CS Executive

CS Executive Jurisprudence, Interpretation & General Laws Chapter Wise Weightage

CS Executive: Jurisprudence, Interpretation & General Laws Chapter Wise Weightage

Wondering how to cover the CS Executive Jurisprudence, Interpretation & General Laws entire syllabus? Don’t worry as we have covered the complete info about JIGL Chapter Wise Weightage in detail. Based on the weightage allotted you can understand what are the Jurisprudence, Interpretation & General Laws Important Chapters and allot more time for them. Planning your preparation as per the CS Executive Jurisprudence, Interpretation & General Laws Chapter Wise Weightage can aid you in scoring better grades in exams.

Additional Read: CS Executive: Jurisprudence, Interpretation & General Laws Important Questions

CS Executive Jurisprudence Chapter Wise Weightage

You can download the Jurisprudence, Interpretation & General Laws CS Executive Chapter Wise Weightage PDF from here and keep it handy. Check it before you plan your preparation schedule so that you don’t invest more time on the topics that aren’t so important. In fact, we have added the Yearwise CS Executive JIGL Chapter Wise Weightage so that you will have an idea of how it’s been changing over the years.

Chapter 2014 2015 2016 2017 2018 2019 2020
D J D J D J D J D J D D
1 9 5 5 5
2 21 13 9 13
3 4 4 9 4
4 4 4 8 5
5 4 4 12 8
6 17 4 8 12
7 4 8 4 8
8 9 16 4 12
9 8 5 16 4
10 4 4 16 9
11 12 13 4 8
12 16 8 8
13 18 5 5 10 3 12 5 11 16 12 9 8
14 5 5 5 3 5 5 5 8 8 8 8
15 15 5 5 3 5 10 8 4 4
16 4 4 4 8
17 8 4 4 8

Final Words

We wish the knowledge shared regarding the CS Executive Jurisprudence Interpretation General Laws has helped you to be on the right track during your preparation. For more information on CS Executive Chapterwise Weightage of different papers, you can always look up to us.

Competition Act, 2002 – Economic, Business and Commercial Laws Important Questions

Competition Act, 2002 – Economic, Business and Commercial Laws Important Questions

Question 1.
Write a short note on Conditions conducive to cartelization [December 2012 & June 2013 (3 Marks)]
Answer:
Meaning

  • Cartel includes an association of producers, sellers, distributors, traders, or service providers who, by agreement amongst themselves, limit, control, or attempt to control the production, distribution, sale, or price of, or, trade in goods or provision of services.
  • Cartels are anti-competitive and hence are void.

Conditions conducive to cartelization:
Some of the conditions that are conducive to cartelization are:

  • High concentration – few competitors
  • High entry and exit barriers
  • Homogeneity of the products (similar products)
  • Similar production costs
  • Excess capacity
  • High dependence of the consumers on the product
  • History of collusion

Question 2.
Write a short note on Cartel [Dec. 2013 (3 Marks)]
Answer:
Definition- Section 2(c)
Cartel includes an association of producers, sellers, distributors, traders, or service providers who, by agreement amongst themselves, limit, control, or attempt to control the production, distribution, sale, or price of, or, trade in goods or provision of services.

  • Cartel result in higher prices, poor quality, and less or no choice for goods and/or services which result in injury to consumer and to the economy
  • Examples of Cartel:
  • All tire manufacture increasing prices uniformly and simultaneously by mutual agreement.
  • Association of transporter fixing prices and prohibiting its members from quoting price below the price fixed by association.
  • Trade association asking their members not to sell below the rates announced by it with the threat of expulsion in the event of non-compliance.

All above agreements or arrangements are cartels; they are anti-competitive and hence are void.

Question 3.
What do you understand by the word ‘competition’ in the market? In what ways ‘competition kills competition’? Discuss briefly. [Dec. 2015 (8 Marks}]
Answer:
Meaning of the word “ Competition”

  1. Definition by Competition Act: The term ‘competition’ is not defined under the Competition Act, 2002. Competition is a complex and technical subject that does not lend itself to easy summary or concise clarification.
  2. General Meaning: Competition can be defined as a process of economic rivalry between market players to attract customers.
  3. Corporate World Meaning: In the corporate world, the term is generally understood as a process whereby the economic enterprises compete with each other to secure customers for their products.
    These market players can be multinational or domestic companies, wholesalers, retailers, or even the neighborhood shopkeeper.
  4. World Bank and OECD Meaning – A situation in a market in which firms or sellers independently strive for the buyers’ patronage in order to achieve a particular business objective, for example, profits, sales on market share.

In what way “competition kills competition”

  • In the process to outdo rival enterprises, the market players may adopt fair means or indulge in unfair measures.
  • The enterprises compete to outsmart their competitors, sometimes to eliminate their rivals.
  • Some competitors may adopt destructive tactics and throw the viable and deserving producer out of the market
  • Competition in the sense of economic rivalry is unstable and has a natural tendency to give way to a monopoly.
  • Thus, competition kills competition.

Question 4.
Write a note on* Evolution and development of Indian competition laws [Dec. 2016 (5 Marks)]
Answer:
Constitution of India (Articles 38 and 39)
The Directive Principle of State Policy in those Articles lays down, inter alia that the State shall strive to promote the welfare of the people by securing and protecting as effectively, as it may, a social order in which justice – social, economic, and political- shall inform all the institutions of the national life, and The State shall, in particular, direct its policy towards securing
1. That the ownership and control of material resources of the community are so distributed as best to sub-serve the common good; and

2. That the operation of the economic system does not result in the concentration of wealth and means of production to the common f detriment.

  • First Competition Law
    The first Indian competition law was the Monopolies and Restrictive j Trade Practices Act, 1969 (MRTP Act).
  • Other Legislation
    Legal framework dealing with competition in India spread over other legislations, besides the Monopolies and Restrictive Trade Practices
    Act, 1969, other legislations dealing with competition include Consumer Protection Act, 1986, the Patents Act, 1970, etc.
  • Competition Act 2002
    Parliament has enacted Competition Act 2002 to prevent the practices from having adverse effects on competition, to promote and sustain competition in the market, and to protect the interest of consumer.

Question 5.
“Competition spurs efficiency and improves consumer welfare. There is a close relationship between competition and economic efficiency”. How far do you agree with this statement? Elucidate. [Dec. 2017 (8 Marks)]
Answer:
A number of empirical studies found a positive relationship between competition and innovation, productivity, and economic growth. P. Aghion and P. Howitt in Endogenous Growth Theory offered several theoretical situations where competition is conducive to innovation.

  • Intensified product market competition could force managers to speed up the adoption of new technologies;
  • Intensive product market competition with incumbent firms engaged in step-by-step innovative activities could enhance each firm’s incentive to acquire or increase its technological lead over its rivals and, if labor markets are flexible, competition will induce skilled workers to move to opportunities employing best practices and technologies.
  • The competition also reduces slack by providing more incentives for managers and workers to increase efforts and improve efficiency.
    Therefore, the product market competition disciplines firms into efficient operation.

Nickel in his article “Competition & Corporate Performance” suggested three different channels of incentives:

  • Competition creates greater opportunities for comparing performance;
  • A more competitive environment where price elasticity of demand tends to be higher induces greater efforts among workers and managers for cost-reducing improvements in productivity since improvements could generate a larger increase in revenue and profits; and
  • A more competitive environment forces managers to improve efficiency, because of the more intense the competition, the greater the chances for inefficient to be extinguished.

Vigorous competition between firms is the lifeblood of strong and effective markets. Competition helps consumers get a good deal. It encourages firms to innovate by reducing slack, putting downward pressure on costs, and providing incentives for the efficient organization of production.

Empirical evidence shows that strong competition is closely linked to dynamic and efficient markets.’ The benefits of competitive forces for economic growth and consumer welfare are widely recognized and evidenced by several studies.

Recently, an empirical study in the U.K. by the Centre for Competition Policy, University of East Anglia showed that prices were more than halved through competition in international telephony and airfares, and were significantly reduced in other areas. The survey also brought home the point that competition is not just about prices but is typically multi-faceted, bringing new ways of doing business and leading to technological and other advances.

Michel Porter in his recent work “Can Japan Compete “shows that in Japan only those sectors characterized by strong domestic competition remain internationally competitive following the country’s recent economic downturn, examples include cameras, automobiles, and audio equipment. Many leading competition experts believe in the premise that, in the presence of competition, the market will achieve the objective of maximizing welfare.

Question 6.
What do you mean by Cartel? Explain it with reference to the Com-petition Act, 2002. [Dec. 2018 (3 Marks)]
Answer:
Definition- Section 2(c)
Cartel includes an association of producers, sellers, distributors, traders, or service providers who, by agreement amongst themselves, limit, control, or attempt to control the production, distribution, sale, or price of, or, trade in goods or provision of services.

  • Cartel result in higher prices, poor quality, and less or no choice for goods and/or services which result in injury to consumer and to the economy
  • Examples of Cartel:
  • All tire manufacture increasing prices uniformly and simultaneously by mutual agreement.
  • Association of transporter fixing prices and prohibiting its members from quoting price below the price fixed by association.
  • Trade association asking their members not to sell below the rates announced by it with the threat of expulsion in the event of non-compliance.
    All above agreements or arrangements are cartels; they are anti-competitive and hence are void.

Question 7.
Who is “consumer” under the Competition Act, 2002? [Dec. 2018 (3 Marks)]
Answer:
As per section 2(f) of the Competition Act, 2002, Consumer means any person who:

  1. Buys goods for a consideration and includes the use of goods, whether a person obtains such goods for resale or for any commercial purpose or
  2. Hires or avails of services for a consideration and includes a beneficiary of services, with the approval of the

It is to be noted that consideration for goods or services may be paid or promised to be paid or partly paid and partly promised. The consumer also includes a person who takes goods or services under a deferred payment system.

Explanation:
If a person purchases goods or avails of services for commercial purposes, he will be a Consumer, whereas, for purposes of the Consumer Protection Act, a person purchasing goods/availing services for commercial purposes is not a “Consumer” and cannot seek relief under that Act.

