the SEBI for its approval.
SEBI may grant the approval to the bye-laws submitted to it, upon being satisfied that the same is in public interest.

Question 16.
A recognized stock exchange proposes to make bye-laws for the regulation and control of contracts relating to the purchase and sale of securities. State the legal requirements under the Securities Contracts (Regulation) Act, 1956 to give effect to the proposal. Explain the powers of the Securities and Exchange Board of India to amend the bye-laws of a recognized stock exchange. [Nov. 13 (6 Marks)]
Answer:
Power of Stock Exchange to make bye-laws:

Sec. 9 of the Securities (Contracts) Regulation Act, 1956 provides the provisions relating to powers of recognised stock exchange to make bye-laws. Accordingly, any recognized stock exchange may make bye-laws for the regulation and control of contracts relating to the purchase and sale of securities subject to the previous approval of the SEBI. The bye-laws made under this section may

(i) specify the bye-laws, the contravention of which shall make a contract void and

(ii) provide that the contravention of any of the bye-laws shall render the member concerned liable to punishments, namely, fine or expulsion from membership or suspension from membership or any other penalty of a like nature not involving the payment of money.

Any bye-laws made under this section shall be subject to such conditions in regard to previous publication as may be prescribed, and, when approved by the SEBI, shall be published in the Gazette of India and also in the Official Gazette of the State in which the principal office of the recognized stock exchange is situated, and shall have effect as from the date of its publication in the Gazette of India.

If the SEBI is satisfied, in any case, that in the interest of the trade or in the public interest any bye-laws should be made immediately, it may, by order in writing specifying the reasons therefore, dispense with the condition of previous publication.

Power of SEBI to amend bye-laws:
Section 10 of the Securities Contracts (Regulation) Act, 1956 empowers the SEBI to amend bye-laws of a recognized stock exchange. Accordingly,

SEBI may either on a request in writing received by it in this behalf from the governing body of a recognised stock exchange or on its own motion amend any bye-laws made by such stock exchange. SEBI will have to be satisfied, after consultation with the governing body of the stock exchange that it is necessary or expedient to amend the bye-laws and record its reasons also.

Amended bye-laws should be published in the Gazette of India and also in the Official Gazette
of the State in which the principal office of the stock exchange is situated.
If the stock exchange has any objection to the amendments made by the SEBI, it may, within 2 months apply to the SEBI for revision.

Question 17.
Describe the provisions of the Securities Contracts (Regulation) Act, 1956 regarding the powers of the Central Government to supersede the Governing Body of a recognized Stock Exchange and the consequences of such supersession.
Answer:
Power of C.G. to supersede the governing body of a recognised stock exchange:

As per Sec. 11 of the Securities Contracts (Regulation) Act, 1956, If the C.G. is of the opinion that the governing body of any recognised stock exchange should be superseded, then C.G. may serve a written notice to the governing body of such stock exchange that the C.G. is considering the supersession of the governing body for the reasons specified in the notice.

The C.G. after giving an opportunity to the governing body to be heard in the matter, may, by notification in the Official Gazette,
(a) declare the governing body of such stock exchange to be superseded, and
(b) may appoint any person or persons to exercise and perform all the powers and duties of the governing body, and, where more persons than one are appointed, may appoint one of such persons to be the chairman and another to be the vice-chairman thereof.

(b) the person or persons appointed by C.G. may exercise and perform all the powers and duties of the governing body which has been superseded;

(c) all such property of the recognised stock exchange as specified in the order, issued by the person appointed by C.G. may, as being necessary for the purpose of enabling him to carry on the business of the stock exchange, shall vest in such person.

Question 18.
Complaints of unethical practices have been received against members of the Governing Body of a Recognized Stock Exchange. Examine whether the Government has any power to take action against the Governing Body of the said exchange.
Or
Determine with the reference to the provisions of the SCRA, 1956: Where the working of the governing body of the stock exchange is unethical. The Central Government served a written notice for the supersession of the governing body. [MTP-Aug. 18]
Answer:
Power of C.G. to supersede the governing body of a recognised stock exchange:
In case of complaints of unethical practices being received against members of the Governing Body of a Recognized Stock Exchange, C.G. may take action u/s 11 to supersede the governing body of stock exchange.

Power of C.G. to supersede the governing body of a recognised stock exchange:

Consequences of supersession:
On the publication of a notification in the Official Gazette of supersession, the following consequences
shall ensue, namely:
(a) the members of the governing body which has been superseded shall, as from the date of the notification of supersession, cease to hold office as such members;
(b) the person or persons appointed by C.G. may exercise and perform all the powers and duties of the governing body which has been superseded;
(c) all such property of the recognised stock exchange as specified in the order, issued by the person appointed by C.G. may, as being necessary for the purpose of enabling him to carry on the business of the stock exchange, shall vest in such person.

Question 19.
Complaints of unethical practices have been received against members of a recognized Stock Exchange by the Government. Examine whether the government has any power to suspend the business of such a recognized Stock Exchange. [Nov. 14 (6 Marks)]
Or
Referring to the provisions of the Securities Contracts (Regulation) Act, 1956: Examine the extent to which the Central Government is empowered to suspend business of a recognized Stock Exchange.
Answer:
Power to suspend business of recognised stock exchange:

As per Sec. 12 of the Securities Contracts (Regulation) Act, 1956,if in the opinion of the C.G. an emergency has arisen and for the purpose of meeting the emergency the C.G. considers it expedient so to do, it may, by notification in the Official Gazette, direct a recognised stock exchange to suspend such of its business for such period not exceeding 7 days and subject to such conditions as may be specified in the notification.

If, in the opinion of the C.G., the interest of the trade or the public interest requires that the period should be extended, the C.G. may, by like notification extend the said period from time to time.

Question 20.
RSE Stock Exchange Limited, a recognised stock exchange is involved in trading of shares of Son Limited. The SEBI on receiving a complaint from a group of investors enquired and found that trading of shares of Son Limited is being conducted in a manner detrimental to the interest of the general investors. In order to curb the same, the SEBI wants to issue some directions to RSE Stock Exchange Limited.

Referring to the provisions of the Securities Contracts (Regulation) Act, 1956, discuss whether the SEBI has power to issue such directions. Can such directions be given to an individual who made some profit in any transaction in contravention of any provision of the Securities Contracts (Regulation) Act, 1956, or regulations made thereunder?
[Nov. 19 – Old Syllabus (6 Marks)]
Answer:
Power to issue directions
As per Sec. 12A of the Securities Contract (Regulation) Act,’ 1956, where the SEBI is satisfied after an inquiry, that it is necessary –
(a) in the interest of investors, or orderly development of securities market; or
(b) to prevent the affairs of any recognised stock exchange, or, clearing corporation, or such other agency or person, providing trading or clearing or settlement facility in respect of securities, being conducted in a manner detrimental to the interests of investors or securities market; or
(c) to secure the proper management of any such stock exchange or clearing corporation or agency or person, referred to in clause (b),
it may issue such directions, –
(i) to any stock exchange or clearing corporation or agency or person referred to in clause (b) or any person or class of persons associated with the securities market; or
(ii) to any company whose securities are listed or proposed to be listed in a recognised stock exchange,
as may be appropriate in the interests of investors in securities and the securities market.
Conclusion: SEBI may issue such direction to RSE Stock Exchange Ltd.

Explanation given in the section clarifies that power to issue directions under Sec. 12A shall include and always be deemed to have been included the power to direct any person, who made profit or averted loss by indulging in any transaction or activity in contravention of the provisions of this Act or regulations made thereunder, to disgorge an amount equivalent to the wrongful gain made or loss averted by such contravention.

So, accordingly the directions can be given to an individual who had made some profit in any transaction in contravention of any provision of the Securities Contracts (Regulation) Act, 1956.

Question 21.
Delhi Stock Exchange wants to establish additional Trading Floor. Explain briefly the meaning of and procedure for establishing additional Trading Floor.
Answer:
Additional Trading Floor:

Additional Trading Floor means a trading facility offered by a recognized stock exchange outside its area of operation to enable the investors to buy and sell securities through such trading floor under the regulatory frame work of that stock exchange.

As per Sec. 13A of the Securities Contracts (Regulation) Act, 1956 a stock exchange may establish additional trading floor with the prior approval of the SEBI in accordance with the terms and conditions stipulated by the said Board.
Conclusion: Delhi Stock Exchange may establish an additional trading floor with prior approval of the SEBI.

Question 22.
M/s AB & Company, a member of a recognised stock exchange proposes to buy and sell shares of a particular company on behalf of investors as well as on their own account. They seek your advice as to restrictions, if any, under Securities Contracts (Regulation) Act, 1956 for dealing in securities on their own account. Advise. [MTP-April 18]
Or
M/s Ganesliam & Company is a member of recognized stock exchange. Nova Crafts Export Limited desires that shares of the company may be bought and sold by M/s Ganesham & Company on their own as well as on behalf of the investors.
Advise M/s Ganesham & company whether they can do so under the provisions of the Securities Contracts (Regulation) Act, 1956. [May 11 (5 Marks)]
Answer:
Members not to act as principals in certain circumstances:

As per section 15 of the Securities Contract (Regulation) Act, 1956, no member of a recognised stock exchange shall enter into any contract as a principal with any person, other than a member of a recognised stock exchange, unless he has secured the consent or authority of such person and discloses the same in the note, memorandum or agreement of sale or purchase that he is acting as a principal.

However, where the member has secured the consent or authority of such person, otherwise than in writing, he shall secure written confirmation by such person or such consent or authority within 3 days from the date of contract.

Further, no such written consent or authority of such person shall be necessary for closing out any outstanding contract entered into by such persons in accordance with the bye-laws, if the member discloses in the note, memorandum or agreement of sale or purchase in respect of such closing out that he is acting as a principal.

Conclusion: Member of a recognised stock exchange may buy and sell shares on their own account after complying with the requirements of Sec. 15.

Question 23.
MNC Limited whose shares are listed on a recognized Stock Exchange, are delisted by the Stock Exchange. The company seeks your advise on the remedies available to the company against the order of the Stock Exchange. Referring to the provisions of the Securities Contracts (Regulation) Act, 1956, advise the company.
Answer:
Delisting of Securities:
Sec. 21A of the Securities Contracts (Regulation) Act, 1956 describes the provisions regarding delisting of securities by a recognised stock exchange. Accordingly,

A recognised stock exchange may delist the securities, after recording the reasons therefore, from any recognised stock exchange on any of the ground or grounds as may be prescribed under this Act.

The securities of a company shall not be delisted unless the company concerned has been given a reasonable opportunity of being heard.

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

Securities Appellate Tribunal may, if it is satisfied that the company was prevented by sufficient cause from filing the appeal within the said period, allow it to be filed within a further period not exceeding one month.
Conclusion: MNC Ltd. may lodge appeal with Securities Appellate Tribunal within 15 days.

Question 24.
DVJ Ltd., a company incorporated under the Companies Act, 1956 applies to Bombay Stock Exchange for listing of its shares. The Stock Exchange refuses to grant listing without assigning any reasons for refusal. Company seeks your advice on the options available to it against the Stock Exchange and wants to move the Court. Examining the provisions of the Securities Contracts (Regulation) Act, 1956, advise the company. [May 12 (6 Marks)]
Or
Softskin Soaps and Consumer Goods Limited has applied to Delhi Stock Exchange to list its securities. The Board of the Stock Exchange after one month refused to list the securities and returned the application. The information of refusal is received by the company on 10th April 2021. The company is aggrieved by the refusal of stock exchange. What is the remedy available under the Securities Contracts (Regulations) Act, 1956? [Nov. 20 – Old Syllabus (3 Marks)]
Answer:
Right of appeal to Securities Appellate Tribunal (SAT) against refusal of stock exchange to list securities of public companies:

As per Sec. 22 A of the Securities Contracts (Regulation) Act, 1956, where a recognised stock exchange, acting in pursuance of any power given to it by its bye-laws, refuses to list the securities of any company, the company shall be entitled to be furnished with reasons for such refusal, and may:

(a) within 15 days from the date on which the reasons for such refusal are furnished to it, or
(b) where the stock exchange has omitted or failed to dispose of, within the time specified, the application for permission for the shares or debentures to be dealt with on the stock exchange, within 15 days from the date of expiry of the specified time or within such further period, not exceeding 1 month, as the SAT may, on sufficient cause being shown, allow,
appeal to the SAT having jurisdiction in the matter against such refusal, omission or failure.
Conclusion: DVJ Ltd. may lodged an appeal with Securities Appellate Tribunal within 15 days.

Question 25.
Securities of Herbal Products Limited were listed in Madras Stock Exchange, which is a recognized stock exchange. The company has incurred losses during the preceding three consecutive years and it has also negative net worth. On having such information, Madras Stock Exchange decided to delist the securities of the company.

Decide the validity of the decision and explain the provisions of Securities Contract (Regulation) Act, 1956along with the grounds made under the Securities Contracts (Regulation) Rules regarding delisting of securities. [May 18 – New Syllabus (6 Marks)]
Or
MNK Limited has incurred heavy losses during the preceding 3 consecutive financial years and has a negative net worth of ₹ 525 crore as at 31st March, 2020. Trading in securities of Company has remained suspended for a period of more than 9 months. CSE, a recognized Stock Exchange, delisted the securities of MNK Limited. Mr. Y was having 25,000 shares of MNK Limited, purchased at ₹ 100 per share, aggrieved against the decision of the Stock Exchange to delist the securities of MNKLimited.Referringtotheprovisions of the Securities Contracts (Regulation) Act, 1956 examine:
(i) Whether CSE, a recognized Stock Exchange can delist the securities of MNK Limited?
(ii) If yes, state the grounds for delisting.
Answer:
Delisting of Securities:

As per Section 21A of Securities Contract (Regulation) Act, 1956, a recognised stock exchange may delist the securities, after recording the reasons therefore, on any of the ground as may be prescribed. However, securities shell not be delisted unless the company concerned has been given a reasonable opportunity of being heard.

As per Rule 21 of Securities Contract (Regulation) Rules, 1957, a recognized stock exchange may, delist any securities listed thereon on any of the following grounds:
(a) the company has incurred losses during the preceding 3 consecutive years and it has negative networth;
(b) trading in the securities of the company has remained suspended for a period of more than 6 months;
(c) the securities of the company have remained infrequently traded during the preceding 3 years;
(d) the company or any of its promoters or any of its director has been convicted for failure to comply with any of the provisions of the Act or the SEBI Act, 1992 or the Depositories Act, 1996 or rules, regulations, agreements made thereunder, as the case may be and awarded a penalty of not less than ₹ 1 Cr. or imprisonment of not less than 3 years;
(e) the addresses of the company or any of its promoter or any of its directors, are not known or false addresses have been furnished or the company has changed its registered office in contravention of the provisions of the Companies Act; or
(f) shareholding of the company held by the public has come below the minimum level applicable to the company as per the listing agreement under the Act and the company has failed to raise public holding to the required level within the time specified by the recognized stock exchange.

In the present case. Stock Exchange decided to delist the securities of the company on the ground that the company has incurred losses during the preceding three consecutive years and it has also negative net worth.
Conclusion: Stock Exchange can delist the securities after providing a reasonable opportunity of being heard to the company.

Question 26.
Aggrieved by the order of Securities Appellate Tribunal (SAT), MNO Ltd. decided to prefer an appeal with the supreme court. Identify the provisions governing further appeal on the order by the company under the provision of Securities Contracts (Regulation) Act, 1956. Also state whether any question of fact arising out of the order of SAT can be challenged in the appeal? [Nov. 18-New Syllabus (3 Marks)]
Answer:
Right of appeal to Supreme Court:

As per Sec. 22F of the Securities Contracts (Regulation) Act, 1956, any person aggrieved by any decision or order of the Securities Appellate Tribunal may file an appeal to the Supreme Court within 60 days from the date of communication of the decision or order of the Securities Appellate Tribunal to him on any question of law arising out of such order.

However, the Supreme Court may, if it is satisfied that the appellant was prevented by sufficient cause from filing the appeal within the said period, allow it to be filed within a further period not exceeding 60 days.
Conclusion: Appeal can be made for any question of law and not for any question of fact arising out of order.

Question 27.
Referring to the provisions of the Securities Contracts (Regulation) Act, 1956 state how a recognized stock exchange may delist the securities and how an appeal may be filed by an aggrieved investor against the decision of stock exchange for delisting of securities. [RTP-Nov. 19]
Answer:
Delisting of Securities:

As per Rule 21 of Securities Contract (Regulation) Rules, 1957, a recognized stock exchange may, delist any securities listed thereon on any of the following grounds:

(a) the company has incurred losses during the preceding 3 consecutive years and it has negative networth;

(b) trading in the securities of the company has remained suspended for a period of more than 6 months;

(d) the company or any of its promoters or any of its director has been convicted for failure to comply with any of the provisions ofthe Act or the SEBI Act, 1992 or the Depositories Act, 1996 or rules, regulations, agreements made thereunder, as the case may be and awarded a penalty of not less than ₹ 1 Cr. or imprisonment of not less than 3 years;

(e) the addresses of the company or any of its promoter or any of its directors, are not known or false addresses have been furnished or the company has changed its registered office in contravention of the provisions of the Companies Act; or

(f) shareholding of the company held by the public has come below the minimum level applicable to the company as per the listing agreement under the Act and the company has failed to raise public holding to the required level within the time specified by the recognized stock exchange.

Delisting of Securities:
Sec. 21A of the Securities Contracts (Regulation) Act, 1956 describes the provisions regarding delisting of securities by a recognised stock exchange. Accordingly,

A recognised stock exchange may delist the securities, after recording the reasons therefore, from any recognised stock exchange on any of the ground or grounds as may be prescribed under this Act.

The securities of a company shall not be delisted unless the company concerned has been given a reasonable opportunity of being heard.

Question 28.
RPS Ltd. got its shares listed with a Stock Exchange. It has been regularly paying the listing fees. Certain information about shareholding pattern etc. was asked by the Stock Exchange, which the company could not supply in the prescribed time. It was then given a further opportunity to furnish the desired information along with supporting document, but in vain, as the company did not maintain any record. What are the penalties leviable against the company under the Securities Contracts (Regulation) Act, 1956 for the failure to furnish the information? [Nov. 15 (4 Marks)]
Answer:
Penalties leviable against the company for the failure to furnish the information:
As per Sec. 23A of the Securities Contracts (Regulation) Act, 1956, any person who is required under this Act or any rules made thereunder;

(a) to furnish any information, document, books, returns or report to a recognized stock exchange or to the Board fails to furnish the same within the time specified therefore in the listing agreement or conditions or bye-laws of the recognized stock exchange or the Act or rules made thereunder or who furnishes false, incorrect or incomplete information, document, books, return or report shall be liable to a penalty of ₹ 1 lakh for each day during which such failure continues or ₹ 1 crore, whichever is less for each such failure;

(b) to maintain books of account or records, as per the listing agreement or conditions, or bye-laws of a recognised stock exchange and if there is failure to maintain the same, shall be liable to a penalty of ₹ 1 lakh for each day during which such failure continues or ₹ 1 crore whichever is less.

Conclusion: RPS Ltd. is liable u/s 23A of the Securities Contracts (Regulation) Act, 1956 as it could not supply the certain information asked by the stock exchange and also did not maintain any record. Fine of at least ₹ 1,00,000 but may extend to ₹ 1,00,000 per day during which such failure continues, subject to a maximum of ₹ 1 crore shall be imposed over the company.

Question 29.
SEBI has asked Jaipur Stock Exchange to furnish their books of account and audited financial statements for the period 1st April 2018 to 31st March 2020 within 30 days of the receipt of the communication by the stock exchange. The communication was received by the company on 30th April 2020 and no documents were furnished to SEBI in reply to the notice till 15th June 2019. Can the stock exchange be penalised for this inaction? [MTP – Oct. 18, April 19]
Answer:
Penalties leviable against the company for the failure to furnish the information:

As per Sec. 23A of the Securities Contracts (Regulation) Act, 1956, any person who is required under this Act or any rules made thereunder to furnish any information, document, books, returns or report to a recognized stock exchange or to the Board, fails to furnish the same within the time specified therefore in the listing agreement or conditions or bye-laws of the recognized stock exchange or the Act or rules made thereunder, or who furnishes false, incorrect or incomplete information, document, books, return or report shall be liable to a penalty of at least ₹ 1 lakh which may extend to ₹ 1 lakh for each day during which such failure continues, subject to a maximum of ₹ 1 crore, for each such failure.

In the instant case, communication was received by the company on 30th April 2020 and no documents were furnished to SEBI in reply to the notice till 15th June 2020.

Conclusion: Fine of at least ₹ 1,00,000 but may extend to ₹ 1,00,000 per day during which such failure continues, subject to a maximum of ₹ 1 crore shall be imposed over the company.

Question 30.
XYZ, a recognized stock exchange fails to comply with certain directions issued by the SEBI and the adjudicating officer initiated proceedings for the purpose of imposing penalty. The stock exchange seeks your advice whether it is possible loj>o for settlement of the proceedings. Advise explaining the relevant provisions of the Securities Contracts (Regulation) Act, 1956? [May 16(4 Marks)]
Answer:
Settlement of administrative and civil proceedings:
Sec. 23JA of the Securities Contracts (Regulation) Act, 1956 deals with the provisions relating to settlement of administrative and civil proceedings-. Accordingly,

Any person against whom any proceedings have been initiated or may be initiated under section 12A or section 23-I, may file an application in writing to SEBI proposing for settlement of the proceedings initiated for the alleged defaults.

The Board may, after taking into consideration the nature, gravity and impact of defaults, agree to the proposal for settlement, on payment of such sum by the defaulter or on such other terms as may be determined by the Board.

For the purposes of settlement under this section, the procedure as specified by the Board under the SEBI Act, 1992 shall apply.

No appeal shall lie under section 23L against any order passed by the Board or the adjudicating
officer, as the case may be, under this section.

All settlement amounts, excluding the disgorgement amount and legal costs, realised under this Act shall be credited to the Consolidated Fund of India.
Conclusion: Stock Exchange may apply to SEBI in writing proposing for settlement of the proceedings initiated for the alleged defaults.

Question 31.
Upon complaints been received by SEBI, regarding the listed securities of Blue Rock Limited at the Guwahati Stock Exchange, SEBI has passed an order to delist the securities of the company from the said stock exchange. Blue Rock Limited is aggrieved by the order of the SEBI. Advise the company on the further step that the company can take against the order of SEBI to delist the securities. [RTP – May 19]
Answer:
Appeal to Securities Appellate Tribunal (SAT)

As per Sec. 23L of the Securities Contracts (Regulation) Act, 1956, any person aggrieved, by the order or decision of the recognized stock exchange or the adjudicating officer or any order made by the SEBI, may prefer an appeal before the SAT.

Appeal shall be filed within a period of 45 days from the date on which a copy of the order or decision is received by the appellant. The SAT may entertain an appeal after the expiry of the said period of 45 days if it is satisfied that there was sufficient cause for not filing it within that period.

On receipt of an appeal, the SAT may, after giving the parties to the appeal, an opportunity of being heard, pass such orders thereon as it thinks fit, confirming, modifying or setting aside the order appealed against.

The SAT shall send a copy of every order made by it to the parties to the appeal and to the concerned adjudicating officer.
Conclusion: Blue Rock Ltd. may prefer appeal with Securities Appellate Tribunal within 45 days.

Question 32.
The Securities and Exchange Board of India issued an order against a stock broker to redress the grievances of the investors within the stipulated time. The stock broker failed to do so, which is an offence under the provisions of the Securities Contracts (Regulation) Act, 1956. Decide:
(a) Whether the offence committed by the stock broker is compoundable? If so, by whom?
(b) Whether this offence can he compounded after institution of proceedings against the stock broker? [Nov. 12 (6 Marks)]
Answer:
Compounding of Offences:

As per Sec. 23C of the Securities Contracts (Regulation) Act, 1956, if any stock broker or subbroker or a company whose securities are listed or proposed to be listed in a recognised stock exchange, after having been called upon by the SEBI or a recognised stock exchange in writing, to redress the grievances of the investors, fails to redress such grievances within the time stipulated by the SEBI or a recognised stock exchange, he or it shall be liable to a penalty which shall not be less than ₹ 1 lakh but which may extend to ₹ 1 lakh for each day during which such failure continues subject to a maximum of 11 crore.

As per Sec. 23N of the Act, any offence punishable under Securities Contracts (Regulation) Act, 1956, not being an offence punishable with imprisonment only, or with imprisonment and also with fine, may either before or after the institution of any proceeding, be compounded by a Securities Appellate Tribunal or a court before which such proceedings are pending.

Conclusion: Based on the provisions of Secs. 23C and 23N, following conclusions may be drawn:
(a) Offence committed by the stock broker is compoundable as he is punishable with fine only as provided u/s 23C.
(b) Offence can be compounded after institution of proceedings against the stock broker as it is clearly stated u/s 23N.

Question 33.
Primex Securities (P) Ltd. is a Company involved in stock broking and is registered with SEBI. The said broking company failed to:

Redress the grievances of the investors within the stipulated time.
Segregate securities or money of clients and used the same for self use for or for any other clients.

The Securities and Exchange Board of India issued an Order against the said Company for committing the above offences. The Managing Director of the Company seeks your advice on the following under the provisions of the Securities Contracts (Regulation) Act, 1956.
(i) What is the penalty for the above offences?
(ii) Whether the offence committed by the stock broking company is compoundable? If so, by whom?
(iii) Whether this offence can be compounded after institution of proceedings against the stock broking Company? [Nov. 18-New Syllabus (6 Marks)]
Answer:
Provisions of Securities Contracts (Regulation) Act, 1956:

(i) Penalties leviable for offences committed under Securities Contracts (Regulation) Act, 1956:
Penalty for failure to redress investors grievances: As per Section 23C of Securities Contracts (Regulation) Act, 1956, if any stock broker or sub-broker or a company whose securities are listed or proposed to be listed in a recognised stock exchange, after having been called upon by the SEBI or a recognised stock exchange in writing, to redress the grievances of the investors, fails to redress such grievances within the time stipulated by the SEBI or a recognised stock exchange, he or it shall be liable to a penalty which shall not be less than ₹ 1 lakh but which may extend to ₹ 1 lakh for each day during which such failure continues subject to a maximum of ₹ 1 crore.

Penalty for failure to segregate securities or moneys of client or clients: As per Section 2 3D of Securities Contracts (Regulation) Act, 1956, if any person, who is registered u/s 12 of the SEBI Act, 1992 as a stock broker or sub-broker, fails to segregate securities or moneys of the client or clients or uses the securities or moneys of a client or clients for self or for any other client, he shall be liable to a penalty which shall not be less than ₹ 1 lakh but Which may extend to ₹ 1 crore.

(ii) Compounding of Offences:
As per Sec. 23N ofthe Securities Contracts (Regulation) Act, 1956, any offence punishable under this Act, not being an offence punishable with imprisonment only, or with imprisonment and also with fine, may either before or after the institution of any proceeding, be compounded by a Securities Appellate Tribunal or a court before which such proceedings are pending.

(iii) Compounding of Offence after institution of proceedings:
Offence can be compounded after institution of proceedings against the stock broker as it is clearly stated u/s 23N.

Question 34.
What are the factors to be considered by the Adjudicating Officer while adjudicating the quantum of penalty under Sec. 23-1 of the Securities Contracts (Regulation) Act, 1956? [May 19 – New Syllabus (2 Marks)]
Answer:
Factors to be considered by the Adjudicating Officer while adjudicating the quantum of penalty under Sec. 23-1 of the SCRA, 1956:
As per Sec. 23J of SCRA, 1956, while adjudging the quantum of penalty u/s 23-1, the SEBI or the adjudicating officer shall have due regard to the following factors –
(a) the amount of disproportionate gain or unfair advantage, wherever quantifiable, made as a result of the default;
(b) the amount of loss caused to an investor or group of investors as a result of the default;
(c) the repetitive nature of the default.
The power of the adjudicating officer to adjudge the quantum of penalty under sections 23A to 23C shall be and shall always be deemed to have exercised under the provisions of this section.

Question 35.
Mr. Gupta has transferred his shares in a listed company in his name to Mr. Patel. Due to his busy schedule, Mr. Patel has failed to get the shares registered in his name before the company declared and paid dividend on those shares.
Examine with reference to the provisions of the Securities Contracts (Regulation) Act, 1956, whether Mr. Gupta is entitled to receive and retain the dividend even though he has transferred his shares before declaration of dividend. [May 15 (4 Marks)]
Answer:
Title to dividends:
As per Sec. 27(1) of the Securities Contracts (Regulation) Act, 1956, it shall be lawful for the holder of any security whose name appears on the books of the company issuing the said security to receive and retain any dividend declared by the company in respect thereof for any year, notwithstanding that the said security has already been transferred by him for consideration, unless the transferee who claims the dividend from the transferor has lodged the security and all other documents relating to the transfer which may be required by the company with the company for being registered in his name within 15 days of the date on which the dividend became due.

The period of 15 days shall be extended as follows :

In case of death of the transferee by the actual period taken by his legal representative to establish his claim to the dividend
In the case of loss of the transfer deed by theft or any other cause beyond the control of the transferee, by the actual period taken for the replacement thereof and
In case of delay in the lodging of any security and other documents relating to the transfer due to causes connected with the post, by the actual period of delay.

Conclusion: Considering the provisions of Sec. 27(1), it can be concluded that Mr. Gupta is entitled to receive and retain the dividend received by him if the transferee, Mr. Patel has not lodged the transfer deed with the company withinl5 days of the date on which dividend became due or the extended period.

Question 36.
What is the right of any person to receive the income from collective investment scheme?
Answer:
Right to receive income from collective scheme:
Sec. 27A of the Securities Contracts (Regulation) Act, 1956 set out the provisions relating to right to receive income from collective scheme. Accordingly,

It shall be lawful for the holder of any securities, being units or other instruments issued by the collective investment scheme, whose name appears on the books of the collective investment scheme issuing the said security to receive and retain any income in respect of units or other instruments issued by the collective investment scheme declared by the collective investment scheme in respect thereof for any year, not withstanding that the said security, being units or other instruments issued by the collective investment scheme, has already been transferred by him for consideration, unless the transferee who claims the income in respect of units or other instruments issued by the collective investment scheme from the transfer or has lodged the security and all other documents relating to the transfer which maybe required by the collective investment scheme with the collective investment scheme for being registered in his name within 15 days of the date on which the income in respect of units or other instruments issued by the collective investment scheme became due.

Question 37.
Mr. Bansal holds certain securities on 31st March, 2008, issued in his favour under the “Collective investment Scheme.” For a consideration, Mr. Bansal transferred the said securities in favour of another person. One month after the date on which the income on these securities became due, the transferee lodged the instrument of transfer. Decide in the light of the provisions of the Securities Contracts (Regulation) Act, 1956.
(i) Whether in the given case Mr. Bansal is entitled to receive and retain the income on these securities for the financial year ended 31st March, 2008?
(ii) What would be your answer in case the transferee lodged the instrument of transfer 10 days after the date on which the income on these securities became due?
Answer:
Right to receive income from collective scheme:
Sec. 27Aofthe Securities Contracts (Regulation) Act, 1956 set out the provisions relating to right to receive income from collective scheme. Accordingly, it shall be lawful for the holder of any securities, being units or the other instruments issued by collective investment scheme, whose name appears on the books of the scheme, issuing the said security to receive and retain any income in respect of units issued by the scheme in respect thereof for any year, notwithstanding that the said security, being units issued by the scheme, has already been transferred by him for consideration, unless the transferee who claims the income in respect of units issued by the scheme from the transferor has lodged the security and all other documents relating to the transfer which may be required by the scheme with the scheme for being registered in his name within 15 days of the date on which the income in respect of units or other instruments issued under the scheme become due.

The period of 15 day can be extended in certain contingencies as stated in Explanation to section 27A (1) of the said Act.

Conclusion: Considering the provisions of Sec. 27A, following conclusions may be drawn:
(i) Mr. Bansal, the transferor has right to receive or retain the income of the said securities for the financial year ended 31st March 2008, since the instrument for transfer was lodged 1 month after the date on which the income became due.

(ii) Mr. Bansal, the transferor will not be entitled to receive and retain the income as the instrument for transfer was lodged with the company within the period of 15 days by the transferee.

Question 38.
The Mewar Rural Financial Corporation, Udaipur, established under a special statute issued 5 years bonds to public directly and not through any Stock Exchange. Decide whether the said act of the Mewar Rural Financial Corporation is in violation of the provisions of the Securities Contracts (Regulation) Act, 1956.
Or
Industrial Finance Corporation of India, established under the Industrial Finance Corporation Act, 1948 having its registered office at Mumbai issued 8% Redeemable Bonds redeemable after 7 years. These bunds were issued directly to the members of the public and not through mechanism of Stock exchanges.

You are required to state with reference to the provisions of Securities Contracts (Regulation) Act, 1956, whether such direct issue of bonds by the Industrial Finance Corporation of India is not violating the provisions of the said Act. [May 09 (6 Marks)]
Answer:
Non-Applicability of the Act:

As per Sec. 28 of the Securities Contracts (Regulation) Act, 1956, provisions of this Act shall not apply to the Government, the Reserve Bank of India, any local authority, or corporation set up by a special law or any person who has affected any transaction with or through the agency of any such authority as stated earlier.

In the instant case, Financial institution is a corporation set up under a special statute enacted by the Parliament.

Conclusion: Corporation does not need any permission from a Stock Exchange to issue any Bond or other securities. Accordingly, it has not violated the provisions of the Securities Contracts (Regulation) Act, 1956. The nature and tenure of the Bonds are immaterial.

Minimum Alternate Tax (MAT) – CA Final DT Question Bank

Leave a Comment / CA Final / By Raju / March 29, 2023 March 29, 2023

Minimum Alternate Tax (MAT) – CA Final DT Question Bank is designed strictly as per the latest syllabus and exam pattern.

Minimum Alternate Tax (MAT) – CA Final DT Question Bank

Question 1.
ABC Pvt. Ltd. made a provision of ₹ 30 lakhs for doubtful debts by debit to statement of profit and loss account. The A.O. while computing ‘Book Profit’ u/s 115JB wants to add back the provision. Is the A.O. justified in making such addition for computing Book Profit? [CA Final May 2010] [2 Marks]
Answer:
As per Fixplamuion 1 to See. 115JB, for the purpose of computing book profit “any provision for diminution in the value of any asset” shall be added back to the Profits computed as per Schedule III of the Com- panics Act, 2013.

Since, the provision for bad and doubtful debts is a provision for diminution in the value of debtors (which is an asset), such provision shall be added back in the compulation of Book Profits of the Company.

Question 2.
The profit of TGP Ltd. as per Statement of Profit & Loss Account for the previous year 2020-21 is ₹ 100 lakhs after debiting/crediting the following items:
(i) Proposed Dividend : ₹ 25 lakhs
(ii) Provision for Income-tax : ₹ 20 lakhs
(iii) Provision for Deferred tax : ₹ 8 lakhs
(iv) Depreciation debited to Statement of Profit & Loss Account is ₹ 12 lakhs. This includes depreciation on revaluation of asset to the tune ₹ of ₹ 2 lakhs.
(v) Profit from unit established in Special Economic Zone : ₹ 30 lakhs
(vi) Provision for permanent diminution in value of investments : ₹ 2 lakhs
Brought forward losses and unabsorbed depreciation as per books of company are as follows: (₹ in lakhs)

Previous year	Brought forward loss	Unabsorbed Depreciation
2017-18	3	6
2018-19	–	2
2019-20	10	4

Compute book profit of the company u/s 115JB for A.Y. 2021-22. [CA Final Nov. 2010] [9 Marks]
Answer:
Computation of book profit of ABP Ltd. u/s 115JB for A.Y. 2021-22

Note: Profit from unit established in SEZ, though deductible u/s 10AA, but is not to be deducted for compulation of book profit u/s 115JB.

Question 3.
ABC Ltd. has claimed exemption on Long Term Capital Gains u/s 54EC by investing in bonds of NHAI within the prescribed time. In the computation of “Book Profit” u/s 115JB, the company claimed exclusion of Long Term Capital Gains because of exemption available on it by virtue of section 54EC. The A.O. included long term capital gains for the purpose of levy of MAT u/s 115JB. Is the action of the A.O. justified in law? [CA Final Nov. 2011] [4 Marks]
Answer:
As per the Kerala High Court in the ease of N.J. Jose and Co. P. Ltd. v. ACIT (Ker.) while computing book profit, il the long term capital gain is included in statement of P & L account, (hen such amount cannot be deducted u/s 115JB, since there is no specific exclusion for long term capital gain. So the action of the A.O. is correct.

Question 4.
XYZ Limited’s Profit & Loss Account for the year ended 31sl March; 2021 shows a net profit of ₹ 75 lakhs after debiting/crediting the following items:
(i) Depreciation ₹ 24 lakhs (including ₹ 4 lakhs on revaluation).
(ii) Interest to financial institution not paid before due date of filing return of income ₹ 6 lakhs.
(iii) Provision for doubtful debts ₹ 1 lakh.
(iv) Provision for unascertained liabilities ₹ 2 lakhs.
(v) Transfer to General Reserve ₹ 5 lakhs.
(vi) Net Agricultural Income ₹ 16 lakhs
(vii) Amount withdrawn from Reserve created during 2017-18 ₹ 3 lakhs. (Book profit was increased by the amount transferred to such reserve in Assessment Year 2018-19)

Other Information:
Brought forward loss and unabsorbed depreciation as per books are ₹ 12 lakhs and ₹ 10 lakhs, respectively.
Compute minimum alternate tax under section 115JB for A.Y. 2021-22. [CA Final May 2013] [8 Marks]
Answer:
Computation of ‘Book Profit’ for levy of MAT u/s 115JB for A.Y. 2021-22

Computation of MAT liability u/s 115JB

₹

15% of book prolit

Add: Health & Education Cess @ 4%

8,70,000

34,800

Minimum Alternate Tax liability

9,04,800

Notes:

Since, interest to financial institution not paid before due date is not specifically mentioned under Explanation 1 to Sec. 115JB, it cannot be adjusted from the profit for computing book profit.
Amount withdrawn from reserve is to be excluded while computing “Book Profit” as the said amount was added and increased the book profit of the earlier assessment year.
As per section 115JB, the amount of brought forward loss or unabsorbed depreciation as per books, whichever is less, has to be reduced from profit. In the present question, unabsorbed depreciation is ₹ 10,00,000 and brought forward loss is ₹ 12,00,000 and therefore, ₹ 10,00,000 shall be deducted.