Question 8.
The Competition Act, 2002 is an improvement on the MRTP Act, 1969. Critically analyze this statement. [June 2019 (5 Marks)]
Answer:
It is true that Competition Act, 2002 is an improvement on the MRTP Act, 1969.

Question 9.
What do you mean by the term “person” as given under the Competition Act, 2002? [Dec. 2019 (3 Marks)]
Answer:
Definition Section 2(1) as per Competition Act, 2002 “person” includes:

  1. an individual;
  2. a Hindu undivided family;
  3. a company;
  4. a firm;
  5. an association of persons or a body of individuals, whether incorporated or not, in India or outside India;
  6. any corporation established by or under any Central, State or Provincial Act or a Government company as defined in section the Companies Act;
  7. anybody corporate incorporated by or under the laws of a country outside India;
  8. a co-operative society registered under any law relating to co-operative societies;
  9. a local authority;
  10. every artificial juridical person, not falling within any of the preceding sub-clauses.

Question 10.
What are the conditions conducive to cartelization under the Com-petition Act, 2002 [Dec 2019 (3 Marks)}
Answer:
Meaning

  • Cartel includes an association of producers, sellers, distributors, traders, or service providers who, by agreement amongst themselves, limit, control, or attempt to control the production, distribution, sale, or price of, or, trade in goods or provision of services.
  • Cartels are anti-competitive and hence are void.

Conditions conducive to cartelization
Some of the conditions that are conducive to cartelization are:

  • High concentration – few competitors
  • High entry and exit barriers
  • Homogeneity of the products (similar products)
  • Similar production costs
  • Excess capacity
  • High dependence of the consumers on the product
  • History of collusion

Question 11.
What are the factors which the Competition Commission of India will take into consideration for determining whether an agreement has an ‘appreciable adverse effect’ on the competition? [June 2013 (5 Marks)]
Answer:

  1. “Adverse appreciable effect on competition” is a key factor while en-quiring into an anti-competitive agreement
  2. As per Section 19(3) of the Competition Act, 2002, the Commission shall, while determining whether an agreement has an appreciable adverse effect on competition may consider the following factors, namely:
  3. Creation of barriers to new entrants in the market.
  4. Driving existing competitors out of the market.
  5. Foreclosure of competition by hindering entry into the market.
  6. Accrual of benefits to consumers.
  7. Improvements in production or distribution of goods or provision of services.
  8. Promotion of technical, scientific, and economic development by means of production or distribution of goods or provision of services.
  9. The first three factors are anti-competitive, while the latter three factors have little effect.

Question 12.
What is an ‘anti-competitive agreement’ under the Competition Act, 2002? Mention any five anti-competitive agreements. [Dec. 2013 (5 Marks)]
Answer:
1. Meaning of Anti-Competitive Agreement
An anti-competitive agreement is an agreement having an appreciable adverse effect on competition.

2. Prohibition on anti-competitive agreements [Section 3]:
Any enterprise or association of enterprises or person or association of persons shall not enter into any agreement of production, supply, distribution, storage, acquisition, or control of goods or provision of services, which causes or is likely to cause an appreciable adverse effect on competition within India.

3. Effects of anti-competitive agreements
Any agreement entered into in contravention of the above provision shall be void.

4. Presumed/deemed anti-competitive agreements
Following agreements shall be presumed to be anti-competitive agreements:

5. Types of Anti-competitive Agreement
The following agreement shall be considered to be agreements made in contravention of section 3 which are likely to cause an appreciable adverse effect on competition

  • Tie-in arrangement
  • Exclusive supply agreement
  • Exclusive distribution agreement
  • Refusal to deal
  • Resale price maintenance.

Question 13.
Explain in brief ‘anti-competitive agreement’ under the Competition Act, 2002. [June 2014 (5 Marks)]
Answer:
Meaning

  • Cartel includes an association of producers, sellers, distributors, traders, or service providers who, by agreement amongst themselves, limit, control, or attempt to control the production, distribution, sale, or price of, or, trade in goods or provision of services.
  • Cartels are anti-competitive and hence are void.

Conditions conducive to cartelization
Some of the conditions that are conducive to cartelization are:

  • High concentration – few competitors
  • High entry and exit barriers
  • Homogeneity of the products (similar products)
  • Similar production costs
  • Excess capacity
  • High dependence of the consumers on the product
  • History of collusion

Question 14.
What are the factors which the Competition Commission of India shall take into consideration to ascertain whether an agreement has an appreciable adverse effect on competition under the Competition Act, 2002? [June 2016 (5 Marks)]
Answer:
Definition Section 2(1) as per Competition Act, 2002 “person” includes:

  1. an individual;
  2. a Hindu undivided family;
  3. a company;
  4. a firm;
  5. an association of persons or a body of individuals, whether incorporated or not, in India or outside India;
  6. any corporation established by or under any Central, State or Provincial Act or a Government company as defined in section the Companies Act;
  7. any body corporate incorporated by or under the laws of a country outside India;
  8. a co-operative society registered under any law relating to co-operative societies;
  9. a local authority;
  10. every artificial juridical person, not falling within any of the preceding sub-clauses.

Question 15.
What is meant by ‘bid rigging’? What are the most commonly used ways in which bid-rigging may occur? [June 2016 (5 Marks)]
Answer:
Meaning of Bid Riggings
Bid rigging means any agreement which has the effect of eliminating or reducing competition for bids or adversely affecting or manipulating the process for bidding.

Bid rigging occurs when two or more competitors agree they will not compete genuinely with each other for tenders, allowing one of the cartel members to ‘win’ the tender.

Participants in a bid-rigging cartel may take turns to be the ‘winner’ by agreeing about the way they submit tenders, including some competitors agreeing not to tender.
1. The legality of Bid Rigging
As per Section 3(3), agreements that directly or indirectly results in bid-rigging or collusive bidding are presumed to be anti-competitive agreements and therefore void.

2. Types of Bid Rigging
Bid rigging can take a variety of forms. They include:
Cover Bidding: Where competitors choose a winner and everyone but the winner deliberately bids above an agreed amount to establish the illusion that the winner’s quote is competitive.

Bid Suppression: Where a business agrees not to tender to ensure that the pre-agreed participant will win the contract.

Bid Withdrawal: Where a business withdraws its winning bid so that an agreed competitor will be successful instead.

Bid Rotation: Where competitors agree to take turns at winning business while monitoring their market shares to ensure they all have a predetermined slice of the pie.

Non-conforming Bids: Where businesses deliberately include terms and conditions that they know will not be acceptable to the client.

Question 16.
Briefly explain categorically the conditions that are conducive to ‘Cartelization’. [June 2018 (3 Marks)]
Answer:
Meaning

  • Cartel includes an association of producers, sellers, distributors, traders, or service providers who, by agreement amongst themselves, limit, control, or attempt to control the production, distribution, sale, or price of, or, trade in goods or provision of services.
  • Cartels are anti-competitive and hence are void.

Conditions conducive to cartelization
Some of the conditions that are conducive to cartelization are:

  • High concentration – few competitors
  • High entry and exit barriers
  • Homogeneity of the products (similar products)
  • Similar production costs
  • Excess capacity
  • High dependence of the consumers on the product
  • History of collusion

Question 17.
What agreements are anti-competitive agreements under the Competition Act, 2002? [Dec. 2018 (3 Marks)]
Answer:
Meaning

  • Cartel includes an association of producers, sellers, distributors, traders, or service providers who, by agreement amongst themselves, limit, control, or attempt to control the production, distribution, sale, or price of, or, trade in goods or provision of services.
  • Cartels are anti-competitive and hence are void.

Conditions conducive to cartelization
Some of the conditions that are conducive to cartelization are:

  • High concentration – few competitors
  • High entry and exit barriers
  • Homogeneity of the products (similar products)
  • Similar production costs
  • Excess capacity
  • High dependence of the consumers on the product
  • History of collusion

Question 18.
How the competition committee will determine whether an agreement has an appreciable adverse effect on the competition? [June 2019 (3 Marks)]
Answer:
Meaning

  • Cartel includes an association of producers, sellers, distributors, traders, or service providers who, by agreement amongst themselves, limit, control, or attempt to control the production, distribution, sale, or price of, or, trade in goods or provision of services.
  • Cartels are anti-competitive and hence are void.

Conditions conducive to cartelization
Some of the conditions that are conducive to cartelization are:

  • High concentration – few competitors
  • High entry and exit barriers
  • Homogeneity of the products (similar products)
  • Similar production costs
  • Excess capacity
  • High dependence of the consumers on the product
  • History of collusion

Question 19.
Explain what is meant by Bid-rigging, Tie-in agreement, Exclusive supply agreement, and Refusal to deal. [June 2019 (3 Marks)]
Answer:
Bid-rigging:

  • Cartel includes an association of producers, sellers, distributors, traders, or service providers who, by agreement amongst themselves, limit, control, or attempt to control the production, distribution, sale, or price of, or, trade in goods or provision of services.
  • Cartels are anti-competitive and hence are void.

Conditions conducive to cartelization
Some of the conditions that are conducive to cartelization are:

  • High concentration – few competitors
  • High entry and exit barriers
  • Homogeneity of the products (similar products)
  • Similar production costs
  • Excess capacity
  • High dependence of the consumers on the product
  • History of collusion

Tie-in Agreement: The term tie-in agreement means any agreement requiring a purchaser of goods, as a condition of such purchase, to purchase some other goods.

Tie-in agreements are anti-competitive
Examples:
Where a gas distributor requires a consumer to buy a gas stove as a precondition to obtaining a connection of domestic cooking gas. [Chanakaya and j Siddharth Gas company]

Exclusive Supply Agreement: The agreement that the purchaser shall not deal with goods, products, articles manufactured by any person other than the seller is an exclusive supply agreement and is an anti-competitive agreement.

Example: Manufacturer asks a dealer not to deal in similar products of its competitor directly or indirectly.

Refusal to deal: Refusal to deal includes any agreement which restricts by any method the persons or classes of persons to whom goods are sold or | from whom goods are bought.

Refusal to deal is anti-competitive.

Question 20.
In what circumstances collusive bidding or bid rigging mat occur as per the Competition Act, 2002?
Answer:
Circumstances in which collusive bidding or bid rigging may occur are:

  • agreements to submit identical bids
  • agreements as to who shall submit the lowest bid, agreements for the submission of cover bids (voluntarily inflated bids)
  • agreements not to bid against each other,
  • agreements on common norms to calculate prices or terms of bids
  • agreements to squeeze out bidders
  • agreements designating bid winners in advance on a rotational basis, or on a geographical or customer allocation basis.

Question 21.
“The Competition Act, 2002 does not prohibit dominance but the abuse of dominant position”. Discuss. [June 2015 (7 Marks)]
Answer:
Abuse of dominant position [Section 4]: No enterprise or group shall abuse [ its dominant position. (Note that ‘dominant position ’is not prohibited. What is prohibited is its misuse)

There shall be an abuse of dominant position if an enterprise or group
(a) Directly or indirectly, imposes unfair or discriminatory condition in purchase or sale of goods or services or

  • price in purchase or sale (including predatory price) of goods or services.

(b) Limits or restricts:

  • production of goods or provision of services or market; or
  • technical or scientific development relating to goods or services to the prejudice of consumers; or

(c) Indulges in practice or practices resulting in a denial of market access in any other manner; or

(d) Makes conclusion of contracts subject to acceptance by other parties I of supplementary obligations which, by their nature or according to | commercial usage, have no connection with the subject of such contracts; or

(e) Uses its dominant position in one relevant market to enter into, or protect other relevant markets.

Meaning of certain terms:
1. Dominant Position: Dominant position means a position of strength, enjoyed by an enterprise, in the relevant market, in India, which enables it to:

  • operate independently of competitive forces prevailing in the relevant market or
  • affect its competitors or consumers or the relevant market in its favor.

2. Predatory Price: Predatory price means the sale of goods or provision of services, at a price that is below the cost with a view to reduce competition or eliminate the competitors.

Example: Microsoft has used its dominant position Disk Operating System (DOS) to dominate the browser market and ruined Netscape.

Question 22.
Explain the term “Abuse of Dominance” under Competition Act, 2002. [June 2017 (3 Marks)] I
Answer:
Meaning

  • Cartel includes an association of producers, sellers, distributors, traders, or service providers who, by agreement amongst themselves, limit, control, or attempt to control the production, distribution, sale, or price of, or, trade in goods or provision of services.
  • Cartels are anti-competitive and hence are void.

Conditions conducive to cartelization
Some of the conditions that are conducive to cartelization are:

  • High concentration – few competitors
  • High entry and exit barriers
  • Homogeneity of the products (similar products)
  • Similar production costs
  • Excess capacity
  • High dependence of the consumers on the product
  • History of collusion

Question 23.
What constitutes ‘abuse of dominance’, under Competition Law? [June 2018 (5 Marks)]
Answer:
Meaning

  • Cartel includes an association of producers, sellers, distributors, traders, or service providers who, by agreement amongst themselves, limit, control, or attempt to control the production, distribution, sale, or price of, or, trade in goods or provision of services.
  • Cartels are anti-competitive and hence are void.

Conditions conducive to cartelization
Some of the conditions that are conducive to cartelization are:

  • High concentration – few competitors
  • High entry and exit barriers
  • Homogeneity of the products (similar products)
  • Similar production costs
  • Excess capacity
  • High dependence of the consumers on the product
  • History of collusion

Question 24.
What constitutes an abuse of dominance under the Competition Act, 2002? [Dec. 2018 (3 Marks)] j
Answer:
Meaning

  • Cartel includes an association of producers, sellers, distributors, traders, or service providers who, by agreement amongst themselves, limit, control, or attempt to control the production, distribution, sale, or price of, or, trade in goods or provision of services.
  • Cartels are anti-competitive and hence are void.

Conditions conducive to cartelization
Some of the conditions that are conducive to cartelization are:

  • High concentration – few competitors
  • High entry and exit barriers
  • Homogeneity of the products (similar products)
  • Similar production costs
  • Excess capacity
  • High dependence of the consumers on the product
  • History of collusion

Question 25.
What factors have to be taken into consideration by the Competition Commission of India for the purpose of determining whether an enterprise enjoys a dominant position or not? Explain. [Dec. 2018 (5 Marks)]
Answer:
As per section 19(4) of the Competition Act, 2002, the Commission while inquiring whether an enterprise enjoys a dominant position or not may consider the following factors:

  • Market share of the enterprises
  • Size and resources of the enterprises
  • Size and importance of competitors
  • The economic power of the enterprises including commercial advantage over competitors
  • Relative advantages by way of contribution to the economic development
  • Vertical integration of the enterprises or sale or service network of such enterprises
  • Dependence of consumers
  • Monopoly or dominant position
  • Entry barriers including barriers such as regulatory barriers, financial risk, the high capital cost of entry, marketing entry barriers, technical entry barriers, economies of scale, high cost of substitutable goods or service for consumers
  • Countervailing buying power
  • Market structure and size of the market
  • Social obligations and social costs
  • Any other factor.

Question 26.
What is meant by dominant position under the Competition Act, 2002? [June 2019 (3 Marks)]
Answer:
Meaning

  • Cartel includes an association of producers, sellers, distributors, traders, or service providers who, by agreement amongst themselves, limit, control, or attempt to control the production, distribution, sale, or price of, or, trade in goods or provision of services.
  • Cartels are anti-competitive and hence are void.

Conditions conducive to cartelization
Some of the conditions that are conducive to cartelization are:

  • High concentration – few competitors
  • High entry and exit barriers
  • Homogeneity of the products (similar products)
  • Similar production costs
  • Excess capacity
  • High dependence of the consumers on the product
  • History of collusion

Question 27.
Mention the provisions of the Competition Act, 2002 relating to ‘regulation of combinations’. [Dec. 2007 (3 Marks)]
Answer:
Regulation of combinations [Section 6]: No person or enterprise shall enter into a combination that causes or is likely to cause an appreciable adverse effect on competition within the relevant market in India and such a combination shall be void. (Thus, combination in itself is not prohibited. It will be held void only if it adversely affects competition.)

Notice to Commission: Any person or enterprise, who or which proposes to enter into a combination shall give notice to the Commission, in the prescribed form along with prescribed fees, disclosing the details of the proposed combination, within 30 days of:
(a) Approval of the proposal relating to merger or amalgamation by the board of directors,
(b) Execution of any agreement or other document for acquisition.

No combination shall come into effect until 210 days have passed from the day on which the notice has been given to the Commission or the Commission has passed orders u/s 31, whichever is earlier.

After receipt of the notice, the Commission shall deal with such notice in accordance with the provisions contained in sections 29, 30 & 31.

Section 29- Procedure for investigation of combination by CCI Section 30- Commission to determine whether disclosure made to it is correct Section 31 – Commission may allow combination if it has no adverse effect on competition.

Provisions not to apply to PFI & FII: The provisions of this section shall not apply to share subscription or financing facility or any acquisition, by a public financial institution, foreign institutional investor, bank, or venture capital fund, pursuant to any covenant of a loan agreement or investment agreement.

However, such PFI/FII, etc. are put under obligation to file with the Commission the details of the acquisition in specified Form within 7 days from the date of the acquisition.

Question 28.
What do you understand by the term “Combination” under the Competition Act, 2002? [Dec. 2018 (3 Marks)]
Answer:
Combination under the Competition Act, 2002, means the acquisition of control, shares, voting rights or assets, acquisition of control by a person over an enterprise where such person has direct or indirect control over another enterprise engaged in competing businesses, and mergers and amalgamations between or amongst enterprises when the combining parties exceed the thresholds set in the Act.

The thresholds are specified in the Competition Act, 2002 in terms of assets or turnover in India and outside India. Entering into a combination that causes or is likely to cause an appreciable adverse effect on competition within the relevant market in India is prohibited and such combination shall be void.

Question 29.
How is the Competition Commission of India established and what is its composition? Discuss the procedure laid down for the selection of Chairperson and other members along with their term of office under the provisions of the Competition Act, 2002. [Dec. 2015 f8 Marks)]
Answer:
Establishment of Commission [Section 7]: The Central Government has established a Competition Commission of India by notification in the year 2003. ”

The Commission shall be a body corporate having perpetual succession and a common seal with power, to acquire, hold and dispose of property, both movable and immovable, and to contract and shall, by the said name, sue or be sued.

The head office of the Commission is situated in New Delhi. The Commission may establish offices at other places in India.

Composition of Commission [Section 8]:
1. Chairperson & Members: The Commission shall consist of a Chairperson and two to six other Members to be appointed by the Central Government.

2. Qualification & Experience: The Chairperson and every other Member shall be a person of ability, integrity, and standing and who has special knowledge of, and professional experience of not less than 15 years in international trade, economics, business, commerce, law, finance, accountancy, management, industry, public affairs, administration or in any other matter which may be useful to the Commission in the opinion of the Central Government.

3. Terms of employment: The Chairperson and other Members shall be whole-time Members.
Selection of Chairperson & Members [Section 9]: The Chairperson and other Members of the Commission shall be appointed by the Central Government from a panel of names recommended by a Selection Committee.

Selection Committee consists of Chief Justice of India or his nominee, as a Chairperson; and the Secretary of Ministry of Corporate Affairs, Member; the Secretary in the Ministry of Law and Justice, Member and two experts of repute as a member.

The term of the Selection Committee and the manner of selection of a panel of names shall be such as may be prescribed.

Term of office of Chairperson & Members [Section 10]:
1. The Chairperson and Members shall hold office for a term of 5 years ) and shall be eligible for re-appointment. The Chairman or other members shall not hold office as such after he has attained the age of 65 years.

2. A vacancy caused by the resignation or removal of the Chairperson or any other Member or by death or otherwise shall be filled by fresh appointment.

3. The Chairperson and every other Member shall, before entering upon his office, make and subscribe to an oath of office and of secrecy.