Question 5.
Examine and explain in the context of provisions contained in the Act as to correctness of the action taken by the A.O. of making adjustments for the following items while assessing the Book Profits of Sonu Pvt. Ltd. for the year ended 31.03.2021:

Prior period expenses of ₹ 3 Lakhs debited in statement of profit and loss account.
Depreciation computed at 9.5% as per useful life prescribed under Schedule II of the Companies Act, 2013 charged for whole of the year on the Car valuing ₹ 20 Lakhs purchased on 01.01.2021 in statement of profit and loss account. [CA Final Nov. 2013] [4 Marks]

Answer:
While computing the Book Profit u/s 1 15JB, only those adjustments as provided in the Explanation 1 to section 115JB should be applied.

Any other provisions of the Income Tax Act should not be applied in computation ot Book Profit. All other adjustments under the Act shall be considered only in compulation of Total Income.
Therefore,
(i) Prior period expense cannot be added back, if it is in consonance with the accounting principles and accounting standards adopted by the Company for presentation of accounts at its AGM.

(ii) Depreciation on car I or the period of 9 months prior to its purchase can be added back, since the Companies Act recognizes time proportionate depreciation for assets put to use for part of the year. In such case, depreciation added back = ₹ 20 lakhs × 9.5 % × 9/12 = ₹ 1,42,500.

Alternative view for Depreciation:
The rates prescribed under Schedule II of the Companies Act constitute for maximum useful life. In case the Company has been regularly following the policy of charging full rate of depreciation irrespective of the date of asset purchase, in such case, the amount of depreciation cannot be added back.

Question 6.
Maitri Jeans (P) Ltd. is in the business of manufacturing jeans. For the assessment year 2021-22 it paid tax @ 15% on its book profit computed u/s 115JB. The A.O. though satisfied that it is liable to pay book profit tax u/s 115JB, wants to charge interest u/ss 234B and 234C as no advance tax was paid during the financial year 2020-21. The company seeks your opinion on the proposed levy of interest. Advice. [CA Final May 2015, Nov. 2013] [4 Marks]
Answer:
In the case of JCITv. Rolta India Ltd., the Supreme Court observed that sec. 115JB(5) provides that all other provisions of the Act shall apply to every assessee, being a company mentioned in that section. Based on this provision, the liability of Advance Tax is attracted on MAT. So, if a company defaults in payment of Advance Tax, it would be liable to pay interest u/ss 234B and 234C.

Therefore, even though Maitri Jeans (P) Ltd. is assessed on the basis of its book profit u/s 1 15JB for A.Y. 2021-22, it is liable to pay advance tax. Since Maitri Jeans (P) Ltd. has not paid any advance tax during the financial year 2020-21, the levy of interest u/ss 234B and 234C is valid.

Question 7.
Sona Ltd., a resident company, earned a profit of ₹ 15 lakhs after debit/credit of the following items to its Statement of Profit and Loss for the year ended on 31.03.2021:
(i) Items debited to Statement of Profit and Loss: ₹
Provision for the loss of subsidiary : 70,000
Provision for doubtful debts : 75,000
Provision for income tax : 1,05,000
Provision for gratuity based on actuarial valuation : 2,00,000
Depreciation : 3,60,000
Interest to financial institution (unpaid before filing of re-turn) : 1,00,000
Penalty for infraction of law : 50,000

(ii) Items credited to Statement of Profit and Loss:
Profit from unit established in special economic zone : 70,000
Share in income of an AOP as a member : 75,000
Income from units of UTI : 1,05,000
Long term capital gains : 2,00,000

Other Information:
(i) Depreciation includes ₹ 1,50,000 on account of revaluation of fixed assets.
(ii) Depreciation as per Income-tax Rules is ₹ 2,80,000.
(iii) Balance of Statement of Profit and Loss shown in Balance Sheet at the asset side as at 31.03.2020 was ₹ 10 lakhs which includes unabsorbed depreciation of ₹ 4 lakhs.
(iv) The capital gain has been invested in specified assets under section 54EC
(v) The AOP, of which the company is a member, has paid tax at maximum marginal rate.
(vi) Provision for income-tax includes ₹ 45,000 of interest payable on income-tax.

Compute minimum alternate tax u/s 115JB of the Income-tax Act, 1961, for A.Y. 2021-22. [CA Final May 2016] [10 Marks]
Answer:
Computation of “Book Profit” for levy of MAT u/s 115JB for A.Y. 2021 -22

Computation of MAT liability u/s 115JB

₹

15% of book profit

Add: Health & Education Cess @ 4%

2,13,750

8,550

Minimum Alternate Tax liability

2,22,300

Notes:
(1) As per Explanation 2 to section 115JB, income tax shall include, inter alia, any interest charged under the Act, therefore, the amount of provision for income-tax including ₹ 45,000 towards interest payable has to be added.

(2) In a case, where AOP has paid tax on its total income at maximum marginal rate, no income-tax is payable by the company, being a member of AOP, in accordance with the provisions of section 86. Therefore, as per clause (iic) of Explanation 1 to section 115JB, share ; in income of an AOP on which no income-tax is payable in accordance with the provisions of section 86, would be reduced while computing book profit, since the same has been credited to statement of profit and loss account.

(3) As per the amendment made by the Finance Act, 2020, w.e.f. A.Y. 2021-22, the income from units of UTI is not exempt u/s 10(35) but shall be taxable in the hands of unitholders and therefore, it shall not be reduced while computing book profits.

(4) As per clause (iii) of Explanation 1 to section 115JB, lower of unabsorbed depreciation ₹ 4,00,000 and brought forward business loss ₹ 6,00,000 as per books of account has to be reduced while computing the book profit.

(5) Items which are not specifically mentioned under Explanation 1 to section 115JB cannot be adjusted from the profit for computing book profit for levy of MAT and therefore, the following items since not specifically mentioned thereunder cannot be adjusted for computing book profit:

Interest to financial institution (unpaid before filing of return) and
Penalty for infraction of law

(6) Provision for gratuity based on actuarial valuation is an ascertained liability [CIT v. Echjay Forgings (P) Ltd. (2001) (Bom.)]. Hence, the same should not be added back to compute book profit.

(7) As per proviso to section 115 JB(6), the profits from unit established in special economic zone cannot be excluded while computing the book profit, and hence, such income would be liable for MAT.

(8) Long-term capital gains cannot be deducted while computing book profit even if such amount of capital gains is invested in specified assets under section 54EC, since book profit has to be computed by adding/ deducting the items mentioned under Explanation 1 to section 115JB alone. Capital Gains reflected in the statement of profit and loss shall be part of book profit under section 115JB. Capital gains exempted under section 54EC cannot also be excluded for computing book profit. [CIT v. Veekaylal Investment Co. P. Ltd. (2001) (Bom.)’& N Jose and Co. (P) Ltd. v. ACIT (2010) (Ker.)]

Question 8.
Share of member of an AOP/BOI in the income of the AOP/BOI is to be reduced from net profit for computing “book profit” for levy of minimum alternate tax with effect from Assessment Year 2016-17. Explain the rationale behind the amendment. [CA Final Nov. 2016] [4 Marks]
Answer:
Under section 86, no income-tax is payable on the share of a member of an AOP/BOI in the income of the AOP/BOI in certain circumstances. A company which is a member of an AOP is also not required to pay tax in respect of its share in the income of the AOP/BOI in such cases.

However, under section 115JB, a company which is a member of an AOP/ BOI was liable to pay Minimum Alternate Tax (MAT) on such share, since such income was not excluded from the book profit while computing the MAT liability of the member, being a company upto A.Y. 2015-16.

It may be noted that in the case of a partner of a firm, t he share in the profits of the firm is exempt in the hands of the partner as per section 10(2A) and no MAT is payable by the partner on such profits, since income in respect of which any provision of section 10 [other than section 10(38)] applies, has to be reduced for computing book profit for levy of MAT.

In order to ensure equity, with effect from A.Y 2016-17, it has been provided that, as per clause (iic) inserted in Explanation 1 to section 115JB, the share of a member of an AOP or BOI, in the income of the AOP or BOI, on which no income-tax is payable in accordance with the provisions of section 86, should be reduced while computing book profit for levy of MAT, if any such amount is credited to profit and loss account.

Question 9.
Viraj Exports Limited, a domestic company, earned profit of ₹ 95 lakhs as per statement of Profit and Loss Account for the year ended 31.3.2021, after debiting or crediting the following items:

Other Information:
(a) Depreciation as per the Income-tax Act, 1961 ₹ 3,50,000.
(b) Depreciation (as per books) includes ₹ 1,90,000 on account of revaluation of assets.
(c) Interest on borrowed capital ₹ 1,00,000 payable to Y, not debited to profit and loss account.
(d) Profit and Loss account in balance sheet on the assets side as at 31.03.2020 was ₹ 4,70,000 which included unabsorbed depreciation of ₹ 4,10,000.
(e) The company is an eligible assessee as per the provision of section 115BBF of Income Tax Act 1961.
Compute the minimum alternate tax (MAT) under section 115JB of the Income-tax Act, 1961. [CA Final May 2017] [10 Marks]
Answer:
Computation of “Book Profit” for levy of MAT under section 115JB for A.Y. 2021-22

Notes:
(1) As per Explanation 2 to 115JB(2), income tax shall include, inter alia, any interest charged under the Act. So the whole amount of provision for income-tax including ₹ 50,000 towards interest payable has to be added.

(2) As per Explanation 1 to 115JB(2), amount carried to any reserve, by whatever name called shall be added back for computing book profit.

(3) Net agricultural income shall be reduced as per Explanation 1 to section 115JB(2), since it is exempt under section 10(1). However, dividend income shall not be reduced, since as per the amendment made by the Finance Act, 2020, the dividends are not exempt u/s 10(34) but shall be taxable in the hands of shareholders.

(4) Long term profit on sale of rural agricultural land is not chargeable to tax under the normal provisions of the Income-tax Act, 1961, since rural agricultural land is not a capital asset as per section 2(14). However, the same cannot be reduced while computing book profit, since no express provision is there u/s 115JB to exclude such profits while computing book profit. Therefore, profit on sale of rural agricultural land reflected in the statement of profit and loss shall be part of book profit, though the same is not chargeable to tax as per normal provisions.

Note: An alternate view is possible that the capital gains on sale of rural agricultural land is to be reduced while computing book profit, by considering the same as agricultural income [based on the interpretation derived from a plain reading of clause (a) of section 2(1A) along with Explanation 1 thereto],

(5) As per proviso to section 115JB(6), the profits from unit established in SEZ cannot be excluded while computing book profit, and hence, such income would be liable for MAT.

(6) As per Explanation 1 to section 115 JB, income from royalty in respect of patent developed and registered in India shall be .excluded from book profit, since the same is chargeable to tax u/s 115BBF.

(7) No adjustment is required in respect of interest on borrowed capital of ₹ 1,00,000 payable to Y, not debited to profit and loss account, since the profit as per the Statement of Profit and Loss prepared as per the Companies Act and the items specified for exclusion/inclusion under section 115 JB alone have to be considered while computing the book profit for levy of MAT.

(8) As per Explanation 1 to section 115JB(2), lower of unabsorbed depreciation ₹ 4,10,000 and brought forward business loss ₹ 60,000 as per books of account has to be reduced while computing the book profit.

(9) Items which are not specifically mentioned under Explanation 1 to section 115JB(2) cannot be adjusted from the profit for computing book profit for levy of MAT and therefore, the following items since not specifically mentioned thereunder cannot be adjusted for computing book profit:

Sale tax liability
Interest to financial institution (unpaid before filing of return) and
Penalty for infraction of law.

Question 10.
Arnold Ltd. (incorporated in UK) has a branch office (PE) in India. The Net Profit of the Branch as per the statement of profit and loss for the year ended 31.03.2021 was ₹ 83 lakhs. It includes the following:
(i) Dividend from Indian companies (listed) ₹ 8,00,000.
(ii) Dividend from Indian companies (unlisted) ₹ 4,00,000.
(iii) Interest received from MMS Ltd. of Mumbai ₹ 7,00,000. The amount was received by the Indian company MMS Ltd. in foreign currency as per loan agreement dated 01.04.2016 (Sec. 194LC applicable).
(iv) Fee for technical services received from Barun Co. Ltd., Kolkata ₹ 25,00,000. The agreement was made on 10.08.2009 and was approved by Central Government. Expenditure incurred for providing technical service amounts to ₹ 6,00,000.

Additional information:
Total income chargeable to tax as per regular provisions of the Income-tax Act, 1961 (Act) is ₹ 20,00,000 (without considering the items (i) to (iv) above).
Compute the book profit and tax u/ s 115JB for the A.Y. 2021 -22 and also the total income-tax liability of the assessee. [CA Final May 2018 (Old Syllabus)] [10 Marks]
Answer:
Computation of Book Profit of Arnold Ltd. u/s 115JB for A.Y. 2021-22

₹

Net Profit as per the statement of Profit and loss account

Less: Net Profit to be decreased [As per Explanation 1 to Sec. 115JB]

Interest received from MMS Ltd. of Mumbai [Note 2]

83,00,000

(7,00,000)

Book Profit as per Sec. 115JB

76,00,000

Computation of Tax payable as per the provisions of MAT

₹

15% of book profit

Add: Health & Education cess @ 4%

11,40,000

45,600

11,85,600

Notes:
1. As per Explanation 1 to Sec. 115JB, income which is exempt u/s 10 shall be reduced from the net profit while computing book profit. However, from A.Y. 2021-22, the dividends are not exempt u/s 10(34) but are taxable in the hands of the shareholders. Therefore, it shall not be reduced from net profit while computing book profit.

2. As per Explanation 1 to Sec. 115JB, interest received by a foreign company and chargeable to tax at the rates specified in Chapter XII which is less than the rate specified in Sec. 115JB(1) i.e. 15%, shall be reduced from the net profit while computing book profit. The interest received from MMS Ltd. of Mumbai shall be chargeable under Chapter XII @ 5% and therefore, it shall be reduced from the net profit.

3. Fees for technical services has not been reduced from the net profit by assuming that Arnold Ltd. has choose to tax the same on the net income basis u/s 44DA.

Computation of Total Income of Arnold Ltd. as per Normal Provisions

Computation of Tax payable as per Normal Provisions

	₹
Tax u/s 115A(1) (a) (₹ 7,00,000 × 5%) Tax on Balance Amount (₹ 51,00,000 × 40%)	35,000 20,40,000
Total tax Add: Health & Education cess @ 4%	20,75,000 83,000
Total Tax Liability	21,58,000

Since, the tax liability of Arnold Ltd. under the normal provisions is higher that the tax liability under the provisions of MAT, Arnold Ltd. will be liable to pay the tax under the normal provisions and its tax liability shall be ₹ 21,58,000.

Question 11.
Zenith Formulations Ltd., an Indian Company engaged in pharmaceutical formulations in Tamil Nadu, started adoption of Ind AS compliance with effect from 1^st April, 2019. The following particulars are furnished for the year ended 31st March, 2021:

(i) The book profits after adjustments of all items specified in section 115JB(2) amounted to ₹ 52.26 lakhs (except the adjustment for brought forward losses), for the year ended 31.3,2021.
(ii) Brought forward losses as per books are as under : (₹ In lakhs)

Financial Year	Business loss	Depreciation
2017-18	4.60	4.90
2018-19	1.75	2.20

(iii) The business loss of ₹ 4,60 lakhs and ₹ 1.75 lakhs have been deducted h while computing book profits u/s 115JB for the assessment years 2019-20 & 2020-21, respectively.
(iv) The particulars of Other Comprehensive Income for the year ended 31.03.2021: (₹ In lakhs)

(v) The transition amount as on convergence date (01-04-2019) stood at ₹ 52.50 lakhs (credit balance) include capital reserve of ₹ 8 lakhs and adjustment of ₹ 4.50 lakhs relating to translation difference in a foreign operation.

(vi) The National Company Law Tribunal (NCLT), Chennai Bench has admitted an application under section 7 of Insolvency and Bankruptcy Code, 2016 (IBC) made by financial creditor against the company for initiation of Corporate Insolvency Resolution Process on 30lh March, 2021.

Compute the MAT liability for the assessment year 2021-22. applying the provisions relating to Ind AS compliant companies.

Assuming that the income tax under normal provisions of Income-tax Act, 1961 for the assessment year 2021-22 works out to ₹ 7.20 lakhs, compute the tax credit, if any, to be carried forward by the company including the period up to which it will be available to be carried forward. [CA Final Nov. 2018 (Old Syllabus)] [10 Marks]
Answer:
Computation of Book Profit of Zenith Formulations Ltd. u/s 115JB for A.Y. 2021-22

Computation of Tax Payable as per provisions of MAT

In the present case, since income-tax payable (computed) on total income as per the provisions of the Act is less than 15% of book profit, the book profit of ₹ 63,96,000 is deemed to be the total income and income-tax is payable @15% thereof plus Health & Education cess @ 4%. The tax liability, therefore, works out to be ₹ 9,97,776.

Section 115JAA provides that where tax is paid in any assessment year in relation to the deemed income under section 115 JB( 1), the excess of tax so paid, over and above the tax payable under the other provisions of the Income-tax Act, 1961, will be allowed as tax credit in the subsequent years.

The said tax credit is allowed to be carried forward for 15 assessment years succeeding the assessment year in which the credit became allowable.

Such credit is allowed to be set-off against the tax payable on the total income in an assessment year in which the tax is computed in accordance with the provisions of the Act, other than section 115JB, to the extent of excess of such tax payable over the tax payable on book profits in that year.

Question 12.
Anustup Chandra Flour mills Ltd, a domestic company engaged in manufacture of wheat flow, furnishes the following information pertaining to the year ended 31.3.2021:

(i) Net profit as per the statement of Profit and Loss is ₹ 77 lakhs, after considering the items listed in (ii) to (vi) below.

(ii) The company i§ a member of Vishnu Food & Co., an AOP in which the members’ shares are determinate and their shares in profit/loss are clearly known. The entire income of the AOP is from business activities. During the year, the company has derived share income of ₹ 9 lakhs frorfi the AOP. The company has spent a sum of ₹ 90,000 towards earning such income.

(iii) The company has provided for income-tax (including interest under sections 234B and 234C of ₹ 62,000) for ₹ 3 lakhs, and ₹ 5 lakhs towards share in loss of foreign subsidiary.

(iv) Amount debited to the statement Profit and Loss towards interest to a public financial institution is ₹ 12 lakhs. Of this, ₹ 4 lakhs was paid on 12-12-2020 only.

(v) The company committed breach of building norms while extending the factory building. The City Corporation initiated proceedings against the company and the company settled the issue by paying compounding fee of ₹ 1 lakh. This amount forms part of general expenses, which has been debited to the statement Profit and Loss.

(vi) In the administrative expenses, the company has debited a sum of ₹ 70,000 towards fee for delayed filing of statement of TDS under section 234E of the Income-tax Act, 1961.

(vii) The company has credited revaluation surplus of ₹ 10 lakhs on fair valuation of assets under Ind AS 16 and Ind AS 38 to other equity.

(viii) The company has credited ₹ 5 lakhs to other comprehensive income ! on fair valuation of equity instruments in which the company has Investment.

During the current year, the depreciation charged as per books of account of the company is the same as allowable under the IT Act, 1961 [before considering the provisions of section 32(2)]. The company proposes to adopt this practice consistently in the future years.

You are required to compute the income-tax payable by the company for the assessment year 2021-22. The company is an Indian Accounting standard compliant company.
Note: The Turnover of company for the P.Y. 2018-19 was ₹ 400 crore. [CA Final Nov. 2018 (New Syllabus] [14 Marks]
Answer:
Computation of Total Income of Anustup Chandra Flour Mills Ltd for the A.Y. 2021-22

Computation of Tax Payable as per provisions of MAT

₹

15% of book profit

Add: Health & Education Cess @ 4%

11,53,500

46,140

11,99,640

In the present case, since the income-tax payable on the total income computed as per the provisions of the Act is not less than 15% of its book profit, section 115JB will not apply for A.Y. 2021-22. So, the company’s total income is ₹ 85,90,000 and the tax liability therefore works out to be ₹ 22,33,400.

Notes:
1. As per Sec. 43B, interest paid to Public Financial Institution shall be allowed as deduction only if it is paid on or before the due date for of furnishing ROI u/s 139(1) in respect of the previous year in which the liability to pay such sum is incurred. In this case, out of ₹ 12,00,000 payable towards interest to Public Financial Institution, only ₹ 4,00,000 has been paid on 12.12.2020 and balance is still outstanding. Therefore, ₹ 8,00,000 (₹ 12,00,000 – ₹ 4,00,000) shall be disallowed u/s 43B.

2. As per Sec. 37, any expenditure incurred wholly and exclusively for the purpose of business or profession is allowed as deduction. The fee paid u/s 234E is not in the nature of penalty or interest. The Legislature has consciously used the word ‘penalty’ and ‘interest’ at other places in contradiction to the word ‘fee’. Also, there is no express provision in the Act which disallows such fee paid and therefore, fee paid u/s 234E is allowable as deduction while computing business income.

3. Since, Explanation 1 to Sec. 115JB does not provide for adjustments relating to compounding fee paid and fee paid towards delay in filing statement of TDS u/s 234E, no adjustment relating to such items has been made while computing the book profit u/s 115JB.

4. As per Sec. 115 JB(2 A), in case of a company whose financial statements are drawn up in compliance with Indian Accounting Standards, the book profit as computed in accordance with Explanation 1 to Sec. 115JB(2) shall be further increased by all amounts credited to other comprehensive income in the statement of profit and loss under the head “Items that will not be re-classified to profit and loss”. However, such provision shall not be applicable in respect of following amounts credited to other comprehensive income under the head “Items that will not be re-classified to profit and loss”:

Revaluation surplus for assets as per IndAS 16 and IndAS 38;
Gains or losses from investments in equity instruments designated as fair value through other comprehensive income as per IndAS 109.

Therefore, the revaluation surplus of ₹ 10,00,000 credited to other equity on fair valuation of assets and ₹ 5,00,000 credited to other comprehensive income on fair valuation of equity instruments shall not be credited while computing book profit.

Question 13.
Alpha and Beta Tyres Limited, an Indian Company engaged in the manufacture of Tyres in Andhra Pradesh has adopted Ind AS from 1-4- I 2017. The following particulars are provided for the year ended 31.3.2021:

1. Net profit as per statement of profit and loss is 20 crores after debit and credit of the following items:
Items Debited:

Depreciation ₹ 18 crores. Included in depreciation is 3 crores being amount provided on revalued assets.
Interest charged for delay in remittance of Tax Deducted at Source ₹ 20 lakhs.

Items Credited:

Share Income from Association of Persons in which the company is a member 50 lakhs. (The AO P is charged to tax at Maximum Marginal Rate) ‘
Amount of ₹ 6 crores withdrawn from revaluation reserves on account of revaluation of assets.

Other Information:

The application of a financial creditor for corporate insolvency res-olution process has been admitted by the Hyderabad Bench of the National Company Law Tribunal u/s 7 of the Insolvency and Bank-ruptcy Code, 2016.
Brought forward business loss and depreciation.

Assessment Year	Business Loss	Depreciation
2017-18	₹ 3 crores	₹ 1 crore
2018-19	₹ 5 crores	₹ 2 crores

3. Items credited to Other Comprehensive Income which will not be reclassified to profit or loss :

Re-measurement of defined employee retirement benefits plan ₹ 50 lakhs.
Revaluation surplus of property, plant and equipment ₹ 1 crore.

4. The transition amount as on convergence date 1-4-2017 stood at ₹ 5 crores including capital reserve of ₹ 50 lakhs (credit balance).

5. Tax payable under the regular provisions of the Income Tax Act is 0.73 crores.

Compute Minimum Alternate Tax payable by the company for the Assessment Year 2021-22.
Compute the amount of MAT credit eligible for carried forward. [CA Final May 2019 (New Syllabus)] [8 Marks]

Answer:

Since, the income tax payable on total income computed as per the provisions of the Act is less than 15% of book profit, the book profit of ₹ 13.10 crores is deemed to be the total income and income tax is payable @ 15% thereof plus health and education cess @ 4%. Therefore, the tax liability works out to be ₹ 1.05 crores

Section 115JAA provides that where tax is paid in any assessment year in relation to the deemed income under section 115JB( 1), the excess of tax so paid, over and above the tax payable under the other provisions of the Income-tax Act, 1961, will be allowed as tax credit-in the subsequent years.

The said tax credit is allowed to be carried forward for 15 assessment years succeeding the assessment year in which the credit became allowable.

Such credit is allowed to be set off against the tax payable on the total income in an assessment year in which the tax is computed in accordance with the provisions of the Act, other than section 115JB, to the extent of excess of such tax payable over the tax payable on book profits in that year.

	₹ in crores
Tax on book profit under section 115JB	1.05
Less: Tax on total income computed as per the other provisions of the Act	0.73
Tax credit to be carried forward under section 115JAA	0.32

Notes:
(1) As per clause (a) of Explanation 1 to Sec. 115JB, Income tax paid or payable shall be added back while computing the book profits. Income Tax shall include, inter alia, any interest charged under this act and therefore, interest charged for delay in remittance of TDS shall be added back.

(2) In a case, where AOP has paid tax on its total income at maximum marginal rate, no income tax is payable by the company, being a member of AOP, in accordance with the provisions of Sec. 86. Therefore, as per clause (iic) of Explanation 1 to Sec. 115JB, share in income of an AOP on which no income tax is payable as per section 86, would : be reduced while computing book profits, since the same has been credited to statement of profit and loss.

(3) As per clause (iib) of Explanation 1 to Sec. 115JB, the amount with drawn from revaluation reserve and credited to statement of profit s and loss shall be reduced while computing book profits to the extent it does not exceed the amount of depreciation on account of revaluation of assets. Therefore, upto ₹ 3 crores (to the extent of depreciation on revalued assets) withdrawn from revaluation reserve shall be reduced from book profits.

(4) As per clause (iih) of Explanation 1 to Sec. 115JB, in case of company against whom an application for corporate insolvency resolution process has been admitted by the Adjudicating Authority under the Insolvency and Bankruptcy Code, 2016, aggregate amount of unabsorbed depreciation and loss brought forward shall be reduced while computing book profit. Here, loss shall not include depreciation.

Assessment Year	Business loss	Depreciation	B/f excluding Depreciation
2017-18	₹ 3 crores	₹ 1 crores	₹ 2 crores
2018-19	₹ 5 crores	₹ 2 crores₹	₹ 3 crores
Total		₹ 3 crores	₹ 5 crores

Therefore, aggregate of unabsorbed depreciation and B/f loss shall be ₹ 8 crores (₹ 3 crores + ₹ 5 crores)

(5) As per Sec. 115JB(2A), for a company whose financial statements are drawn up in compliance to the IndAS, the book profit as computed as per Explanation 1 to Sec. 115JB shall be further increased by all amounts credited to ‘Other Comprehensive Income’ in the statement of profit and loss under the head “Items that will not be reclassified to profit or loss”.

However, the book profits shall not be increased by revaluation surplus from assets. Therefore, re-measurement of defined employee retirement benefits plan of ₹ 50 lakhs credited to ‘Other Comprehensive Income’ which will not be reclassified to profit or loss shall be added to the book profits. However, revaluation surplus of property, plant and equipment of ₹ 1 crore shall not be added to the book profit.

(6) The book profit of the year of convergence and each of the following four previous years, shall be further increased or decreased by 1 / 5th of the transition amount. However, transition amount shall not include capital reserve.
Transition amount = ₹ 5 crores – ₹ 0.50 crores (capital reserve)
= ₹ 4.5 crores
Therefore, amount to be added to the book profit shall be ₹ 0.90 crores (1 /5th of ₹ 4.50 crores).

Corporate Secretarial Practice-Drafting of Notices, Resolutions, Minutes and Reports – CA Final Law Study Material

Leave a Comment / CA Final / By Murali / March 29, 2023 May 10, 2023

Corporate Secretarial Practice-Drafting of Notices, Resolutions, Minutes and Reports – CA Final Law Study Material is designed strictly as per the latest syllabus and exam pattern.

Corporate Secretarial Practice-Drafting of Notices, Resolutions, Minutes and Reports – CA Final Law Study Material

Question 1.
Elaborate the provisions of the Companies Act, 2013 regarding Notice of Board Meeting. Draft a notice for the first meeting of the Board of Directors of India Timber Ltd. [Nov. 15 (8 Marks)]
Answer:
Provisions related to Notice of Board Meetings:
Sec. 173(3) of Companies Act, 2013 provides the provisions related to notice of board meetings. Accordingly,

A meeting of the Board shall be called by giving not less than 7 days’ notice in writing to every director at his address registered with the company and such notice shall be sent by hand delivery or by post or by electronic means.

A meeting of the Board may be called at shorter notice to transact urgent business subject to the condition that at least one independent director, if any, shall be present at the meeting.

In case of absence of independent directors from such a meeting of the Board, decisions taken at such a meeting shall be circulated to all the directors and shall be final only on ratification thereof by at least one independent director, if any.

The Companies (Meetings of Board and its Powers) Rules, 2014, provides that the notice of the meeting shall inform the directors regarding the option available to them to participate through video conferencing mode or other audio-visual means, and shall provide all the necessary information to enable the directors to participate through video conferencing mode or other audio-visual means.

On receiving such a notice, a director intending to participate through video conferencing or audio-visual means shall communicate his intention to the Chairperson or the company secretary of the company. He shall give prior intimation to the effect sufficiently in advance so that the company is able to make suitable arrangements in this behalf.

If the director does not give any intimation of his intention to participate that he wants to participate through the electronic mode, it shall be assumed that the director shall attend the meeting in person.

Draft Notice of First Board Meeting:

Notice of the Board Meeting
India Timber Ltd.
(Regd. Office)

To,
(Director)
Dear Sir/Madam,
This is to inform you that a meeting of the Board of directors will be held at the Registered Office of the company on ___ at ____.

You are requested to make it convenient to attend the meeting. An option is also available to you to participate in the Board Meeting through video conferencing or audio-visual means. Kindly communicate your preference in this regard.

A copy of the agenda of the businesses which are likely to be transacted at the meeting is enclosed for your perusal.

Yours faithfully,
For ABC Ltd.
Secretary

Encl: A copy of agenda of the meeting.

Question 2.
Draft a resolution proposed to be passed at a General Meeting of a Public Company giving consent to the Board of Directors for borrowing upto a specified amount in excess of the limits laid down under Section 180(1)(c) of the Companies Act, 2013.
Answer:
Draft resolution:
“RESOLVED that pursuant to Section 180(1)(c) and any other applicable provisions of the Companies Act, 2013 and the rules made thereunder (including any statutory modification(s) or re-enactment thereof for the time being in force), the consent of the Company be and is hereby accorded to the Board of Directors to borrow moneys in excess of the aggregate of the paid up share capital and free reserves of the Company, provided that the total amount borrowed and outstanding at any point of time, apart from temporary loans obtained/to be obtained from the Company’s Bankers in the ordinary course of business, shall not be in excess of ₹___ Crores (₹ ____ crores) over and above the aggregate of the paid up share capital and free reserves of the Company.”

Question 3.
The Board of Directors of XYZ Limited decided to pass a resolution to purchase 35,000 equity shares of ₹ 100 each of PQR Limited at a meeting. Draft a specimen Board Resolution to be passed at the said meeting.
Answer:
Draft Board Resolution for Investments:
“Resolved unanimously that pursuant to provisions of Section 186(2) of the Companies Act, 2013, the company be and is hereby authorized to purchase 35,000 equity shares of ₹ 100 each of PQR Limited, the investment in addition to other investments made to date in the aggregate being within the limits prescribed under the said section.”
“Resolved further that Mr………….., a Director of the company, be and is hereby authorised to sign/execute the necessary documents in this connection.”

Question 4.
The members of XYZ Limited decided to pass a resolution for appointing Mr. Smith as an Independent director of the company. Draft a specimen resolution to be passed at the said meeting. [MTP-Oct. 20]
Answer:
Draft Resolution for Appointment of Independent Director:
“RESOLVED that pursuant to the provisions of Sections 149, 150, 152 and any other applicable provisions of the Companies Act, 2013 and the rules made thereunder (including any statutory modification(s) or re-enactment thereof for the time being in force) read with Schedule IV to the Companies Act, 2013, Mr.—–(holding DIN—–), Director of the Company who retires by rotation at the Annual General Meeting and in respect of whom the Company has received a notice in writing from a member proposing his candidature for the office of Director, be and is hereby appointed as an Independent Director of the Company to hold office for five consecutive years for a term up to ____, 20____.”

Question 5.
Morbani Woods Limited decide to appoint Mr. Wahid as its Managing Director for a period of 5 years with effect from 1st May, 2021. Mr. Wahid fulfils all the conditions as specified under Schedule V to the Companies Act, 2013.
The terms of appointment are as under:
(i) Salary ₹ 1 lakh per month;
(ii) Commission, as may be decided by the Board of Directors of the company;
(iii) Perquisites;

Free Housing,
Medical reimbursement upto ₹ 10,000 per month, Leave Travel concession for the family,
Club membership fee,
Personal Accident Insurance ₹ 10 lakh,
Gratuity, and Provident Fund as per Company’s policy.

You being the Secretary of the said Company, are required to draft a resolution to give effect to the above, assuming that Mr. Wahid is already the Managing Director in a public limited company.
Answer:
Resolution passed at the meeting of board of directors of Morbani Woods Limited held at its registered office situated at ……… on …….. (day) at ……. A.M.
“Resolved that consent of all the directors present at the meeting be and is hereby accorded to the appointment of Mr. Wahid, who is already the Managing Director of another public limited company, and fulfils the conditions as specified in Schedule V of the Companies Act, 2013, as the Managing Director of the company for a period of 5 years effective from 1st May, 2021 subject to approval by a resolution of shareholders in a general meeting and that Mr. Wahid may be paid remuneration as follows:

1. Salary of ₹ 1 Lakh per month
2. Commission
3. Perquisites: Free Housing, Medical reimbursement upto ₹ 10,000, Leave Travel Concession for the family, Club membership fee, Personal Accident Insurance of ₹ 10 Lakhs, Gratuity, Provident Fund etc.
Resolved further that in the event of loss or inadequacy of profits, the salary payable to him shall be subject to the limits specified in Schedule V.
Resolved further that the Secretary of the company be and is hereby authorize to prepare and file with the Registrar of Companies necessary forms and returns in respect of the above appointment.”

Sd/
Board of Directors, Morbani Woods Limited

[Note: Since in the given case Mr. Wahid fulfils all the conditions for appointment of Managing Director as specified in Schedule V, approval of Central Government is not required]

Question 6.
Mr. N is appointed as an additional Director by the Board of Directors of MNR Company Limited at its meeting held on 1st May, 2020 for a period as permitted by law. Articles of Association has conferred the power to appoint the additional director on the Board of Directors of MNR Company Limited. Draft a resolution and state the body which appoints N. [Nov. 14 (3 Marks), RTP-May 18]
Answer:
Appointment of Additional Director: Resolution (Section 161 of the Companies Act, 2013)
According to section 161(1) of the Companies Act, 2013, the articles of a company may confer on its Board of Directors the power to appoint any person’ as an additional director at any time.

Board Resolution
“Resolved that pursuant to the Articles of Association of the company and section 161(1) of the Companies Act, 2013, Mr. N is appointed as an Additional Director of the MNR Company Limited with effect from 1st May, 2020 to hold office up to the date of the next annual general meeting or the last date on which the annual general meeting should have been held, whichever is earlier.
Resolved further that Mr. N will enjoy the same powers and rights as other directors.
Resolved further that Mr. ____ Secretary of MNR Company Limited be and is hereby authorised
to electronically file necessary returns with the Registrar of Companies and to do all other necessary things required under the Act.”

Question 7.
The Board of Directors of RPS Limited decides to pass a resolution by circulation for allotment of 1,000 equity shares to Mr. A. Draft a specimen Board Resolution to be passed by circulation for this purpose. [May 15 (4 Marks)]
Answer:

RPS Limited
____ (Place)

To
Mr. X (Director)
(Address in India only)
Dear Sir,
The following resolution which is intended to be passed as a resolution by circulation as provided in Section 175 of the Companies Act, 2013 is circulated herewith as per the provisions of the said section. If only you are Not Interested in the resolution, you may please indicate by appending your signature in the space provided beneath the resolution appearing herein below as a separate perforated slip, if you are in favour or against the said resolution. The perforated slip may please be returned if and when signed within seven days of this letter. However, it need not be returned if you are interested in the resolution.

Yours faithfully,
(Secretary)
RPS Limited

Resolution:
Resolution by circulation passed by directors as per circulation effected …….. 20 ………..
Resolved that 1.000 equitvshares in thecompanvbeand herebv allotted to Mr. A. _____ from whom full amount has been received.
It is further resolved that necessary return of allotment be filed in the office of the ROC under the signature of Mr. Y, a Director.