4. In the event of the occurrence of a vacancy in the office of the Chair- j person by reason of his death, resignation, or otherwise, the senior-most Member shall act as the Chairperson until the date on which a new Chairperson is appointed.

5. When the Chairperson is unable to discharge his functions owing to absence, illness, or any other cause, the senior-most Member shall discharge the functions of the Chairperson.

Question 30.
State the composition, duties, powers, and functions of the Competition Commission of India under the Competition Act, 2002. [June 2017 (8 Marks)]
Answer:
Establishment of Commission [Section 7]: The Central Government has established a Competition Commission of India by notification in the year 2003.

The Commission shall be a body corporate having perpetual succession and a common seal with power, to acquire, hold and dispose of property, both movable and immovable, and to contract and shall, by the said name, sue or be sued.

The head office of the Commission is situated in New Delhi. The Commission may establish offices at other places in India.

Composition of Commission [Section 8]:
1. Chairperson & Members: The Commission shall consist of a Chairperson and two to six other Members to be appointed by the Central Government.

2. Qualification & Experience: The Chairperson and every other Member shall be a person of ability, integrity, and standing and who has special knowledge of, and professional experience of not less than 15 years in international trade, economics, business, commerce, law, finance, accountancy, management, industry, public affairs, administration or in any other matter which may be useful to the Commission in the opinion of the Central Government.

3. Terms of employment: The Chairperson and other Members shall be whole-time Members.
Duties of Commission [Section 18]: Duties of the Competition Commission are as follows:

  • To eliminate practices having an adverse effect on competition
  • To promote and sustain competition
  • To protect the interests of consumers
  • To ensure freedom of trade carried on by other participants, in markets in India.

The Commission may enter into any memorandum or arrangement with the prior approval of the Central Government with any agency of any foreign country for the purpose of discharging its duties or performing its functions.

Power to issue interim orders [Section 33]: Where during an inquiry, the j Commission is satisfied that an act in contravention of section 3(1) or Section 4(1) or Section 6 has been committed and continues to be committed 2 or that such action is about to be committed, the Commission may, by order, g temporarily restrain any party from carrying on such activities until the conclusion of such inquiry or until further orders, without giving notice to such party, where it deems it necessary.

Power to award compensation [Section 34]: This section is deleted.

Powers of Commission to regulate its own procedure are as follows [Section 36]:
Power of Civil Court: The Commission shall be guided by the principle of natural justice and shall have the same powers as are vested in a Civil Court, while trying a suit, in respect of the following matters:

  • Summoning and enforcing the attendance of any person and examining him on oath.
  • Requiring the discovery and production of documents.
  • Receiving evidence on affidavit.
  • Issuing commissions for the examination of witnesses or documents.
  • Requisitioning any public record or document or copy from any office.

Power to take help of an expert: The Commission may call upon experts from the field of economics, commerce, accountancy, international trade, etc. to assist in the conduct of inquiry.

Power to call records: The Commission may direct any person:

  • To produce before the Director-General or the Secretary or authorized officer books or other documents the examination of which may be required for the purposes of the Act.
  • To furnish information to the Director-General or the Secretary or an authorized officer as may be required for the purposes of the Act.

Power of CCI to rectify order [Section 38]: The Commission may amend any order passed by it with a view to rectifying any mistake apparent from the record on its own motion. The Commission may make an amendment of an order for rectifying apparent from the record, which has been brought to its notice by any party to the order.

However, while rectifying any mistake apparent from the record, the Commission shall not amend the substantive part of the order passed by it.

Question 31.
Discuss the duties, powers, and functions of the Competition Commission of India. {June 2018 (5 Marks)]
Answer:
Regulation of combinations [Section 6]: No person or enterprise shall enter into a combination that causes or is likely to cause an appreciable adverse effect on competition within the relevant market in India and such a combination shall be void. (Thus, combination in itself is not prohibited. It will be held void only if it adversely affects competition.)

Notice to Commission: Any person or enterprise, who or which proposes to enter into a combination shall give notice to the Commission, in the prescribed form along with prescribed fees, disclosing the details of the proposed combination, within 30 days of:
(a) Approval of the proposal relating to merger or amalgamation by the board of directors,
(b) Execution of any agreement or other document for acquisition.

No combination shall come into effect until 210 days have passed from the day on which the notice has been given to the Commission or the Commission has passed orders u/s 31, whichever is earlier.

After receipt of the notice, the Commission shall deal with such notice in accordance with the provisions contained in sections 29, 30 & 31.

Section 29- Procedure for investigation of combination by CCI Section 30- Commission to determine whether disclosure made to it is correct Section 31 – Commission may allow combination if it has no adverse effect on competition.

Provisions not to apply to PFI & FII: The provisions of this section shall not apply to share subscription or financing facility or any acquisition, by a public financial institution, foreign institutional investor, bank, or venture capital fund, pursuant to any covenant of a loan agreement or investment agreement.

However, such PFI/FII, etc. are put under obligation to file with the Commission the details of the acquisition in specified Form within 7 days from the date of the acquisition.

Question 32.
What orders can be passed by the Competition Commission of India under section 27 of the Competition Act, 2002 after any inquiry into agreement entered into by any enterprise or association of enterprises or person or association of persons or an inquiry into abuse of dominant position? Explain. [Dec. 2018 (5 Marks)]
Answer:
Section 27 of the Competition Act, 2002 provides that if after inquiry the Commission finds that any agreement is in contravention of section 3 or section 4, it may pass all or any of the following orders:
(a) Cease & Desist Order: Direct to discontinue and not to re-enter such agreement or discontinue such abuse of dominant position (known as Cease & Desist Order)

(b) Penalty Order: The Commission may impose a penalty not exceeding 10% of the average turnover of last 3 financial years, upon each party to the agreement.

In case any agreement has been entered by any cartel, the Commission may impose a penalty which may higher of following two amounts:

  • 3 times of its profits for each year of the continuance of such agreement or
  • 10% of its turnover for each year of the continuance of such agreement.

(c) Order to modify agreement: The Commission may direct that the agreements shall stand modified to the extent and in the manner as specified in the order.

(d) Compliance Order: The Commission may direct the enterprises to do comply with other orders and directions, including payment of cost, if any, as it deems fit.

(e) Other Orders: The Commission may Pass such other order as it may deem fit.

Question 33.
Whether the jurisdiction of the competition commission of India extends to acts/agreements taking place outside India, which affects competition in India? Explain. [June 2019 (3 Marks)]
Answer:
Section 32 of the Competition Act, 2002 provides that the jurisdiction of the Competition Commission of India extends to inquire and pass orders into an agreement or dominant position or combination, which is likely to have, an appreciable adverse effect on competition in the relevant market in India even if:

  • An agreement referred to in section 3 has been entered into outside India or
  • Any party to such agreement is outside India or
  • Any enterprise abusing the dominant position is outside India or
  • A combination has taken place outside India or
  • Any party to combination is outside India or
  • Any other matter or practice or action arising out of such agreement or dominant position or combination is outside India.

Thus acts taking place outside India but having an effect on competition in India will be subject to the jurisdiction of the Commission. The Competition Commission of India will have jurisdiction even if both the parties to an agreement are outside India but only if the agreement, dominant position, or combination entered into by them has an appreciable adverse effect on competition in the relevant market of India.

Question 34.
Who can appear before the Competition Commission of India? Explain [Dec. 2019 (3 Marks)]
Answer:
1.Authorized to Appear
As per Section 35 of the Competition Act, 2002, the following persons are entitled to appear before the Competition Commission of India:

  1. a complainant; or
  2. a defendant; or
  3. the Director-General.

2. Representative
They may either appear in person or authorize any of the following:
(a) a chartered accountant as defined in section 2(1 )(b) of Chartered Accountants Act, 1949 who has obtained a certificate of practice; or

(b) a company secretary as defined in section 2(l)(c) of the Company Secretaries Act, 1980 and who has obtained a certificate of practice;

(c) a cost accountant as defined in section 2(l)(b) of the Cost and Works Accountants Act, 1959 and who has obtained a certificate of practice;

(d) a legal practitioner that is an advocate, vakil, or an attorney of any High Court including a pleader in practice.

Question 35.
State the process of selection of chairperson and members of Competition Commission of India as given in the Competition Act, 2002. Under what circumstances, they may be removed by the Central Government [Dec. 2019(5 Marks)]
Answer:
Selection of Chairperson and Member
Meaning

  • Cartel includes an association of producers, sellers, distributors, traders, or service providers who, by agreement amongst themselves, limit, control, or attempt to control the production, distribution, sale, or price of, or, trade in goods or provision of services.
  • Cartels are anti-competitive and hence are void.

Conditions conducive to cartelization
Some of the conditions that are conducive to cartelization are:

  • High concentration – few competitors
  • High entry and exit barriers
  • Homogeneity of the products (similar products)
  • Similar production costs
  • Excess capacity
  • High dependence of the consumers on the product
  • History of collusion

Removal of Chairperson and Member – Section 11(2)

The Competition Act, 2002 provides that in the following circumstances the Central Government may, by order, remove the Chairperson or any j Member from his office if such Chairman or Member as the case may be,

  1. Insolvency: Is, or at any time has been, adjudged as an insolvent; or
  2. Paid Employment: Has engaged at any time, during his term of office, in any paid employment; or
  3. Offense Involving Moral Turpitude: Has been convicted of an offense which, in the opinion of the Central Government, involves moral turpitude; or
  4. Financial Interest: Has acquired such financial or other interest as is likely to affect prejudicially his functions as a Member; or
  5. Prejudicial Public Interest: Has so abused his position as to render his continuance in office prejudicial to the public interest; or
  6. Incapacity: Has become physically or mentally incapable of acting as a Member.

Question 36.
Describe the duties and powers of the Director-General under the Competition Act, 2002. [Dec. 2017 (3 Marks)]
Answer:
Duties of Director General [Section 41]: The Director-General shall assist the Commission in investigating any contravention of the provisions, rules, or regulations made under the Act.

The Director-General shall have all the powers available to the Com-mission u/s 36(2).

The provisions of the Companies Act shall apply to an investigation made by the Director-General as they apply to an inspector appointed under that Act.