For/Against
Signature

Question 8.
R Ltd. wants to constitute an Audit Committee. Draft a board resolution covering the following matters [compliance with Companies Act, 2013 to be ensured].
(1) Member of the Audit Committee “
(2) Chairman of the Audit Committee
(3) Any 2 functions of the said Committee. [May 16 (4 Marks)]
Answer:
Audit Committee – Board’s Resolution:
“Resolved that pursuant to Section 177 of the Companies Act, 2013 an Audit Committee consisting of the following Directors be and is hereby constituted.

Mr. —- Independent Director
Mr. —– Independent Director
Mr. —– Independent Director
Mr. —– Independent Director
Mr. —– Managing Director.
Mr. —– Chief Financial Officer”

“Further resolved that the Chairman of the Audit Committee’ shall be elected by its members from amongst themselves and shall be an independent director”.

“Further resolved that the quorum for a meeting of the Audit committee shall be three directors (other than the Managing Director), out of which at least two must be independent directors”.

“Resolved further that the Audit Committee shall perform all the functions as laid down in section 177(4) of the Companies Act, 2013 including but not limited to:

(a) make the recommendation for appointment, remuneration and terms of appointment of the auditors of the company;
(b) review and monitor the independence and performance of auditors of the company and the effectiveness of the audit process”.

“Further resolved that the Audit Committee shall review the quarterly and annual financial statements and submit the same to the Board with its recommendations if any”.

Question 9.
Mr. Shukla is working as General Manager (Finance and Accounts) in Target Limited. The Board of directors of the said company propose to entrust him with the duty of ensuring compliance with the provisions of the Companies Act, 2013 so that the books of account, balance sheet statement of profit and loss and the cash flow statemcnts can be prepared and maintained in accordance with law.
Draft a Board Resolution for the said purpose. [Nov. 17 (4 Marks), RTP-May 18]
Answer:
Resolution passed at the meeting of board of directors of Target Limited held at its registered office situated at ……… on …….. (date) at …….. (Time).
“Resolved that pursuant to sections 128(6) and 129 of the Companies Act, 2013, Mr. Shukla, who is already the General Manager (Finance and Accounts) of the company, be and is hereby entrusted with additional duties of ensuring compliance with the provisions of the Companies Act, 2013 so that the books of account, balance sheet, statement of profit and loss and the cash flow statements are maintained in accordance with the provisions of law.”

“Further Resolved that the said Mr. Shukla be and is hereby entrusted with the authority to do such acts things or deeds as may be necessary or expedient for the purpose of discharging his above referred duties.”

Question 10.
Board of Directors of the ABC Ltd., a listed company, in their meeting passed the resolution for an appointment of Company Secretary and the Compliance Officer for the guidance to the Board with regards to their duties, responsibilities and powers and the conduct of the affairs of the company. Draft the Resolution for an appointment of Mr. Nirman as Company Secretary and Compliance Officer of the company. [RTP-May 19]
Answer:
Resolution to consider the appointment of Mr. Nirman as Company Secretary and Compliance Officer of ABC Ltd.:

“RESOLVED THAT pursuant to the provisions of section 203 of the Companies Act, 2013 read with Rule 8 of the Companies [Appointment and Remuneration of Managerial Personnel] Rules, 2014, approval of the Board be and is hereby given to appoint Mr. Nirman as Whole Time Company Secretary of ABC listed company, with effect from 11th January 2019, to perform the duties which shall be performed by a Company Secretary under the Companies Act, 2013 and other duties as assigned to him by the Board from time to time.

“RESOLVED FURTHER that Mr. Nirman be and is hereby appointed as Compliance Officer of the company as per the Regulation 6 of the SEBI (LODR) Regulations, 2015 with effect from 11th January 2019.

Question 11.
Answer the following: Board of Directors of DBM Limited held a board meeting on 2nd May, 2021 at its registered office. You are required to state the salient points to be taken into account while drafting the minutes of the said board meeting.
Draft a board resolution for appointment of Mr. Paulas the managing director for 5 years with effect from 1st June, 2021 of DBM Limited passed in the above stated board meeting.
Answer:
Considerations while drafting Minutes:

The minutes may be drafted in a tabular form or they may be drafted in the form of a series of paragraphs, numbered consecutively and with relevant headings.
The place, date and time of the meeting should be stated.
The Chairman of the meeting must be mentioned. The general phrase used in the Minutes is “Mr.—-, Chairman of the meeting took the chair and called the meeting to order”.
The minutes should clearly mention the attendance and the constitution of the meeting, i.e., persons present and the capacity in which present, e.g. name of the person chairing the meeting, names of the directors and secretary, identifying them as director or
Secretary, names of persons in attendance like auditor, internal auditor etc. The minutes should also contain the subject of leave of absence granted, if any, to any of the Board members.
The adoption of the Minutes of the previous Board Meeting must be the first item on the Agenda by the directors giving their approval and the Chairman signing the Minutes as proof of approval of the Minutes.
Conduct of the business at the meeting should be recorded in the chronological sequence as per the Agenda.
In respect of each item of business the names of the directors dissenting or not concurring with any resolution passed at the board meeting should be mentioned.
Reference about interested directors abstaining from voting is also required to be stated in the minutes.
Chairman’s signature and date of verification of minutes as correct.

Draft Board Resolutions for appointment of Managing Director:

“RESOLVED that subject to the approval by the shareholders in a general meeting and pursuant to the provisions of the applicable provisions of the Companies Act, 2013, Mr. Paul be and is hereby appointed as the Managing Director of the Company with effect from 1st June, 2021 for a period of five years on a remuneration approved by the Remuneration Committee as enumerated below:

(1) Salary: ₹ …………. per month
(2) Perquisites, Benefits and Facilities ……….

RESOLVED FURTHER that Mr. Paul, so long as he functions as the Managing Director of the Company shall not be entitled to any sitting fee for attending the meeting of the board of directors or any committee thereof and that he shall not be liable to retire by rotation.

RESOLVED FURTHER that the Secretary of the company be and is hereby directed and authorized to file necessary returns with the Registrar of Companies and to do all other necessary things required under the provisions of the Companies Act, 2013.”

Question 12.
(i) 17th Board meeting of Jai Entertainment Ltd. was held at its registered office situated at B-17, Industrial Area, Suncity. While discussing the matter of appointment of Mr. Kaabil as Managing Director of the company, certain defamatory remarks were made by Mr. X, one of the directors. The draft minutes submitted by the Company Secretary also incorporated the indecent remarks of Mr. X. The chairman wants to remove those undesirable remarks from the minutes. Can he do so?

(ii) Draft the minutes of Board meeting containing the matter regarding appointment of Managing Director in addition to the usual items. [May 17 (8 Marks)}
Answer:
(a) Exemptions from inclusion in minutes of the meeting:

Section 118 of the Companies Act, 2013, deals with Minutes of Proceedings of General Meeting, Meetings of Board of Directors and Other Meetings and Resolutions Passed by Postal Ballot. The section provides certain exemptions to matters from inclusion in the minutes. Accordingly, there shall not be included in the minutes, any matter which, in the opinion of the Chairman of the meeting,
(a) is or could reasonably be regarded as defamatory of any person; or
(b) is irrelevant or immaterial to the proceedings; or
(c) is detrimental to the interests of the company.
The Chairman shall exercise absolute discretion in regard to the inclusion or non-inclusion of any matter in the minutes on the grounds as specified above.
Conclusion: The Chairman can exercise his discretion of not including the undesirable remarks from the minute of the 17th Board meeting of Jai Entertainment Ltd.

(b) Draft Minutes:
Minutes of ___ meeting of the Board of Directors of ____ (Name of company) held on ____ the ___ 2021, at ____
Present:
1. ____ Chairman
2. ____ Director
3. ____ Director

In attendance Secretary
Item No. 1: Leave of Absence was grant to ___ Director.
Leave of absence was granted to ____ Director.
Item No. 2: Confirmation of minutes of the Board meeting:
The minutes of the ____ meeting of the Board of Directors held on ____ were considered and confirmed.
Item No. 3: Appointment of Managing Director:
The Board noted the appointment of Mr. XY, director of the company as the Managing Director of the company. In this connection, the following resolutions were passed:
“Resolved that Mr. XY who fulfils the conditions specified in Parts 1 and II of Schedule V to the Companies Act, 2013, be and is here by appointed as the Managing Director of the company for a period of five years effective from ____ and that he may be paid remuneration by way of salary, commission and perquisites in accordance with Part II of Schedule V to the Act.
Resolved further that the Secretary of the company be and is hereby directed to file the necessary returns with the Registrar of Companies and to do all acts and things as may be necessary in this connection.”
Item No. 4: Next Board Meeting:
The next meeting of the Board will be held on ____ the ____ 20____ at the registered office of the company. The meeting ended with a vote of thanks to the chair.

National Company Law Tribunal and Appellate Tribunal – CA Final Law Study Material

Leave a Comment / CA Final / By Murali / March 29, 2023 May 10, 2023

National Company Law Tribunal and Appellate Tribunal – CA Final Law Study Material is designed strictly as per the latest syllabus and exam pattern.

National Company Law Tribunal and Appellate Tribunal – CA Final Law Study Material

Question 1.
Aggrieved by an Order of NCLT dated 05.05.2020, passed without the consent of the parties, Madhruk Ltd. decided to file an appeal before NCLAT. Meanwhile, the employees and officers of the company went on a strike from 10.05.2020 demanding higher pay and allowances and as a result of which, the operational and management activities were badly affected. The strike was called-off on 15.06.2020.

Thereafter, the appeal was filed on 25.06.2020 before NCLAT with a prayer for condoning the delay in filing the appeal. A single judicial member of NCLT started the hearing. With reference to the provisions of the Companies Act, 2013. Examine the following:
(i) Whether the appeal is admissible?
(ii) Maximum period allowed for condonation,
(iii) Is the appeal transferable to a Bench consisting of two members? [Nov. 18-New Syllabus (8 Marks)]
Answer:
Provisions as to appeal from Orders of NCLT:
(i) Admissibility of Appeal: Section 421 of the Companies Act, 2013 deals with the provisions relating to appeal against the orders of Tribunal. Accordingly,

Any person aggrieved by an order of the Tribunal may prefer an appeal to the Appellate Tribunal.
No appeal shall lie to the Appellate Tribunal from an order made by the Tribunal with the consent of parties.
Every appeal shall be filed within a period of 45 days from the date on which a copy of the order of the Tribunal is made available to the person aggrieved :

Provided that the Appellate Tribunal may entertain an appeal after the expiry of the said period of 45 days from the date aforesaid, but within a further period not exceeding 45 days, if it is satisfied that the appellant was prevented by sufficient cause from filing the appeal within that period.

Conclusion: Appeal is admissible as it appears from the facts of the case that the appellant was prevented by sufficient cause from filing the appeal within 45 days.

(ii) Maximum period allowed for condonation:
Appellate Tribunal may entertain an appeal after the expiry of the stipulated period of 45 days, but within a further period not exceeding 45 days.

(iii) Transfer of Appeal:

Section 419(3) of the Companies Act, 2013 provides that the powers of the Tribunal shall be exercisable by Benches consisting of 2 Members out of whom one shall be a Judicial Member and the other shall be a Technical Member:

Provided that it shall be competent for the Members of the Tribunal authorised in this behalf to function as a Bench consisting of a single Judicial Member and exercise the powers of the Tribunal in respect of such class of cases or such matters pertaining to such class of cases, as the President may, by general or special order, specify:

Provided further that if at any stage of the hearing of any such case or matter, it appears to the Member that the case or matter is of such a nature that it ought to be heard by a Bench consisting of two Members, the case or matter may be transferred by the President, or, as the case may be, referred to him for transfer, to such Bench as the President may deem fit.
Conclusion: Hearing may be transferred to a bench consisting of two members.

Note: Questions does not seem to be framed appropriately as question states that hearing of appeal is started by a single judicial member of NCLT and requirement of question was whether the appeal is transferable.
Appeal is to be heard by NCLAT not by NCLT and there is no provision in the law as to the transfer of appeal.

Question 2.
Aggrieved by an order of Hon’ble NCLT, dated 3rd April, 2020, passed without the consent of parties, Solan Minerals Limited decided to file an appeal before, Hon’ble NCLAT. The order was received by the company on 4th April, 2020. The employees and officers went on a strike for a period of 10 days from 22nd May, 2020 demanding higher bonus and pay.

In view of this, the management of the company was forced to a grinding halt during the strike period. Thereafter, the appeal was filed on 6th June, 2020 before the Hon’ble NCLAT and the company prayed for condonation of delay. Referring to and analysing the applicable provisions of the Companies Act, 2013, decide the following:
(i) Whether the proposed appeal would be admitted by the Hon’ble NCLAT.
(ii) What is the maximum period allowed by the NCLAT for condonation of delay? [May 19 – Old Syllabus (4 Marks)]
Answer:
Provisions as to appeal from Orders of NCLT:
Section 421 of the Companies Act, 2013 deals with the provisions relating to appeal against the orders of Tribunal. Accordingly,

Any person aggrieved by an order of the Tribunal may prefer an appeal to the Appellate Tribunal.
No appeal shall lie to the Appellate Tribunal from an order made by the Tribunal with the consent of parties.
Every appeal shall be filed within a period of 45 days from the date on which a copy of the order of the Tribunal is made available to the person aggrieved.

In the present case, Order was received by the company on 04th April 2020 and the appeal was to be filed by 19 May 2020, i.e. within 45 days, from the date of receipt of appeal. Employees go on strike from 22nd May 2020. As the strike starts after expiry of last date of filing appeal, there does not appear any reason that appellant was prevented by sufficient cause from filing the appeal within 45 days.

Conclusion: Based on the provisions as stated above, following conclusions may be drawn:

(i) Proposed appeal would not be admitted by the Hon’ble NCLAT.

(ii) Appellate Tribunal may entertain an appeal after the expiry of the stipulated period of 45 days, but within a further period not exceeding 45 days.
Note: Alternate answer possible with different assumption.

Question 3.
Royal Productions Limited filed an application before the National Company Law Tribunal and the application was dismissed for want of evidence and documents by the Tribunal on 2.2.2021. The order was received by the company on 4,2.2021. Aggrieved by the order, the company wants to file an appeal to NCLAT. It seeks the procedure to file the appeal and the time limit for filing the appeal under the following circumstances:
(i) The Tribunal has passed the order without giving a reasonable opportunity of being heard and the impugned order is passed ex-parte.
(ii) The order has been passed with the consent of both the parties before the Tribunal. [Nov. 20 – Old Syllabus (4 Marks)]
Answer:
Appeal against order of Tribunal:
Section 421 of the Companies Act, 2013 deals with the provisions relating to appeal against the orders of Tribunal. Accordingly,

Any person aggrieved by an order of the Tribunal may prefer an appeal to the Appellate Tribunal.
No appeal shall lie to the Appellate Tribunal from an order made by the Tribunal with the consent of parties.
Every appeal shall be filed within a period of 45 days from the date on which a copy of the order of the Tribunal is made available to the person aggrieved:

Conclusion: Considering the provisions of Sec. 421 as stated above, following conclusions may be drawn:

Appeal can be filed within a period of 45 days.
No appeal shall lie to the Appellate Tribunal from an order made by the Tribunal with the consent of parties.

Question 4.
A petitioner presented an application before the tribunal in July, 2020 and order was passed and made available to parties in September, 2020. Aggrieved party filed an appeal before NCLAT in November, 2020. The appeal was pending before NCLAT for 6 months.
Examine in the light of the Companies Act, 2013, the following issues-
(i) Whether the filling of an appeal before the NCLAT is in order.
(ii) Time period latest by which the NCLAT should dispose off the said appeal. [MTP-Aug.18]
Answer:
Filling of Appeal before the NCLAT:

As per Sec. 421 of the Companies Act, 2013, any person aggrieved by an order of the Tribunal may prefer an appeal to the Appellate Tribunal within a period of 45 days from the date on which a copy of the order of the Tribunal is made available to the person.

However, the Appellate Tribunal may entertain an appeal after the expiry of the said period of 45 days from the date aforesaid, but within a further period not exceeding 45 days, if it is satisfied that the appellant was prevented by sufficient cause from filing the appeal within that period.

As per Sec. 422 of the Companies Act, 2013, every application or petition presented before the Tribunal and every appeal filed before the Appellate Tribunal shall be dealt with and disposed of by it as expeditiously as possible and every endeavour shall be made by the Tribunal or the Appellate Tribunal, as the case may be, for the disposal of such application or petition or appeal within 3 months from the date of its presentation before the Tribunal or the filing of the appeal before the Appellate Tribunal.

Where any application or petition or appeal is not disposed of within the period specified above, the Tribunal or, as the case may be, the Appellate Tribunal, shall record the reasons for not disposing of the application or petition or the appeal, as the case may be, within the period so specified; and the President or the Chairperson, as the case maybe, may, after taking into account the reasons so recorded, extend the period referred to above, by such period not exceeding 90 days as he may consider necessary.

Conclusion: Based on the provisions of Secs. 421 & 422 as discussed above, following conclusions may be drawn:

Appeal is in order if made within 45 days from the date on which a copy of the order is made available to the person.
Appeal should be disposed off by May 2021.

Question 5.
JSK, a shareholder of CKI (Private) Ltd. filed an application before erstwhile Company Law Board, alleging various acts of oppression and-mis-management in the affairs of the company and sought certain relief measures. The petition was transferred to NCLT on its constitution. The NCLT passed an order on 5th October, 2020 without the consent of the parties.

Aggrieved by the order, the share-holder decided to prefer an appeal. Nevertheless the shareholder was suffering from low blood pressure. He was medically advised not to move and he did not move. Therefore, he preferred the appeal with NCLAT on 5th December, 2020. Examine whether the appeal is admissible with reference to time limitation?
Identify the provisions governing further appeal on the orders of NCLAT under section 423 of the Companies Act, 2013. [May 18 – New Syllabus (8 Marks)]
Answer:
Appeal from Orders of Tribunal:

Section 421 of Companies Act, 2013 provides that every appeal against the order of Tribunal shall be filed within a period of 45 days from the date on which a copy of the order of the Tribunal is made available to the person aggrieved. However, Appellate Tribunal may entertain an appeal after the expiry of the said period of 45 days from the date aforesaid, but within a further period not exceeding 45 days, if it is satisfied that the appellant was prevented by sufficient cause from filing the appeal within that period.

In the’present case, it appears that appellant was prevented by sufficient cause from filing the appeal within 45 days of the date of the order.

Conclusion: Appellate Tribunal may entertain the appeal as appellant was prevented by sufficient
cause and appeal if filed within the specified extended period.

Provisions relating to appeal on order of NCLAT:

Sec. 423 of Companies Act, 2013 provides that any person aggrieved by any order of the Appellate Tribunal may file an appeal to the Supreme Court within 60 days from the date of receipt of the order of the Appellate Tribunal to him on any question of law arising out of such order.

However, Supreme Court may, if it is satisfied that the appellant was prevented by sufficient cause from filing the appeal within the said period, allow it to be filed within a further period not exceeding 60 days.

Question 6.
On an application filed from shareholder of Company, Tribunal (NCLT) passed an order on 20th December, 2020 without the consent of parties. Mr. Rama whose family’s condition was not good so didn’t take much interest in order of tribunal but after few days due to aggrieved by an order, he filled an appeal before Appellate Tribunal (NCLAT) on 15th March, 2021 showing sufficient cause of delay for not filling appeal up to 45 days from the date of order. Even after receiving order from Appellate Tribunal dated 30th April, 2021, Mr. Rama was not satisfied and desires to make application to Supreme Court on 30th October, 2021.
Considering the given situation, examine whether Appeal to be filed before the Supreme Court will be admissible? [RTP-Nov. 20]
Answer:
Provisions relating to appeal on order of NCLAT:

In present case, since Mr. Rama even aggrieved by an order of Appellate Tribunal desires to file an application before Supreme Court on 30th October 2020. But as Supreme Court can entertain appeal only upto 60 days + 60 Days (Extension if sufficient cause).

Conclusion: Appeal to be filed before the Supreme Court will not be admissible as it is to be filed with 120 days (60 + 60) of 30.04.2021.

Question 7.
NCLAT was constituted by the Central Government consisting of a Chairperson along with the Judicial and Technical Members for hearing appeals against the orders of the Tribunal. Later it was discovered that chairperson is a judge of a high court. Aggrieved parties to a case, challenged the sanctity of the order of the respective case and said that it is invalid. Examine in the light of the given situations the validity of the act or proceedings conducted by the NCLAT. [MTP-March 18]
Answer:
Qualifications of Chairperson of NCLAT:

As per section 411 of the Companies Act, 2013 the chairperson of NCLAT shall be a person who is or has been a judge of the Supreme Court or the Chief Justice of a High Court.

In the instant case, chairperson is a judge and not a chief justice of a High Court, so his appoint-ment is invalid.

Section 431 of the Companies Act, 2013 provides that no act or proceeding of the Tribunal or the Appellate Tribunal shall be questioned or shall be invalid merely on the ground of the existence of any vacancy or defect in the constitution of the Tribunal or the Appellate Tribunal, as the case may be.

Accordingly, the act or proceeding of the Appellate Tribunal (NCLAT) shall not be invalid on the basis of defect in the constitution of the Appellate Tribunal.
Conclusion: Though appointment is invalid, but the act or proceedings remains valid.

Compounding of Offences, Adjudication and Special Courts – CA Final Law Study Material

Leave a Comment / CA Final / By Murali / March 29, 2023 May 10, 2023

Compounding of Offences, Adjudication and Special Courts – CA Final Law Study Material is designed strictly as per the latest syllabus and exam pattern.

Compounding of Offences, Adjudication and Special Courts – CA Final Law Study Material

Question 1.
Mr. A is Judicial magistrate in a lower court. He was appointed to hold the office of the special court for the speedy disposal of the pending cases under the Act. Decide as per the applicable provisions of the Companies Act, 2013, whether the appointment of Mr. A is tenable. [MTP-March 18]
Answer:
Eligibility for appointment as judge of Special Court:
As per Sec. 435 of Companies Act, 2013, a Special Court shall consist of:
(a) a single judge holding office as Session Judge or Additional Session Judge, in case of offences punishable under this Act with imprisonment of two years or more; and
(b) a Metropolitan Magistrate or a Judicial Magistrate of the First Class, in the case of other offences,
who shall be appointed by the Central Government with the concurrence of the Chief Justice of the High Court within whose jurisdiction the judge to be appointed is working.

In the instant case, Mr. A, a judicial magistrate of a lower court was appointed to hold the office of the special court for the speedy disposal of the pending cases under the Act.

Conclusion: Considering the provisions as stated in Sec. 435, Mr. A is not qualified as he is a judicial magistrate of lower court.

Question 2.
Excel Ltd. committed an offence under the Companies Act, 2013. The offences fall within the jurisdiction of a special court of Bundi district of Rajasthan in which the registered office of Excel Ltd. was situated. However, in that district, there were two special courts one in X place and other in Y place. Identify the jurisdiction of the special court for trial of an offence committed by Excel Ltd. [MTP-March 2018, Oct. 19, May 20)
Answer:
Competent Court for trial of an offence:

As per Sec. 436(1) of Companies Act, 2013, all offences which are punishable in this Act with imprisonment of 2 years or more, shall be triable only by the special court established for the area in which the registered office of the company in relation to which the offence is committed.

In case there are more than one special courts for such area, offences shall be triable by such one of them as may be specified in this behalf by the high court concerned.
In the instant case, there are more than one special court in such area where registered office of Excel Ltd. is situated.

Conclusion: The jurisdiction for trail in special court will be specified by High Court of the State (i.e. Rajasthan).

Question 3.
Describe the Power of special court on trial of an offence where it appears to the Special Court that the nature of the case is such that the sentence of imprisonment for a term exceeding one year may have to be passed. [MTP-Aug. 18]
Answer:
Summary Trial:

As per Sec. 436(3) of Companies Act, 2013, notwithstanding anything contained in the Code of Criminal Procedure, 1973, the Special Court may, if it thinks fit, try in a summary way any offence under this Act which is punishable with imprisonment for a term not exceeding 3 years.

However, in the case of conviction in a summary trial no sentence of imprisonment for a term exceeding one year shall be passed.

When at the commencement of, or in the course of, a summary trial, it appears to the Special
Court

that the nature of the case is such that the sentence of imprisonment for a term exceeding one year may have to be passed,
or

that it is, for any other reason, undesirable to try the case summarily the Special Court shall, after hearing the parties, record an order to that effect and thereafter recall any witnesses who may have been examined and proceed to hear or rehear the case in accordance with the procedure for the regular trial.

Question 4.
Which offences are deemed to be Non- cognizable under the Companies Act, 2013? Enumerate the relevant provisions.
Answer:
Non-Cognizable offences:

As per Sec. 439(1), every offence under the Companies Act, 2013 except the offences referred to in Sec. 212(6) shall be deemed to be non-cognizable within the meaning of the Code of Criminal Procedure.

As per Sec. 439(2), no court shall take cognizance of any offence under this Act which is alleged to have been committed by any company or any officer thereof, except on the written complaint of

the Registrar,
a shareholder of the company, or
a person authorised by the Central Government in that behalf.

However, court may take cognizance of offences relating to

issue and transfer of securities and
non-payment of dividend
on a complaint in writing, by a person authorised by the SEBI.

In case of government companies, court shall take cognizance of an offence under this Act which is alleged to have been committed by any company or any officer thereof, on the complaint in writing of a person authorized by the C.G. in that behalf.

Question 5.
In the AGM of XYZ Ltd., while discussing on the matter of retirement and reappointment of director Mr. X, allegations of fraud and financial irregularities were levelled against him by some members.
This resulted into chaos in the meeting. The situation was normal only after the Chairman declared about initiating an inquiry against the director Mr. X, however, could not be re-appointed in the meeting. The matter was published in the newspapers next day.
On the basis of such news, whether the court can take cognizance of the matter and take action against the director on its own?
Justify your answer with reference to the provisions of the Companies Act, 2013. [Nov. 15 (4 Marks), MTP – March 19, Oct 20]
Or
In the annual general meeting of XYZ Ltd. held on 28th May, 2020, while discussing on the matter of retirement and reappointment of director Mr. X, allegations of fraud of ₹ 20 lakhs in Bombay branch of the Company were marked against him by some members. This resulted into disorder and confusion in the meeting. The Chairman declared initiating an inquiry against the director. Mr. X, however, could not be re-appointed in the meeting. The matter was published in the newspapers next day. On the basis of such news, examine whether the Court can take cognizance of the matter and take action against the Director on its own? Justify your answer with reference to the provisions of the Companies Act, 2013. [Nov. 20 – New Syllabus (4 Marks)]
Answer:
Suo motu cognizance by Court:

As per Sec. 439(1), every offence under the Companies Act, 2013 except the offences referred to in Sec. 212 (6) shall be deemed to be non-cognizable within the meaning of the Code of Criminal Procedure.

As per Sec. 439(2), no court shall take cognizance of any offence under this Act which is alleged to have been committed by any company or any officer thereof, except on the written complaint of

the Registrar,
a shareholder of the company, or
a person authorised by the Central Government in that behalf.

However, court may take cognizance of offences relating to

issue and transfer of securities and
non-payment of dividend
on a complaint in writing, by a person authorised by the SEBI.

Conclusion: Considering the provisions of Sec. 439, the court cannot initiate any suo motu action against the director without receiving any complaint in writing of the Registrar of Companies, a shareholder of the company or of a person authorized by the Central Government in this behalf.

Question 6.
Mr. Joseph, a member of Armaments Ltd., is aggrieved due to failure of the company to make payment of dividend declared in the AGM held in August, 2020. He makes a complaint, in writing, before the court of competent jurisdiction within the prescribed period of limitation, but the court refused to take cognizance of the alleged offence. Explain the legal position in this regard under the Companies Act, 2013.
Also state the offences under the Companies Act, 2013 which are cognizable and which are non- cognizable. [MTP-April 18]
Answer:
Cognizance of offences:

As per Sec. 439(1), every offence under the Companies Act, 2013 except the offences referred to in Sec. 212 (6) shall be deemed to be non-cognizable within the meaning of the Code of Criminal Procedure.

As per Sec. 439(2), no court shall take cognizance of any offence under this Act which is alleged to have been committed by any company or any officer thereof, except on the written complaint of

the Registrar,
a shareholder of the company, or
a person authorised by the Central Government in that behalf.

However, court may take cognizance of offences relating to

issue and transfer of securities and
non-payment of dividend
on a complaint in writing, by a person authorised by the SEBI.

In the instant case, Mr. Joseph, a member of the company is aggrieved due to failure of the company to make payment of dividend declared in the AGM held in August 2018. He makes a complaint, in writing, before the court of competent jurisdiction within the prescribed period of limitation, but the court refused to take cognizance of the alleged offence.

Conclusion: The Court shall take cognizance of the offence relating to non-payment of dividend as the shareholders have made a complaint in writing before the competent jurisdiction.

Cognizable and non-cognizable offences:

Every offence under the Companies Act, 2013 except the offences referred to in section 212 (6) of the Companies Act, 2013, which deals with the investigation into affairs of company by serious fraud investigation office, shall be deemed to be non-cognizable within the meaning of the Code of Criminal procedure.

The offences as covered u/s 212(6) shall now be deemed to be cognizable where police officer may arrest person without warrant and are non-bailable.

Question 7.
P, a private company committed an offence related to issue of securities to a group of persons. A shareholder among the group, filed a complaint against the company and its officers. Examine the law related to the cognizance of an offence under the Companies Act, 2013. What if, the said company would have been a government company?
Answer:
Cognizance of offences:

As per Sec. 439(2), no court shall take cognizance of any offence under this Act which is alleged to have been committed by any company or any officer thereof, except on the written complaint of

the Registrar,
a shareholder of the company, or
a person authorised by the Central Government in that behalf.

However, court may take cognizance of offences relating to

issue and transfer of securities and
non-payment of dividend
on a complaint in writing, by a person authorised by the SEBI.

In the instant case, a private company committed an offence related to issue of securities to a group of persons. A shareholder among the group, filed a complaint against the company and its officers.

Conclusion: The Court shall take cognizance of the offence relating to issue of securities. In case of Government company, court will not take cognizance unless complaint is being filed by a person authorized by C.G.

Question 8.
All offences under the Companies Act, 2013 are non-cognizable except offences of fraud covered under section 447 of the Act. Explain the validity of the statement. [May 18 – New Syllabus (2 Marks)]
Answer:
Statement is valid. Sec. 439(1) of Companies Act, 2013 provides that every offence under the Companies Act, 2013 except the offences referred to in Sec. 212(6) shall be deemed to be non- cognizable within the meaning of the Code of Criminal Procedure.
As per Sec. 212(6), offences covered u/s 447 shall be cognizable.

Question 9.
What do you understand by the terms “Mediation” and “Conciliation”? Mention the provisions regarding Mediation and Conciliation Panel under the Companies Act, 2013. [Nov. 17 (3 Marks)]
Answer:
Meaning of Mediation and Conciliation:
In common parlance, mediation means intervention of some third party in a dispute with the intention to resolve the dispute. Conciliation means the process of adjusting or settling disputes in a friendly manner through extra judicial means.

Constitution and Functioning of Mediation and Conciliation Panel:
Sec. 442 of the Companies Act, 2013 deals with the constitution and functioning of the mediation and conciliation panel in order to dispose the matter. Accordingly,

(1) Maintenance of the Panel: The C.G. shall maintain a panel of experts to be known as Mediation and Conciliation Panel for mediation between the parties during the pendency of any proceedings before the C.G. or the Tribunal or the Appellate Tribunal under this Act.

(2) Panel consisting of Experts: The Panel shall consist of such number of experts having such qualification as may be prescribed.

(3) Filing of Application: Application for mediation and conciliation can be made by:

any parties to the proceedings.
The Central Government or the Tribunal or the Appellate Tribunal before which any proceeding is pending may, suo motu refer any matter pertaining to such proceeding to such number of experts as it may deem fit.

(4) Appointment of expert/s from Panel: The C.G. or the Tribunal or the Appellate Tribunal before which any proceeding is pending may appoint one or more experts from the Panel as may be deemed fit.

(5) Fees, terms and conditions of the experts: The fee and other terms and conditions of experts of the Mediation and Conciliation Panel shall be such as may be prescribed.

(6) Procedure for the disposal of matter: In order to dispose the matter, the Mediatiorrand Conciliation Panel shall follow such procedure as may be prescribed.

(7) Period for the disposal of matter: The Mediation and Conciliation Panel shall dispose of the matter referred to it within a period of three months from the date of such reference and forward its recommendations to the Central Government or the Tribunal or the Appellate Tribunal, as the case may be.

(8) Filing of objection on the recommendation of the panel: Any party aggrieved by the recommendation of the Mediation and Conciliation Panel may file objections to the Central Government or the Tribunal or the Appellate Tribunal, as the case may be.

Question 10.
What is the object of Conciliation Panel for Mediation and Conciliation under the Companies Act, 2013? Who can file application for mediation and conciliation? [RTP-Nov. 18]
Answer:
Meaning of Mediation and Conciliation:
In common parlance, mediation means intervention of some third party in a dispute with the intention to resolve the dispute. Conciliation means the process of adjusting or settling disputes in a friendly manner through extra judicial means.

(2) Panel consisting of Experts: The Panel shall consist of such number of experts having such qualification as may be prescribed.

(3) Filing of Application: Application for mediation and conciliation can be made by:

any parties to the proceedings.
The Central Government or the Tribunal or the Appellate Tribunal before which any proceeding is pending may, suo motu refer any matter pertaining to such proceeding to such number of experts as it may deem fit.

(4) Appointment of expert/s from Panel: The C.G. or the Tribunal or the Appellate Tribunal before which any proceeding is pending may appoint one or more experts from the Panel as may be deemed fit.

(5) Fees, terms and conditions of the experts: The fee and other terms and conditions of experts of the Mediation and Conciliation Panel shall be such as may be prescribed.

(6) Procedure for the disposal of matter: In order to dispose the matter, the Mediatiorrand Conciliation Panel shall follow such procedure as may be prescribed.

Question 11.
What are the powers of the Central Government under the Companies Act, 2013 regarding:
(i) To appoint company prosecutors [MTP-April 18, RTP-May 18]
(ii) To Appeal against acquittal. [MTP-April 18, RTP-May 18, MTP-Oct.18, Nov. 18-New Syllabus (2 Marks)]
Answer:
Power of Central Government

(i) To appoint company prosecutors:
Sec. 443 of Companies Act, 2013 lays down the provisions relating to powers of C.G. to appoint company prosecutors. Accordingly:

The Central Government may appoint (generally, or for any case, or in any case, or for any specified class of cases in any local area) one or more persons, as company prosecutors for the conduct of prosecutions arising out of this Act; and

The persons so appointed as company prosecutors shall have all the powers and privileges conferred on Public Prosecutors appointed under section 24 of the Cr. PC.

(ii) Appeal against acquittal:

As per Sec. 444, the Central Government may, in any case arising under this Act, direct any company prosecutor, or authorise any other person either by name or by virtue of his office, to present an appeal from an order of acquittal passed by any court, other than a High Court.

Appeal presented by such prosecutor or other person shall be deemed to have been validly presented to the Appellate Court.

Question 12.
The Central Government wants to appoint Mr. Honest as company Prosecutor. Can it do so? Mention the provisions regarding the power of Central Government to appoint company prosecutors along with their powers and privileges under the Companies Act, 2013. [Nov. 18-Old Syllabus (4 Marks)]
Answer:
Power of C.G. to appoint Company Prosecutors:
Sec. 443 of the Companies Act, 2013 deals with the powers of Central Government to appoint company prosecutors. Accordingly,

Not withstanding anything contained in the Code of Criminal Procedure, 1973, the C.G. may appoint generally, or for any case, or in any case, or for any specified class of cases in any local area, one or more persons, as company prosecutors for the conduct of prosecutions arising out of this Act.

The persons so appointed as company prosecutors shall have all the powers and privileges conferred by the Code on Public Prosecutors appointed u/s 24 of the Code.
Conclusion: C.G. may appoint Mr. Honesfas Company Prosecutor.

Taxation of Mutual Concerns – CA Final DT Question Bank

Leave a Comment / CA Final / By Raju / March 29, 2023 March 29, 2023

Taxation of Mutual Concerns – CA Final DT Question Bank is designed strictly as per the latest syllabus and exam pattern.

Taxation of Mutual Concerns – CA Final DT Question Bank

Question 1.
X is an association governed by the provisions of section 44A. The subscription receipts for the year ended 2020-21 were ₹ 60,000. The expenditure in the normal course of its activities was ₹ 85,000. Its other income taxable works out to ₹ 75,000. On these facts, you are consulted as to how X’s taxable income will be determined for assessment year 2021-22. In case the association did not have the other income taxable, will there be any difference in computation of its income. [CA Final May 2001] [4 Marks]
Answer:

	₹
Income From Other Source	75,000
Less: Deheienev as per section 44A [The maximum deficiencv which can be set off as per sec. 44A is 50% of ₹ 75,000 = ₹ 37,500 restricted to actual deheienev i.e. ₹ 25,000]	(25,000)
Total Income	50,000

In case the association did not have other taxable income, then the total income shall have been NIL. The defeiency of ₹ 25,000 will have no tax treatment and shall not be carried forward.

Question 2.
Bahubali Co-operative Housing Society is a registered co-operative housing society. It is formed with the objective of maintaining the property owned by it. It effects repairs and maintenance of the common property of the members and confers the usual rights and privileges to its members. During the year ended 31 st March, 2021, Mr. X transferred his membership to Mr. Y for which the society received transfer fees of ₹ 5.50 lakhs each from Mr. X and Mr. Y. Mr. Y was not a member of the society at the time of transfer. In course of assessment of the society under section 143(3) the Assessing Officer charged transfer fees to tax under the head “profits and gains of business or profession”. Is the action of the Assessing Officer correct? [CA Final Nov. 2016, May 2013] [4 Marks]
Answer:
The issue is whether the transfer fee received by Bahubali co-operative housing society from its incoming member Mr. Y and outgoing member Mr. X is taxable or exempt on the principle of mutuality.

The Bombay High Court dealt with similar issue in case of Sind Co-operative Housing Society v. ITO where it was observed that under the bye-laws of the society, charging of transfer fee had no element of trading or commerciality. Both the incoming and outgoing members have to contribute to the common fund of the society which was to be exclusively used for the-benefit of the members.

The High Court, therefore, held that transfer fees received by a co-operative housing society, whether from outgoing or from incoming members, is not liable to tax on the grounds of principle of mutuality since the predominant activity of such co-operative society is maintenance of property of the society and there is no taint of commerciality, trade or business.

Applying the above ruling, transfer fees received by a Bahubali co-operative housing society from Mr. X and Mr. Y would not be liable to tax in the hands of the co-operative society.

Miscellaneous Provisions – CA Final Law Study Material

Leave a Comment / CA Final / By Murali / March 29, 2023 May 10, 2023

Miscellaneous Provisions – CA Final Law Study Material is designed strictly as per the latest syllabus and exam pattern.

Miscellaneous Provisions – CA Final Law Study Material

Question 1.
The Board of Directors of M/s APCO Limited a listed company, for carrying out the valuation of the immovable properties standing in the name of the company as required under the provisions of the Companies Act, 2013 proposes to appoint Mr. Mehta, an individual as the valuer. Referring to the provisions of the Companies Act, 2013 read with The Companies (Registered Valuers and Valuation) Rules, 2017, the Audit Committee is of the opinion that the Board of Directors does not have right to appoint the valuer. Decide. [Nov. 18-Old Syllabus (4 Marks), RTP – May 19]
Answer:
Appointment of Valuer:
Sec. 247 of Companies Act, 2013, deals with the provisions relating to registered valuers. Accordingly, Where a valuation is required to be made in respect of

any property, stocks, shares, debentures, securities or goodwill or any other assets (herein referred to as the assets) or
net worth of a company or
its liabilities under the provision of this Act,

it shall be valued by a person having prescribed qualifications and experience and registered as a valuer and is a member of a recognised organization.

Valuation shall be done in such manner and on such terms and conditions as may be prescribed.
Valuer will be appointed by the audit committee or in its absence by the Board of Directors of that company.

Conclusion: Opinion of audit committee is correct as appointment of valuer is to be made by audit committee. Board of Directors can appoint valuer only in absence of Audit Committee.

Question 2.
M/s KIL Limited, a listed company, proposed to acquire a plant for consideration other than cash from Mr. KK, a director. The Managing Director of the Company identified Mr. JK a registered valuer under the provisions of the Companies Act, 2013 for the purpose of valuation of the plant. Mr. KK acquired the plant 48 months back from a partnership firm in which the spouse of Mr. )K is a partner. The Managing Director of the Company issued an order appointing Mr. JK as a registered valuer. Examine and decide whether the decision of appointment and the mode of appointment is valid under the provisions of the Companies Act, 2013? (Nov. 19 – New Syllabus (4 Marks)]
Answer:
Appointment of Valuer:

Sec. 247 of Companies Act, 2013, deals with the provisions relating to registered valuers. Accordingly, Valuer will be appointed by the audit committee or in its absence by the Board of Directors of that company. The valuer appointed u/s 247(1) shall not undertake valuation of any assets in which he has a direct or indirect interest or becomes so interested at any time during a period of 3 years prior to his appointment as valuer.

As per Sec. 177 of Companies Act, 2013, company being a listed company is required to have an audit committee. Hence, appointment of valuer is to be made by audit committee.

As per Sec. 192 of Companies Act, 2013, if an asset is acquired for consideration other than cash, by a company from a director, then prior approval of members shall be required and value of such asset shall be duly determined by a registered valuer.

In the present case, M/s KIL Limited, a listed company, proposed to acquire a plant for consideration other than cash from Mr. KK, a director. The Managing Director of the Company identified Mr. JK a registered valuer under the provisions of the Companies Act, 2013 for the purpose of valuation of the plant. Mr. KK acquired the plant 48 months back from a partnership firm in which the spouse of Mr. JK is a partner. The Managing Director of the Company issued an order appointing Mr. JK as a registered valuer.

Conclusion: Based on the provisions as stated above, following conclusion may be drawn:

Decision to appoint Mr. JK as registered valuer is valid as he is duly qualified.
Appointment of valuer is not valid as appointment can be made by Audit committee, not by managing director on his own.

Question 3.
Eminence Ltd. after passing special resolution filed an application to the registrar for removal of the name of company from the register of companies. On the complaint of certain members, Registrar came to know that already an application is pending before the Tribunal for the sanctioning of a compromise or arrangement proposal. The application was filed by the Eminence Ltd. two months before the filing of this application to the Registrar.
Determine the given situations in the lights of the given facts as per the Companies Act, 2013:
(i) Legality of filing an application by Eminence Ltd. before the registrar.
(ii) Consequences if Eminence Ltd. files an application in the above given situation.
(iii) In case registrar notifies eminence Ltd. as dissolved under section 248 in compliances to the required provisions, what remedy will be available to the aggrieved party? [MTP-March 18, Oct. 19, May 20]
Answer:
Removal of names of companies from the register of companies:

As per Sec. 248(2) of the Companies Act, 2013, a company may, after extinguishing all its liabilities, by a special resolution, or consent of 75% members in terms of paid-up share capital, file an application in the prescribed manner to the Registrar for removing the name of the company from the register of companies on all or any of the grounds specified u/s 248(1) and the Registrar shall, on receipt of such application, cause a public notice to be issued in the prescribed manner.

As per Sec. 249 of the Companies Act, 2013, an application u/s 248 on behalf of a company shall not be made if, at any time in the previous 3 months, the company-
(a) has changed its name or shifted its registered office from one State to another;
(b) has made a disposal for value of property or rights held by it, immediately before cesser of trade or otherwise carrying on of business, for the purpose of disposal for gain in the normal course of trading or otherwise carrying on of business;
(c) has engaged in any other activity except the one which is necessary or expedient for the purpose of making an application under that section, or deciding whether to do so or concluding the affairs of the company, or complying with any statutory requirement;
(d) has made an application to the Tribunal for the sanctioning of a compromise or arrangement and the matter has not been finally concluded; or
(e) is being wound up under Chapter XX of this Act or under the Insolvency and Bankruptcy Code, 2016.

If a company files an application in violation of restriction given u/s 249, it shall be punishable with fine which may extend to ₹ 1 lakh.
An application filed under above circumstances, shall be withdrawn by the company or rejected by the Registrar as soon as conditions are brought to his notice.

As per section 252(1), any person aggrieved by an order of the Registrar, notifying a company as dissolved u/s 248, may file an appeal to the Tribunal Within a period of 3 years from the date of the order of the Registrar and if the Tribunal is of the opinion that the removal of the name of the company from the register of companies is not justified in view of the absence of any of the grounds on which the order was passed by the Registrar, it may order restoration of the name of the company in the register of companies. However, a reasonable opportunity is given to the company and all the persons concerned.

Conclusion: Applying the provisions of Sections 248, 249 and 259 as stated above, following conclusions may be drawn:

(i) Filing of application by Eminence Ltd. is not valid as an application u/s 248 on behalf of a company shall not be made if, at any time in the previous 3 months, the company has made an application to the Tribunal for the sanctioning of a compromise or arrangement and the matter has not been finally concluded.

(ii) Company shall be punishable with fine which may extend to ₹ 1 lakh. Application so filed, shall be withdrawn by the company or rejected by the Registrar as soon as conditions are brought to his notice.

(iii) Appeal may be preferred to Tribunal u/s 252.

Question 4.
Kojol Research Development Ltd. was registered to innovate unique business idea emerging from research and development in a new area. It is a future project and the company has no significant accounting transactions and business activities.

Therefore, the company made an application to ROC for obtaining the status of a Dormant Company. The application is under process. In the meantime, ‘ the company without extinguishing all its liabilities filed an application to ROC for removing the name of the company, after passing a special resolution giving effect to this.
In the light of the provisions of the Companies Act, 2013, analyse the following:
1. Whether the application is tenable under the Act?
2. What are the restrictions imposed under the act for making application by a company to remove the name of the company from the register of ROC?
3. What are the penal consequences in case of violation of restrictions? [May 18 – New Syllabus (8 Marks)]
Answer:
Removal of Name of company from Register of Companies:

Sec. 248(2) of Companies Act, 2013 provides that a company may, after extinguishing all its liabilities, by a special resolution or consent of 75% members in terms of paid-up share capital, file an application in the prescribed manner to the Registrar for removing the name of the company from the register of companies on all or any of the grounds:
(a) company has failed to commence its business within one year, of its incorporation;
(b) company is not carrying on any business or operation for a period of 2 immediately preceding financial years and has not made any application within such period for obtaining the status of a dormant company u/s 455.

In the present case, company has filed an application to ROC for obtaining status of Dormant company. While the application is under process, company without extinguishing all its liabilities filed an application to ROC for removing the name of the company, after passing a special resolution.
Conclusion: Application made by the company is not tenable by virtue of provisions of Sec. 248.

Restrictions on making application u/s 248 in certain situations:
Sec. 249(1) of Companies Act, 2013 provides that an application u/s 248(2) on behalf of a company shall not be made if, at any time in the previous 3 months, the company:
(a) has changed its name or shifted its registered office from one State to another;
(b) has made a disposal for value of property or rights held by it, immediately before cesser of trade or otherwise carrying on of business, for the purpose of disposal for gain in the normal course of trading or otherwise carrying on of business;
(c) has engaged in any other activity except the one which is necessary or expedient for the purpose of making an application under that section, or deciding whether to do so or concluding the affairs of the company, or complying with any statutory requirement;
(d) has made an application to the Tribunal for the sanctioning of a compromise or arrangement and the matter has not been finally concluded; or
(e) is being wound up under Chapter XX of this Act or under the IBC, 2016.

Penal consequences in case of violation of restrictions:
Sec. 249(2) of Companies Act, 2013 provides that if a company files an application u/s 248(2) in violation of Sec. 249(1), it shall be punishable with fine which may extend to ₹ 1 lakh.

Question 5.
Rudraksh Ltd. related to manufacturing of tyres works, was incorporated in January 2019. Due to certain cause, it failed to commence its business for 1 year. In April, 2020, Rudraksh Ltd. filed a 1 application to the tribunal for the merger of the company with the Shri Narayan Ltd.

In between, in August 2020, Rudraksh Ltd. after extinguishing all its liabilities in compliance, filed an application to the Registrar for the removal of its name from the register of companies.

Shri Narayan Ltd. came to know of the fact of their filing of an application for removal of names. It took the plea that section 248 w.r.t. filing of application for removal of names shall not be applicable on the Rudraksh Ltd., due to pendency of an application of a proposed merger scheme.

Determine as per the given facts, whether the objection made by the Shri Narayan Ltd. against the filing of an application for removal of name by Rudraksh Ltd, is tenable. [MTP-Aug. 18|
Answer:
Removal of Name of company from Register of Companies:

As per Sec. 248 of the Companies Act, 2013, the name of the companies can be removed from the register of companies either by Registrar or through an application of the company by itself on the ground as mentioned below:
(a) company has failed to commence its business within one year of its incorporation, or;
(b) company is not carrying on any business or operation for a period of 2 immediately preceding
financial years and has not made any application within such period for obtaining the status of a dormant company u/s 455. ”

Sec. 249(1) of Companies Act, 2013 provides that an application u/s 248 on behalf of a company shall not be made if, at any time in the previous 3 months, the company:
(a) has changed its name or shifted its registered office from one State to another;
(b) has made a disposal for value of property or rights held by it, immediately before cesser of trade or otherwise carrying on of business, for the purpose of disposal for gain in the normal course of trading or otherwise carrying on of business;
(c) has engaged in any other activity except the one which is necessary or expedient for the purpose of making an application under that section, or deciding whether to do so or concluding the affairs of the company, or complying with any statutory requirement;
(d) has made an application to the Tribunal for the sanctioning of a compromise or arrangement and the matter has not been finally concluded; or
(e) is being wound up under Chapter XX of this Act or under the IBC, 2016.

In the instant case, Rudraksh Ltd. was incorporated in January 2019 and due to certain cause, it failed to commence its business for 1 year. In April, 2020, Rudraksh Ltd. filed a application to the tribunal for the merger of the company with the Shri Narayan Ltd. In between, in August 2020, Rudraksh Ltd. after extinguishing all its liabilities in compliance, filed an application to the Registrar for the removal of its name from the register of companies.

Conclusion: Application u/s 248 was filed after the period of 3 months from the date of filing of application for the sanction of proposal of Merger. So objection raised by Shri Narayanan Ltd. is not tenable and Rudraksh Ltd. can file an application for removal of its name from register of companies.

Question 6.
Buina Limited has discontinued its business since 2016 and has not been filing annual returns. The Register of companies issued a notice for striking off the company. Since no reply was received within the time specified in the notice, the name of the company was struck off from the register of companies.

There were tax arrears and a notice was sent to the company by the tax recovery officer. The Directors contended that since the company’s name has been struck off, the company does not exist and not liable to pay the tax. Referring to and analysing the relevant provisions of the Companies Act, 2013 examine the validity of the Company’s claim. [May 19 – Old Syllabus (4 Marks)]
Answer:
Consequences of Removal of Name from register of companies:

Proviso to Sec. 248(6) of Companies Act, 2013 provides that in case name of the company was struck off from the register of companies, assets of the company shall be made available for the payment or discharge of all its liabilities and obligations even after the date of the order removing the name of the company from the register of companies.

In the present case, company has discontinued its business since 2016 and has not been filing annual returns. The ROC issued a notice for striking off the company and in the absence of any reply, the name of the company was struck off from the register of companies. There were tax .arrears and a notice was sent to the company by the tax recovery officer. The Directors contended that since the company’s name has been struck off, the company does not exist and not liable to pay the tax.

Conclusion: Company claim is not valid considering the provisions of proviso to Sec. 248(6) as stated above.

Question 7.
Fine Electric Scooter Pvt. Ltd. incorporated in November, 2017 has not commenced or carried on any business since its inception. Promoters of the Company being two subscribers have decided to dissolve the Company and get the name of the Company strike off from the Registrar of Companies under the Fast Track Exit Mode. The promoters’ Directors seek your advice for dissolving the Company. Advise. [Nov. 19 – Old Syllabus (4 Marks)]
Answer:
Removal of Name on Application by company through Fast Track Exit Mode:

Sec. 248(2) of Companies Act, 2013 deals with the provisions related to removal of name of company on application of company under the Fast Track Exit Mode. Accordingly, a company may, after extinguishing all its liabilities, by
(a) a special resolution or
(b) consent of 75% members in terms of paid-up share capital,
file an application in the prescribed manner to the Registrar for removing the name of the company from the register of companies on all or any of the grounds:
(a) company has failed to commence its business within 1 year of its incorporation;
(b) company is not cariying on any business or operation for a period of 2 immediately preceding financial years and has not made any application within such period for obtaining the status of a dormant company u/s 455.

Company shall file an application in the prescribed manner to the Registrar for removing the name of the company from the register of companies after satisfying all conditions.
Registrar shall, on receipt of such application, cause a public notice to be issued in the prescribed manner.
Notice issued u/s 248(2) shall be published in the prescribed manner and also in the Official Gazette for the information of the general public.

At the expiry of the time mentioned in the notice, the Registrar may, unless cause to the contrary is shown by the company, strike off its name from the register of companies, and shall publish notice thereof in the Official Gazette, and on the publication in the Official Gazette of this notice, the company shall stand dissolved.

Question 8.
Digital Era Limited (DEL), is a start-up Company, incorporated in the year 2017 under the provisions of the Companies Act, 2013. The main object of the Company is to manufacture and market two wheelers adopting a new technology of using hydrogen as a fuel to run the vehicle in lieu of petrol.

Despite several experiments, the technology of hydrogen fuelled engine for the two wheelers was not successful. As per the requirements of the Companies Act, 2013, no business was commenced and no financial statements were filed with the Registrar of Companies (ROC). Eventually the Board of Directors of the Company resolved to apply to the RoC for getting the name of the Company struck-off from the Register of Companies.

The RoC, after satisfying that all the compliances specified under Section 248 of the Companies Act, 2013 have been met by the Company and after publishing a notice for general public and also in the official gazette, the name of the Company was struck-off from the Register of Companies w.e.f. 7th January, 2020.

Earlier in the year 2018, Mr. Amrit, had supplied certain spares to the Company for ₹ 2,50,000and despite his several requests, the amount was not settled by the Company. In September 2020, he came to know from his close aides that DEL has some assets available with them. Thereafter, with a view to recover his dues from the Company, he approached you seeking your professional guidance. As a competent professional, advise Mr. Amrit, the following, in the light of the provisions of the Companies Act, 2013:

(i) Whether the assets of the Company shall be made available for the discharge of its liabilities even after the date of the order removing the name of the Company from the Register of Companies?
(ii) Can an aggrieved person file an appeal against the order of the ROC? If so, state the legal provisions in this regard.
(iii) When and under what circumstances can the RoC restore the name of the Company?
(iv) State the circumstances and the time frame within which the Tribunal can order the name of
the Company to be restored to the Register of Companies?
(v) Can the name of a Company registered under Section 8 of the Companies Act, 2013 be removed
from the Register of Companies? [Nov. 20 – New Syllabus (8 Marks)]
Answer:
Provisions relating with Removal of name of company:
(i) Availability of Assets of company after removal of name:
Proviso to Sec. 248(6) of Companies Act, 2013 provides that the assets of the company shall be made available for the payment or discharge of all its liabilities and obligations even after the date of the order removing the name of the company from the register of companies.

(ii) Appeal to Tribunal:
As per Sec. 252(1) of the Companies Act, 2013, any person aggrieved by an order of the Registrar, notifying a company as dissolved u/s 248, may file an appeal to the Tribunal within a period of 3 years from the date of the order of the Registrar and if the Tribunal is of the opinion that the removal of the name of the company from the register of companies is not justified in view of the absence of any of the grounds on which the order was passed by the Registrar, it may order restoration of the name of the company in the register of companies:

Provided that before passing any order under this section, the Tribunal shall give a reasonable opportunity of making representations and of being heard to the Registrar, the company and all the persons concerned.

(iii) Restoration of name of Company by ROC:
Proviso to Sec. 252(1) of Companies Act, 2013 provides that if the Registrar is satisfied, that the name of the company has been struck off from the register of companies either inadvertently or on the basis of incorrect information furnished by the company or its directors, which requires restoration in the register of companies, he may within a period of 3 years from the date of passing of the order dissolving the company u/s 248, file an application before the Tribunal seeking restoration of name of such company.

(iv) Order of Tribunal for restoration of name of company:
As per Sec. 252(3) of Companies Act, 2013, the Tribunal on an application made by the company, member, creditor or workman before the expiry of 20 years from the publication in the Official Gazette of the notice u/s 248(5) may, if satisfied that the company was, at the time of its name being struck off, carrying on business or in operation or otherwise it is just that the name of the company be restored to the register of companies, order the name of the company to be restored to the register of companies.

(v) Removal of Name of Sec. 8 company:
As per Sec. 248(2) of Companies Act, 2013, a company may, after extinguishing all its liabilities, by a special resolution or consent of 75% members in terms of paid-up share capital, file an application in the prescribed manner t0 the Registrar for removing the name of the company from the register of companies on all or any of the grounds specified in Sec. 248(1).
However, Sec. 248(3) provides that nothing in Sec. 248(2) shall apply to a Sec. 8 company. Hence Sec. 8 company cannot apply for removal of its name on its own.

Question 9.
Examine with reference to the provisions of the Companies Act, 2013 whether MN Limited and PQ Limited can be considered as Government Company.
(i) C.G. and Government of Maharashtra together hold 40% of the paid-up share capital of MN Limited. A government company also holds 20% of the paid-up share capital in MN Limited.
(ii) PQ Limited is a subsidiary but not a wholly owned subsidiary of a government company.
Answer:
Determination of status of company:

As per Sec. 2(45) of the Companies Act, 2013, “Government company” means any company in which not less than fifty-one percent of the paid-up share capital is held by the Central Government, or by any State Government or Governments, or partly by the Central Government and partly by one or more State Governments, and includes a company which is a subsidiary company of such a Government company.

Status of MN Limited: The C.G. and Government of Maharashtra together hold 40% of the paid- up share capital of MN Limited. A government company also holds 20% of the paid-up share capital in MN Limited. In this case, MN Limited is not a Govt, company as the holding of the C.G. and Govt, of Maharashtra is only 40%. Holding of government company in MN Limited of 20% is not considered for the purpose of Sec. 2(45).

Status of PQ Limited: PQ Limited is a Govt, company, being a subsidiary company of a Government company. It is immaterial whether the subsidiary is a wholly owned subsidiary or not.

Question 10.
M/s Kashi Mutual Benefits Nidhi Ltd. is incorporated as a Nidhi company under the companies Act, 2013. The board of directors of the company seeks your advice on the following issues as per the provisions of the Companies Act, 2013 read with rules. Advice.

(i) The Board of Directors is planning to issue preference shares.
(ii) The Board of Directors have decided to provide Locker Facilities on rent to its members and have estimated that rental income from such letting will be around 30% of the gross income of the company.
(iii) The Board of Directors of the company is planning to declare dividend for the current year at 45%.
(iv) The Board of Directors of the company have decided to appoint Mr. Prince (a minor) as a member of the company. [May 18 – Old Syllabus (4 Marks)]
Answer:
Nidhi Companies – Miscellaneous Provisions:

(i) A Nidhi Company cannot issue preference shares [Rule 6 of Nidhi Rules, 2014).

(ii) A Nidhi company is not allowed to carry on any business other than the business of borrowing or lending in its own name. However Nidhis which have adhered to all the provisions of these rules may provide locker facilities on rent to its members subject to the rental income from such facilities not exceeding 20% of the gross income of the Nidhi at any point of time during a financial year (Rule 6 of Nidhi Rules, 2014). So, the board of directors cannot provide locker facilities on rent to its members on which the rental income will be around 30% of the gross income of the company. ”

(iii) A Nidhi company cannot declare dividend in excess of 25% (Rule 18 of Nidhi Rules, 2014).

(iv) A Minor cannot be admitted as member of a Nidhi Company (Rule 8 of Nidhi Rules, 2014).

Question 11.
Akri Nidhi Limited proposes:
(i) To reappoint Mr. X, a Director who has completed a term of 10 consecutive years as a Director of the Nidhi.
(ii) To pay dividend at the rate of 45%.
Examine and analyse the validity of the above proposals with reference to Nidhi Rules, 2014 formulated under Companies Act, 2013. [May 19 – Old Syllabus (4 Marks)]
Answer:
Nidhi Companies – Miscellaneous Provisions:
As per Rule 17 of Nidhi Rules, 2014, the Director of a Nidhi shall hold office for a term up to 10 consecutive years on the Board of Nidhi. The Director shall be eligible for re-appointment only after the expiration of 2 years of ceasing to be a Director.

As per Rule 18 of Nidhi Rules, 2014, a Nidhi company cannot declare dividend in excess of 25% (Rule 18 of Nidhi Rules, 2014).

Conclusion: Considering the provisions stated above, following conclusions may be drawn:

(i) Proposal to reappoint Mr. X, a Director is not valid as on completion of tenure of 10 consecutive years, such Director shall be eligible for re-appointment only after the expiration of 2 years of ceasing to be a Director.

(ii) Proposal to pay dividend at a rate of 45% is not valid as a Nidhi company cannot declare dividend in excess of 25%.

Question 12.
Explain the meaning of ‘Fraud’ in relation to the affairs of a company and the punishment provided for the same in Section 447 of the Companies Act, 2013.
Answer:
Meaning of Fraud:
Section 447 defines the term fraud as:
“Fraud” in relation to affairs of a company or anybody corporate, includes any act, omission, concealment of any fact or abuse of position committed by any person or any other person with the connivance in any manner, with intent to deceive, to gain undue advantage from, or to injure the interests of, the company or its shareholders or its creditors or any other person, whether or not there is any wrongful gain or wrongful loss.
Punishment provided u/s 447:

Question 13.
JKL Research Development Limited is a registered Public Limited Company. The company has a unique business idea emerging from research and development in a new area. However, it is a future project and the company has no significant accounting transactions and business activities at present. The company desires to obtain the status of a ‘Dormant Company’. Advise the company regarding the provisions of the Companies Act, 2 013 in this regard and the procedure to be followed in this regard. [MTP-Oct.18, RTP-Nov.18]
Answer:
Provisions as to Dormant Company:
Provisions related to the Dormant companies is covered u/s 455 of the Companies Act, 2013. Accordingly,

(i) Where a company is formed and registered under this Act for a future project or to hold an asset or intellectual property and has no significant accounting transaction, such a company or an inactive company may make an application to the Registrar in such manner as may be prescribed for obtaining the status of a dormant company.

(ii) The Registrar shall allow the status of a dormant company to the applicant and issue a certificate after considerating of the application,

(iii) The Registrar shall maintain a register of dormant companies in such form as may be prescribed.

(iv) In case of a company which has not filed financial statements or annual returns for two financial years consecutively, the Register shall issue a notice to that company and enter the name of such company in the register maintained for dormant companies.

(v) A dormant company shall have such minimum number of directors, file such documents and pay such annual fee as may be prescribed to the Registrar to retain its dormant status in the register and may become an active company on an application made in this behalf accompanied by such documents and fee as may be prescribed.

(vi) The Registrar shall strike off the name of a dormant company from the register of dormant companies, which has failed to comply with the requirements of this section.

Question 14.
Rudraksh Ltd., a public company, was incorporated for supply of solar panels for the emerging project of government for construction of highways. However, the said project did not turn up for two years due to some legal implications. During the said period, no any significant accounting transaction was made and so the company did not file financial statements and annual returns during the last two financial years.

In the meantime, the Board proposed for Mr. Ram & Mr. Rahim to be appointed as an Independent Directors for their independent and expertise knowledge and experience for better working and improvement of financial position of the company.

Evaluate in the light of the given facts, the following legal position:
(a) Comment upon the accountability for non-filing of financial statements and annual returns for last two financial years of the Rudraksh Ltd.
(b) Nature of the proposal for an appointment of Mr. Ram & Mr. Rahim in the Rudraksh Ltd. for
improvement of the company. [RTP-May 19]
Answer:
Provisions as to Dormant Company:
(i) Accountability for non-filing of financial statements and annual returns for last two financial years:
As per Sec. 455 of the Companies Act, 2013, where a company is formed and registered under this Act for a future project or to hold an-asset or intellectual property and has no significant accounting transaction, such a company or an inactive company may make an application to the Registrar in such manner as may be prescribed for obtaining the status of a dormant company.

As per the stated facts, Rudraksh Ltd. is an inactive company and has not filed financial statements or annual returns for 2 financial years consecutively, the Registrar shall issue a notice to that effect and enter the name in the register maintained for dormant companies.

(ii) Proposal for Independent Directors:
Proposal for appointment of Independent Director (Mr. Ram & Mr. Rahim) is not necessitated as a dormant company is not required to have independent director.

Question 15.
Gulmohar Ltd. is a company registered in India for last 5 years. Since last 2 financial years, it has not been carrying on any business or operations and has not filed financial statements and annual returns saying that it has not made any significant accounting transaction during the last two financial years. Considering the current situation, Directors of the Company is contemplating to apply to Registrar of Companies to obtain the status of dormant or inactive company. Advise them on:

(i) Whether Gulmohar Ltd. is eligible to apply to Registrar of Companies to obtain dormant status for the company?
(ii) Will your answer be different if Gulmohar Ltd. is continuing payment of fees to Registrar of Companies and payment of rentals for its office and accounting records for last two financial years?
(iii) Is special resolution in general meeting a pre-requisite to make an application to Registrar of Companies for obtaining the status of dormant company?
(iv) What will be your answer if it found after making an application of dormant company to Registrar of Companies that an investigation is pending against the company which was ordered 6 months ago? [May 19 – New Syllabus (8 Marks)]
Answer:
Provisions as to Dormant Company:

As per Sec. 455 of the Companies Act, 2013, where a company is formed and registered under this Act for a future project or to hold an asset or intellectual property and has no significant accounting transaction, such a company or an inactive company may make an application to the Registrar in such manner as may be prescribed for obtaining the status of a dormant company.

Inactive company means a company which has not been carrying on any business or operation, or has not made any significant accounting transaction during the last 2 financial years, or has not filed F.S. and annual returns during the last 2 financial years.

“Significant accounting transaction” means any transaction other than
(a) payment of fees by a company to the Registrar;
(b) payments made by it to fulfil the requirements of this Act or any other law;
(c) allotment of shares to fulfil the requirements of this Act; and
(d) payments for maintenance of its office and records.

Rule 3 of Companies (Miscellaneous) Rules, 2014 prescribes the manner and conditions subject to which status of dormant company may be obtained. In accordance with Rule 3, a company may make an application to the Registrar for obtaining the status of a Dormant Company after passing a special resolution to this effect in the general meeting of the company or after issuing a notice to all the shareholders of the company for this purpose and obtaining consent of at least 3/4^th shareholders (in value).

Further, a company shall be eligible to apply under this rule only, if no inspection, inquiry or investigation has been ordered or taken up or carried out against the company;

Conclusion: Based on the provisions as stated above, following conclusions may be drawn:

Company is eligible to apply as it falls within the definition of inactive company.
Answer will remain same as payment of fees to ROC and payments for its office and accounting records do not fall within the meaning of significant accounting transactions.
Special Resolution is a pre-requisite. However company has an option to issue a notice to all shareholders for this purpose and obtaining consent of atleast 3/4th of shareholders in value.
Application will not be considered as investigation is pending against the company.

Question 16.
M & N Project Engineering Services Private Limited had applied to the Registrar of Companies to be considered as Dormant company as the project got delayed due to the non-clearance from the National Green Tribunal. The RoC has granted the certificate to allow the status of dormant company in May 2018. Now the company is granted clearance from National Green Tribunal. The Board of the company wants to revive the status as active company. They seek your advice on approval by the Registrar for revival of status as active company. [Nov. 20 – Old Syllabus (4 Marks)]
Answer:
Application for seeking status of an active company:
Provision relating to revival of status of active company are provided by Rule 8 of the Companies (Miscellaneous] Rules, 2014. Accordingly,

(1) An application for obtaining the status of an active company shall be made in Form MSC-4 along with prescribed fees and shall be accompanied by a return in Form MSC-3 in respect of the financial year in which the application for obtaining the status of an active company is being filed.
However, the Registrar shall initiate the process of striking off the name of the company if the company remains as a dormant company for a period of consecutive 5 years.

(2) The Registrar shall, after considering the application filed for obtaining the status of an active company, issue a certificate in Form MSC-5 allowing the status of an active company to the applicant.

(3) Where a dormant company does or omits to do any act mentioned in the Grounds of application in Form MSC-1 submitted to Registrar for obtaining the status of dormant company, affecting its status of dormant company, the directors shall within 7 days from such event, file an application for obtaining the status of an active company.

(4) Where the Registrar has reasonable cause to believe that any company registered as ‘dormant company’ under his jurisdiction has been functioning in any manner, directly or indirectly, he may initiate the proceedings for enquiry u/s 206 of the Act and if, after giving a reasonable opportunity of being heard to the company in this regard, it is found that the company has actually been functioning, the Registrar may remove the name of such company from register of dormant companies and treat it as an active company.

Mergers, Acquisitions and Corporate Restructuring – CA Final SFM Study Material

Leave a Comment / CA Final / By Murali / March 29, 2023 March 30, 2023

Mergers, Acquisitions and Corporate Restructuring – CA Final SFM Study Material is designed strictly as per the latest syllabus and exam pattern.

Mergers, Acquisitions and Corporate Restructuring – CA Final SFM Study Material

Part-1(Theory)

Question 1.
Write short note on Horizontal Merger and Vertical Merger. [May 2016] [4 Marks]
Answer:
A merger is generally understood to be a fusion of two companies. It may be classified as horizontal merger or vertical merger.

Horizontal Merger: Under this type of merger, the two companies which have merged are in the same industry. Normally the market share of the new consolidated company would be larger and it is possible that it may move closer to being a monopoly or a near monopoly to avoid competition.

Vertical Merger: This merger happens when two companies that have ‘buyer- seller’ relationship (or potential buyer-seller relationship) come together.

Question 2.
What are the problems for “Merger and Acquisitions” in India? [Nov. 2016] [4 Marks]
Answer:
The following are the problems of mergers and acquisitions in India:

Controlling Interest: The Indian companies are largely promoter-controlled and managed.
Legal Compliances: There are strict SEBI rules and regulations. In addition, the need for ‘prior negotiations and concurrence of financial institutions and banks’ also creates problem.
Funding Problem: The reluctance of financial institutions and banks to fund acquisitions directly.
Exit Policy: There is a lack of exit policy for restructuring or downsizing of schemes of mergers and acquisitions.
Valuation Problem: The absence of efficient capital market system makes the market capitalisation not fair in some cases. The fair valuation of entity is still creating hurdles.

Question 3.
Explain “Synergy” in the context of Merger and Acquisitions? [Nov. 2012] [4 Marks]
Answer:
The one of the most common reasons for Mergers and Acquisition (M&A) is Synergistic operating economics. In simple terms, synergy implies that one plus one is more than two. In terms of mergers and acquisition, if V (A) and V (B) denote the Values of two Firms ‘A’ and ‘B’ then following shall prevail:
V (AB) > V (A) + V (B)
In other words the combined value of two firms or companies shall be more than their individual value. The ‘Synergy’ is the increase in performance of the combined firm over what the two firms are already expected or required to accomplish as independent firms. The synergy benefits arise due to following:
1. Economics of combined efforts: A company may have a good networking of branches and other company may have efficient production system. Thus, the merged companies will be more efficient than individual companies.

2. Economies of scale: The economies of large scale are also one of the reasons for synergy benefits. The main reason is that, the large scale production results in lower average cost of production e.g. reduction in overhead costs on account of sharing of central services such as accounting and finances, office executives, top level management, legal, sales promotion and advertisement etc.

3. Real and Pecuniary Economies: The economics can be “real’’ arising out of reduction in factor input per unit of output, whereas pecuniary economics are realized from paying lower prices for factor inputs for bulk transactions.

Question 4.
How synergy is used as a tool when deciding merger and acquisitions? – [May 2017] [4 Marks]
Answer:
The mergers and acquisitions are made with the goal of improving the company’s financial performance for the shareholders. The shareholders will benefit if company’s post-merger share price increases due to the synergistic effect of the deal. The expected synergy achieved through the merger can be attributed to various factors, such as increased revenues, combined talent and technology or cost reduction.

The two businesses can merger to form one company that is capable of producing more revenue than either could have been able to independently or to create one company that is able to eliminate or streamline redundant processes, resulting in significant cost reduction.
When two companies merge to create greater efficiency or scale, it is called as synergy merge. It is clear the synergy may be used as a tool for deciding the merger or acquisition.

Question 5.
What is equity carve out? How does it differ from a spin off? [Nov. 2013] [4 Marks]
Answer:
Equity Carve out:
It is partial spin-off in which a company creates its own new subsidiary and subsequently brings out its IPO. The parent keeps a controlling stake in the newly traded subsidiary. A carve-out is a strategic avenue a parent firm may take when one of its subsidiaries is growing faster and carrying higher valuations than other businesses owned by the parent. A carve-out generates cash because shares in the subsidiary are sold to the public, but the issue also unlocks the value of the subsidiary unit and enhances the parent’s shareholder value.

Spin-off
In this case, a part of the business is separated and created as a separate firm. The existing shareholders of the firm get proportionate ownership. So there is no change in ownership and the same shareholders continue to own the newly created entity in the same proportion as previously in the original firm.

Difference between Equity Carve Out and Spin-Off

Under spin-off, the shareholders in new company remain the same but not in case of equity curve out.
Under Spin-off parent company does not receive any cash but equity carve-out generates cash because shares in the subsidiary are sold to the public.

Question 6.
Write short note on “Takeover by Reverse Bid”. [Nov, 2011, 2014, 2019] [4 Marks]
Answer:
Usually, a large company takes over smaller company. In a ‘reverse takeover’, a smaller company gains control of a larger one. The concept of takeover by reverse bid, or of reverse merger, is thus not the usual case of amalgamation of a sick unit which is non-viable with a healthy or prosperous unit but is a case whereby the entire undertaking of the healthy and prosperous company is to be merged and vested in the sick company which is non-viable. A company becomes a sick industrial company when there is erosion in its net worth. This alternative is also known as taking over by reverse bid.

Conditions for Reverse Takeover:
The following are the conditions of reverse merger:
(a) Value of Assets: The assets of the transferor company are greater than the transferee company,
(b) Value of Shares issued: The equity capital to be issued by the transferee company pursuant to the acquisition exceeds its original issued capital, and
(c) Controlling Interest: The change of control in the transferee company through the introduction of a minority holder or group of holders.

Question 7.
Write short note on “Financial Restructuring.” [Nov. 2008, May 2013] [4 Marks]
Answer:
When a company incurs continuous losses, the share capital or net worth of such companies gets substantially eroded. In fact, in some cases, the accumulated losses are even more than the share capital and thus leading to negative net worth, putting the firm on the verge of liquidation. In order to revive such firms, financial restructuring is one of the techniques to bring into health such firms which are having potential and promise for better financial performance in the years to come. Financial restructuring refers to a kind of internal changes made by the management in Assets and Liabilities of a company with the consent of its various stakeholders. With the help of restructuring, the firm re-starts with a fresh balance sheet free from losses and fictitious assets and show share capital at its true worth.