Power of Civil Court [Section 36(2)]: The Commission shall have the same powers as are vested in a Civil Court, while trying a suit, in respect of the following matters:

  • Summoning and enforcing the attendance of any person and examining him on oath
  • Requiring the discovery and production of documents
  • Receiving evidence on affidavit
  • Issuing commissions for the examination of witnesses or documents
  • Requisitioning any public record or document or copy from any office.

Question 37.
Write a short note on Competition Advocacy [June 2010 (3 Marks)]
Answer:
Competition Advocacy is one of the main pillars of modern competition law which aims at creating, expanding, and strengthening awareness of competition in the market. Section 49 of the Competition Act, 2002 mandates the CCI to undertake advocacy for promoting competition.

Competition Advocacy [Section 49]:

  • The Central or State Government may seek the opinion of the CCI on the possible effects of the policy on competition or any other matter.
  • On receipt of such a reference, the Commission shall give its opinion within 60 days of making such a reference.
  • The role of the Commission is advisory and the opinion given by the Commission shall not be binding upon the Central or State Government in formulating such a policy.
  • The Commission shall take suitable measures for the
  • Promotion of competition advocacy,
  • Creating awareness and
  • Imparting training about competition issues.
  • Creating awareness about the benefits of competition and imparting training in competition issues is expected to generate a conducive environment to promote and foster competition, which is the sine qua non for accelerating economic growth.

Question 38.
Write a short note on Competition Advocacy [June 2013 (3 Marks)}
Answer:
Section 27 of the Competition Act, 2002 provides that if after inquiry the Commission finds that any agreement is in contravention of section 3 or section 4, it may pass all or any of the following orders:
(a) Cease & Desist Order: Direct to discontinue and not to re-enter such agreement or discontinue such abuse of dominant position (known as Cease & Desist Order)

(b) Penalty Order: The Commission may impose a penalty not exceeding 10% of the average turnover of the last 3 financial years, upon each party to the agreement.

In case any agreement has been entered by any cartel, the Commission may impose a penalty which may higher of following two amounts:

  • 3 times of its profits for each year of the continuance of such agreement or
  • 10% of its turnover for each year of the continuance of such agreement.

(c) Order to modify agreement: The Commission may direct that the agreements shall stand modified to the extent and in the manner as specified in the order.

(d) Compliance Order: The Commission may direct the enterprises to do comply with other orders and directions, including payment of cost, if any, as it deems fit.

(e) Other Orders: The Commission may Pass such other order as it may deem fit.

Question 39.
What is the purpose of the competition policy of India and Competition Act, 2002? [June 2019 (3 Marks)]
Answer:
The basic purpose of Competition Policy and law is to preserve and promote competition as a means of ensuring efficient allocation of resources in an economy.

Competition policy typically has two elements:

  • A set of policies that enhance competition in local and national markets.
  • Legislation designed to prevent anticompetitive business practices Le. a competition law.

Competition law by itself cannot produce or ensure competition in the market unless this is facilitated by appropriate Government policies. On the other hand, Government policies without a law to enforce such policies and prevent competition malpractices would also be incomplete.

Question 40.
How can the orders of the Competition Commission imposing monetary penalty be executed under the Competition Act, 2002? [Dec. 2014 (7 Marks)]
Answer:
Execution of orders of Commission imposing monetary penalty [Section 39]:
1. If any person fails to pay any monetary penalty imposed under the Act then the Commission shall proceed to recover such penalty in a specified manner as per the Regulations made under the Act.

2. If the Commission is of the opinion that it can recover the penalty as per the provisions of the Income Tax Act, 1961 then it may make a reference to the concerned income-tax authority for the recovery of the penalty.

3. In such cases the person upon whom the penalty has been imposed shall be deemed to be an assessee in default under the Income Tax Act, 1961 and the provisions of the said Act shall apply for recovery of penalty.

Question 41.
What penalties are prescribed by the Competition Act, 2002 for contravention of orders of the Competition Commission? [Dec. 2019 (3 marks)]
Answer:
1. Enquire into compliance of orders or directions
As per section 42, the Competition Commission of India may cause an inquiry to be made into compliance with its orders or directions made in the exercise of its powers under the Act.

2. Penalty for Non-Compliance
If any person, without reasonable cause, fails to comply with the orders or directions of the Commission issued under sections 27, 28, 31, 32,33, 42A, and 43A of the Competition Act, he shall be punishable with a fine which may extend to rupees one lakh for each day during which such non-compliance occurs, subject to a maximum of rupees ten crores, as the Commission may determine.

3. Fail to comply with the penalty
If any person fails to comply with the orders or directions or fails to pay a fine, he shall be punishable with imprisonment up to three years or a fine which may extend to rupees twenty-five crore, or both, as the Chief Metropolitan Magistrate, Delhi may deem fit.

Question 42.
State the composition of the “Competition Appellate Tribunal”, comprising of qualification term provisions relating to Resignation and Restriction on employment after the resignation of chairperson and/or member; and who can represent the appellant before the Tribunal? [June 2018 (7Marks)]
Answer:
Appellate Tribunal [Section 53A]: The NCLAT constituted u/s 410 of the Companies Act, 2013 shall be the Appellate Tribunal.

Appellate Tribunal shall hear and dispose of appeals against any direction issued or decision made or order passed by the Commission.

Appellate Tribunal shall adjudicate on a claim for compensation that may arise from the findings of the Commission or the orders of the Appellate Tribunal in an appeal against any finding of the Commission and pass orders for the recovery of compensation.

Qualification: (Section 411 of the Companies Act, 2013)
The Chairperson shall be a person who is or has been a Judge of the Supreme Court or the Chief Justice of a High Court.

A Judicial Member shall be a person who is or has been a Judge of a High Court or is a Judicial Member of the Tribunal for five years.

A technical member shall be a person of proven ability, integrity, and standing having special knowledge and professional experience of not less than twenty-five years in industrial finance, industrial management, industrial reconstruction, investment, and accountancy.

Resignation: (Section 416 of the Companies Act, 2013)
The President, the Chairperson, or any Member may, by notice in writing under his hand addressed to the Central Government, resign from his office.

However, the President, the Chairperson, or the Member shall continue to hold office until the expiry of three months from the date of receipt of such notice by the Central Government or until a person duly appointed as his successor enters upon his office or until the expiry of his term of office, whichever is earliest.

Right to legal representation [Section 53S]:
1. A person preferring an appeal to the Appellate Tribunal may either appear in person or authorize one or more Chartered Accountants or Company Secretaries or Cost Accountants or legal practitioners or any of its officers to present his or its case before the Appellate Tribunal.

2. The Central or State Government or a local authority or any enterprise preferring an appeal to the Appellate Tribunal may authorize one or more Chartered Accountants or Company Secretaries or Cost Accountants or legal practitioners or any of its officers to act as presenting officers and every person so authorized may present the case with respect to any appeal before the Appellate Tribunal.

3. The Commission may authorize one or more Chartered Accountants or Company Secretaries or Cost Accountants or legal practitioners or any of its officers to act as presenting officers and every person so authorized may present the case with respect to any appeal before the Appellate Tribunal.

Question 43.
Discuss the consequences of making a false statement by a person being a party to a combination under the Competition Act, 2002. [June 2019 (3 Marks)]
Answer:
As per Section 44 of the Competition Act, 2002, Any person who being a party to a combination and committing the following acts shall be liable to a penalty which shall not be less than ₹ 50 lakhs but which may extend to ₹ 1 Crore for the following:

  • A person who makes a statement that is false in any material particular, or knowing it to be false.
  • A person who omits to state any material particularly knowing it to be material.

Economic, Business and Commercial Laws Questions and Answers

External Commercial Borrowings (ECB) – Economic, Business and Commercial Laws Important Questions

External Commercial Borrowings (ECB) – Economic, Business and Commercial Laws Important Questions

Question 1.
Write a short note on Foreign Currency Convertible Bond (FCCB).
Answer:
Meaning:

  1. Foreign Currency Convertible Bond (FCCB) means a bond issued by an Indian company expressed in foreign currency, and the principal and interest in respect of which is payable in foreign currency.
  2. These bonds assume great importance for multinational corporations and in the current business scenario of globalization, where companies are constantly dealing in foreign currencies.
  3. They are issued according to Foreign Currency Convertible Bonds and Ordinary Shares (Through Depositary Receipt Mechanism) Scheme, 1993

Peculiarities of FCCB:

  • FCCB is a hybrid instrument. It is issued as a bond but later it is converted into shares.
  • FCCB carries a fixed rate of interest until the bond is converted into shares.
  • FCCB can be secured as well as unsecured. Mostly the FCCB issued by the Indian Companies are unsecured.
  • FCCBs are denominated foreign currency.
  • Interest is payable in foreign currency.
  • The redemption price is payable in foreign currency (if the option of conversion is not exercised).

Question 2.
Write a short note on External Commercial Borrowing.
Answer:
(a) External Commercial Borrowings (ECBs) are commercial loans raised by eligible resident entities from recognized non-resident entities.

(b) Externa] Commercial Borrowings should conform to the parameters j such as minimum maturity, permitted and non-permitted end-uses, maximum all-in-cost ceiling, etc.