Normally equity shareholders make maximum sacrihce by foregoing certain accrued benefits, followed by preference shareholders and debenture holders, lenders and creditors etc. The sacrifice may be in the form of waving a part of the sum payable to various liability holders. The foregone benefits may be in the form of new securities with lower coupon rates so as to reduce future liabilities. The sacrifice may also lead to the conversion of debt into equity. Sometime, creditors, apart from reducing their claim, may also agree to convert their dues into securities to avert pressure of payment. These measures will lead to better financial liquidity. The financial restructuring leads to significant changes in the financial obligations and capital structure of corporate firm, leading to a change in the financing pattern, ownership and control and payment of various financial charges.

The financial restructuring results into the following:
(i) The reduction or waiver in the claims from various stakeholders.
(ii) The revaluation of various properties and assets of the entity.
(iii) The profit accruing on account of appreciation of assets is utilised to write off accumulated losses and fictitious assets (such as preliminary expenses and cost of issue of shares and debentures) and creating provision for bad and doubtful debts.

Part-2(Numerical Problems: Topic Wise In Chronological Order)

Question 1.
1K Ltd. is considering acquiring N. Ltd., the following information is available:

Exchange of equity shares for acquisition is based on current market value as above. There is no synergy advantage available:
(i) Find the earning per share for company K. Ltd. after merger.
(ii) Find the exchange ratio so that shareholders of N. Ltd. would not be at a loss. [Nov. 2008] [12 Marks]
Answer:
(i) Determination of new EPS of K. Ltd. after Merger:

Exchange Ratio	= \(\frac{\text { Market Value of } N \text { Ltd } .}{\text { Market Value of } K \mathrm{Ltd} .}\) = \( \frac{160}{200} \) = 0.8 [0.8 shares of K Ltd. for every 1 share of N Ltd.]
No. of shares to be issued	= 2,50,000 × 0.8 = 2,00,000 Shares
Total Shares of K Limited (after merger)	= 10,00,000 + 2,00,000 = 12,00,000 Shares
Total Profits of K Ltd. (After Merger)	Rs. 50,00,000 + Rs. 15,00,000 = Rs. 65,00,000
EPS of K Ltd. (After Merger)	= \( \frac{R s .65,00,000}{12,00,000 \text { Shares }} \) = Rs. 5.42

(ii) Exchange Ratio so that shareholder of N. Ltd. would not be at a Loss:
The shareholders of N Limited would not be at loss if the exchange ratio is based on EPS.

	K Ltd.	N Ltd.
EPS before Merger	= \(\frac{\text { Rs. } 50,00,000}{10,00,000 \text { Shares }} \) = Rs. 5.00	= \(\frac{R s \cdot 15,00,000}{2,50,000 \text { Shares }} \) = Rs. 6.00

Exchange Ratio (with EPS as base) = \(\frac{E P S \text { of } N \text { Ltd. }(\text { Target Co. })}{\text { EPS of } K \text { Ltd. }(\text { Acquirer Co. })}\)
= \(\frac{R s .6}{R s .5}\) = 1.2
It means 1.2 shares of K Ltd. for every 1 share of N Ltd.
Shares to be issued to N Ltd. = 2,50,000 Shares × 1.2 = 3,00,000 Shares
Total number of Shares = 10,00,000 + 3,00,000 = 13,00,000 Shares
EPS of K Ltd. (after merger) = \(\frac{R s .65,00,000}{R s .13,00,000}\) = ₹ 5.00

Verification that the shareholders of target company are not at loss:
Method 1 (Total Earnings approach)
Total Earnings available to Shareholders of N. Ltd,:
Before Merger = 2,50,000 Shares × ₹ 6.00 (EPS) = ₹ 15,00,000
After Merger = 3,00,000 Shares × ₹ 5.00 (EPS) = ₹ 15,00,000

Method 2 (EPS approach)
The EPS available to Shareholders of N. Ltd.:
Before Merger = ₹ 6
After Merger = EPS of K Ltd, after merger × Exchange Ratio = 5 × 1.2 = ₹ 6
Therefore, the exchange ratio on the basis of EPS is recommended.

Question 2.
You have been provided the following Financial data of two companies:

	Krishna Ltd. (₹)	Rama Ltd. (₹)
Earnings after taxes	7,00,000	10,00,000
Equity shares (outstanding)	2,00,000	4,00,000
EPS	3.5	2.5
P/E ratio	10 times	14 times
Market price per share	35	35

Company Rama Ltd. is acquiring the company Krishna Ltd., exchanging its shares on a one-to-one basis for company Krishna Ltd. The exchange ratio is based on the market prices of the shares of the two companies.
Required:
(i) What will be the EPS subsequent to merger?
(ii) What is the change in EPS for the shareholders of companies Rama Ltd. and Krishna Ltd.?
(iii) Determine the market value of the post-merger firm: PE ratio is likely to remain the same.
(iv) Ascertain profits accounting to shareholders of both the companies. [Nov. 2009] [10 Marks]
Answer:
(i) Determination of new EPS subsequent to Merger:

Exchange Ratio	= \(\frac{\text { Market Value of Krishna Ltd. } . \text { Target Co.) }}{\text { Market Value of Rama Ltd. }}\) = \(\frac{35}{35}\) = 1 [1 share of K Ltd. for every 1 share of Krishna Ltd.]
No. of shares to be issued	= 2,00,000 × 1 = 2,00,000
Total Shares of Rama Limited (after merger)	= 4,00,000 + 2,00,000 = 6,00,000 Shares
Total Profits of Rama Ltd. (After Merger)	= (2,00,000 × 3.5) + (4,00,000 × 2.5) = Rs. 7,00,000 + Rs. 10,00,000 = Rs. 17,00,000
EPS of Rama Ltd. (After Merger)	= \(\frac{R s, 17,00,000}{6,00,000 \text { Shares }}\) = Rs. 2.83

(ii) Change in EPS for shareholders of both companies:

The exchange ratio is 1:1, therefore the new EPS of Rama Ltd. i.e. Rs. 2.83 need not to be adjusted while determining the impact on EPS.

(iii) Market Value of merged firm:

P/E ratio of new firm (expected to remain same)	14 times
New market price (14 × ₹ 2.83)	₹ 39.62
Total No. of Shares (4,00,000 + 2,00,000)	6,00,000
Total market Capitalization (6,00,000 × ₹ 39.62)	₹ 2,37,72,000
Existing market capitalization (₹ 70,00,000 + ₹ 1,40,00,000)	₹ 2,10,00,000
Total gain	₹ 27,72,000

(iv) Determination of profits to shareholders of companies:

Question 3
MK Ltd. is considering acquiring NN Ltd. The following information is available:

Exchange of equity shares for acquisition is based on current market value as above. There is no synergy advantage available.
(i) Find the earning per share for company MK Ltd. after merger, and
(ii) Find the exchange ratio so that shareho1rers of NN Ltd. would not be at a loss. [Nov. 2010] [8 Marks]
Answer:
(i) Determination of new EPS of MK Ltd. after merger:

Exchange Ratio	= \(\frac{\text { Market Value of NN Ltd }}{\text { Market Value of MK Ltd. }} \) = \( \frac{160}{200} \) = 0.8 [0.8 shares of MK Ltd. for every 1 share of NN Ltd.]
No. of shares to be issued	= 3,00,000 × 0.8 = 2,40,000 Shares
Total Shares of MK Limited (after merger)	= 12,00,000 + 2,40,000 = 14,40,000 Shares
Total Profits of MK Ltd. (After Merger)	Rs. 60,00,000 + Rs. 18,00,000 = Rs. 78,00,000
EPS of MK Ltd. (After Merger)	= \(\frac{\text { Rs. } 78,00,000}{14,40,000 \text { Shares }} \) = Rs. 5.42 per share

(ii) Exchange Ratio so that shareholder of NN Ltd. would not be at a Loss: The shareholders of NN Limited would not be at loss if the exchange ratio is based on EPS.

	MK Ltd.	NN Ltd.
EPS before Merger	= \(\frac{\text { Rs. } 60,00,000}{12,00,000 \text { Shares }}\) = Rs. 5.00	= \(\frac{\text { Rs. } 18,00,000}{3,00,000 \text { Shares }}\) = Rs. 6.00

Exchange Ratio (with EPS as base) = \(\frac{E P S \text { of } N N \text { Ltd } .(\text { Target Co. })}{\text { EPS of MK Ltd. }(\text { Acquirer Co. })}\) = \(\frac{\text { Rs. } 6}{\text { Rs. } 5}\) = 1.2
It means 1.2 shares of MK Ltd. for every 1 share of NN Ltd.
Shares to be issued to NN Ltd. = 3,00,000 Shares × 1.2 = 3,60,000 Shares
Total number of Shares = 12,00,000 + 3,60,000 = 15,60,000 Shares
EPS of MK Ltd. (after, merger) = \(\frac{R s .78,00,000}{15,60,000 \text { Shares }}\) = ₹ 5.00

Verification that the shareholders of target company are not at loss:
Method 1 (Total Earnings approach)
Total Earnings available to Shareholders of NN Ltd.:
Before Merger = 3,00,000 Shares × ₹ 6.00 (EPS) = ₹ 18,00,000
After Merger = 3,60,000 Shares × ₹ 5.00 (EPS) = ₹ 18,00,000

Method 2 (EPS approach)
The EPS available to Shareholders of NN Ltd.:
Before Merger = ₹ 6
After Merger = EPS of MK Ltd, after merger × Exchange Ratio = 5 × 12 = ₹ 6
Therefore, the exchange ratio on the basis of EPS is recommended.

Question 4.
Longitude Limited is in the process of acquiring Latitude Limited on a share exchange basis. Following relevant data are available:

You are required to determine:
(i) Pre-merger Market Value per Share, and
(ii) The maximum exchange ratio Longitude Limited can offer without the dilution of
(1) EPS and
(2) Market Value per Share
Calculate Ratio/s up to four decimal points and amounts and number of shares up to two decimal points. [May 2013] [8 Marks]
Answer:
(i) Pre-Merger Market Value of Share (in unit):

Formula	Longitude Ltd.	Latitude Ltd.
P/E Ratio × EPS	15 × Rs. 8 = Rs. 120	10 × Rs. 5 = Rs. 50

(ii) (i) Maximum Exchange Ratio without dilution of EPS:
The shareholders of Latitude Ltd. would not be at loss if the exchange ratio is based on EPS.

Exchange Ratio (with EPS as base)
= \(\frac{\text { EPS of Latitude Ltd. }(\text { Target Co.) }}{\text { EPS of Longitude Ltd. }(\text { Acquirer Co.) }}\) = \(\frac{R s .5}{R s .8}\) = 0.625
It means 0.625 shares of Longitude Ltd. for every 1 share of Latitude Ltd.
Shares to be issued to Latitude Ltd. = 16 Lakh Shares × 0.625 = 10 Lakh Shares

(ii) Maximum Exchange Ratio without dilution of Market Value per share: The shareholders of Latitude Ltd. would not be at loss if the exchange ratio is based on Market Price.

Exchange Ratio (with Market Price as base)
= \(\frac{\text { Market Price of Latitude Ltd. }(\text { Target Co.) }}{\text { Market Price of Longitude Ltd. }(\text { Acquirer Co.) }}\) = \(\frac{R s .50}{R s .120}\) = 0.4167

It means 0.4167 shares of Longitude Ltd. for every 1 share of Latitude Ltd.
Shares to be issued to Latitude Ltd.= 16 Lakh Shares × 0.4167 = 6,66,666.67 Shares

Alternative approach:

	Longitude Ltd.	Latitude Ltd.	Total
Pre-merger	= Rs. 120 × 15 Lakhs	= Rs. 50 × 16 Lakhs	Rs. 2,600 Lakhs
Market Capitalisation	= Rs. 1800 Lakhs	= Rs. 800 Lakhs

Max. No. of Shares (After Merger)
= \(\frac{\text { Combined Market Capitalisation }}{\text { Current Market Price of Longitude Lid. }}\)
= \(\frac{R s .2600}{R s .120}\) = 21.67 Lakh Shares

Max. Shares no. be issued to Latitude Limited = 21.67 – 15 = 6.67 Lakh Shares
Therefore, the maximum share exchange ratio is 6.67:16 or 0.4169:1

Question 5.
Cauliflower Limited is contemplating acquisition of Cabbage Limited. Cauliflower Limited has 5 lakh shares having market value of ₹ 40 per share while Cabbage Limited has 3 lakh shares having market value of ₹ 25 per share. The EPS for Cabbage Limited and Cauliflower Limited are ₹ 3 per share and ₹ 5 per share respectively. The managements of both the companies are discussing two alternatives for exchange of shares as follows:
(i) In proportion to relative earnings per share of the two companies.
(ii) 1 share of Cauliflower Limited for two shares of Cabbage Limited.
Required:
(i) Calculate the EPS after merger under both the alternatives.
(ii) Show the impact of EPS for the shareholders of the two companies under both the alternatives. [Nov. 2014] [10 Marks]
Answer:
(i) Calculation of EPS after merger:

	Alternative I (EPS Basis)	Alternative II (Exchange Ratio 1:2)
Total Earnings (W.N.1)	Rs. 34,00,000	Rs. 34,00,000
Total Shares (W.N.3)	6,80,000	6,50,000
EPS of Cauliflower after Merger	\( \frac{34,00,000}{6,80,000} \) = ₹ 5.00	\( \frac{34,00,000}{6,50,000} \) = ₹ 5.23

(ii) Merger impact of EPS for the shareholders of the two companies:
With EPS based Share Exchange Ratio:

	EPS (Existing)	EPS (After Merger)	Change in EPS
Cauliflower Ltd.	Rs. 5	Rs. 5	No Change
Cabbage Ltd	Rs. 3	Rs. 5 × 0.6 = Rs. 3	No Change

With Exchange Ratio of 1:2

EPS	Existing	After Merger	Change in EPS
Cauliflower Ltd.	Rs. 5	Rs. 5.23	Increase [0.23]
Cabbage Ltd.	Rs. 3	Rs. 5.23 × 0.5 = Rs. 2.615	Decrease [0.385]

Note: While comparing the EPS (before and after merger) for the shareholders of target company (Cabbage Ltd.), the post-merger EPS has to be adjusted on the basis of Exchange Ratio.

Working Note-1 Calculation of total earnings

Company	Existing No. of Shares	EPS	Total earnings
Cauliflower Ltd.	5,00,000	5.00	25,00,000
Cabbage Ltd.	3,00,000	3.00	9,00,000
Total earnings		Rs. 34,00,000

Working Note-2 Calculation of total shares to be issued to Cabbage Company:
No. of shares (EPS Basis) = Shares in Cabbage Ltd. × \(=\frac{\text { EPS of Cabbage }}{\text { EPS of Cauliflower }}\)
= 3,00,000 × \(\frac{\text { Rs. } 3}{\text { Rs. } 5}\) = 1,80,000 shares
No. of shares (ER 1:2) = Shares in Cabbage Ltd. × Exchange Ratio
= 3,00,000 × \(\frac{\text { Rs. } 1}{\text { Rs. } 2}\) = 1,50,000 shares

Working Note-3 Calculation of total number of shares
No. of shares after merger = 5,00,000 + 1,80,000 = 6,80,000

	Alternative I (EPS Basis)	Alternative II (Exchange Ratio 1:2)
Existing Shares	5,00,000	5,00,000
Fresh Shares issued	1,80,000	1,50,000
Total Shares	6,80,000	6,50,000

Question 6.
East Co. Ltd. is studying the possible acquisition of Fost Co. Ltd. by way of merger. The following data are available in respect of the companies.

	East Co. Ltd.	Fost Co. Ltd.
Earning after tax (₹)	2,00,000	60,000
No. of equity shares	40,000	10,000
Market value per share (₹)	15	12

(i) If the merger goes through by exchange of equity share and the exchange ratio is based on the current market price, what is the new earning per share for East Co. Ltd.?
(ii) Fost Co. Ltd. wants to be sure that the merger will not diminish the earnings available to its shareholders. What should be the exchange ratio in that case? [Nov. 2017] [8 Marks]
Answer:
(i) Determination of new EPS of East Ltd. (After Merger):

Exchange Ratio	= \(\frac{\text { Market Value of Fost Ltd }}{\text { Market Value of East Ltd. }}\) = \(\frac{12}{15}\) = 0.8 [0.8 shares of East Ltd. for every 1 share of Fost Ltd.]
No. of shares to be issued	= 10,000 x 0.8 = 8,000 Shares
Total Shares of East Limited (after merger)	= 40,000 + 8,000 = 48,000 Shares
Total Profits of East Ltd. (After Merger)	Rs. 2,00,000 + Rs. 60,000 = Rs. 2,60,000
EPS of East Ltd. (After Merger)	= \( \frac{R s, 2,60,000}{48,000 \text { Shares }\) = Rs. 5.416

(ii) Exchange Ratio so that shareholder of Fost Ltd. would not be at a Loss: The shareholders of Fost Limited would not be at loss if the exchange ratio is based on EPS.

	East Ltd.	Fost Ltd.
EPS before Merger	= \(\frac{R s .2,00,000}{40,000 \text { Shares }}\) = Rs. 5.00	= \(\frac{R s .60,000}{10,000 \text { Shares }}\) = Rs. 6.00

Exchange Ratio (with EPS as base) = \(\frac{\text { EPS of Fost Ltd. }(\text { Target Co.) }}{\text { EPS of East Ltd. }(\text { Acquirer Co. })}\) = \(\frac{R s .6}{R s .5}\) = 1.2
It means 1.2 shares of East Ltd. for every 1 share of Fost Ltd.
Shares to be issued to Fost Ltd. = 10,000 Shares × 1.2 = 12,000
Shares Total number of Shares = 40,000 + 12,000 = 52,000 Shares
EPS of East Ltd. (after merger) = \(\frac{R s .2,60,000}{R s .52,000}\) = Rs. 5.00

Verification that the shareholders of target company are not at loss:
The EPS available to Shareholders of Fost Ltd.:
Before Merger = 10,000 shares × Rs. 6 = Rs. 60,000
After Merger = Shares issued to Foster × Post merger EPS = 12,000 × 5 = Rs. 60,000
Therefore, the exchange ratio on the basis of EPS is recommended.

Question 7.
Tatu Ltd. wants to takeover Mantu Ltd. and has offered a swap ratio of 1:2 (0.5 shares for everyone share of Mantu Ltd.). Following information is provided:

	Tatu Ltd.	Mantu Ltd.
Profit after tax	Rs. 24,00,000	Rs.4,80,000
Equity shares outstanding (Nos.)	8,00,000	2,40,000
EPS	Rs. 3	Rs. 2
PE Ratio	10 times	7 times
Market price per share	Rs. 30	Rs. 14

You are required to calculate:
(i) The number of equity shares to be issued by Tatu Ltd. for acquisition of Mantu Ltd.
(ii) What is the EPS of Tatu Ltd. after the acquisition?
(in) Determine the equivalent earnings per share of Mantu Ltd.
(iv) What is the expected market price per share of Tatu Ltd. after the acquisition, assuming its PE multiple remains unchanged?
(v) Determine the market value of the merged firm. [May 2018][8 Marks]
Answer:
(i) The number of equity shares to be issued by Tatu Ltd.:
= Shares in Mantu Ltd. × Exchange Ratio
= 2,40,000 × 0.5 = 1,20,000 Shares

(ii) Determination of new EPS subsequent to Merger:

Total Shares of Tatu Limited (after merger)	= 8,00,000 + 1,20,000 = 9,20,000 Shares
Total Profits of Tatu Ltd. (After Merger)	= Rs. 24 Lakhs + Rs. 4,80,000 = Rs. 28,80,000
EPS of Tatu Ltd. (After Merger)	= \(\frac{\text { Rs. } 28,80,000}{9,20,000 \text { Shares }}\) = Rs. 3.13

(iii) Equivalent EPS of Mantu Limited:
= New EPS × Exchange Ratio = 3.13 × 0.5 = 1.57

(iv) New Market price of Tatu Limited (P/E remaining unchanged)
= Expected EPS × P/E Ratio = 3.13 × 10 = ₹ 31.30

(v) Market value of Merged Firm
= Total No. of Shares × Expected market price
= 9,20,000 Shares × Rs. 31.30 = Rs. 287,96,000

Question 8.
T Ltd. and E Ltd. are in the same industry. The former is in negotiation for acquisition of the latter. Important information about the two companies as per their latest financial statements is given below:

	T Ltd.	E Ltd.
Number of outstanding Equity shares @ ₹ 10 each	12 lakhs	6 lakhs
Debt:
10% Debentures (₹ lakhs)	580	–
12.5% Institutional Loan (₹ lakhs)	–	240
Earnings before interest, depreciation and Tax (EBI- DAT) (₹ lakhs)	400.86	115.71
Market Price/Share (₹)	220.00	110.00

T Ltd. plans to offer a price for E Ltd., business as a whole which will be 7 times EBITDAT reduced by outstanding debt, to be discharged by own shares at market price.
E Ltd. is planning to seek one share in T Ltd. for every 2 shares in E Ltd. based on the market price. Tax rate for the two companies may be assumed as 30%.
Calculate and show the following under both alternatives – T Ltd.’s offer and E Ltd.’s plan:
(i) Net consideration payable.
(ii) No. of shares to be issued by T Ltd.
(iii) EPS of T Ltd. after acquisition.
(iv) Expected market price per share of T Ltd. after acquisition.
(v) State briefly the advantages to T Ltd. from the acquisition.
Calculate (except EPS) may be rounded off to 2 decimals in lakhs.
[May 2010] [16 Marks]
Answer:
As per T Ltd’s Offer

As per E Ltd’s Plan

	(₹ in lakhs)
(i) Net Consideration Payable
6 lakh shares × ₹ 110	660
(ii) No. of shares to be issued by T Ltd.
₹ 660 lakhs ÷ ₹ 220	3 lakh
(iii) EPS of T Ltd. after Acquisition
NPAT (as per earlier calculations)	300.00
Total no. of shares outstanding (12 lakhs – 3 lakhs)	1 5 lakh
Earnings per share (EPS) ₹ 300 lakh 15 lakh	₹ 20.00
(iv) Expected Market Price (₹ 20 × 11)	220

Advantage of Acquisition T Ltd.
Since the two companies are in the same industry, the following advantage could accrue:
(i) Synergy, cost reduction and operating efficiency.
(ii) Better market share
(ii) Avoidance of competition

Question 9.
TK Ltd. and SK Ltd. are both in the same industry. The former is in negotiation for acquisition of the latter. Information about the two companies as per their latest financial statements are given below:

	TK Ltd.	SK Ltd.
₹ 10 Equity shares outstanding	24 Lakhs	12 Lakhs
10% Debentures (₹ Lakhs)	1160	–
12.5% Institutional loan (₹ Lakhs)	–	480
Earnings before interest, depreciation and tax (EBIDAT) (₹ Lakhs)	800.00	230.00
Market Price/Share (₹)	220.00	110.00

TK Ltd. plans to offer a price for SK Ltd. business, as a whole, which will be 7 times of EBIDAT as reduced by outstanding debt and to be discharged by own shares at market price.
SK Ltd. is planning to seek one share in TK Ltd. for every 2 shares in SK Ltd. based on the market price. Tax rate for the two companies may be assumed as 30%.
Calculate and show the following under both alternatives- TK Ltd.’s offer and SK Ltd.’s plan:
(i) Net consideration payable.
(ii) No. of shares to be issued by TK Ltd.
(iii) EPS of TK Ltd. after acquisition.
(iv) Expected market price per share of TK Ltd. after acquisition.
(v) State briefly the advantages to TK Ltd. from the acquisition.
Calculate may be rounded off to two decimals points. [Nov. 2018 New Syllabus] [12 Marks]
Answer:
As per TK Ltd’s Offer

As per SK Ltd.’s Plan

	(₹ in lakhs)
(i) Net Consideration Payable
12 lakhs shares × ₹ 110	1,320
(ii) No. of shares to be issued by TK Ltd.
₹ 1,320 lakhs + ₹ 220	6 lakh
(iii) EPS of TK Ltd. after Acquisition
NOPAT (as per earlier calculations)	597.80
Total no. of shares outstanding (24 lakhs – 6 lakhs)	30 lakh
Earnings Per share (EPS) ₹ 597.8 lakh 30 lakh	₹ 19.93
(iv) Expected Market Price (₹ 19.93 × 11)	₹ 219.23

Advantage of Acquisition TK Ltd
Since the two companies are in the same industry, the following advantage could accrue.
(i) Synergy, cost reduction and operating efficiency.
(ii) Better market share.
(iii) Avoidance of competition.

Question 10
LMN Ltd. is considering merger with XYZ Ltd. LMN Ltd’s shares are currently traded at ₹ 30.00 per share. It has 3,00,000 shares outstanding. Its earnings after taxes (EAT) amount to ₹ 6,00,000. XYZ Ltd. has 1,60,000 shares outstanding and its current market price is ? 15.00 per share and its earnings after taxes (EAT) amount to ₹ 1,60,000. The merger is decided to be effected by means of a stock swap (exchange). XYZ Ltd. has agreed to a proposal by which LMN Ltd. will offer the current market value of XYZ Ltd’s shares.
Find out:
(i) The pre-merger earning per share (EPS) and price/earnings (P/E) ratios of both the companies.
(ii) If XYZ Ltd’s P/E Ratio is 9.6, what is its current Market Price? What is the Exchange Ratio? What will LMN Ltd.’s post-merger EPS be?
(iii) What should be the exchange ratio; if LMN Ltd.’s pre-merger and post-merger EPS are to be the same? [May 2012] [8 Marks]
Answer:
(i) Determination of Pre-merger EPS and P/E ratios:

Particulars	LMN Ltd. (Acquirer)	XYZ Ltd. (Target)
Earnings after taxes	6,00,000	1,60,000
Number of shares outstanding	3,00,000	1,60,000
(Earnings per share) EPS (Rs. per share)	2	1
Market Price per share	30	15
P/E Ratio (times)	15	15

(ii) Current Market Price of XYZ Ltd. if P/E ratio is 9.6
Current Market Price of XYZ = P/E Ratio × EPS = ₹ 1 × 9.6 = ₹ 9.60
Exchange ratio = \(\frac{\text { Market Price of Target Co. }(X Y Z \text { Lld. })}{\text { Market Price of Acquirer Co. }(L M N \text { Lid. })}\) = \(\frac{9.6}{30}\) = 32
Shares to be issued = 1,60,000 × 0.32 = 51,200 Shares
Post-merger EPS of LMN Ltd. = \(\frac{6,00,000+1,60,000}{3,00,000+51,200}\) = \(\frac{7,60,000}{3,51,200}\) = ₹ 2.16

(iii) Desired Exchange Ratio:
Exchange ratio = \(=\frac{\text { EPS of Target } C o .(X Y Z \text { Ltd.) }}{\text { EPS of Acquirer Co.(LMN Ltd.) }}\) = \(\frac{1}{2}\) = 0.5
Shares to be issued = 1,60,000 × 0.5 = 80,000 Shares
Post-merger EPS of LMN Ltd. = \(\frac{6,00,000+1,60,000}{3,00,000+80,000}\) = \(\frac{7,60,000}{3,80,200}\) = ₹ 2

Verification:
Before Merger = ₹ 1
Equivalent post-merger = ₹ 2 × 0.5 (exchange Ratio) = ₹ 1

Alternative Method of computation:

Total number of shares in post merged company	= \(\frac{\text { Post-merger earnings }}{\text { pre-merger EPS of LMN Ltd. }}\) = \( \frac{7,60,000}{2} \) = 3,80,000 shares
Number of shares required to be issued to XYZ Ltd.	= 3,80,000 – 3,00,000 = 80,000 shares
Therefore, the exchange ratio (ER) should be	= 80,000 : 1,60,000 = \(\frac{80,000}{1,60,000}\) = 0.50

Question 11.
XYZ Ltd. wants to purchase ABC Ltd. by exchanging 0.7 of its share for each share of ABC Ltd., Relevant financial data are as follows:

	XYZ Ltd.	ABC Ltd.
Equity shares outstanding (in numbers)	10,00,000	4,00,000
EPS (₹)	40	28
Market price per share (₹)	253	160

(i) Illustrate the impact of merger on EPS of both the companies.
(ii) The management of ABC Ltd. has quoted a share exchange ratio of 1:1 for the merger. Assuming that P/E ratio of XYZ Ltd. will remain unchanged after the merger, what will be the gain from merger for ABC Ltd.?
(iii) What will be the gain/loss to shareholders of XYZ Ltd.?
(iv) Determine the maximum exchange ratio acceptable to shareholders of XYZ Ltd. [Nov. 2015] [10 Marks]
Answer:
Calculation of Earnings and P/E Ratio:

	Earnings (EPS × No. of Shares)	P/E Ratio(MPS + EPS)
XYZ Ltd.	10,00,000 × 40 = ₹ 400 Lakhs	Rs. 250 ÷ 40 = 6.25
ABC Ltd.	4,00,000 × 28 = ₹ 112 Lakhs	Rs. 160 ÷ 28 = 5.71

Calculation of EPS after merger:
Share to be issued by XYZ to ABC = 4,00,000 × 1.7 = 2,80,000 shares
EPS = \(\frac{\text { Rs. } 400 \text { Lakhs }+ \text { Rs. } 112 \text { Lakhs }}{10 \text { Lakhs + 2.8 Lakhs Shares }}\) = \(\frac{\text { Rs. } 512 \text { Lakhs }}{12.8 \text { Lakh Shares }}\) = ₹ 40

(i) Merger impact of EPS with Exchange Ratio 0.7

	EPS (Existing)	EPS (After Merger)	Change in EPS
XYZ Ltd.	₹40	₹40	No Change
ABC Ltd.	₹28	₹4 × 0.7 = ₹ 28	No Change

(ii) Gain from Merger if Exchange Ratio is 1:1
Share to be issued by XYZ to ABC = 4,00,000 × 1 = 4,00,000 shares
EPS = \(=\frac{\text { Rs. } 400 \text { Lakhs }+ \text { Rs. } 112 \text { Lakhs }}{10 \text { Lakhs }+4 \text { Lakhs Shares }}\) = \(\frac{\text { Rs. } 512 \text { Lakhs }}{14 \text { Lakh Shares }}\) = ₹ 36.57
Market Price of Share = ₹ 36.57 × 6.25 = ₹ 228.56
Market Price (Before Merger of ABC) = ₹ 160
Gain from Merger = ₹ 68.56

(iii) Gain/Loss from the Merger to the shareholders of XYZ Ltd.
Market Price of Share = ₹ 228.56
Market Price (Before Merger of ABC) = ₹ 250
Loss from Merger (per share) = ₹ 21.44

(iv) Maximum Exchange Ratio acceptable to XYZ Ltd. Shareholders

	₹ in Lakhs
Market Value of Merged Entity (₹ 228.57 × 14,00,000)	3,199.98
Less: Value acceptable to shareholders of XYZ Ltd.	2,500.00
Value of Merged Entity available to shareholders of ABC Ltd.	699.98
Market Price per share	250.00
No. of shares to be issued to shareholders of ABC Ltd. (Lakhs)	2.80

Thus, maximum ratio of issue shall be 2.80:4.00 or 0.70 share of XYZ Ltd. for one share of ABC Ltd.

Question 12.
A Lid., a listed company, is considering merger of B Ltd. which is also a listed company, with itself by means of a stock swap (exchange). B Ltd. has agreed to a plan under which A Ltd. will offer the current market value of B Ltd’s shares.
Additional Information :

Particulars	A Ltd.	B Ltd.
Earnings after tax (Rs.)	10,00,000	2,50,000
Number of shares outstanding	4,00,000	2,00,000
Current market price (Rs.) per share	50	20

On the basis of above information, you required to calculate the following:
(i) What is the pre-merger Earnings Per Share (EPS) and P/E ratios of both the companies?
(ii) If B Ltd.’s P/E is 10, what will be its current market price per share ? What will be the exchange ratio on the basis of such market price? What will be the A Ltd.’s post-merger EPS?
(iii) What must be the exchange ratio if A Ltd.’s Pre-merger and Post-merger EPS to be the same? [Nov. 2019, Modified] [8 Marks]
Answer:
(i) Calculation of Pre-merger EPS & P/E Ratio

	EPS = Earnings ÷ No. of Shares	P/E Ratio = MPS ÷ EPS
A Ltd.	\(\frac{\mathrm{Rs} .10,00,000}{4,00,000}\) = Rs. 2.50	Rs. 50 ÷ 2,5 = 20 Times
B Ltd.	\(\frac{\text { Rs. } 2,50,000}{2,00,000}\) = Rs. 1.25	Rs. 20 ÷ 1.25 = 16 Times

(ii) Current Market Price of B Ltd. if P/E is 10
EPS (B Ltd.) = Rs. 1.25
P/E Ratio = 10 times
Market Price = 1.25 × 10 = Rs. 12.50
Exchange Ratio (ER) on the basis of Revised Market Price
Exchange Ratio = \(\frac{\text { Market Price of B Ltd. }}{\text { Market Price of A Ltd. }}\) = \(\frac{12.50}{50}\) = 0.25
Share to be issued by A Ltd. to B Ltd. = 2,00,000 × 0.25 = 50,000 shares.
Post Merger EPS of A Ltd.
EPS (A Ltd.) = \(\frac{10,00,000+2,50,000}{4,00,000+50,000}\) = Rs. 2.78

(iii) Required Exchange Ratio to maintain EPS of A Ltd.
The pre-merger and post-merger EPS would be the same if Exchange Ratio is based on EPS. It may be determined as under:
Exchange Ratio = \(\frac{\text { EPS of B Ltd. (Target Company) }}{\text { EPS of A Ltd. (Acquiring Company) }}\) = \(\frac{1.25}{2.50}\) = 0.5

Verification:
EPS (After Acquisition) = \(\frac{10,00,000+2,50,000}{4,00,000+(2,00,000 \times 0.5)}\) = Rs. 2.50

Question 13.
A Ltd. wants to acquire T Ltd. and has offered a swap ratio of 1:2 (0.5 shares for every one share of T Ltd.). Following information is provided:

	A Ltd.	T Ltd.
Profit after tax (₹)	18,00,000	3,60,000
Equity shares outstanding (Nos.) .	6,00,000	1,80,000
EPS (₹)	3	2
PE Ratio	10 times	7 times
Market price per share (₹)	30	14

(i) The number of equity shares to be issued by A Ltd. for acquisition of T Ltd.
(ii) What is the EPS of A Ltd. after the acquisition?
(iii) Determine the equivalent earnings per share of T Ltd.
(iv) What is the expected market price per share of A Ltd. after the acquisition, assuming its PE multiple remains unchanged?
(v) Determine the market value of the merged firm. [Nov. 2007] [10 Marks]
Answer:
(i) The number of shares to be issued by A Ltd.:
The Exchange ratio is 0.5
So, new Shares = 1,80,000 × 0.5 = 90,000 shares.

(ii) EPS of A Ltd. after acquisition:
Total Earnings (₹ 18,00,000 + ₹ 3,60,000) = ₹ 21,60,000
No. of Shares (6,00,000 + 90,000) = 6,90,000
EPS (₹ 21,60,000/6,90,000) = ₹ 3.13

(iii) Equivalent EPS of T Ltd.:
No. of new Shares = 0.5
EPS = ₹ 3.13
Equivalent EPS (₹ 3.13 × 0.5) = ₹ 1.57

(iv) New Market Price of A Ltd. (P/E remaining unchanged):
Present P/E Ratio of A Ltd. = 10 times
Expected EPS after merger = ₹ 3.13
Expected Market Price (₹ 3.13 × 10) = ₹ 31.30

Market Value of merged firm:
Total number of Shares = 6,90,000
Expected Market Price = ₹ 31.30
Total’ alue (6,90,000 × 31.30) = ₹ 2,15,97,000

Question 14.
ABC Ltd. is intending to acquire XYZ Ltd. by merger and the following information is available in respect of the companies:

	ABC Ltd.	XYZ Ltd.
Number of equity shares	10,00,000	6,00,000
Earnings after tax (₹)	50,00,000	18,00,000
Market value per share (₹)	42	28

Required:
(i) What is the present EPS of both the companies?
(ii) If the proposed merger takes place, what would be the new earning per share for ABC Ltd.? Assume that the merger takes place by exchange of equity shares and the exchange ratio is based on the current market ‘ price.
(iii) What should be exchange ratio, if XYZ Ltd. wants to ensure the earnings to members are as before the merger takes place? [May 2004] [8 Marks]
Answer:
(i) Earnings per share = Earnings after tax/No. of equity shares
ABC Ltd. = ₹ 50,00,000/10,00,000 = ₹ 5
XYZ Ltd. = ₹ 18,00,000/6,00,000 = ₹ 3

(it) Number of Shares XYZ limited’s shareholders will get in ABC Ltd. based on market value per share = ₹ 28/42 × 6,00,000 = 4,00,000 shares
Total number of equity shares of ABC Ltd. after merger = 10,00,000 + 4,00,000 = 14,00,000 shares.
Earnings per share after merger = (₹ 50,00,000 + 18,00,000)/14,00,000 = ₹ 4.86

(iii) Calculation of exchange ratio to ensure shareholders of XYZ Ltd. to earn the same as was before merger:
Shares to be exchanged based on EPS = (₹ 3/₹ 5) × 6,00,000 = 3,60,000 shares
EPS after merger = (₹ 50,00,000 + 18,00,000)/13,60,000 = ₹ 5
Total earnings in ABC Ltd. available to shareholders of XYZ Ltd. = 3,60,000 × ₹5 = ₹ 18,00,000.
Thus, to ensure that Earning to members are same as before, the ratio of exchange should be 0.6 share for 1 share.

Question 15.
XYZ Ltd. is considering merger with ABC Ltd. XYZ Ltd.’s shares are currently traded at ₹ 25. It has 2,00,000 shares outstanding and its earnings after taxes (EAT) amount to ₹ 4,00,000. ABC Ltd. has 1,00,000 shares outstanding: its current market price is ₹ 12.50 and its EAT is ₹ 1,00,000. The merger will be effected by means of a stock swap (exchange). ABC Ltd. has agreed to a plan under which XYZ Ltd. will offer the current market value of ABC Ltd.’s shares.
(i) What is the pre-merger earnings per share (EPS) and P/E ratios of both the companies?
(ii) If ABC Ltd.’s P/E ratio is 8, what is its current market price? What is the exchange ratio? What will XYZ Ltd.’s post merger EPS be?
(iii) What must the exchange ratio be for XYZ Ltd.’s pre-merger and postmerger EPS to be the same? [May 2005] [8 Marks]
Answer:
(i) Determination of Pre-merger EPS and P/E ratios:

Particulars	XYZ Ltd. (Acquirer)	ABC Ltd. (Target)
Earnings After taxes (₹) Number of shares outstanding	4,00,000 2,00,000	1,00,000 1,00,000
(Earnings per share) EPS (₹ per share) share)	2	1
Market Price per share (₹)	25	12.5
P/E Ratio (times)	12.5	12.5

(ii) Current Market Price of ABC Ltd. if P/E ratio is 8
Current Market Price of ABC = P/E Ratio × EPS = 8 × ₹ 1 = ₹ 8
Exchange ratio = \(\frac{\text { Market Price of Target Co. }(A B C \text { Ltd. })}{\text { Market Price of Acquirer }{Co}(X Y Z ~ L t d .)}\) = \(\frac{8}{25}\) = 32
Shares to be issued = 1,00,000 × 0.32 = 32,000 Shares
Post-merger EPS of XYZ Ltd. = \(\frac{4,00,000+1,00,000}{2,00,000+32,000}=\frac{5,00,000}{2,32,000}\) = ₹ 2.16

(iii) Desired Exchange Ratio:
Exchange ratio = \(\frac{\text { EPS of Target Co. (ABC Ltd.) }}{\text { EPS of Acquirer Co. (XYZ Ltd.) }}\) = \(\frac{1}{2}\) = 0.5
Shares to be issued = 1,00,000 × 0.5 = 50,000 Shares
Post-merger EPS of XYZ Ltd. = \(\frac{4,00,000+1,00,000}{2,00,000+50,000}=\frac{5,00,000}{2,50,000}\) = ₹ 2

Verification:
Before Merger = ₹ 1
Equivalent post-merger = ₹ 2 × 0.5 (exchange Ratio) = ₹ 1

Alternative Method of computation:

Total number of shares in post-merged company	= \(\frac{\text { Post }- \text { merger earnings }}{\text { pre }- \text { merger EPS of XYZ Ltd. }}\) = \(\frac{5,00,000}{2}\) = 2,50,000 Shares
Number of shares required to be issued to ABC Ltd.	= 2,50,000 – 2,00,000 = 50,000 Shares
Therefore, the exchange ratio (ER) should be	= 50,000 : 1,00,000 = \( \frac{50,000}{1,00,000} \) = 0.50

Question 16.
M Co. Ltd., is studying the possible acquisition of N Co. Ltd., by way of merger. The following data are available in respect of the companies:

Particulars	M Co. Ltd.	N Co. Ltd.
Earnings after tax (₹)	80,00,000	24,00,000
No. of equity shares	16,00,000	4,00,000
Market value per share (₹)	200	160

(i) If the merger goes through by exchange of equity and the exchange ratio is based on the current market price, what is the new earning per share for M Co. Ltd.?
(ii) N Co. Ltd. wants to be sure that the earnings available to its shareholders will not be diminished by the merger. What should be the exchange ratio in that case? [Nov. 2003] [8 Marks]
Answer:
(i) Determination of new EPS of M Ltd. (After Merger):

Exchange Ratio	= \(\frac{\text { Market Value of } N L t d}{\text { Market Value of } M L t d .}\) = \(\frac{160}{200\) = 0. [0.8 shares of M Ltd. for every 1 share of N Ltd.]
No. of shares to be issued	= 4,00,000 × 0.8 = 3,20,000 Shares
Total Shares of M Limited (after merger)	= 16,00,000 + 3,20,000 = 19,20,000 Shares
Total Profits of M Ltd. (After Merger)	₹ 80,00,000 + ₹ 24,00,000 = ₹ 104,00,000
EPS of M Ltd. (After Merger)	= \(\frac{R s \cdot 104,00,000}{19,20,000 \text { Shares }}\) = ₹ 5.416

(ii) Exchange Ratio so that shareholder of N Ltd. would not be at a Loss:
The shareholders of N Limited would not be at loss if the exchange ratio is based on EPS.

	M Ltd.	N Ltd.
EPS before Merger	= \(\frac{R s \cdot 80,00,000}{16,00,000 \text { Shares }}\) = ₹ 5.00	= \(\frac{R s .24,00,000}{4,00,000 \text { Shares }}\) = ₹ 60

Exchange Ratio (with EPS as base) = \(\frac{E P S \text { of } N L t d .(\text { Target Co.) }}{E P S \text { of } M L t d .(\text { Acquirer Co.) }}\)
= \(\frac{R s .6}{R s .5}\) = 1.2
It means 1.2 shares of M Ltd. for every 1 share of N Ltd.
Shares to be issued to N Ltd. = 4,00,000 Shares × 1.2 = 4,80,000 Shares
Total number of Shares = 16,00,000 + 4,80,000 = 20,80,000 Shares
EPS of M Ltd. (after merger) = \(\frac{\text { Rs. } 80,00,000+R s .24,00,000}{\text { Rs.20,80,000 }}\) = ₹ 500
Verification that the shareholders of target company are not at loss:
The EPS available to Shareholders of N Ltd.:
Before Merger = 4,00,000 shares × ₹ 6 = ₹ 24,00,000
After Merger = Shares issued to N × Post merger EPS
= 4,80,000 × 5 = ₹ 24,00,000
Therefore, the exchange ratio on the basis of EPS is recommended.

Question 17.
The following information is provided related to the acquiring Mark Limited and the target Mask Limited:

	Mark Limited	Mask Limited
Earnings after tax (₹)	2,000 lakhs	400 lakhs
Number of shares outstanding	200 lakhs	100 lakhs
P/E ratio (times)	10	5

Required:
(i) What is the Swap Ratio based on current market prices?
(ii) What is the EPS of Mark Limited after acquisition?
(iii) What is the expected market price per share of Mark Limited after acquisition, assuming P/E ratio of Mark Limited remains unchanged?
(iv) Determine the market value of the merged firm.
(v) Calculate gain/loss for shareholders of the two independent companies after acquisition. [Nov. 2004] [8 Marks]
Answer:
(i) Determination of SWAP Ratio based on Current Market Price:
Determination of Current Market Price Per Share:

Particulars	Mark Ltd. (Acquirer)	Mask Ltd. (Target)
Earnings After taxes (₹) Number of shares outstanding	2,000 Lakhs 200 Lakhs	400 Lakhs 100 Lakhs
EPS (Earnings per share)	₹ 10	₹ 4
P/E Ratio (times)	10	5
Market Price per share	₹ 100	₹ 20

Determination of SWAP Ratio:
Exchange Ratio = \(\frac{\text { Market Value of Mask Ltd. }(\text { Target Co. })}{\text { Market Value of Mark Ltd. }(\text { Acquiring Co. })}\) = \(\frac{20}{100}\) = 0.2
[0.2 share of Mark Ltd. for every 1 share of Mask Ltd.]

(ii) Determination of EPS of Mark Limited after acquisition:

Exchange Ratio	0.2
No. of shares to be issued	= 100 Lakhs × 0.2 = 20 Lakhs Shares
Total Shares of Mark Limited (after merger)	= 200 Lakhs + 20 Lakhs = 220 Shares
Total Profits of Mark Ltd. (After Merger)	= ₹ 2,000 + ₹ 400 = ₹ 2,400 Lakhs
EPS of Mark Ltd. (After Merger)	= \(\frac{\text { Rs. 2,400 Lakhs }}{220 \text { Lakhs Shares }}\) = ₹ 10.91

(iii) Determination of Expected Market Price of Mark Limited after acquisi-tion:
P/E ratio of new firm (expected to remain same) = 10 times
New market price (10 × ₹ 10.91) = ₹ 109.10

(iv) Market value of merged firm
= ₹ 109.10 market price × 220 lakhs shares = ₹ 240.02 crores

(v) Gain from the merger
Post merger market value of the merged firm = ₹ 240.02 crores
Less: Pre-merger market value
Mark Ltd. 200 Lakhs × ₹ 100 = 200 crores
Mask Ltd. 100 Lakhs × ₹ 20 = 20 crores = ₹ 220.00 crores
Gain from merger = ₹ 20.02 crores

Appropriation of gains from the merger among shareholders:

Mark Ltd.

Mask Ltd.

Post-merger value

Less: Pre-merger market value

218.20 crores
200.00 crores

21.82 crores
20.00 crores

Gain to Shareholders

18.20 crores

1.82 crores

Question 18.
Following information is provided relating to the acquiring company Mani Ltd. and the target company Ratnam Ltd:

	Mani Ltd.	Ratnam Ltd.
Earnings after tax (₹ in lakhs)	2,000	4,000
Number of shares outstanding (lakhs)	200	1,000
P/E ratio (No. of times)	10	5

Required:
(i) What is the swap ratio based on current market prices?
(ii) What is the EPS of Mani Ltd. after the acquisition?
(iii) What is the expected market price per share of Mani Ltd. after the acquisition, assuming its P/E ratio is adversely affected by 10%? [June 2009] [10 Marks]
Answer:
(i) Determination of SWAP Ratio based on Current Market Price:
Determination of EPS and Current Market Price before acquisition:

Particulars	Mani Ltd. (Acquirer)	Ratnam Ltd. (Target)
Earnings After taxes (₹) Number of shares outstanding	2,000 Lakhs 200 Lakhs	4,0000 Lakhs 1,0000 Lakhs
P/E Ratio (times)	10	5
EPS (Earnings per share) ₹	10	4
Market Price per share ₹	100	20

Determination of SWAP Ratio:
Exchange Ratio = \(\frac{\text { Market Value of Ratnam Ltd. (Target } C o .)}{\text { Market Value of Mani Ltd. }(\text { Acquiring Co.) }}\) = \(\frac{20}{100}\) = 0.2
[0.2 share of Mani Ltd. for every 1 share of Ratnam Ltd.]

(ii) Determination of EPS of Mani Limited after acquisition:

Exchange Ratio	0.2
No. of shares to be issued	= 1,000 Lakhs × 0.2 = 200 Lakhs Shares
Total Shares of Mani Limited (after merger)	= 200 Lakhs + 200 Lakhs = 400 Shares
Total Profits of Mani Ltd. (After Merger)	= ₹ 2,000 + ₹ 4,000 = ₹ 6,000 Lakhs
EPS of Mani Ltd. (After Merger)	= \(\frac{\text { Rs.6,000 Lakhs }}{400 \text { Lakhs Shares }}\) = ₹ 15

(iii) Determination of Expected Market Price of Mani Limited after acquisition:
EPS after acquisition ₹ 15
P/E ratio (after acquisition) = 10 × 0.9 = 9 times
New market price (9 × ₹ 15) = ₹ 135

(iv) Market value of merged company:
= ₹ 135 × 400 Lakh Shares = ₹ 54,000 Lakhs or ₹ 540 Crores

(v) Gain from the merger

	Mani Ltd.	Ratnam Ltd.
Total value before acquisition Less: Value after acquisition	200 crores 270 crores	200 crores 270 crores
Total Gain	70 crores	70 crores
No. of shares (pre-merger) (Lakhs)	200	1,000
Gain per share (₹)	35	7

Question 19.
ABC Ltd. is a company operating in the software industry. It is considering the acquisition of XYZ Ltd. which is also into software industry. The following information are available for the companies:

	ABC Ltd,	XYZ Ltd,
Earnings after tax (Rs.)	9,00,000	2,40,000
Number of equity shares	1,50,000	60,000
P/E ratio (no. of times)	14	10

ABC Ltd. is planning to offer a premium of 25% over the market price of XYZ Ltd. Required:
(i) What is the swap ratio based on current market price ?
(ii) Find the number of shares to be issued by ABC Ltd. to the shareholders of XYZ Ltd.
(iii) Compute the new EPS of ABC Ltd. after merger and comment on the impact of merger.
(iv) Determine the market price of the share when P/E ratio remains unchanged.
(v) Compute the market price when P/E declines to 12 and comment on the results. Figures are to be rounded off to 2 decimals. [Nov. 2019 Old Syllabus] [10 Marks]
Answer:
(i) Determination of SWAP Ratio based on Current Market Price:
Determination of EPS and Current Market Price before acquisition:

c	ABC Ltd. (Acquirer)	XYZ Ltd. (Target)
Earnings after tax (Rs.)	9,00,000	2,40,000
Number of shares outstanding	1,50,000	60,000
P/E Ratio (times)	14	10
EPS (Earnings per share) Rs.	6	4
Market Price per share Rs.	84	40

Determination of SWAP Ratio Based on Current Market Price:
The Premium offered by ABC Limited has not been considered as SWAP ratio is to be calculated on the basis of Current Market Price.
Exchange Ratio = \(\frac{\text { Market Value of XYZ Ltd. (T arg et Co.) }}{\text { Market Value of ABC Ltd. (Acquring Co.) }}\) = \(\frac{0 \times 1.25}{84}\) = 0.6
[0.6 share of ABC Ltd. for every 1 share of XYZ Ltd.]

(ii) Determination of No. of Shares:
Exchange Ratio = 0.6 (as calculated above)
Agreed Exchange Ratio = 0.60
No. of Shares of XYZ Ltd. = 60,000
Share to be issued by ABC Ltd. = 60,000 × 0.6 = 36,000 shares.

(iii) Determination of EPS of ABC Limited after acquisition:

No. of shares issued	= 36,000 Shares
Total Shares of ABC Limited (after merger)	= 1,50,000 + 36,000 = 1,86,000 Shares
Total Profits of ABC Ltd. (After Merger)	= Rs.9,00,000 + 2,40,000 = 11,40,000
EPS of ABC Ltd. (After Merger)	= \(\frac{\text { Rs. } 11,40,000}{1,86,000 \text { Shares }}\) = Rs. 6.13

(iv) Determination of Expected Market Price of ABC Limited after acquisition if P/E ratio remains unchanged:
EPS after Acquisition = Rs. 6.13
New Market Price (14 × Rs. 6.13) = Rs. 85.82

(v) Determination of Expected Market Price of ABC Limited after acquisition if P/E ratio declines to 12:
EPS after acquisition = Rs. 6.13
Declined P/E ratio (after acquisition) = 12 times
Resultant New market price (12 × Rs. 6.13) = Rs. 73.56

Question 20.
P Ltd. is considering takeover of R Ltd. by the exchange of four new shares in P Ltd. for every five shares in R Ltd. The relevant financial details of the two companies prior to merger announcement are as follows:

	P Ltd.	R Ltd.
Profit before Tax (₹ Crore)	15	13.50
No. of Shares (Crore)	25	15
P/E Ratio	12	9
Corporate Tax Rate 30%

You are required to determine:
(i) Market value of both the company.
(ii) Value of original shareholders.
(iii) Price per share after merger.
(iv) Effect on share price of both the company if the Directors of P Ltd. expect their own pre-merger P/E ratio to be applied to the combined earnings. [Nov. 2010 (Modified)] [10 Marks]
Answer:

	P Ltd.	R Ltd.
Profit before Tax (₹ in crore)	15	13.50
Tax 30% (₹ in crore)	4.50	4.05
Profit after Tax (₹ in crore)	10.50	9.45
Earning per Share (₹)	\(\frac{10.50}{25}\) = ₹ 0.42	\(\frac{9.45}{15}\)= ₹ 0.63
Price of Share before Merger	₹ 0.42 × 12	0.63 × ₹ 9
(EPS X P/E Ratio)	= ₹ 5.04	= ₹ 5.67

(i) Market Value of company
P Ltd. = ₹ 5.04 × 25 Crore = ₹ 126 crore
R Ltd. = ₹ 5.67 × 15 Crore = ₹ 85.05 crore
Combined = ₹ 126 + ₹ 85.05 = ₹ 211.05 Crores

After Merger

	P Ltd.	R Ltd.
No. of Shares	25 crores	15 × \(\frac{4}{5}\) = 12 crores
Combined	37 crores
% of Combined Equity Owned	\(\frac{25}{37}\) × 100 = 67.57%	\(\frac{12}{37}\) × 100 = 32.43%

(ii) Value of Original Shareholders

P Ltd.	R Ltd.
₹ 211.05 crore × 67.57% = ₹ 142.61	₹ 211.05 crore × 32.43% = ₹ 68.44

(iii) Price per Share after Merger
EPS = ₹ \(\frac{₹ 19.95 \text { crore }}{37 \text { crore }}\) = ₹ 0.539 per share
P/E Ratio = 12
Market Value per Share = ₹ 0.539 × 12 = ₹ 6.47
Total Market Value = ₹ 6.47 × 37 crore = ₹ 239.39 crore
Price of Share = \(\frac{\text { Market Value }}{\text { Number of Shares }}\) = \(\frac{239.39 \text { crore }}{37 \text { crore }}\) = ₹ 6.47

(iv) Effect on Share Price

MPS before merger	₹ 5.04	₹ 5.67
MPS after merger (Equivalent for R Ltd.)	₹ 6.47	6.47 × \(\frac{4}{5}\) = ₹ 5.18
Gain (Loss) per share	₹ 1.43 (Gain)	₹ 0.49 (Loss)
Change in share price	= \(\frac{1.43}{5.04}\) × 100 = 0.284 = 28.4%Rise in share price	= \(\frac{-0.49}{5.67}\) × 100 = – 0.0864 (- ve) 8.64% Decrease in share price

Question 21.
Reliable Industries Ltd. (RIL) is considering a takeover of Sunflower Industries Ltd. (SIL). The particulars of 2 companies are given below:

Particulars	Reliable Industries Ltd.	Sunflower Industries Ltd.
Earnings After Tax (EAT)	₹ 20,00,000	₹ 10,00,000
Equity shares Outstanding	10,00,000	10,00,000
Earnings per share (EPS)	2	1
P/E Ratio (Times)	10	5

Required:
(i) What is the market value of each Company before merger?
(ii) Assume that the management of RIL estimates that the shareholders of SIL will accept an offer of one share of RIL for four shares of SIL.
If there are no synergic effects, what is the market value of the Postmerger RIL? What is the new price per share? Are the shareholders of RIL better or worse off than they were before the merger?
(iii) Due to synergic effects, the management of RIL estimates that the earnings will increase by 20%. What are the new post-merger EPS and Price per share? Will the shareholders be better off or worse off than before the merger? [May 2006] [8 Marks]
Answer:
(i) Market value of Companies before Merger

Particulars	RIL	SIL
EPS	₹ 2	₹ 1
P/E Ratio	10	5
Market Price Per Share	₹ 20	₹ 5
Equity Shares	10,00,000	10,00,000
Total Market Value	2,00,00,000	50,00,000

(ii) Post-Merger Effects on RIL

	₹
Post-merger earnings	30,00,000
Exchange Ratio (1:4)
No. of equity shares outstanding (10,00,000 + 2,50,000)	12,50,000
EPS : 30,00,000/12,50,000	2.4
P/E Ratio	10
Market Value (10 × 2.4)	24
Total Value (12,50,000 × 24)	3,00,00,000

Gains from Merger:

Apportionment of Gains between the Shareholders:

Particulars	RIL (₹)	SIL (₹)
Post Merger Market Value:	10,00,000 × 24 = 2,40,00,000	2,50,000 × 24 = 60,00,000
Less: Pre-Merger Market Value	2,00,00,000	50,00,000
Gains from Merger	40,00,000	10,00,000

Thus, the shareholders of both the companies (RIL + SIL) are better off than before

(iii) Post-Merger Earnings:

Increase in Earnings by 20%
New Earnings = ₹ 30,00,000 × (1 + 0.20)	₹ 36,00,000
No. of equity shares outstanding	12,50,000
EPS (₹ 36,00,000/12,50,000)	₹ 2.88
P/E Ratio	10
Market Price Per Share = ₹ 2.88 × 10	= ₹ 28.80
Shareholders will be better-off than before the merger situation.

Question 22.
The CEO of a company thinks that shareholders always look for EPS. Therefore he considers maximization of EPS as his company’s objective. His company’s current Net Profits are ₹ 80 lakhs and P/E multiple is 10.5. He wants to buy another firm which has current income of ₹ 15.75 lakhs & P/E multiple of 10.
What is the maximum exchange ratio which the CEO should offer so that he could keep EPS at the current level, given that the current market price of both the acquirer and the target company are ₹ 42 and ₹ 105 respectively₹
If the CEO borrows funds at 15% and buys out Target Company by paying cash, how much should he offer to maintain his EPS₹ Assume tax rate of 30%. [May 2016] [8 Marks]
Answer:
(i) Determination of Maximum Exchange Ratio

	Acquirer Company	Target Company
Net Profit	₹ 80 Lakhs	₹ 15.75 Lakhs
P/E multiple	10.50	10.00
Market Capitalisation	₹ 840 Lakhs	₹ 157.50 Lakhs
Market Price	₹ 42	₹ 105
No. of Shares	20 Lakhs	1.50 Lakhs
EPS	₹ 4	₹ 10.50

Maximum Exchange ratio = \(\frac{\text { EPS of Target Co. }}{\text { EPS of of Acquirer Co. }}\) = \(\frac{10.5}{4}\) = 2.625
Thus, for every one share of Target Company 2.625 shares of Acquirer Company will be issued.

(ii) Determination of Maximum Exchange Ratio
Let x lakhs be the amount paid by ‘Acquirer Company’ to ‘target company’. Then, to maintain the same EPS (i.e. Rs. 4) the number of shares to be issued will be:
\(\frac{(80 \text { Lakhs }+15.75 \text { Lakhs })-0.70 \times 150 \times x}{20 \text { Lakhs }}\) = ₹ 4
\(\frac{95.75-0.105 x}{20}\) = ₹ 4
x = ₹ 150 Lakhs
Thus, ₹ 150 Lakhs shall be offered in cash to target company to maintain same EPS.

Question 23.
C Ltd. & D Ltd. are contemplating a merger deal in which C Ltd. will acquire D Ltd. the relevant information about the firms are given as follow:

	C Ltd.	D Ltd.
Total Earning (E) (in millions)	₹ 96	₹ 30
Number of outstanding shares (S) (in millions)	20	14
Earnings per share (EPS) (₹ )	4.8	2.143
Price earnings ratio (P/E)	8	7
Market price per share (P) (₹)	38.4	15

(i) What is the maximum exchange ratio acceptable to the shareholders of C Ltd., if the ratio of the combined firm is 7?
(ii) What is the minimum exchange ratio acceptable to the shareholder of D Ltd., if the P/E ratio of the combined firm is 9? [Nov. 2018 Old Syllabus] [12 Marks]
Answer:
(i) Maximum Exchange Ratio acceptable to the shareholders of C Limited

Market Price of share of C Ltd. (₹ 4.8 × 8)	₹ 38.40
No. of Equity Shares	20 Million
Market Capitalisation of C Ltd. (₹ 38.40 × 20 Million)	₹ 768 Million
Combined Earnings (₹ 96 + ₹ 30 Million)	₹ 126 Million
Combined Market Capitalisation (₹ 126 Million × 7)	₹ 882 Million
Market Capitalisation of C Ltd. (₹ 38.40 × 20 Million)	₹ 768 Million
Balance for D Ltd.	₹ 114 Million

Let D be the no. of equity shares to be issued to D Ltd. then,
D = \(\frac{₹ 114 \text { Million }}{\left[\frac{126 \text { Million }}{D+20}\right] \times 7}\)
Solving for D, we get
D = 2.96875 Million Shares
Exchange Ratio = \(\frac{2.96875}{14}\) = 0.212:1

(ii) Minimum Exchange Ratio: acceptable to the shareholders of D Ltd.

Market Price of share of D Ltd.	₹ 15.00
No. of Equity Shares	14 Million
Market Capitalisation of D Ltd. (₹ 15.00 × 14 Million)	₹ 210 Million
Combined Earnings (₹ 96 + ₹ 30) Million	₹ 126 Million
Combined Market Capitalisation (₹ 126 Million × 9)	₹ 1,134 Million
Balance for C Ltd.	₹ 924 Million

Let D be the no. of equity shares to be issued to D Ltd. then,
D = \(\frac{\text { Rs. } 210 \text { Million }}{\left[\begin{array}{c}
126 \text { Million } \\
\text { D }+20
\end{array}\right] \times 9}\)
D = 4.54545 Million Shares
Exchange Ratio = \(\frac{4.54545}{14}\) = 0.325:1

Alternative Method of finding Minimum and Maximum Ratio
(i) Maximum Exchange Ratio from the point of the shareholders of C Ltd.

(ii) Minimum Exchange Ratio from the point of the shareholders of D Ltd.

Question 24.
The following information relating to the acquiring Company Abhiman Ltd. and the target Company Abhishek Ltd. are available. Both the Companies are promoted by Multinational Company, Trident Ltd. The promoter’s holding is 50% and 60% respectively in Abhiman Ltd. and Abhishek Ltd. :

	Abhiman Ltd.	Abhishek Ltd.
Share Capital (₹)	200 lakh	100 lakh
Free Reserves and Surplus (₹)	800 lakh	500 lakh
Paid up Value per share (₹)	100	10
Free float Market Capitalisation (₹)	400 lakh	128 lakh
P/E Ratio (times)	10	4

Trident Ltd. is interested to do justice to the shareholders of both the Companies. For the swap ratio weights are assigned to different parameters by the Board of Directors as follows:

Book Value	25%
EPS (Earning per share	50%
Market Price	25%

(a) What is the swap ratio based on above weights?
(b) What is the Book Value, EPS and expected Market price of Abhiman Ltd. after acquisition of Abhishek Ltd. (assuming P.E. ratio of Abhiman Ltd. remains unchanged and all assets and liabilities of Abhishek Ltd. are taken over at book value).
(c) Calculate:
(i) Promoter’s revised holding in the Abhiman Ltd.
(ii) Free float market capitalization
(iii) Also calculate No. of Shares, Earning per Share (EPS) and Book Value (B.V.), if after acquisition of Abhishek Ltd., Abhiman Ltd. decided to:
(1) Issue Bonus shares in the ratio of 1 : 2; and
(2) Split the stock (shares) as ₹ 5 each fully paid. [May 2009] [20 Marks]
Answer:
(a) Calculation of Book Value, Market Price and EPS

	Abhiman Ltd. (Acquirer Co.)	Abhishek Ltd. (Target Co.)
Share Capital	200 Lakh	100 Lakh
Free Reserves	800 Lakh	500 Lakh
Total	1000 Lakh	600 Lakh
No. of Shares	2 Lakh	10 Lakh
Book Value per share	₹ 500	₹ 60
Promoter’s holding	50%	60%
Non-promoter’s holding	50%	40%
Free Float Market Cap. i.e. Relating to Public’s holding	400 Lakh	128 Lakh
Hence Total market Cap.	800 Lakh	320 Lakh
No.of Shares	2 Lakh	10 Lakh
Market Price	₹ 400	₹ 32
P/E Ratio	10	4
EPS	₹ 40	₹ 8

Calculation of weighted Swap Ratio

Swap ratio is for every one share of Abhishek Ltd. to issue 0.15 shares of Abhiman Ltd.
Hence total No. of shares to be issued 10 Lakh × 0.15 = 1,50,000 shares

(b) Values of Abhiman Ltd. after acquisition of Abhishek Limited
Total No. of Shares = 2 Lakhs + 1.5 Lakhs = 3,50,000 shares
Total Capital (in ₹) = 3,50,000 @ ₹ 10 = ₹ 350 Lakh
Total Reserves (in ₹) = 800 Lakhs + 450 Lakhs = Rs. 1,250 Lakh

Book Value	(350 Lakhs + 1250 Lakhs) ÷ 3.5 Lakhs	₹ 45.71
EPS(Total Profits ÷ No. of Shares)	[(2 × 40) + (10 × 8)] ÷ 3.5 Lakhs	₹ 45.71
Expected Market price(P/E Ratio × EPS)	10 × 45.71	₹ 457.10

(c) (1) Promoter’s holding after merger
= Holding in Abhiman + Holdings in Abhishek
= (50 + of 2,00,000)+ (60 + of 1,50,000) = 1,90,000 Shares
% Holding = (1,90,000 + 3,50,000) × 100 = 54.29%

(2) Free Float Market Capitalisation after merger
= Non-promoters holding × Expected Market Price
= (3,50,000 – 1,90,000) × 457.10 = ₹ 731.36 Lakhs

(3) (i) & (ii)
Revised Share Capital after Bonus = ₹ 350 Lakh + ₹ 175 = ₹ 525 Lakhs
No. of Shares before Split (EV. ₹ 100) = 525 – 100 = 5.25 Lakh
No. of Shares after Split (F.V. ₹ 5) = (5.25 Lakh × 100) ÷ 5 = 105 Lakh
EPS = 160 Lakh/105 Lakh = 1.523
Book Value = Total Capital ÷ No. of Shares
= (525 Lakh + 1075 Lakh) ÷ 105 Lakh = × 15.23809 per share

Question 25.
The following information is provided relating to the acquiring company Efficient Ltd. and the target Company Healthy Ltd.

	Efficient Ltd.	Healthy Ltd.
No. of shares (F.V. ₹ 10 each)	10.00 lakhs	7.5 lakhs
Market capitalization	500.00 lakhs	750.00 lakhs
P/E ratio (times)	10.00	5.00
Reserves and Surplus	300.00 lakhs	165.00 lakhs
Promoter’s Holding (No. of shares)	4.75 lakhs	5.00 lakhs

Board of Directors of both the Companies have decided to give a fair deal to the shareholders and accordingly for swap ratio the weights are decided as 40%, 25% and 35% respectively for Earning, Book Value and Market Price of share of each company:
(i) Calculate the swap ratio and also calculate Promoter’s holding % after acquisition.
(ii) What is the EPS of Efficient Ltd. after acquisition of Healthy Ltd.?
(iii) What is the expected market price per share and market capitalization of Efficient Ltd. after acquisition, assuming P/E ratio of Firm Efficient Ltd. remains unchanged.
(iv) Calculate free flat market capitalization of the merged firm. [12 Marks] [May 2005]
Answer:
Calculation of Basic required values

		Efficient Ltd.	Healthy Ltd.
Market capitalization (Given)	A	500 lakhs	750 lakhs
No. of shares (Given)	B	10 lakhs	7.5 lakhs
Market Price per share (A/B)	C	₹ 50	₹ 100
P/E ratio (Given)	D	10	5
EPS(C/D)	E	₹ 5	₹ 20
Profit (B X E)	F	₹ 50 lakh	₹ 150 lakh
Share capital (B X Face Value @ X 10)	G	₹ 100 lakh	₹ 75 lakh
Reserves and surplus (Given) .	H	₹ 300 lakh	₹ 165 lakh
Total (G + H)	I	₹ 400 lakh	₹ 240 lakh
Book Value per share (I -r B)	J	₹ 40	₹ 32

(i) Calculation of weighted Swap Ratio

Swap ratio is for every one share of Healthy Ltd., to issue 2.5 shares of Efficient Ltd. Hence, total no. of shares to be issued 7.5 lakh × 2.5 = 18.75 lakh shares
Promoter’s holding = 4.75 lakh shares + (5 × 2.5 = 12.5 lakh shares) = 17.25 lakh i.e. Promoter’s holding % is (17.25 lakh/28.75 lakh) × 100 = 60%.

Calculation of EPS, Market price, Market capitalization and free float market capitalization.
(ii) Total No. of shares = 10 lakh + 18.75 lakh = 28.75 lakh
Total capital = 100 lakh + 187.5 lakh = ₹ 287.5 lakh
EPS = \(\frac{\text { Total profit }}{\text { No.of shares }}\) = \(\frac{50 \text { lakh }+150 \text { lakh }}{28.75 \text { lakh }}\) = \(\frac{200}{28.75}\) = ₹ 6.956

(iii) Expected market price = EPS 6.956 × P/E 10 = ₹ 69.56 Market capitalization= ₹ 69.56 per share × 28.75 lakh shares
= ₹ 1,999.85 lakh

(iv) Free float of market capitalization = ₹ 69.56 per share × (28.75 lakh × 40%) = ₹ 799.94 lakh

Question 26.
Abhiman Ltd. is a subsidiary of Janam Ltd. and is acquiring Swabhi- man Ltd. which is also a subsidiary of Janam Ltd. The following information is given:

	Abhiman Ltd.	Swabhiman Ltd.
% Share holding of promoter	50%	60%
Share capital	₹ 200	100 lacs
Free Reserves and surplus	₹OO	600 lacs
Paid up value per share	₹ 100	10
Free float market capitalization	₹ 500 lacs	156 lacs
P/E Ratio (times)	10	4

Janam Ltd., is interested in doing justice to both companies. The following parameters have been assigned by the Board of Janam Ltd., for determining the swap ratio :

Book value	25%
Earning per share	50%
Market price	25%

You are required to compute :
(i) The swap ratio.
(ii) The book value, Earning per share and expected market price of Swabhiman Ltd., (assuming P/E Ratio of Abhiman ratio remains the same and all assets and liabilities of Swabhiman Ltd. are taken over at book value) [May 2011] [8 Marks]
Answer:
Calculation of Book Value, Market Price and EPS

	Abhiman Ltd. (Acquirer Co.)	Swabhiman Ltd. (Target Co.)
Share Capital	200 Lakh	100 Lakh
Free Reserves	900 Lakh	600 Lakh
Total	Rs. 1,100 Lakh	Rs. 700 Lakh
No. of Shares	2 Lakh	10 Lakh
Book Value per share	₹ 550	₹ 70
Promoter’s holding	50%	60%
Non-promoter’s holding	50%	40%
Free Float Market Cap. i.e. Relating to Public’s holding	500 Lakh	156 Lakh
Hence Total market Cap.	1,000 Lakh	390 Lakh
No. of Shares	2 Lakh	10 Lakh
Market Price	₹ 500	₹ 39
P/E Ratio	10	4
EPS	₹ 50	₹ 9.75

Calculation of weighted Swap Ratio

(a) The swap ratio is for every one share of Swabhiman Ltd. to issue 0.148825 shares of Abhiman Ltd.
Hence, total No. of shares to be issued by Abhiman to Swabhiman Ltd.
= 10 Lakh × 0.148825 = 1,48,825 shares.

(b) Calculation of various Values of Abhiman Ltd. after merger
Total No. of shares = 2,00,000 + 1,48,825 = 3,48,825 Shares
Total capital = ₹ 200 lakhs + ₹ 148.825 lakhs = ₹ 348.825
Lakhs Reserves = ₹ 900 lac + ₹ 551.175 lakhs = ₹ 1,451.175 Lakhs

Book Value per share:
= \(\frac{\text { Total Capital }+ \text { Reserve and Surplus }}{\text { No. of shares }}\) = \(\frac{R s .348 .825+\text { Rs. } 1451.175}{3.48825 \text { Lakhs }}\) = Rs. 516.02

Earnings per share:
= \(\frac{\text { Total Profit }}{\text { No. of shares }}\) = \(\frac{R s .100 \text { Lakhs }+ \text { Rs. } 97.50 \text { Lakhs }}{3.48825 \text { Lakhs }}\) = Rs. 56.62

Expected Market Price
= EPS × P/E Ratio = Rs. 56.62 × 10 = Rs. 566.20

Question 27.
Bank ‘R’ was established in 2005 and doing banking in India. The bank is facing DO OR DIE situation. There are problems of Gross NPA (NonPerforming Assets) at 40% & CAR/CRAR (Capital Adequacy Ratio/Capital Risk Weight Asset Ratio) at 4%. The net worth of the bank is not good. Shares are not traded regularly. Last week, it was traded @ ₹ 8 per share.
RBI Audit suggested that bank has either to liquidate or to merge with other bank.
Bank ‘P’ is professionally managed bank with low gross NPA of 5%. It has Net NPA as 0% and CAR at 16%. Its share is quoted in the market @ ₹ 128 per share. The Board of Directors of bank ‘P’ has submitted a proposal to RBI for takeover of bank ‘R’ on the basis of share exchange ratio.
The Balance Sheet details of both the banks are as follows:

	Bank ‘R’ Amount in ₹ Lacs	Bank P Amount in ₹ Lacs
Paid up share capital (Face Value @ ₹10)	140	500
Reserves & Surplus	70	5,500
Deposits	4,000	40,000
Other liabilities	890	2,500
Total Liabilities	5,100	48,500
Cash in hand & with RBI	400	2,500
Balance with other banks	–	2,000
Investments	1,100	15,000
Advances	3,500	27,000
Other Assets	100	2,000
Total Assets	5,100	48,500

It was decided to issue shares at Book Value of Bank ‘P’ to the shareholders of Bank ‘R’, AH assets and liabilities are to be taken over at Book Value.
For the swap ratio, weights assigned to different parameters are as follows:

Gross NPA	30%
CAR	20%
Market Price	40%
Book Value	10%

(a) What is the swap ratio based on above weights?
(b) How many shares are to be issued?
(c) Prepare Balance Sheet after merger.
(d) Calculate CAR & Gross NPA % of Bank ‘P’ after merger. [May 2015] [11 Marks]
Answer:
Calculation of Book Value per share

	Bank R’ (in Lakhs)	Bank P (in Lakhs)
Paid up share capital	140	500
Reserves & Surplus	70	5,500
Net Assets	210	6,000
No. of Shares	14	50
Book Value per share	15	120

(a) Calculation of weighted Swap Ratio

Swap ratio is for every one share of Bank “R”, 0.125 share of Bank “P” shall be issued.