(c) ECB can be accessed under two routes:

  1. Automatic Route
  2. Approval Route

(d) Types of ECB

  1. Foreign Currency denominated ECB
  2. Indian Rupee Denominated ECB

(e) Transactions on account of External Commercial Borrowings (ECB) are governed by Section 6(3 )(d) of the Foreign Exchange Management | Act, 1999 (FEMA)

(f) Example: RIL avails loan from a bank in the USA is called ECB

Question 3.
FCCB and ECB are different inodes for raising foreign capital. [Dec 2011 (3 Marks)]
Answer:
Following are the main points of difference between ECB and FCCB:

Points ECBs FCCBs
Meaning ECBs refer to commercial loans in the form of bank loans, securitized instruments, buyer’s credit, supplier’s credit availed of from non-resident lenders with a minimum average maturity of 3 years. FCCBs means a bond issued by an Indian company expressed in foreign currency and the principal and interest in respect of which is payable in foreign currency or shares
Nature ECB is borrowing and is thus purely debt finance. FCCB is a hybrid instrument. It is issued as a bond but later it is converted into equity.
Procedure ECBs are to be availed as per the relevant guideline, notifications, and circulars issued by the RBI from time to time. FCCBs are required to be issued in accordance with the scheme viz., Issue of Foreign Currency Convertible Bonds and Ordinary Shares (Through Depositary Receipt Mechanism) Scheme, 1993.
Listing Since ECB is borrowing/loan it cannot be listed at all in the stock exchange. FCCBs can be listed in the stock exchange after their conversion into shares.
Term Generally, Short term Generally, Long Term

Question 4.
Distinguish between: FCCB & FCEB. [Dec 2015 (2 Marks)]
Answer:
FCCBs are issued by a company to non-residents giving them the option to convert them into shares of the same company at a predetermined price.

On the other hand, FCEBs are issued by the investment or holding company of a group to non-residents which are exchangeable for the shares of the specified group company at a predetermined price.

The key difference, therefore, is while FCCB involves just one company, FCEB involves at least two companies – the bonds are usually of the parent company while the shares offered are of the operating company which must be a listed company.

Question 5.
What do you understand by ‘external commercial borrowings (ECBs)? Discuss the type of ECB. [June 2012 (5 Marks)]
Answer:
(a) External Commercial Borrowings (ECBs) are commercial loans raised by eligible resident entities from recognized non-resident entities.

(b) Externa] Commercial Borrowings should conform to the parameters j such as minimum maturity, permitted and non-permitted end-uses, maximum all-in-cost ceiling, etc.

(c) ECB can be accessed under two routes:

  1. Automatic Route
  2. Approval Route

(d) Types of ECB

  1. Foreign Currency denominated ECB
  2. Indian Rupee Denominated ECB

(e) Transactions on account of External Commercial Borrowings (ECB) are governed by Section 6(3 )(d) of the Foreign Exchange Management Act, 1999 (FEMA)

(f) Example: RIL avails loan from a bank in the USA is called ECB

Question 6.
Externa] commercial borrowings (ECBs) refer to commercial loans. [June 2013 (4 Marks)]
Answer:
(a) External Commercial Borrowings (ECBs) are commercial loans raised by eligible resident entities from recognized non-resident entities.

(b) Externa] Commercial Borrowings should conform to the parameters j such as minimum maturity, permitted and non-permitted end-uses, maximum all-in-cost ceiling, etc.

(c) ECB can be accessed under two routes:

  1. Automatic Route
  2. Approval Route

(d) Types of ECB

  1. Foreign Currency denominated ECB
  2. Indian Rupee Denominated ECB

(e) Transactions on account of External Commercial Borrowings (ECB) are governed by Section 6(3 )(d) of the Foreign Exchange Management | Act, 1999 (FEMA)

(f) Example: RIL avails loan from a bank in the USA is called ECB

Question 7.
“Both foreign currency exchangeable bonds (FCEBs) and foreign currency convertible bonds (FCCBs) are convertible into equity shares.” Since both are convertible into equity shares, you are required to highlight the advantages of FCEBs over FCCBs. [Dec 2014 (6 Marks)]
Answer:
Foreign Currency Exchangeable Bonds (FCEB) as defined includes the following:

  • A bond expressed in foreign currency.
  • The principal and the interest of which is payable in foreign currency.
  • The issuer of the bond is an Indian company.
  • The bonds are subscribed by a person resident outside India.
  • The bonds are exchangeable into equity shares of another company which is also called the offered company.

Foreign Currency Convertible Bond (FCCB) means a bond issued by an Indian company expressed in foreign currency, and the principal and in¬terest in respect of which is payable in foreign currency.

The launch of the FCEB scheme affords a unique opportunity for Indian promoters to unlock value in group companies. FCEBs are another arrow? in the quiver of Indian promoters to raise money overseas to fund their new projects and acquisitions, both Indian and global, by leveraging a part of their shareholding in listed group entities.

FCEB involves three parties: The issuer company offered company (OC) and an investor.

Under this option, an issuer company may issue FCEBs in foreign currency, and these FCEBs are convertible into shares of another company (offered company) that forms part of the same promoter group as the issuer company. Thus, FCEBs are exchangeable into shares of the offered company. They have an inherent advantage in that it does not result in dilution of shareholding at the offered company level.

Question 8.
What do you mean by foreign currency convertible bonds (FCCBs)? State the benefits of FCCBs to investors and the issuer. [Dec 2016 (5 Marks)]
Answer:
Foreign Currency Convertible Bond (FCCB) means a bond issued by an Indian company expressed in foreign currency, and the principal and interest in respect of which is payable in foreign currency.

Peculiarities of FCCB:

  • FCCB is a hybrid instrument. It is issued as a bond but later it is converted into shares.
  • FCCB carries a fixed rate of interest until the bond is converted into shares.
  • FCCB can be secured as well as unsecured. Mostly the FCCB issued by the Indian Companies are unsecured.
  • FCCBs are denominated foreign currency.
  • Interest is payable in foreign currency.
  • The redemption price is payable in foreign currency (if the option of conversion is not exercised).

Benefits of FCCB to the issuer company:

  • FCCB generally has a low rate of interest as compared to pure debt instruments. Thus, it reduces the debt financing cost.
  • FCCB does not require a credit rating.
  • FCCB saves risks of immediate equity dilution as in the case of public shares.
  • FCCB can be raised within a month while pure debt takes a longer period to raise.

Benefits of FCCB to investors:

  • FCCB has the advantage of both equity and debt.
  • FCCB gives the investor much of the upside of investment in equity, and the debt portion protects the downside.
  • Assured return on bond in the form of fixed interest payments.
  • Ability to take advantage of price appreciation in the stock by means of warrants attached to the bonds, which are activated when the price of a stock reaches a certain point.
  • Significant Yield to maturity (YTM) is guaranteed at maturity.
  • Lower tax liability as compared to pure debt instruments due to the lower interest rates.

Question 9.
State the conditions required to be fulfilled for conversion of external commercial borrowings (ECBs) into equity. [June 2010 (4 Marks)]
Answer:
Conversion of ECBs, including those which are matured but unpaid, into equity is permitted subject to the following conditions:

  1. The activity of the borrowing company is covered under the automatic route for Foreign Direct Investment (FDI) or approval from the Foreign Investment Promotion Board (FIPB), wherever applicable, for foreign equity participation has been obtained as per the extant FDI policy.
  2. The conversion, which should be with the lender’s consent and without any additional cost, will not result in a breach of the applicable sector cap on the foreign equity holding.
  3. Applicable pricing guidelines for shares are complied with.
  4. Reporting requirements under the ECB framework are complied with.
  5. If the borrower concerned has availed of other credit facilities from the Indian banking system, including overseas branches/subsidiar¬ies, the applicable prudential guidelines issued by the Department of Banking Regulation of RBI, including guidelines on restructuring are complied with.
  6. Consent of other lenders, if any, to the same borrower is available or at least information regarding conversions is exchanged with other lenders of the borrower,

Question 10.
Who can access external commercial borrowings (ECB) as per the guidelines/directions issued by the Reserve Bank of India? [Dec. 2009 (5 Marks)]
Answer:
The following are the Eligible Borrowers of External Commercial Borrowing:
(a) Foreign Currency Denominated ECB: The following entities are also eligible to raise ECB:

  1. Port Trusts;
  2. Units in SEZ;
  3. SIDBI; and
  4. EXIM Bank of India.

(b) Indian Currency Denominated ECB:

  1. All entities eligible to raise Foreign Currency ECB;
  2. Registered entities engaged in micro-finance activities, viz., registered Not for Profit companies, registered societies/trusts/ co-operatives, and Non-Government Organisations

Question 11.
Discuss in brief reporting requirements with respect or external commercial borrowings.
Answer:
Reporting Requirements: Borrowings under ECB Framework are subject to reporting requirements in respect of the following:
1. Loan Registration Number (LRN): Any draw-down in respect of an ECB, as well as payment of any fees/charges for raising an ECB, should happen only after obtaining the LRN from RBI. To obtain the LRN, borrowers are required to submit duly certified Form ECB, which also contains terms and conditions of the ECB, in duplicate to the designated AD Category I bank.

In turn, the AD Category-I bank will forward one copy to the Director, Balance of Payments Statistics Division, Department of Statistics and Information Management (DSIM), Reserve Bank of India. Copies of the loan agreement for raising ECB are not required to be submitted to the RBI.

2. Changes In terms and conditions of ECB: Permitted changes in ECB parameters should be reported to the DSIM through revised Form ECB at the earliest, in any case not later than 7 days from the changes effected. While submitting revised Form 83 the changes should be specifically mentioned in the communication.

3. ReportIng of actual transactions: The borrowers are required to report actual ECB transactions through ECB 2 Return through the AD Category I bank on a mõnthly basis so as to reach DSIM within seven working days from the close of the month to which it relates. Changes, if any, in ECB parameters should also be incorporated in ECB 2 Return.

Format of ECB 2 Return is available at Annex III of Part V of Master Directions – Reporting under Foreign Exchange Management Act.

4. Reporting on account of the conversion of ECB into equity: In case of partial or full conversion of ECB into equity, the reporting to the RBI will be as under:
(a) Partial conversion: For partial conversion, the converted portion is to be reported to the concerned Regional Office of the Foreign Exchange Department of RBI in Form FC-GPR prescribed for reporting of FDI flows, while monthly reporting to DSIM in ECB 2 Return will be with suitable remarks “ECB partially converted to equity”.

(b) Full conversion: For full conversion, the entire portion is to be reported in Form FC-GPR, while reporting to DSIM in ECB 2 Return should be done with remarks “ECB fully converted to equity”. Subsequent filing of ECB 2 Return is not required.

(c) For conversion of ECB into equity in phases, reporting through ECB 2 Return will also be in phases.