(b) Calculation of number of shares to be issued by Bank “P”
= Number of shares in Bank “R” × Exchange Ratio
= (140/10) Lakh Shares × 0.125 = 1,75,000 shares.

(c) Balance Sheet of Bank “P” after merger
Capital Reserve = Book Value of Shares – Value of shares issued
= Rs. 210.00 Lakhs – Rs. 17.50 Lakhs = Rs. 192.50 Lakhs

Balance Sheet of Bank “P” after merger

	Amount (Rs. in Lakhs)
Paid up share capital	517.50
Reserves & Surplus (including capital reserve)	5,692.50
Deposits	44,000.00
Other liabilities	3,390.00
Total Liabilities	53,600.00
Cash in hand & with RBI	2,900.00
Balance with other banks	2,000.00
Investments	16,100.00
Advances	30,500.00
Other Assets	2,100.00
Total Assets	53,600.00

(d) Calculation of CAR and Gross NPA of Bank “P” after merger
CAR/CRWR = \(\frac{\text { Total Capital }}{\text { Risky Weighted Assets }}\) × 100

	Bank “R”	Bank “P”	Merged
	4%	16%
Total Capital	Rs. 210 Lacs	Rs. 6,000 Lacs	Rs. 6,210 Lacs
Risky Weighted Assets	Rs. 5,250 Lacs	Rs. 37,500 Lacs	Rs. 42,750 Lacs

CAR/CRWR = \(\frac{₹ 6,210}{₹ 42,750}\) × 100 = 14.53%
GNPA Ration = \(\frac{\text { Gross NPA }}{\text { Gross Deposits }}\) × 100

Question 28.
The following information is provided relating to the acquiring company E Ltd., and the target company H Ltd:

Particulars	E Ltd. (₹)	H Ltd. (₹)
Number of shares (Face value ₹ 10 each)	20 Lakhs	15 Lakhs
Market Capitalization	1,000 Lakhs	1,500 Lakhs
P/E Ratio (times)	10.00	5.00
Reserves and surplus in ₹	600.00 Lakhs	330.00 Lakhs
Promoter’s Holding (No. of shares)	9.50 Lakhs	10.00 Lakhs

The Board of Directors of both the companies have decided to give a fair deal to the shareholders. Accordingly, the weights are decided as 40%, 25% and 35% respectively for earnings, book value and market price of share of each company for swap ratio.
Calculate the following:
(i) Market price per share, earnings per share and Book Value per share;
(ii) Swap ratio;
(iii) Promoter’s holding percentage after acquisition;
(iv) EPS of E Ltd. after acquisitions of H Ltd;
(v) Expected market price per share and market capitalization of E Ltd.; after acquisition, assuming P/E ratio of E Ltd. remains unchanged; and
(vi) Free float market capitalization of the merged firm. [Nov. 2015] [10 Marks]
Answer:
(i) Calculation of Book Value, Market Price and EPS

	E Ltd. (₹) (Acquirer Co.)	H Ltd. (₹) (Target Co.)
Market Capitalization	1,000 Lakh	1,500 Lakh
No. of Shares	20 Lakh	15 Lakh
Market Price [Market Capitalization + No. of Shares]	₹ 50	₹ 100
P/E Ratio	10	5
EPS [Market Price + P/E Ratio]	₹ 5	₹ 20
Profit	100 Lakh	300 Lakh
Share capital	200 Lakh	150 Lakh
Reserve and Surplus	600 Lakh	330 Lakh
Total	800 Lakh	480 Lakh
Book Value per share	₹ 40	₹ 32

(ii) Calculation of weighted Swap Ratio

The Swap ratio is for every one share of H Ltd. to issue 2.5 shares of E Ltd.
Hence, total no. of shares to be issued = 15 Lakh × 2.5 = 37,50,000 shares

(iii) Promoter’s Holding in E Ltd. After merger
= Holding in E Ltd. + Due to Holdings in H Ltd.
= 9.5 Lakh Shares + 10 Lakhs × 2.5 (i.e. Exchange Ratio) = 34.5 Lakhs Shares
Promoter’s Holding = 34.5 Lakhs ÷ 57.5 Lakhs = 0.6 or 60%

(iv) EPS of E Ltd. After acquisition of H Ltd.
Total No. of Shares = 20 Lakhs + 37.5 Lakhs = 57.5 Lakhs shares
Total Profits = Existing EPS × Existing No. of shares = (5 × 20) + (20 × 15) = Rs. 400 Lakhs
EPS = Total Profits ÷ No. of Shares= Rs. 400 Lakhs ÷ 57.5 Lakhs shares = 6.956

(v) Expected Market Price
= EPS × P/E Ratio = 6.956 × 10 = Rs. 69.56
Market Capitalisation
= Expected Market Price × No. of Shares = Rs. 69.56 × 57.5 = Rs. 3,999.7 , Lakhs

(vi) Free Float of Market Capitalisation
= Market Capitalisation × Non-promoters holding
= Rs. 3,999.7 Lakhs × 40% = ₹ 1,599.88 Lakhs

Question 29.
XML Bank was established in 2001 and doing banking business in India. The bank is facing very critical situation. There are problems of Gross NPA (Non-Performing Assets) at 40% & CAR/CRAR (Capital Adequacy Ratio/ Capital Risk Weight Asset Ratio) at 2%. The net worth of the bank is not good. Shares are not traded regularly. Last week, it was traded @ t 4 per share.
RBI Audit suggested that bank has either to liquidate or to merge with other bank.
ZML Bank is professionally managed bank with low gross NPA of 5%. It has net NPA as 0% and CAR at 16%. Its share is quoted in the market @ ₹ 64 per share. The Board of Directors of ZML Bank has submitted a proposal to RBI for takeover of bank XML on the basis of share exchange ratio.
The Balance Sheet details of both the banks are as follows:

Particulars	XML Bank (₹ in Crores)	ZML Bank (₹ in Crores)
Liabilities
Paid up share capital (₹ 10)	70	250
Reserve and Surplus	35	2,750
Deposits	2,000	20,000
Other Liabilities	445	1,250
Total Liabilities	2,550	24,250
Assets
Cash in hand and with RBI	200	1,250
Balance with other banks	0	1,000
Investments	550	7,500
Advances	1,750	13,500
Other Assets	50	1,000
Total Assets	2,550	24,250

It was decided to issue shares at Book Value of ZML Bank to the shareholders of XML Bank. All Assets & Liabilities are to be taken over at Book Value.
For the Swap Ratio, weights assigned to different parameters are as follows:

Gross NPA	40%
CAR	10%
Market Price	40%
Book Value	10%

You are required to:
(i) Calculate swap ratio based on above rates.
(ii) Calculate number of shares is to be issued.
(iii) Prepare Balance Sheet after Merger. [May 2017] [12 Marks]
Answer:
Calculation of Book Value per share

	Bank ‘XML’ (₹ in Crores)	Bank ‘ZML’ (₹ in Crores)
Paid up share capital	70	250
Reserves & Surplus	35	2,750
Net Assets	105	3,000
No. of Shares (in Crores)	7	25
Book Value per share	15	120

(a) Calculation of weighted Swap Ratio

Note: In case of NPA, the exchange ratio has to be calculated reciprocally since more NPA means negative factor.
Swap ratio is for every one share of Bank “XML”, 0.1 share of Bank “ZML” -shall be issued.

(b) Calculation of number of shares to be issued by Bank “ZML”
= Number of shares in Bank “XML” × Exchange Ratio
= 7 Crores Shares × 0.1 = 70 Lakh

(c) Balance Sheet of Bank “P” after merger
Capital Reserve = Net Assets – Purchase Consideration
= Rs. 105 – Rs. 84 = Rs. 21 Crores

Balance Sheet of Bank “ZML” after merger

	Amount (Rs. in Crores)
Paid up share capital Reserves & Surplus (sec Note given below) Deposits Other liabilities	257 2,848 22,000 1,695
Total Liabilities	26,800
Cash in hand & with RBI Balance with other banks Investments Advances Other Assets	1,450 1,000 8,050 15,250 1,050
Total Assets	26,800

NOTE:
Reserve and Surplus = Given + Capital Reserve + Securities Premium
= 2,750 + 21 + (0.7 × 110) = Rs. 2,848 crores

Question 30.
Simple Ltd. and Dimple Ltd. are planning to merge. The total value of the companies is dependent on the fluctuating business conditions. The following information is given for the total value (debt + equity) structure of each of the two companies.

Business Condition	Probability	Simple Ltd. ₹ Lacs	Dimple Ltd. ₹ Lacs
High Growth	0.20	820	1,050
Medium Growth	0.60	550	825
Slow Growth	0.20	410	590

The current debt of Dimple Ltd. is ₹ 65 lacs and of Simple Ltd. is ₹ 460 lacs.
Calculate the expected value of debt and equity separately for the merged entity. [May 2011] [8 Marks]
Answer:
(a) Computation of Value of Equity
Simple Ltd. (₹ in Lacs)

	High Growth	Medium Growth	Slow Growth
Debt + Equity	820	550	410
Less: Debt	460	460	460
Equity	360	90	-50

Since the Company has limited liability the value of equity cannot be negative therefore the value of equity under slow growth will be taken as zero because of insolvency risk and the value of debt is taken at 410 lacs.
The expected value of debt and equity can then be calculated as:

Question 31.
Yes Ltd. wants to acquire No Ltd. and the cash flows of Yes Ltd. and the merged entity are given below: (₹ in Lakhs)

Earnings would have witnessed 5% contestant growth rate without merger and 6% with merger on account of economies of operations after 5 years in each case. The cost of capital is 15%.
The number of shares outstanding in both the companies before the merger is the same and the companies agree to an exchange ratio of 0.5 shares of Yes Ltd. for each share of No Ltd.
PV factor at 15% for years 1-5 are 0.870,0.756,0.658,0.572,0.497 respectively. You are required to :
(i) Compute the Value of Yes Ltd. before and after merger.
(ii) Value of Acquisition and
(iii) Gain to shareholders of Yes Ltd. [Nov. 2012] [8 Marks]
Answer:
(i) Working Notes:
Present Value of Cash Flows (CF) upto 5 years

PV of Cash Flows of Yes Ltd. after the forecast period
TV₅ = \(\frac{C F_5(1+g)}{K-g}=\frac{350(1+0.05)}{0.15-0.05}\) = \(\frac{367.50}{0.10}\) = ₹ 3,675 lakhs
PV of TV₅ = ₹ 3,675 lakhs × 0.497 = ₹ 1,826.475 lakhs
PV of Cash Flows of Merged Entity after the forecast period
TV₅ = \(\frac{C F_5(\mathrm{I}+g)}{K_c-g}\) = \(\frac{620(1+0.06)}{0.15-0.06}\) = \(\frac{657.20}{0.09}\) = ₹ 7,302.22 lakhs
PV of TV₅ = ₹ 7,302.22 lakhs × 0.497 = ₹ 3,629.20 lakhs

Value of Yes Ltd.

(ii) Value of Acquisition
= Value of Merged Entity – Value of Yes Ltd.
= ₹ 5,308.47 lakhs – ₹ 2,708.915 lakhs = ₹ 2,599.555 lakhs

(iii) Gain to Shareholders of Yes Ltd.
Share of Yes Ltd. in merged entity = ₹ 5,308.47 lakhs × \(\frac{1}{1.5}\)
= ₹ 3,538.98 lakhs
Gain to shareholder = Share of Yes Ltd. in merged entity – Value of Yes Ltd. before merger
= ₹ 3,538.98 lakhs – ₹ 2,708.915 lakhs = ₹ 830.065 lakhs

Question 32.
M/s Tiger Ltd. wants to acquire M/s Leopard Ltd. The balance sheet of Leopard Ltd. as on 31st March, 2012 is as follows:

Additional information:
(i) Shareholders of Leopard Ltd. will get one share in Tiger Ltd. for every two shares. External liabilities are expected to be settled at ₹ 5,00,000. Shares of Tiger Ltd. would be issued at its current price of ₹ 15 per share. Debenture-holders will get 13% convertible debentures in the purchasing company for the same amount. Debtors and inventories are expected to realise ₹ 2,00,000.
(ii) Tiger Ltd. has decided to operate the business of Leopard Ltd. as a separate division. The division is likely to give cash flows (after tax) to the extent of ₹ 5,00,000 per year for 6 years. Tiger Ltd, has planned that, after 6 years, this division would be demerged and disposed of for ₹ 2,00,000.
(iii) The company’s cost of capital is 16%.
Make a report to the Board of the company advising them about the financial feasibility of this acquisition. [Nov. 2013] [10 Marks]

Answer:

Computation of Net Present Value

Since NPV of the decision is positive, it is advantageous to acquire Leopard Ltd.

Question 33.
The following is the Balance-Sheet of Grape Fruit Company Ltd. as at March 31st, 2011.

The Company did not perform well and has suffered sizable losses during the last few years. However, it is felt that the company could be nursed back to health by proper financial restructuring. Consequently the following scheme of reconstruction has been drawn up:
(i) Equity shares are to be reduced to ₹ 25 per share, fully paid up;
(ii) Preference shares are to be reduced (with coupon rate of 10%) to equal number of shares of ₹ 50 each, fully paid up.
(iii) Debenture holders have agreed to forego the accrued interest due to them. In the future, the rate of interest on debentures is to be reduced to 9 per cent.
(iv) Trade creditors will forego 25 per cent of the amount due to them.
(v) The company issues 6 lakh of equity shares at ₹ 25 each and the entire sum was to be paid on application. The entire amount was fully sub-scribed by promoters.
(vi) Land and Building was to be revalued at ₹ 450 lakhs, Plant and Machinery was to be written down by ₹ 120 lakhs and a provision of ₹ 15 lakhs had to be made for bad and doubtful debts.
Required:
(i) Show the impact of financial restructuring on the company’s activities. [Nov. 2011] [6 Marks]
(ii) Prepare the fresh balance sheet after the reconstruction is completed on the basis of the above proposals. [4 Marks]
Answer:
(1) Impact of Financial Restructuring

Balance Sheet of Grape Fruit Limited (after reconstruction)
As at 31st March, 2011

Notes to Accounts

Question 34.
The following is the Balance Sheet of XYZ Ltd. as at 31st March, 2016:

The Company’s performance is not good and has suffered sizable losses during the last few years. The Company can be nursed back to health with proper financial restructuring. As such, the following scheme is prepared:
(i) Equity Shares are to be reduced to ₹ 2 per Share, fully paid-up.
(ii) Preference Shares are to be reduced (with coupon Rate of 9%) to equal number of Shares of ₹ 5 each, fully paid-up.
(iii) Debenture holders have agreed to forgo the accrued interest due to them and for the future the rate of interest on Debentures to be 10%.
(iv) Trade Creditors will forgo 20% of the amount due to them.
(v) The Company to issue 50 Lakhs Shares at ₹ 2 each to be paid fully on Application. The entire amount is fully subscribed by Promoters.
(vi) Land and Building to be revalued at ₹ 350 Lakhs, Plant and Machinery value to be taken at ₹ 150 Lakhs and a provision of D 5 Lakhs to be made for Bad and Doubtful Debts.
You are required to :
(1) Show the impact of Financial Restructuring on the Company’s activities.
(2) Prepare the fresh Balance Sheet after the reconstruction is completed on the basis of above proposals. [May 2017] [8 Marks]
Answer:
(1) Impact of Financial Restructuring

Balance Sheet of XYZ Limited (after reconstruction)
As at 31st March, 2016

Notes to Accounts

Maximum Price to be offered for shares of Target Company

Question 35.
The equity shares of XYZ Ltd. are currently being traded at ₹ 24 per share in the market. XYZ Ltd. has total 10,00,000 equity shares outstanding in number; and promoters’ equity holding in the company is 40%. PQR Ltd. wishes to acquire XYZ Ltd. because of likely synergies. The estimated present value of these synergies is ₹ 80,00,000.
Further, PQR feels that management of XYZ Ltd. has been overpaid. With better motivation, lower salaries and fewer perks for the top management, will lead to savings of ₹ 4,00,000 p.a. Top management with their families are promoters of XYZ Ltd. Present value of these savings would add ₹ 30,00,000 in value to the acquisition.
Following additional information is available regarding PQR Ltd.:
Earnings per share: ₹ 4
Total number of equity shares outstanding: 15,00,000
Market price of equity share: ₹ 40
Required:
(i) What is the maximum price per equity share which PQR Ltd. can offer to pay for XYZ Ltd.?
(ii) What is the minimum price per equity share at which the management of XYZ Ltd. will be willing to offer their controlling interest? [May 2014] [4 + 2 = 6 Marks]
Answer:
(a) Calculation of maximum price per share at which PQR Ltd. can offer to pay for XYZ Ltd.’s share

Market Value (10,00,000 × ₹ 24)

Synergy Gain

Saving of Overpayment

₹ 2,40,00,000
₹ 80,00,000
₹ 30,00,000

Total Benefits

₹ 3,50,00,000

Maximum Price (₹ 3,50,00,000 ÷ 10,00,000)

₹ 35

(b) Calculation of minimum price per share at which the management of XYZ Ltd.’s will be willing to offer their controlling interest.

	Amount (₹)
Value of XYZ Ltd.’s Mgt. Holding (40% of 10,00,000 × ₹ 24)	96,00,000
Add: PV of loss of remuneration to top management	30,00,000
	1,26,00,000
No. of Shares	4,00,000
Minimum Price (₹ 1,26,00,000/4,00,000)	₹ 31.50

Question 36.
BA Ltd. and DA Ltd. both the companies operate in the same industry. The Financial statements of both the companies for the current financial year are as follows:
Balance Sheet

Particulars	BA Ltd. (₹)	DA Ltd. (₹)
Current Assets	14,00,000	10,00,000
Fixed Assets (Net)	10,00,000	5,00,000
Total (₹)	24,00,000	15,00,000
Equity capital (₹ 10 each)	10,00,000	8,00,000
Retained earnings	2,00,000	–
14% long-term debt	5,00,000	3,00,000
Current liabilities	7,00,000	4,00,000
Total (₹)	24,00,000	15,00,000

Income Statement

		DA Ltd. (₹)
Net Sales	34,50,000	17,00,000
Cost of Goods sold	27,60,000	13,60,000
Gross profit	6,90,000	3,40,000
Operating expenses	2,00,000	1,00,000
Interest	70,000	42,000
Earnings before taxes	4,20,000	1,98,000
Taxes @ 50%	2,10,000	99,000
Earnings after taxes (EAT)	2,10,000	99,000
Additional Information:
No. of Equity shares	1,00,000	80,000
Dividend payment ratio	40%	60%
Market price per share	₹ 40	₹ 15

Assume that both companies are in the process of negotiating a merger through an exchange of equity shares. You have been asked to assist in establishing equitable exchange terms and are required to:
(i) Decompose the share price of both the companies into EPS and P/E components; and also segregate their EPS figures into Return on Equity (ROE) and book value/intrinsic value per share components.
(ii) Estimate future EPS growth rates for each company.
(iii) Based on expected operating synergies BA Ltd. estimates that the intrinsic value of DA’s equity share would be C 20 per share on its acquisition. You are required to develop a range of justifiable equity share exchange ratios that can be offered by BA Ltd. to the shareholders of DA Ltd. Based on your analysis in parts (i) and (ii), would you expect the negotiated terms to be closer to the upper, or the lower exchange ratio limits and why?
(iv) Calculate the post-merger EPS based on an exchange ratio of 0.4: 1 being offered by BA Ltd. and indicate the immediate EPS accretion or dilution, if any, that will occur for each group of shareholders.
(v) Based on a 0.4:1 exchange ratio and assuming that BA Ltd.’s pre-merger P/E ratio will continue after the merger, estimate the post-merger market price. Also show the resulting accretion or dilution in pre-merger market prices. . [Nov. 2008 (M)] [12 Marks]
Answer:
Market price per share (MPS) = EPS × P/E ratio or P/E ratio = MPS/EPS

(i) Determination of EPS, P/E ratio, ROE and BVPS of BA Ltd. and DA Ltd.

		BA Ltd. (₹)	DA Ltd. (₹)
Earnings After Tax(Given)	A	2,10,000	99,000
No. of Shares(Given)	B	1,00,000	80,000
EPS(A ÷ B)	C	2.10	1.2375
Market price per share(Given)	D	40	15
P/E Ratio(D ÷ C)	E	19.05	12.12
Equity Fnnds(Given)	F	12,00,000	8,00,000
BVPS(F ÷ B)	G	12	10
ROE(A ÷ F) × 100	H	17.50%	12.37%

(ii) Estimation of growth rates in EPS for BA Ltd. and DA Ltd.

		BA Ltd.	DA Ltd.
Retention Ratio	(1 – D/P ratio)	0.6	0.4
Growth Rate	(ROE × Retention Ratio)	10.50%	4.59%

(iii) Justifiable Equity Shares Exchange Ratio
(a) Intrinsic value based = ₹ 20/₹ 40 = 0.5:1 (Upper limit)
(b) Market price based = MPS_DA/MPS_BA = ₹ 15/₹ 40 = 0.375:1 (Lower limit)
Since, BA Ltd. has a higher EPS, ROE, P/E ratio and even higher EPS growth expectations, the negotiable term should be expected to be closer to the lower limit based on the existing share prices.

(iv) Calculation of post-merger EPS and its effects

Working for calculation of EPS Dilution of DA Limited :
EPS Old = ₹ 1.2375
EPS claim as per Exchange Ratio = ₹ 2.34 × 0.4 = ₹ 0.936
EPS Dilution (₹ 1.2375 – ₹ 0.936) = ₹ 0.3015

(v) Estimation of Post-merger Market price and other effects

Particulars	BA Ltd.	DA Ltd.	Combined
EPS (₹)	2.1	1.2375	2.341
P/E Ratio	19.05	12.12	19.05
MPS (₹ ) [EPS ÷ P/E Ratio]	40	15	44.6
MPS Accretion (₹)	4.6	2.84 See below

Question 37
R Ltd. and S Ltd. are companies that operate in the same industry. The financial statements of both the companies for the current financial year are as follows:
Balance Sheet

Particulars	R Ltd. (₹)	S Ltd. (₹)
Equity & Liabilities Shareholders Fund Equity Capital (D10 each) Retained earnings Non-current Liabilities 16% Long term Debt Current Liabilities	20,00,000 4,00,000 10,00,000 14,00,000	16,00,000 – 6,00,000 8,00,000
Total	48,00,000	30,00,000
Assets Non-Current Assets Current Assets	20,00,000 28,00,000	10,00,000 20,00,000
Total	48,00,000	30,00,000

Income Statement

Particulars	R Ltd. (₹)	S Ltd. (₹)
A. Net Sales B. Cost of Goods sold	69,00,000 55,20,000	34,00,000 27,20,000
C.Gross Profit (A-B)	13,80,000	6,80,000
D. Operating Expenses E. Interest	4,00,000 1,60,000	2,00,000 96,000
F. Earnings before taxes [C-(D+E)]	8,20,000	3,84,000
G. Taxes @ 35% H. Earnings After Tax (EAT)	2.87.000 5.33.000	1,34,400 2,49,600

Additional Information:

No. of equity shares	2,00,000	1,60,000
Dividend Payment Ratio (D/P)	20%	30%
Market price per share	₹ 50	₹ 20

Assume that both companies are in the process of negotiating a merger through exchange of Equity shares:
You are required to:
(i) Decompose the share price of both the companies into EPS & P/E components. Also segregate their EPS figures into Return on Equity (ROE) and Book Value/Intrinsic Value per share components.
(ii) Estimate future EPS growth rates for both the companies.
(iii) Based on expected operating synergies, R Ltd. estimated that the intrinsic
value of S Ltd. Equity share would be D 25 per share on its acquisition. You are required to develop a range of justifiable Equity Share Exchange ratios that can be offered by R Ltd. to the shareholders of S Ltd. Based on your analysis on parts (i) and (ii), would you expect the negotiated terms to be closer to the upper or the lower exchange ratio limits and why? [May 2015]
Answer:
(i) Determination of various values

Particulars	R Ltd.	S Ltd.
(a) Earnings after Tax	Rs. 5,33,000	Rs. 2,49,600
(b) No.of shares	2,00,000	1,60,000
(c) Equity/Net Assets (20 Lakhs + 4 Lakhs )	Rs. 24,00,000	Rs. 16,00,000
(d) MPS	Rs. 50	Rs. 20
(e) EPS	Rs. 2.665	Rs. 1.56
(f) P/E Ratio (d/e)	18.76 times	12.82 times
(g) ROE (a/c x 100)	22.21%	15.6%
(h) Book Value (c/b)	Rs. 12	Rs. 10

(ii) Determination of Growth Rate of EPS of R Ltd. and S Ltd.

Particulars	R Ltd.	S Ltd.
Retention Ratio (1 – D/P Ratio)	0.80	0.70
Growth Rate (ROE × Retention Ratio)	0.1777	0.1092
Growth Rate (in percentage)	17.77%	10.92%

(iii) Justifiable equity share exchange ratio

Market Price Based
MPS_s÷ MPS_B = Rs. 20/Rs. 50	0.41: 1	Lower Limit
Intrinsic Value Based
= Rs. 25/Rs. 50	0.50: 1	Max. Limit

Since R Ltd. has higher EPS, PE, ROE and higher growth expectations the negotiated term would be expected to be closer to the lower limit, based on existing share price.

Question 38.
R Ltd, and S Ltd. operating in same industry are not experiencing any rapid growth but providing a steady stream of earnings. R Ltd.’s management is interested in acquisition of S Ltd. due to its excess plant capacity. Share of S Ltd, is trading in market at ₹ 3.20 each. Other data relating to S Ltd. is as follow:
Balance sheet of S Ltd.

Other Information

You are required to compute the following:
(a) Minimum price per share S Ltd. should accept from R Ltd.
(b) Maximum price per share R Ltd. shall be willing to offer to S Ltd.
(c) Floor value of per share of S Ltd., whether it shall play any role in decision for its acquisition by R Ltd. [May 2019 Old Syllabus] [8 Marks]
Answer:

	R	S	Combined
MP per share		3.2
Number of shares		80 lakhs
Paid up value per share		1.5
Reserves		279,95,000
PAT	86,50,000	49,72,000	121,85,000
Net cash flows per year	90,10,000	54,87,000	185,00,000
Ke	13.75	13.05	12.5

1. Minimum Price per share payable by R to S Ltd.
Minimum Value payable by R to S is Pre-merger value to S Ltd, But if Pre Merger value is value is less than book value, R will pay Book value to S.
Pre Value of S Ltd. = 80,00,000 × 3.2 = ₹ 2,56,00,000
Book Value of S Ltd. = (80,00,000 × 1.5) + (2,79,95,000) = ₹ 3,99,95,000
Minimum price per share payable to S Ltd. = \(\frac{3,99,95,000}{80,00,000}\) = ₹ 4.99 or ₹ 5 per share

2. Maximum Price per share payable to S Ltd.
Value of combined firm after acquisition (i.e. Present value of all future
cash inflows of combined firm) = \(\frac{R s .185,00,000}{0.125}\) = ₹ 1480,00,000
Pre value of R Ltd. = \(\frac{R s \cdot 90,10,000}{0.1375}\) = ₹ 6,55,27,273
Value given to S Ltd. = ₹ 8,24,72,727
Value Per share = \(\frac{R s .824,72,727}{80,00,000}/latex] = ₹ 10.31
Floor value for S Ltd. (Per share) = ₹ 3.20
It shall not play any role in decision for the acquisition of S Ltd. as it is lower than its current book value

Question 39.
Elrond Limited plans to acquire Doom Limited. The relevant financial details of the two firms prior to the merger announcement are:

	Elrond Limited	Doom Limited
Market price per share	₹ 50	₹ 25
Number of outstanding shares	20 lakhs	10 lakhs

The merger is expected to generate gains, which have a present value of ₹ 200 lakhs. The exchange ratio agreed to 0.5.
What is the true cost of the merger from the point of view of Elrond Limited? [Nov. 2014] [5 Marks]
Answer:
(a) Shares to be issued by Elrond Limited:
= No. of shares in Doom Ltd. ₹ Exchange Ratio
= 10 Lakhs ₹ 0.5 = 5 Lakh Shares

(b) Percentage holding of shareholders of Doom Ltd. in Elrond Limited:
= [latex]\frac{5 \text { lakh }}{20 \text { lakh }+5 \text { lakh }}\) i.e. 20%

(c) The value of Elrond Ltd. after merger:
= (₹ 50 × 20 lakh) + (₹ 25 × 10 lakh) + ₹ 200 lakh
= ₹ 1,000 lakh + ₹ 250 lakh + ₹ 200 lakh = ₹ 1,450 lakh
Value for shareholders of Doom Ltd. = ₹ 1,450 × 20% = ₹ 290 lakhs

(d) True Cost of Merger will be:
= ₹ 290 lakhs – ₹ 250 lakhs = ₹ 40 lakhs

Question 40.
Given is the following information:

	Day Ltd.	Night Ltd.
Net Earnings	₹ 5 crores	₹ 3.50 Crores
No. of Equity Shares	10,00,000	7,00,000

The shares of Day Ltd. and Night Ltd. are traded with P/E ratios 20 and 15 times respectively. The Day Ltd. considers taking over Night Ltd. by paying ₹ 55 crores considering that the market price of Night Ltd. reflects its true value. It is considering both the following options:
(i) Takeover is funded entirely in cash.
(ii) Takeover is funded entirely in stock.
You are required to calculate the cost of the takeover and advise Day Ltd. on the best alternative. [May 2019] [8 Marks]
Answer:
Calculation of EPS and MPS

	Day Ltd.	Night Ltd.
EPS	\(\frac{\text { Rs.3.5 Crores }}{7 \text { Lakhs }}\) = ₹ 50	\(\frac{\text { Rs.3.5 Crores }}{7 \text { Lakhs }}\) = ₹ 50
P/E Ratio	20	15
MPS (P/E Ratio X EPS)	₹ 1,000	₹ 750
Market Capitalisation (No. of Shares X MPS)	10 Lakhs × 1,000 = ₹ 100 Crores	7 Lakhs 750 = ₹ 52.50 Crores

(a) If takeover is funded entirely in CASH:
True Cost of Merger = Amount paid to Vendor Co. – Pre-Value of Vendor Company
= ₹ 55 Crores – ₹ 52.5 Crores = ₹ 2.5 Crores

(b) If takeover is funded entirely in STOCK:
Amount Payable = ₹ 55 Crores
Market Price per Share (Acquirer) = ₹ 1,000
No. of shares to be issued = \(\frac{\text { Rs.55 Crores }}{R s .1,000}\) = 5,50,000 Shares
Therefore, the shareholders of Night Limited will get 5,50,000 shares of Day Limited
Market Value of Merged Firm = Rs. 1,00,00,00,000 + Rs. 52,50,00,000
= Rs. 1,52,50,00,000 i.e. Rs. 152.50 Crore
Proportion that Night Ltd.’s shareholders get in Day Ltd.’s Capital Structure will be:
\(\frac{5.5 \text { Lakhs }}{5.5 \text { Lakhs }+10 \text { Lakhs }}\) = 0.3548
True Cost of Merger = Rs. 152.50 Crore × 0.3548 – Rs. 55 Crore
= Rs. (-) 8.93 Crore
Since true cost is negative in case of funding from stock, Day Ltd. would better off by funding the takeover by stock.

Question 41.
B Ltd., is a highly successful company and wishes to expand by acquiring other firms. Its expected high growth in earnings and dividends is reflected in its PE ratio of 17. The Board of Directors of B Ltd. has been advised that if it were to takeover firms with a lower PE ratio than it own, using a share- for-share exchange, then it could increase its reported earnings per share. C Ltd. has been suggested as a possible target for a takeover, which has a PE ratio of 10 and 1,00,000 shares in issue with a share price of ₹ 15. B Ltd. has
5,0, 000 shares in issue with a share price of ₹ 12.
Calculate the change in earnings per share of B Ltd. if it acquires the whole of C Ltd. by issuing shares at its market price of ₹ 12. Assume the price of B Ltd. shares remains constant. [Nov. 2014][8 Marks]
Answer:

Total market value of C Ltd. (1,00,000 × ₹ 15)	₹ 15,00,000
PE ratio (given)	10
Therefore, earnings	15,00,000/10
	1,50,000
Total market value of B Ltd. (5,00,000 × ₹ 12)	60,00,000
PE ratio (given)	17
Therefore, earnings	60,00,000/17
	3,52,941
The number of shares to be issued by B Ltd.
₹ 15,00,000 × 12	1,25,000
Total number of shares of B Ltd.	5,00,000 + 1,25,000 = 6,25,000
The EPS of the new firm is	(₹ 3,52,941 + ₹ l,50,000)/6,25,000
	0.80
The present EPS of B Ltd. is	3,52,941/5,00,000
	0.71

So the EPS affirm B will increase from ₹ 0.71 to ₹ 0.80 as a result of merger.

Question 42.
ABC Co. is considering a new sales strategy that will be valid for the next 4 years. They want to know the value of the new strategy. Following information relating to the year which has just ended, is available:

Income Statement	₹
Sales	20,000
Gross margin (20%)	4,000
Administration, Selling & distribution expense (10%)	2,000
PBT	2,000
Tax (30%)	600
PAT	1,400
Balance Sheet Information
Fixed Assets	8,000
Current Assets	4,000
Equity	12,000

If it adopts the new strategy, sales will grow at the rate of 20% per year for three years. The gross margin ratio, Assets turnover ratio, the Capital structure and the income tax rate will remain unchanged.
Depreciation would be at 10% of net fixed assets at the beginning of the year. The Company’s target rate of return is 15%.
Determine the incremental value due to adoption of the strategy. [May 2007] [8 Marks]
Answer:
Projected Balance Sheet

Projected Cash Flows

Present Value of Projected Cash Flows

Cash Flows	PV at 15%	PV
-720	0.870	-626.40
-864	0.756	-653.18
-1,036.80	0.658	-682.21
		-1,961.79

Residual Value = \(\frac{2,419.20}{0.15}\) = ₹ 16,128
Present value of Residual value = \(\frac{16,128}{(1.15)^3}\) = \(\frac{16,128}{1.521}\) = 10603.55
Total shareholders’ value = 10,603.55 – 1,961.79 = 8,641.76
Pre strategy value = 1,400/0.15 = 9,333.33
∴ Value of strategy = 8,641.76 – 9,333.33 = (691.57)

Conclusion:
The strategy is not financially viable

Question 43.
Helium Ltd. has evolved a new sales strategy for the next 4 years. The following information is given:

Income Statement	₹ in thousands
Sales	40,000
Gross Margin at 30%	12,000
Accounting, administration and distribution expense at 15%	6,000
Profit before tax	6,000
Tax at 30%	1,800
Profit after tax	4,200
Balance sheet information	₹ in thousands
Fixed Assets	10,000
Current Assets	6,000
Equity	15,000

As per the new strategy, sales will grow at 30 per cent per year for the next four years. The gross margin ratio will increase to 35 per cent. The Assets turnover ratio and income tax rate will remain unchanged.
Depreciation is to be at 15 per cent on the value of the net fixed assets at the beginning of the year.
Company’s target rate of return is 14%.
Determine if the strategy is financially viable in cases:
Case (a) C. Liabilities are ₹ 1000 (thousands)
Case (b) There is no current liability & equity is assumed to be ₹ 16,000 (thousand) [Nov. 2011] [10 Marks]
Answer:
Case I C. Liabilities are ₹ 1000 (thousands)
Projected Balance Sheet

Projected Cash Flows

	(In ₹ Thousands)
Total for first 4 years (A)	4145.35
Residual value (11995.62/0.14)	85683
Present value of Residual value [85683/(1.14)⁴] (B)	50731.21
Total Shareholders value (C) = (A) + (B)	54876.56
Pre strategy value (4200/0.14) (D)	30000.00
Value of strategy (C) – (D)	24876.56

Conclusion: The strategy is financially viable.

Case II There is no C. Liabilities & Equity is ₹ 16,000

	(In ₹ Thousands)
Total for first 4 years (A)	3113.03
Residual value (6225.73/0.14)	44469.50
Present value of Residual value [44469.50/(1.14)⁴] (B)	26329.51
Total Shareholders’ value (C) = (A) + (B)	29442.54
Pre strategy value (4200/0.14) (D)	30000.00
Value of strategy (C) – (D)	-557.46

Question 44.
Following details are available for X Ltd.
Income statement for the year ended 31st March, 2018

Particulars	Amount
Sales	40,000
Gross profit	12,000
Administrative Expenses	6,000
Profit before tax	6,000
Tax @ 30%	1,800
Profit After Tax	4,200

Balance sheet as on 31st March, 2018

Assets	Amount
Fixed Assets	10,000
Current Assets	6,000
Total Assets	16,000
Liabilities	Amount
Equity share capital	15,000
Sundry creditors	1,000
Total liabilities	16,000

The company is contemplating for new sales strategy as follows:
(i) Sales to grow at 30% per year for next four years.
(ii) Assets turnover ratio, net profit ratio and tax rate will remain the same.
(iii) Depreciation will be 15% of value of net fixed assets at the beginning of the year.
(iv) Required rate of return for the company is 15%.
Evaluate the viability of new strategy. [Nov. 2018] [12 Marks]
Answer:
Step 1 Preparation of Projected Balance Sheet of X Ltd.