Question 12.
Discuss the end-use of external commercial borrowings under the approval route. [June 2009 (5 Marks)]
Answer:
The negative list, for which the ECB proceeds cannot be utilized, would include the following

  • Real estate activities.
  • Investment in the capital market. ,
  • Equity investment.
  • Working Capital

Exception: (ECB allowed to be used)

  1. EÇB raised from Foreign Equity holder (5 years)
  2. ECB raised from NBFC (10 years),

General Corporate Purposes
Exception: (ECB allowed to be used)

  1. ECB raised from Foreign Equity holder (5 years)
  2. ECB raised from NBFC (10 years)

Repayment of Rupee Loan
Exception:

  1. Loan availed for capital expenditure (7 years)
  2. Loan availed for other than capital expenditure (10 years)

On lending to entities Exception

  1. Working capital (10 years)
  2. Capital Expenses (7 years)
  3. Other than Capital Expenses (10 years)

Question 13.
What is the parking of external commercial borrowings (ECB) pro¬ceeds? [June 2011 (5 Marks)]
Answer:
ECB proceeds are permitted to be parked abroad as well as domestically in the manner given below:
Parking of ECB proceeds abroad: ECB proceeds meant only for foreign currency expenditure can be parked abroad pending utilization.

Till utilization, these funds can be invested in the following liquid assets:

  1. Deposits or Certificate of Deposit or other products offered by banks rated not less than AA(-) by Standard and Poor/Fitch IBCA or Aa3 by Moody’s.
  2. Treasury bills and other monetary instruments of one-year maturity having minimum rating as indicated above.
  3. Deposits with overseas branches/subsidiaries of Indian banks abroad. Parking of ECB proceeds domestically: ECB proceeds meant for Rupee expenditure should be repatriated immediately for credit to their Rupee accounts with AD Category-I banks in India. ECB borrowers are also allowed to park ECB proceeds in term deposits with AD Category-I banks in India for a maximum period of 12 months. These term deposits should be kept in an unencumbered position.

Question 14.
Describe the end use of external commercial borrowings under the approval route. [June 2014 (5 Marks)]
Answer:
The negative list, for which the ECB proceeds cannot be utilized, would include the following

  • Real estate activities.
  • Investment in the capital market. ,
  • Equity investment.
  • Working Capital

Exception: (ECB allowed to be used)

  1. EÇB raised from Foreign Equity holder (5 years)
  2. ECB raised from NBFC (10 years),

General Corporate Purposes
Exception: (ECB allowed to be used)

  1. ECB raised from Foreign Equity holder (5 years)
  2. ECB raised from NBFC (10 years)

Repayment of Rupee Loan
Exception:

  1. Loan availed for capital expenditure (7 years)
  2. Loan availed for other than capital expenditure (10 years)

On lending to entities Exception

  1. Working capital (10 years)
  2. Capital Expenses (7 years)
  3. Other than Capital Expenses (10 years)

Question 15.
Whether conversion of ‘External Commercial Borrowing’ into equity is permissible? [June 2019 (4 Marks)]
Answer:
Conversion of ECB into equity: Conversion of ECBs, including those which are matured but unpaid, into equity is permitted subject to the following conditions:
1. Activity of the borrowing company is covered under the automatic route for Foreign Direct Investment (FDI) or approval from the Foreign Investment Promotion Board (FIPB), wherever applicable, for foreign equity participation has been obtained as per the extant FDI policy.

2. The conversion, which should be with the lender’s consent and without any additional cost, will not result in a breach of the applicable sector cap on the foreign equity holding.

3. Applicable pricing guidelines for shares are complied with.

4. Reporting requirements under the ECB framework are complied with.

5. If the borrower concerned has availed of other credit facilities from the Indian banking system, including overseas branches/subsidiar¬ies, the applicable prudential guidelines issued by the Department of Banking Regulation of RBI, including guidelines on restructuring are complied with.

6. Consent of other lenders, if any, to the same borrower is available or at least information regarding conversions is exchanged with other lenders of the borrower.

Exchange rate for conversion of ECB dues into equity: For conversion of ECB dues into equity, the exchange rate prevailing on the date of the agreement between the parties concerned for such conversion or any lesser rate can be applied with a mutual agreement with the ECB lender.

Economic, Business and Commercial Laws Questions and Answers

Structure of Capital Market – Securities Laws and Capital Markets Important Questions

Structure of Capital Market – Securities Laws and Capital Markets Important Questions

Question 1.
Distinguish between: Money Market & Securities Market [June 2006 (2 Marks), Dec 2006 (2 Marks)]
Answer:
Following are the main points of distinction between money market & securities market:

Points Money Market Securities Market
Meaning The money market refers to the market where borrowers and lenders exchange short-term funds to solve their liquidity needs. It is the market for dealing in monetary assets of short-term nature. Funds are available in this market for periods ranging from a single day up to a year. A securities market is a place where buyers and sellers of securities can enter into transactions to purchase and sell shares, bonds, debentures, etc. The main instruments used in the securities market are stocks, shares, debentures, bonds, securities of the government.
Maturity period It deals in the lending and borrowing of short-term finance (i.e., for 1 year or less) It deals in the lending and borrowing of medium and long-term finance.
Credit instruments The main credit instruments of the money market are call money, collateral loans, acceptances, bills of exchange. The main instruments used in the securities market are stocks, shares, debentures, bonds, securities of the government.
Major constituents The banking industry, Mutual funds, Foreign institutional investors, large corporations, and the RBI are the major constituents of the Indian money market. Major constituents are Stock Exchanges, Domestic Institutional Investors (DII), Foreign Institutional Investors (FII), and small investors.
Risk The degree of risk is small in the money market. The risk is much greater in the securities market.
Basic role The basic role is that of liquidity adjustment. The basic role is that of putting capital to work, preferably to long-term, secure and productive employment.
Market Regulation The money market is closely regulated by RBI. The securities market is closely regulated by SEBI.

Question 2.
Discuss briefly the regulatory framework governing the securities in India. [June 2009 (4 Marks)]
Answer:
Following are the important statutes, which governs the Indian securities markets:

  • Securities Exchange Board of India Act, 1992
  • Securities Contracts (Regulation) Act, 1956
  • Depositories Act, 1996
  • Companies Act, 2013
  • Foreign Exchange Management Act, 1999 (FEMA)

Agencies involved in the relation of securities market are:

  • Ministry of Finance
  • Ministry of Corporate Affairs (MCA)
  • Department of Economic Affairs (DEA)
  • The Reserve Bank of India (RBI)
  • The Securities & Exchange Board of India (SEBI)
  • Stock Exchanges

Question 3.
“Primary market is of great significance to the economy.” Comment. [June 2010 (4 Marks)]
Answer:
The primary market is that part of the capital market that deals with the issuance of new securities. Companies, governments, or public sector institutions can obtain funding through the sale of new shares or bond issues. The primary market is the market where the securities are sold for the first time. 1 Therefore, it is also called the New Issue Market.

Features of Primary Markets:

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

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

Question 4.
“A well functioning securities market is conducive to the sustained economic growth of a country.” Comment and discuss briefly the regulatory framework of the securities market in India. [Dec 2010 (7 Marks)]
Answer:
Following are the important statutes, which governs the Indian securities markets:

  • Securities Exchange Board of India Act, 1992
  • Securities Contracts (Regulation) Act, 1956
  • Depositories Act, 1996
  • Companies Act, 2013
  • Foreign Exchange Management Act, 1999 (FEMA)

Agencies involved in the relation to the securities market are:

  • Ministry of Finance
  • Ministry of Corporate Affairs (MCA)
  • Department of Economic Affairs (DEA)
  • The Reserve Bank of India (RBI)
  • The Securities & Exchange Board of India (SEBI)
  • Stock Exchanges

Question 5.
The securities market has two interdependent and inseparable segments. Comment. [June 2012 (5 Marks)]
Answer:
The Indian financial system has two major components:
1. Money Market: The money market refers to the market where borrowers and lenders exchange short-term funds to solve their liquidity needs. It is the market for dealing in monetary assets of short-term nature. Funds are available in this market for periods ranging from a single day up to a year.

Instruments used in the money market are generally had:

  • Low default risk,
  • Maturities below 1 year.
  • High marketability.

2. Capital Market: Capital Market is a market for financial investments that are direct or indirect claims to capital. It is wider than the securities market and embraces all forms of lending and borrowing. It is a market, where business enterprises and governments can raise long-term funds. Securities Market: Securities market is a place where buyers and sellers of securities can enter into transactions to purchase and sell shares, bonds, debentures, etc. The main instruments used in the securities market are stocks, shares, debentures, bonds, securities of the government.

The securities market has the following two interdependent and inseparable segments:
(a) Primary Market: Primary market is that part of the capital markets that deals with the issuance of new securities. Companies, governments, or public sector institutions can obtain funding through the sale of new shares or bond issues. The primary market is the market where the securities are sold for the first time. Therefore it is also called the New Issue Market (NIM).

Issue of securities by companies can take place in any of the following methods:

  • Initial public offer
  • Further issue of capital
  • Rights issue
  • Firm allotment
  • Offer to public
  • Bonus issue

(b) Secondary Market: The secondary market, also known as the aftermarket, is the financial market where previously issued securities and financial instruments such as stock, bonds, options, and futures are bought and sold.

The stock market or secondary market ensures free marketability, negotiability, and price discharge. The secondary market has further two components:

  • Spot Market: Where securities are traded for immediate delivery and payment.
  • Futures Market: Where the securities are traded for future delivery and payment.

Question 6.
The capital market and the stock exchange in particular are referred to as the barometer of the economy. Comment. [June 2016 (4 Marks)]
Answer:
The Capital Market is a market for financial investments that are direct or indirect claims to capital. It is wider than the securities market and embraces all forms of lending and borrowing, whether or not evidenced by the creation of a negotiable financial instrument. The capital market comprises the complex of institutions and mechanisms through which intermediate-term funds and long-term funds are pooled and made available to businesses, governments, and individuals. The capital market also encompasses the process by which securities already outstanding are transferred.