Step 2 Determination of Present Value of Projected Cash Flows
Projected Cash Flows:-

Present value of Projected Cash Flows:-

Cash Flows	PVF at 15%	PV
960	0.870	835.20
1248	0.756	943.49
1622.40	0.658	1067.54
2109.12	0.572	1206.42
		4,052.65

Step 3 Determination of Value of Strategy:

Residual Value = 11,995.62/0.15 = 79,970.80
Present value of Residual value = 79.970.80 × PVF (15%, 4) = 79,970.80 × 0.572 = 45,743.30
Total shareholders value = 45743.30 + 4052.65 = 49795.95
Pre-strategy value = 4200/0.15 = 28,000
Value of strategy = 49795.95 – 28,000 = 21795.95
Conclusion: The strategy is financially viable.

Question 45.
The following information is relating to Fortune India Ltd. having two divisions, viz. Pharma Division and Fast Moving Consumer Goods Division (FMCG Division). Paid up share capital of Fortune India Ltd. is consisting of 3,000 Lakhs equity shares of Re. 1 each. Fortune India Ltd. decided to de-merge Pharma Division as Fortune Pharma Ltd. w.e.f. 1.4.2009. Details of Fortune India Ltd. as on 31.3.2009 and of Fortune Pharma Ltd. as on 1.4.2009 are given below:

Particulars	Fortune Pharma Ltd. (₹)	Fortune India Ltd. (₹)
Outside Liabilities
Secured Loans	400 lakh	3,000 lakh
Unsecured Loans	2,400 lakh	800 lakh
Current Liabilities & Provisions	1,300 lakh	21,200 lakh
Assets
Fixed Assets	7,740 lakh	20,400 lakh
Investments	7,600 lakh	12,300 lakh
Current Assets	8,800 lakh	30,200 lakh
Loans & Advances	900 lakh	7,300 lakh
Deferred tax/Misc. Expenses	60 lakh	(200) lakh

Board of Directors of the Company have decided to issue necessary equity shares of Fortune Pharma Ltd. of Re. 1 each, without any consideration to the shareholders of Fortune India Ltd. For that purpose following points are to be considered:
(a) Transfer of Liabilities & Assets at Book value.
(b) Estimated Profit for the year 2009-10 is ₹ 11,400 Lakh for Fortune India Ltd. & ₹ 1,470 lakhs for Fortune Pharma Ltd.
(c) Estimated Market Price of Fortune Pharma Ltd. is ₹ 24.50 per share.
(d) Average P/E Ratio of FMCG sector is 42 & Pharma sector is 25, which is to be expected for both the companies.
Calculate:
1. The Ratio in which shares of Fortune Pharma are to be issued to the shareholders of Fortune India Ltd.
2. Expected Market price of Fortune India Ltd.
3. Book Value per share of both the Companies immediately after Demerger. [Nov. 2005] [8 Marks]
Answer:
Determination of Shareholder’s funds (₹ in Lakhs)

Particulars	Fortune India Ltd.	Fortune Pharma Ltd.	Fortune India (FMCG) Ltd.
Assets	70,000	25,100	44,900
Outside liabilities	25,000	4,100	20,900
Net worth	45,000	21,000	24,000

1. Calculation of Shares of Fortune Pharma Ltd. to be issued to shareholders of Fortune India Ltd.

	Fortune Pharma Ltd.
Estimated Profit (₹ in lakhs)	1,470
Estimated market price (₹)	24.5
Estimated P/E	25
Estimated EPS (₹)	0.98
No. of shares lakhs	1,500

Hence, Ratio is 1 share of Fortune Pharma Ltd. for 2 shares of Fortune India Ltd.

2. Expected market price of Fortune India Ltd.

	Fortune India (FMCG) Ltd.
Estimated Profit (₹ in lakhs)	11,400
No. of equity shares (₹ in lakhs)	3,000
Estimated EPS (₹)	3.8
Estimated P/E	42
Estimated market price (₹)	159.60

3. Book value per share

	Fortune Pharma Ltd.	Fortune India (FMCG) Ltd.
Net worth (₹ in lakhs)	21,000	24,000
No. of shares (₹ in lakhs)	1,500	3,000
Book value of shares	₹ 14	₹ 8

Question 46.
AB Ltd. has recently approached the shareholders of CD Ltd. which is engaged in the same line of business as that of AB Ltd. with a bid of 4 news shares in AB Ltd. for every 5 CD Ltd. shares or a cash alterative of ₹ 360 per share. Past records of earnings of CD Ltd. had been poor and the company’s shares have been out of favour with the stock market for some time.
Pre-bid information for the year ended 31.3.2006 are as follows:

	AB Ltd. in Lakhs	CD Ltd. in Lakhs
Equity share capital	60	170
Number of shares	24	17
Pre-tax profit	125	110
P/E Ratio	11	7
Estimated post tax cost of Equity Capital per Annum	12%	10%

Both AB Ltd. and CD Ltd. pay income tax at 30%. Current earnings growth forecast is 4% for the foreseeable future of both the Companies.
Assuming no synergy exists, you are required to evaluate whether proposed share to share offer is likely to be beneficial to the shareholders of both the companies using merger terms available. AB Ltd.’s directors might expect their own pre-bid P/E ratio to be applied to combined earnings.
Also comment on the value of the two Companies from the constant growth form of dividend valuation model assuming all earnings are paid out as dividends. [Nov. 2007] [14 Marks]
Answer:
Alternative 1 (when number of shares are 2.4 and 1.7 lakhs respectively) Background calculations for Evaluation: (Figures in lakhs)

	AB Ltd.	CD Ltd.	Total
PBT	125	110	235
PAT	87.5	77	164.5
Prc bid EPS	36.45	45.29
P/E ratio	11	7
Pre-bid Price Per Share	401.06	317.03
Market value of the company	962.54	538.95	1,501.49
No. of New Shares Post bid	2.4	1.36	3.76
% combined company owned by	63.83%	36.17%
Value to the original Shareholders	958.40	543.09	1,501.49
Post bid Price per share to original shareholders i.e., 2.40 lakhs and 1.70 lakhs shareholders respectively.	399.33	319.46

(Note: The Post bid Price per share to new shareholders as per terms of acquisition works out to ₹ 399.33 for both the companies)
These figures suggest post bid acquisition share price of ₹ 399.33 for AB Ltd., and 319.46 for CD Ltd.’s original shareholders. The price of CD Ltd. share is likely to be influenced by the value of cash alternative.
The post bid share price of the new firm can be estimated by applying the P/E ratio to the combined earnings of the two old companies.
In that case,
Market Value would be = 164.5 × 11 = 1809.50
Price per share of the combined company would be = \(\frac{1,809.50}{3.76}\) = ₹ 481.25
∴ Therefore share of AB Ltd., shareholders would rise by ₹ 481.25 – ₹ 401.06 = ₹ 80.19 i.e., 20%.
Share value of CD Ltd., shareholder expected to rise by
(₹ 481.25 × \(\frac{4}{5}\)) – 317.03 = ₹ 67.97 i.e. 21.44%
With the cash offer the premium is \(\frac{360-317.03}{317.03}\) = 13.55% only
Hence shareholders of CD Ltd. are gaining more from the merger in a share exchange and cash alternative is unlikely to be accepted.
Using constant growth model the value of both the individual companies would be:
AB Ltd., share price = \(\frac{36.46(1.04)}{0.12-0.04}\) = ₹ 473.98
CD Ltd., share price = \(\frac{45.29 \times 1.04}{0.10-0.04}\) = ₹ 785.03
On this basis market slightly undervalues AB Ltd. share but share of CD Ltd., are highly undervalued possibly because of previous disappointments. However, if AB Ltd. forecast is believed that the AB Ltd., is getting CD Ltd. shares, it will be a cheap proposal for AB Ltd. to acquire the CD Ltd. on share exchange basis and especially if any of the shareholder of CD Ltd. Accept the cash offer.

The shareholders of CD Ltd. would also be benefited post merger based on share exchange ratio since the value of their share would be going up from ₹ 317.03 to ₹ 399.33. However, their share price would still be undervalued as compared with the share price calculated by using constant growth model.

Alternative 2 (when number of shares are 24 and 17 lakhs respectively)
If we take into consideration the number of shares being 24 lakhs and 17 lakhs the Pre-bid share price works out to ₹ 40.15 and ₹ 31.71 respectively, which seems to be illogical against a cash offer @ ₹ 360 per share. However, since many students may have solved this question based on the figures of 24 lakhs and 17 lakhs number of shares, an alternative solution is provided below.

Evaluation:		.	Figure in lakhs
Background calculations:	AB Ltd.	CD Ltd.	Total
PBT	125	110	225
PAT	87.5	77	164.5
Pre-bid EPS	3.65	4.53
P/E Ratio	11	7
Pre-bid Price per share	40.15	31.71
Market value of the company	963.60	539.07	1502.67
No. of new shares Post-bid	24	13.6	37.6
% of combined company owned by	63.83	36.17
Value to the original shareholders	959.15	543.52	1502.67
Post-bid Price to original shareholders i.e., 24 lakhs and 17 lakhs shareholders respectively	39.96	31.97

(Note: The Post bid price per share works out to ₹ 39.96 for both the companies)
These figures suggest Post acquisition share price of ₹ 39.96 for AB Ltd. and ₹ 31.97 for CD Ltd’s original shareholders. The Price of CD Ltd. Share is likely to be influenced by the value of cash alternative.
The Post bid share price of the new firm can be estimated by applying the P/E ratio to the combined earnings of the two old companies.
In that case,
Market-value would be = 164.5 × 11 = 1809.50
Price per share of the combined company
Would be = \(\frac{1809.50}{37.6}\) = 48.13
∴ Shares of AB Ltd. shareholders would raise by ₹ 48.13 – 40.15 = 7.98 i.e., 19.87% or 20%.
Share value of CD Ltd., shareholders expected to raise by (₹ 48.13 × \(\frac{4}{5}\)) – 31.71 = ₹ 7.40 or 23.34%.
However, with the cash offer the premium is \(\frac{360-31.71}{31.71}\) = 1035.29%
Hence, the shareholders of CD Ltd., are substantially benefited by cash offer and they are unlikely to accept the share swap ratio.
Using constant growth model the value of shares of both the individual companies would be
AB Ltd. Share Price = \(\frac{3.65(1.04)}{0.12-0.04}=\frac{3.80}{0.08}\) = ₹ 47.5
CD Ltd. Share Price = \(\frac{4.53(1.04)}{0.10-0.04}=\frac{4.71}{0.06}\) = ₹ 78.5
On this basis market slightly undervalues AB Ltd. Share but share of CD Ltd., is highly undervalued possibly because of previous disappointments. However, if AB Ltd. forecast is believed that the AB Ltd. is getting CD Ltd. share it will be a cheap proposal for AB Ltd., to acquired CD Ltd., on share exchange basis.

The shareholders of CD Ltd., would however be more benefited by cash offer.
Note: The above answer is based upon the solution given by ICAI in their suggested answers.

Companies incorporated Outside India – CA Final Law Study Material

Leave a Comment / CA Final / By Murali / March 29, 2023 May 10, 2023

Companies incorporated Outside India – CA Final Law Study Material is designed strictly as per the latest syllabus and exam pattern.

Companies incorporated Outside India – CA Final Law Study Material

Question 1.
Examine with reference to the provisions of the Companies Act, 2013 whether the following companies can be treated as foreign companies:
(i) A company incorporated outside India having a share registration office at Mumbai.
(ii) Indian citizens incorporated a company in Singapore for the purpose of carrying on business there. [MTP-April 18]
Answer:
Determination of status of foreign company:

As per Section 2(42) of Companies Act, 2013, foreign company means any company or body corporate incorporated outside India which:
(a) has a place of business in India whether by itself or through an agent, physically or through electronic mode; and
(b) conducts any business activity in India in any other manner.

As per Sec. 386 of Companies Act, 2013 interpreted the expression “Place of business” as including a share transfer or registration office.

Accordingly, to qualify as foreign company, a company must have the following features:

It must be incorporated outside India.
It should have a place of business in India.
Place of Business may be hold by the company directly or through its agent.
Place of business may be physically or through electronic mode.
It must conduct a business activity of any nature in India.

Conclusion:

As place of business includes a share registration office, the company will be treated as foreign company provided it conducts any business activity in India.
As the company is incorporated for the purpose of carrying business in Singapore, it cannot be treated as a foreign company as no place of business in India.

Question 2.
Indian citizens incorporated a company in U.K. for the purpose of carrying on business there. Examine with reference to the relevant provisions of the Companies Act, 2013 whether it is a “Foreign Company”. What would be your answer in case the U.K. company was incorporated-by a company registered in India? [Nov. 08 (5 Marks)]
Answer:
Determination of status of foreign company:
As per Section 2(42) of Companies Act, 2013, foreign company means any company or body corporate incorporated outside India which:
(a) has a place of business in India whether by itself or through an agent, physically or through electronic mode; and
(b) conducts any business activity in India in any other manner.

Accordingly, to qualify as foreign company, a company must have the following features:

It must be incorporated outside India.
It should have a place of business in India.
Place of business may be hold by the company directly or through its agent.
Place of business may be physically or through electronic mode.
It must conduct a business activity of any nature in India.

Conclusion:

As the company is incorporated for the purpose of carrying business in U.K., it cannot be treated as a foreign company as no place of business in India.
Answer will remain the same, as it is immaterial who incorporate the company.

Question 3.
Examine in the light of the provisions of the Companies Act, 2013 whether the following companies can be considered as “Foreign Companies”:-
(i) A company incorporated outside India having a share registration office at New Delhi
(ii) A company incorporated outside India having shareholders who are all Indian citizens;
(iii) A company incorporated in India but all the shares are held by foreigners.
Also examine whether the above companies can issue Indian Depository Receipts under the provisions of the Companies Act, 2013? [May 13 (8 Marks)]
Answer:
Determination of status of foreign company:

As per Sec. 386 of Companies Act, 2013 interpreted the expression “Place of business” as including a share transfer or registration office.
Conclusion:

As place of business includes a share registration office, the company will be treated as foreign company provided it conducts any business activity in India.
Assuming that company no place of business in India, it cannot be treated as foreign company. It is immaterial that all of its shareholders are Indian Citizens.
As the company is incorporated in India, it cannot be treated as foreign company.

Issue of IDRs:
As per Sec. 390 read with Rule 13 of the Companies (Registration of Foreign Companies) Rules, 2014, no company incorporated or to be incorporated outside India, whether the company has or has not established, or may or may not establish, any place of business in India shall make an issue of IDRs unless it complies with the

conditions mentioned under this rule,
SEBI (ICDR) Regulations, 2009, and
any directions issued by the RBI.

Question 4.
Robertson Ltd. is a company registered in Thailand. Although, it has no place of business established in India, yet it is doing online business through telemarketing in India. Whether it will be treated as a Foreign Company under the Companies Act, 2013? Explain. [Nov. 15 (4 Marks), RTP-May 18]
Or
Radix Ltd. is a company registered in Thailand. Although, it has no place of business established in India, yet it is engaged in online business through remote delivery of healthcare services in India. State the legal position as to the nature of the Radix Ltd. as a foreign company in the light of the Companies Act, 2013. – [MTP-Oct. 20]
Answer:
Determination of status of foreign company:

As per Section 2(42) of Companies Act, 2013, foreign company means any company or body corporate incorporated outside India which:
(a) has a place of business in India whether by itself or through an agent, physically or through
electronic mode; and
(b) conducts any business activity in India in any other manner.

Rule 2(1)(c) of Companies (Registration of Foreign Companies) Rules, 2014, defines the term electronic mode and electronically based online services such as telemarketing, telecommuting, telemedicine, education and information research are covered within the meaning of electronic mode.

Conclusion: Robertson Ltd. will be treated as Foreign company as it is having place of business electronically and involved in business activity through telemarketing/telemedicine.

Question 5.
In the light of the provisions of the Companies Act, 2013 explain whether the following Companies can be considered as a ‘Foreign Company’:
(i) A Company which has no place of business established in India, yet, is doing online business through telemarketing in India.
(ii) A company which is incorporated outside India employs agents in India but has no place of business in India.
(iii) A Company incorporated outside India having shareholders who are all Indian citizens. [Nov. 18-New Syllabus (8 Marks)]
Answer:
Determination of status of foreign company:
As per Section 2(42) of Companies Act, 2013, foreign company means any company or body corporate incorporated outside India which:
(a) has a place of business in India whether by itself or through an agent, physically or through electronic mode; and
(b) conducts any business activity in India in any other manner.

(i) A Company which has no place of business established in India, yet, is doing online business through telemarketing in India will be treated as Foreign company as it is having place of business electronically and involved in business activity through telemarketing.

(ii) A company which is incorporated outside India employs agents in India but has no place of business in India, will not be treated as Foreign company as it is not having any place of business in India.

(iii) A Company incorporated outside India having shareholders who are all Indian citizens, cannot be treated as foreign company. As it is not having any place of business in India. It is immaterial that all of its shareholders are Indian Citizens.

Question 6.
In the light of the provisions of the Companies Act, 2013, examine whether the following companies can be considered as a ‘Foreign Company’:
(i) M/s Red Stone Limited is a company registered in Singapore. The Board of Directors meets and executes business decisions at their Board Meeting held in India.
(ii) M/s Blue Star Public Company Limited registered in Thailand has authorized Mr. ‘Y’ in India to find customers and to enter contracts with them on behalf of the Company.
(iii) M/s. Xex Limited Liability Company registered in Dubai has installed its main server in Dubai for maintaining office automation software by Cloud Computing for its client in India. [Nov. 19 – New Syllabus (8 Marks)]
Answer:
Determination of status of foreign company:

Accordingly, to qualify as foreign company, a company must have the following features:

It must be incorporated outside India.
It should have a place of business in India.
Place of Business may be hold by the company directly or through its agent.
Place of business may be physically or through electronic mode.
It must conduct a business activity of any nature in India.

Rule 2(1)(c) of Companies (Registration of Foreign Companies) Rules, 2014, defines the term electronic mode so as to mean carrying out electronically based,
(a) business to business and business to consumer transactions, data interchange and other digital supply transactions;
(b) offering to accept deposits or inviting deposits or accepting deposits or subscriptions in securities, in India or from citizens of India;
(c) fihancial settlements, web-based marketing, advisory and transactional services, database services and products, supply chain management;
(d) online services such as telemarketing, telecommuting, telemedicine, education and ’ information research; and
(e) all related data communication services,
whether conducted by e-mail, mobile devices, social media, cloud computing, document management, voice or data transmission or otherwise.
It is immaterial whether the main server is installed in India or outside India.

Conclusion: Based on the provisions as stated above, following conclusions may be drawn:
(i) M/s Red Stone Limited is not a foreign company as holding Board meetings in India in itself cannot established that company is conducting any business activity in India.

(ii) M/s Blue Star Public Company Limited registered in Thailand will be considered as foreign company as it has authorized Mr. ‘Y’ in India to find customers and to enter contracts with them on behalf of the Company.

(iii) M/s. Xex Limited Liability Company registered in Dubai will be considered as foreign company as it is engaged in maintaining office automation software by Cloud Computing for its client in India. Location of server is immaterial.

Question 7.
Trans Asia Limited is registered as a public company u/s 4(7) of the erstwhile Companies Act, 1956 which is a subsidiary of Galilio Limited, a foreign company. Trans Asia Limited carries in business in India describing itself as a foreign company. Can it do so? State the actions that can be taken against the company for improper use or description as foreign company under the provisions of the Companies Act, 2013. [Nov. 18-Old Syllabus (4 Marks)]
Answer:
Action for Improper Use or Description as Foreign Company:

As per Sec. 2 (42) of Companies Act, 2013, foreign company means any company or body corporate incorporated outside India which:
(a) has a place of business in India whether by itself or through an agent, physically or through electronic mode; and
(b) conducts any business activity in India in any other manner.

In instant case, Trans Asia Limited is registered as a public company u/s 4(7) of the erstwhile Companies Act, 1956 which is a subsidiary of Galilio Limited, a foreign company.

Conclusion: As trans Asia Limited is registered in India, hence it cannot describe itself as a foreign company merely on the basis that it is a subsidiary of a foreign company.

As per Rule 12 of Companies (Registration of Foreign Companies) Rules, 2014, if any person trade or carry on business in any manner under any name or title or description as a foreign company registered under the Act or the rules made thereunder, that person shall, unless duly registered as foreign company under the Act and rules made thereunder, shall be liable for investigation u/s 210 of the Act and action consequent upon that investigation shall be taken against that person.

Question 8.
Puresoft Solutions Private Limited is incorporated in Singapore and more than 60% of the paid-up share capital is held by two citizens of India who are Software Engineers. The company wants to open a branch office in Kolkata.
Determine the status of Puresoft Solutions as per the provisions of the Companies Act, 2013.
[Nov. 20 – Old Syllabus (2 Marks)]
Answer:
Determining status of a foreign company:
As per Sec. 379(2) of Companies Act, 2013, where not less than 50% of the paid-up share capital, whether equity or preference or partly equity and partly preference, of a foreign company is held by:
(i) one or more citizens of India;
or
(ii) by one or more companies or bodies corporate incorporated in India;
or
(iii) by one or more citizens of India and one or more companies or bodies corporate incorporated in India,

whether singly or in the aggregate, such company shall comply with the provisions of Chapter XXII (Section 379 to Sec. 393 – Companies Incorporated outside India) and such other provisions of this Act as may be prescribed with regard to the business carried on by it in India as if it were a company incorporated in India.

Conclusion: As more than 60% of the paid up capital of Puresoft Solutions Pvt. Ltd. is being held by Citizens of India, company is required to comply with the provisions of Secs. 379 to 393 and such other prescribed provisions of this Act with regard to business carried by it in India as it were as company incorporated in India.

Question 9.
A company incorporated in Singapore has established its place of business at Chennai. State the documents which are required to be furnished on such establishment of business in India under the Companies Act, 2013 and the authorities to whom such documents are to be furnished. [May 09 (5 Marks)]
Or
DEJY Company Limited incorporated in Singapore, desires to establish a place of business at Mumbai. You being a practicing Chartered Accountant has been appointed by the company as a liaison officer, for compliance of legal formalities on behalf of the company. Examining the provisions of the Companies Act, 2013, state the documents you are required to furnish on behalf of the company, on the establishment of a place of business at Mumbai. [May 12 (8 Marks), RTP – May 19]
Or
State the documents that are required to be delivered by a foreign company at the time of I establishment of a place of business in India. State to whom the said documents are to be delivered. [May 14 (4 Marks)]
Answer:
Documents to be furnished by a foreign company:
Section 380(1) of Companies Act, 2013 requires that every foreign company shall, within 30 days of the establishment of its place of business in India, deliver to the Registrar for registration:

(a) Certified copy of the instrument constituting or defining the constitution of the company. If the instrument is not in the English language, a certified translation thereof in the English language.
(b) Full address of the registered or principal office of the company.
(c) List of the directors and secretary of the company containing such particulars as may be prescribed.
Particulars relating to directors and Secretary to be furnished to the Registrar by foreign Companies are prescribed in Rule 3(2) of the Companies (Registration of Foreign Companies) Rules, 2014.
(d) Name and address of one or more persons resident in India authorised to accept on behalf of the company service of any notices or other documents required to be served on the company.
(e) Full address of the office of the company in India which is deemed to be its principal place of
business in India.
(f) Particulars of opening and closing of a place of business in India on earlier occasion(s).
(g) Declaration that none of the directors of the company or the authorized representative in India has ever been convicted or debarred from formation of companies and management in India or abroad; and –
(h) Any other information as may be prescribed.

Office where documents to be delivered
Rule 8 of the Companies (Registration of Foreign” Companies) Rules, 2014 provides that any document, which any foreign company is required to deliver to the Registrar shall be delivered to the Registrar having jurisdiction over New Delhi.

Question 10.
ABC Ltd., a foreign company having its Indian principal place of business at Kolkata, West Bengal is required to deliver various documents to Registrar under the provisions of the Companies Act, 2013. You are required to state, where the said company should deliver such documents. [MTP-April 18]
Answer:
Office where documents to be delivered by a foreign company:
Rule 8 of the Companies (Registration of Foreign Companies) Rules, 2014 provides that any document, which any foreign company is required to deliver to the Registrar shall be delivered to the Registrar having jurisdiction over New Delhi.

Question 11.
M/s Joel Ltd. was incorporated in London with a paid-up capital of 10 million pounds. Mr. Y an Indian citizen holds 25% of the paid-up capital. M/s. X Ltd. a company registered in India holds 30% of the paid-up capital of Joel Ltd. M/s. Joel Ltd. has recently established a share transfer office at New Delhi. The company seeks your advice as to what formalities it should observe as a foreign company under Companies Act, 2013.
Or
Mr. Ziyan an Indian citizen holds 25% of the paid-up capital of Laurel Steven Limited, a company which was incorporated in Singapore with a paid-up capital of 10 million Singapore Dollars. Swaraj Limited a company registered in India holds 30% of the paid-up capital of Laurel Steven Limited. Laurel Steven Limited has recently established a share transfer office at New Delhi. The Company seeks your advice as to what formalities it should observe as a foreign company under the Companies Act, 2013. [Nov. 17 (4 Marks)]
Answer:
Formalities to be observed by a foreign company:

As per Sec. 386 of Companies Act, 2013 interpreted the expression “Place of business” as including a share transfer or registration office.

As per Section 379 of Companies Act, 2013, where not less than 50% of the paid-up share capital, whether equity or preference or partly equity and partly preference, of a foreign company is held by one or more citizens of India or by one or more companies or bodies corporate incorporated in India, whether singly or in the aggregate, such company shall comply with the provisions of Chapter XXII (Section 379 to Sec. 393 – Companies Incorporated outside India) and such other provisions of this Act as may be prescribed with regard to the business carried on by it in India as if it were a company incorporated in India.

Conclusion: As the company is a foreign company as per section 2 (42) read with Sec. 3 86, and more than 5 0% of share capital is held by Indian Citizen and Indian company, it is required to comply with the provisions of Sections 379 to 393 and such other provisions as prescribed for a foreign company.

Formalities to be observed:

Documents to be furnished by a foreign company:
Section 380(1) of Companies Act, 2013 requires that every foreign company shall, within 30 days of the establishment of its place of business in India, deliver to the Registrar for registration:
(a) Certified copy of the instrument constituting or defining the constitution of the company. If the instrument is not in the English language, a certified translation thereof in the English language.
(b) Full address of the registered or principal office of the company.
(c) List of the directors and secretary of the company containing such particulars as may be prescribed.
Particulars relating to directors and Secretary to be furnished to the Registrar by foreign Companies are prescribed in Rule 3(2) of the Companies (Registration of Foreign Companies) Rules, 2014.
(d) Name and address of one or more persons resident in India authorised to accept on behalf of the company service of any notices or other documents required to be served on the company.
(e) Full address of the office of the company in India which is deemed to be its principal place of
business in India.
(f) Particulars of opening and closing of a place of business in India on earlier occasion(s).
(g) Declaration that none of the directors of the company or the authorized representative in India has ever been convicted or debarred from formation of companies and management in India or abroad; and –
(h) Any other information as may be prescribed.

Question 12.
Qinghai Huading Industrial Company Ltd., incorporated in China established a place of business at Mumbai. The Charter/Documents constituting the company is in Mandarian Chinese (Chinese local language). It is required inter alia to file a certified translation of above Documents with the Registrar of companies in India. Who can authenticate the translated charter/documents as per the provisions of the Companies Act, 2013 and rules made there under governing foreign companies in case such translation is made at Mumbai? (May 18 – New Syllabus (2 Marks)]
Answer:
Authentication of Translated Documents:

Rule 10 of the Companies (Registration of Foreign Companies) Rules, 2014 provides that all the documents required to be filed with the Registrar by the foreign companies shall be in English language and where any such document is not in English language, there shall be attached a translation thereof in English language duly certified to be correct in the manner given in these rules.

Where any such translation is made outside India, it shall be authenticated by the signature and the seal, if any, of
(a) the official having custody of the original; or
(b) a Notary (Public) of the country (or part of the country) where the company is incorporated.

Where such translation is made within India, it shall be authenticated by
(a) an advocate, attorney or pleader entitled to appear before any High Court; or
(b) an affidavit, of a competent person having, in the opinion of the Registrar, an adequate knowledge of the language of the original and of English.

Question 13.
Transtar Limited, a company incorporated in Thailand, has a place of business through an agent in Bangalore. The agent transacts the business on behalf of the company through electronic mode. As regards Transtar LimIted, answer the following:
(i) Whether, Transtar Limited shall be called a foreign company within the meaning of the Companies Act, 2013?
(ii) What are the regulatory requirements under the Companies Act, 2013 to be complied with by a company which has establishéd its place of business in India with respect to delivery of documents etc. to Registrar? [Nov. 19 – Old Syllabus (4 Marks)]
Answer:
Determination of Status of foreign company:

As per Section 2(42) of Companies Act, 2013, foreign company means any company or body corporate incorporated outside India which:
(a) has a place of business in India whether by itself or through an agent, physically or through
electronic mode; and
(b) conducts any business activity in India in any other manner.

Conclusion: Transtar Limited shall be called a foreign company as it has a place of business in India through an agent who transacts the business on behalf of the company through electronic mode.

Regulatory requirements to be complied with bya company which has established its place of business in India with respect to delivery of documents etc. to Registrar:

Question 14.
State briefly the requirements relating to filing of financial statements with the Registrar of Companies by the foreign company in respect of its global business as well as Indian business.
Or
Galillo Ltd. is a foreign company In Germany and It established a place of business in Mumbai. Explain the relevant provisions of the Companies Act, 2013 and rules made thereunder relating to preparation and filing of financial statements, as also the documents to be attached along with the financial statements by the foreign company. [May 16(4 Marks)].
Answer:
Filing of Accounts by Foreign Companies:
As per Sec. 381 of Companies Act, 2013, ever3 foreign company shall, in every calendar year, make out a balance sheet and profit and loss account

in such form as prescribed,
containing such particulars as prescribed, and
including or having attached or annexed thereto such documents as may be prescribed, and
deliver a copy of those documents to the Registrar.

As per Rule 4 of the Companies (Registration of Foreign Companies) Rules, 2014, every foreign company shall prepare F.S. of its Indian business operations in accordance with Schedule III or as near thereto as may be possible for each financial year including:

(i) documents required to be annexed thereto in accordance with the provisions of Chapter IX of the Act ie. Accounts of Companies;
(ii) documents relating to copies of latest consolidated F.S. of the parent foreign company, as submitted by it to the prescribed authority in the country of its incorporation under the provisions of the law for the time being in force in that country.

Additional documents to be attached (Rule 4): Every foreign company shall, along with the F.S. required to be filed with the Registrar, attach thereto the following documents; namely:
a. Statement of related party transaction
b. Statement of repatriation of profits
c. Statement of transfer of funds (including dividends if any).
Time limit for filing (Rule 4): Documents shall be delivered to the Registrar within a period of 6 months of the close of the financial year of the foreign company to which the documents relate.

Service on Foreign Company – Sec. 383

Question 15.
X Inc is a company registered in UK and carrying on Trading Activity with Principal Place of Business in Chennal. Since the company did not obtain registration or make arrangement to file Return, the Registrar having jurisdiction, intends to serve show cause notice on the Foreign Company. As Standing Counsel for the department, advise the Registraron valid service of notice. [Nov. 14(4 Marks), MTP-Aug. 18]
Answer:
Manner of service of notice etc. to foreign company:
As per Sec. 383 of Companies Act, 2013, any notice, or other document required to be served on a foreign company shall be deemed to be sufficiently served,

if it is addressed to any person whose name and address have been delivered to the Registrar
u/s 380 of Companies Act, 2013
and
it isleft at the address which has been so delivered to the Registrar,
or
sent by post to the address which has been so delivered to the Registrar.
or
sent by electronic mode.
Conclusion: Notice may be served in compliance of Sec. 383.

Question 16.
Under Section 387 of the Companies Act 2013, what are particulars required to be incorporated in a prospectus to be issued by an existing foreign company?
Answer:
Particulars to be Incorporated In Prospectus Issued by a foreign company:
Section 387(1) of the Companies Act, 2013 requires the following particulars to be incorporated in the prospectus:
(a) Prospectus must contain particulars with respect to the following matters, namely:

the instrument constituting or defining the constitution of the company
the enactments under which the company was incorporated;
address in India where the said instrument, enactments, or copies thereof, and if the same are not in the English language, a certified translation thereof in the English language can be inspected;
the date on which and the country in which the company would be or was incorporated; and
whether the company has established a place of business in India and, if so, the address of its principal office in India:

Provided that points (1), (ii) and (iii) shall not apply in the case of a prospectus issued more than 2 years after the date at which the company is entitled to commence business.
(b) Prospectus must state the matters specified u/s 26.

Question 17.
Blue Berry Ltd. Is a Company incorporated outside India. 50% of its preference share capital and 20% of Its equity share capital are, held by Companies incorporated in India. It issued prospectus inviting subscriptions in India for its share but did not state the Country in which it is incorporated. Examine in the light of the provisions of the Companies Act 2013 whether the issue of prospectus by the Company in valid. [May 19- Old Syllabus (2 Marks)]
Answer:
Determination of Validity of a prospectus:

As per Section 387(1) of Companies Act, 2013, prospectus issued by a foreign company must contain the particulars with respect to certain matters, including therein the country in which the company was incorporated.
Conclusion: Prospectus issued by Blue Berry Ltd. is not valid as it does not contain the particulars as prescribed u/s 387(1).

Question 18.
Chang Limited, a company incorporated in Singapore proposes to issue prospectus offering its securities in India. The Company has no established place of business in India.

The officer in charge of the issue of the prospectus in India seeks your opinion regarding the provisions relating to registration of the prospectus under the Companies Act, 2013. List out the documents required to be enclosed with the prospectus. [May 18 – Old Syllabus (4 Marks)]
Or
Abroad Ltd. a foreign company without establishing a place of business in India, issued prospectus for subscription of securities in India. Being a consultant of the company advise on the validity of such an issue of prospectus by Abroad Ltd. [MTP-May 20]
Answer:
Documents required to be enclosed with the prospectus:

As per Sec. 389 of the Companies Act, 2013, no person shall issue, circulate or distribute in India any prospectus offering for subscription in securities of a company incorporated or to be incorporated outside India, whether the company has or has not established, or when formed will or will not establish, a place of business in India, unless before the issue, circulation or distribution of the prospectus in India,
(a) a copy thereof certified by the chairperson of the company and two other directors of the company as having been approved by resolution of the managing body has been delivered for registration to the Registrar and
(b) the prospectus states on the face of it that a copy has been so delivered, and
(c) there is endorsed on or attached to the copy, any consent to the issue of the prospectus required by Section 388 and such documents as may be prescribed.

As per Rule 11 of the Companies (Registration of Foreign Companies) Rules, 2014, the following documents shall be annexed to the prospectus, namely:
(a) any consent to the issue of the prospectus required from any person as an expert;
(b) a copy of contracts for appointment of managing director or manager and in case of a contract not reduced into writing, a memorandum giving full particulars thereof;
(c) a copy of any other material contracts, not entered in the ordinary course of business, but entered within preceding 2 years;
(d) a copy of underwriting agreement; and
(e) a copy of power of attorney if prospectus is signed through duly authorized agent of directors.

Question 19.
In case, a foreign company does not deliver its documents to the Registrar of Companies as required u/s 380 of the Companies Act, 2013, state the penalty prescribed under the said Act, which can be levied. [RTP-May 18]
Or
ABC Limited, a foreign company failed to deliver some desired documents to the Registrar of Companies as required under Section 380 of the Companies Act, 2013. State the provisions of penalty prescribed under the said Act, which can be levied on ABC Limited for its failure.
Or
Ronnie Coleman Ltd., a foreign company failed to deliver some documents to the Registrar of Com-panies as required under section 380 of the Companies Act, 2013. State the provisions of penalty prescribed under the Act, which can be levied on Ronnie Coleman Ltd. for its failure to deliver the documents. [Nov. 18-New Syllabus (2 Marks)]
Answer:
Penalty provisions in case of foreign companies:
Section 392 of Companies Act, 2013 provides that if a foreign company contravenes the provisions of this Chapter (Secs. 379 to 393),
(a) the foreign company shall be punishable with

fine which shall not be less than ₹ 1 lakh but which may extend to ₹ 3 lakhs and
in the case of a continuing offence, with an additional fine which may extend to ₹ 50,000 for every day after the first during which the contravention continues and

(b) every officer of the foreign company who is in default shall be punishable with imprisonment for a term which may extend to 6 months or with fine which shall not be less than ₹ 25,000 but which may extend to ₹ 5 lakhs or with both.

Question 20.
North Sea Shipping Limited is incorporated in South Korea. It has established an office in Paradecp. Mr. Jonathan is the Branch in charge and the Compliance Officer in India. He has received a communication from the Chief Executive Officer in South Korea to explore the possibilities of issuing Indian Depository Receipts to the extent of Rs. 1,000 million in financial year 2020-21. He has approached you being financial consultant for your advice.
Advise him as per the provisions of the Companies Act, 2013. [Nov. 20 – Old Syllabus (2 Marks)]
Answer:
Offer of GDRs:
Sec. 390 of Companies Act, 2013 provides that Central Government may make rules for:
(a) the offer of IDR;
(b) the requirement of disclosures in prospectus or letter of offer issued in connection with IDRs;
(c) the manner in which the IDRs shall be dealt with in a depository mode and by custodian and underwriters; and
(d) the manner of sale, transfer or transmission of IDRs,
by a company incorporated or to be incorporated outside India, whether the company has or has not established, or will or will not establish, any place of business in India.

For the purpose of section 390, Rule 13 of the Companies (Registration of Foreign Companies) Rules, 2014 provides that no company incorporated or to be incorporated outside India, whether the company has or has not established, or may or may not establish, any place of business in India shall make an issue of IDRs unless it complies with the

conditions mentioned under this rule,
SEBI (ICDR) Regulations, 2009 and
any directions issued by the RBI.