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

Question 7.
“Financial instruments that are used for raising capital resources are affected by the preference factors for choosing and it is different for issuers and for the investor.” Explain briefly and also classify the instruments. [Dec 2017 (5 Marks)]
Answer:
The instruments used by the corporate sector to raise funds are selected on the basis of:

  1. Investor preference for a given instrument and
  2. The regulatory framework, where under the company has to issue the security.

Investor preferences vary with their attitude towards risk, and their investment goals and investment horizon.
The tax liability of the investor affects the choice of investment media.

The firm, on the other hand, is affected by the debt-equity ratio permissible, SEBI Regulations on the issue of capital, and the formalities to be complied with while raising an issue.

The tax liability of the company, the purpose for which funds are required, debt servicing ability, and willingness to broad base the shareholding of the company, all influence the choice of the instrument.

The corporate sector and financial/investment institutions have been issuing new instruments to attract investors. However, the range of instruments used is still very narrow.

A convertible debenture is the most popular instrument in the current scenario to raise funds from the markets.

The attraction for the instrument for both the corporate sector and the investor lies in:
(a) The investor gets a reasonable return during the initial years, followed by equity participation on conversion, and
(b) The issue involves a lower post-tax cost of capital, thereby entailing a lesser strain on liquidity.

Question 8.
“A well functioning securities market is conducive to sustained economic growth.” Explain. [June 2016 (5 Marks)]
Answer:
A securities market is a place where buyers and sellers of securities can enter into transactions to purchase and sell shares, bonds, debentures, etc. The securities market has two segments viz. primary market & secondary market.

Various functions performed by securities markets are as follows:
1. Continuous & ready market for securities: Securities market provides a ready and continuous market for the purchase and sale of securities. It provides a ready outlet for buying and selling securities.

2. Evaluation of securities: Securities market is useful for the evaluation of securities. This enables investors to know the true worth of their holdings at any time. Comparison of companies in the same industry is possible through a securities market price list.

3. Encourages capital formation: Securities market accelerates the process of capital formation. It creates the habit of saving, investing, and risk-taking among the investing class and converts their savings into a profitable investment. It acts as an instrument of capital formation.

4. Safety in dealings: Securities market provides safety in dealings as transactions are conducted as per well-defined Rules and Regulations. The managing body of the exchange keeps control of the members. Fraudulent practices are also checked effectively.

5. Regulates company management: Listed companies have to comply with rules and regulations of the concerned securities market and work under the vigilance of various authorities.

6. Public borrowing: Securities market serves as a platform for marketing Government securities. It enables the government to raise public debt easily and quickly.

7. Clearinghouse facility: Securities market provides a clearinghouse facility to members. It settles the transactions among the members quickly and with ease. The members have to pay or receive only the net dues because of the clearinghouse facility.

8. Healthy speculation: Normal speculation is not dangerous but provides more business to the exchange. However, excessive speculation is undesirable as it is dangerous to investors & the growth of the corporate sector.

9. Economic barometer: Securities market indicates the state of health of companies and the national economy. It acts as a barometer of economic conditions.

10. Bank lending: Banks easily know the prices of quoted securities. They offer loans to customers against corporate securities.

Question 9.
Explain: Functions of Securities Market [June 2017(3 Marks)]
Answer:
A securities market is a place where buyers and sellers of securities can enter into transactions to purchase and sell shares, bonds, debentures, etc. The securities market has two segments viz. primary market & secondary market.

Various functions performed by securities markets are as follows:
1. Continuous & ready market for securities: Securities market provides a ready and continuous market for the purchase and sale of securities. It provides a ready outlet for buying and selling securities.

2. Evaluation of securities: Securities market is useful for the evaluation of securities. This enables investors to know the true worth of their holdings at any time. Comparison of companies in the same industry is possible through a securities market price list.

3. Encourages capital formation: Securities market accelerates the process of capital formation. It creates the habit of saving, investing, and risk-taking among the investing class and converts their savings into a profitable investment. It acts as an instrument of capital formation.

4. Safety in dealings: Securities market provides safety in dealings as transactions are conducted as per well-defined Rules and Regulations. The managing body of the exchange keeps control of the members. Fraudulent practices are also checked effectively.

5. Regulates company management: Listed companies have to comply with rules and regulations of the concerned securities market and work under the vigilance of various authorities.

6. Public borrowing: Securities market serves as a platform for marketing Government securities. It enables the government to raise public debt easily and quickly.

7. Clearinghouse facility: Securities market provides a clearinghouse facility to members. It settles the transactions among the members quickly and with ease. The members have to pay or receive only the net dues because of the clearinghouse facility.

8. Healthy speculation: Normal speculation is not dangerous but provides more business to the exchange. However, excessive speculation is undesirable as it is dangerous to investors & the growth of the corporate sector.

9. Economic barometer: Securities market indicates the state of health of companies and the national economy. It acts as a barometer of economic conditions.

10. Bank lending: Banks easily know the prices of quoted securities. They offer loans to customers against corporate securities.

Question 10.
Private equity funds are just like hedge funds. Comment. [Dec 2010 (3 Marks)]
Answer:
A private equity fund, like a hedge fund, is an unregistered investment vehicle in which investors pool money to invest. Private equity funds concentrate their investments in unregistered (and typically illiquid) securities. Like hedge funds, private equity funds also rely on the exemption from registration of the offer and sale of their securities.

The investors in private equity funds and hedge funds typically include high net worth individuals and families, pension funds, endowments, banks, and insurance companies. Private equity funds, however, differ from hedge funds in terms of the manner in which contribution to the investment pool is made by the investors.

Private equity investors typically commit to invest a certain amount of money with the fund over the life of the fund and make their contributions in response to “capital calls” from the fund’s general partner. Private equity funds are long-term investments, provide for liquidation at the end of the term specified in the fund’s governing documents and offer little if any, opportunities for investors to redeem their investments. A private equity fund may distribute cash to its investors when it sells its portfolio investment, or it may distribute the securities of a portfolio company.

Question 11.
Write a short note on Venture capital fund [June 2011 (2 Marks)]
Answer:
Venture capital fund means an Alternative Investment Fund which invests primarily in unlisted securities of start-ups, emerging or early-stage venture capital undertakings mainly involved in new products, new services, technology or intellectual property right based activities, or a new business model and shall include an angel fund.

Venture Capital is money provided by professionals who invest alongside investment, in young, rapidly growing companies that have the potential to develop into economic powerhouses.

A firm engaged in providing venture capital and related service is referred to as a venture capitalist. Venture Capital firms are generally private partnerships, or closely-held private companies, funded by private pension funds. Venture Capital is also referred to as Risk Capital.

Question 12.
Write a short note on Private Equity Funds [Dec 2012 (3 Marks)]
Answer:
A private equity fund, like a hedge fund, is an unregistered investment vehicle in which investors pool money to invest. Private equity funds concentrate their investments in unregistered (and typically illiquid) securities. Like hedge funds, private equity funds also rely on the exemption from registration of the offer and sale of their securities. The investors in private equity funds and hedge funds typically include high net worth individuals and families, pension funds, endowments, banks, and insurance companies. Private equity funds, however, differ from hedge funds in terms of the manner in which contribution to the investment pool is made by the investors.

Private equity investors typically commit to invest a certain amount of money with the fund over the life of the fund and make their contributions in response to “capital calls” from the fund’s general partner. Private equity funds are long-term investments, provide for liquidation at the end of the term specified in the fund’s governing documents and offer little if any, opportunities for investors to redeem their investments. A private equity fund may distribute cash to its investors when it sells its portfolio investment, or it may distribute the securities of a portfolio company.

Question 13.
Write a short note on Alternative Investment Fund [June 2013 (4 Marks)]
Answer:
Alternative Investment Fund means any fund established in the form of a trust or a company or an LLP or a body corporate.

It is a privately pooled investment vehicle that collects funds from investors for investing it in accordance with a defined investment policy for the benefit of its investors.

The following shall not be considered as AIF:

  • Mutual funds
  • Collective Investment Schemes
  • Family trusts set up for the benefit of ‘relatives.
  • ESOP Trusts.
  • Employee welfare trusts or gratuity trusts.
  • Holding companies
  • Other special purpose vehicles including securitization trusts
  • Funds managed by a securitization company or reconstruction company which is registered with the RBI u/s 3 of the Securitisation & Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 and
  • Any funds which are directly regulated by another regulator in India.

Question 14.
Write a short note on Social Venture Fund [Dec. 2013 (3 Marks)]
Answer:
A social venture fund means an Alternative Investment Fund that invests; primarily in securities or units of social ventures and which satisfies social I performance norms laid

Question 15.
Discuss briefly the various categories of alternative investment funds. [Dec. 2013 (5 Marks)]
Answer:
Registration of Alternative Investment Funds [Regulation 3]: No entity or person shall act as an Alternative Investment Fund unless it has obtained a certificate of registration from the SEBI.

Alternative Investment Funds shall seek registration in one of the categories mentioned below:
(a) Category-I AIF: It invests in start-up or early-stage ventures or social ventures or SMEs or infrastructure or other sectors or areas which the government or regulators consider as socially or economically desirable and shall include venture capital funds, SME funds, social venture funds, infrastructure funds, and such other AIF as may be specified.

(b) Category-II AIF: It does not fall in Category-I and III and does not undertake leverage or borrowing other than to meet day-to-day operational requirements.

(c) Category-Ill AIF: It employs diverse or complex trading strategies and may employ leverage including through investment in listed or unlisted derivatives.

An application for grant of the certificate shall be made in Form A as specified in the First Schedule and shall be accompanied by a non-refundable application fee as specified in Part A of the Second Schedule to be paid in the manner specified in Part B thereof.

Question 16.
A private equity fund, like a hedge fund, is an unregistered investment vehicle in which investors pool money to invest. Explain the concept of a private equity fund and distinguish it from a hedge fund. [June 2015 (5 Marks)]
Answer:
A securities market is a place where buyers and sellers of securities can enter into transactions to purchase and sell shares, bonds, debentures, etc. The securities market has two segments viz. primary market & secondary market.

Various functions performed by securities markets are as follows:
1. Continuous & ready market for securities: Securities market provides a ready and continuous market for the purchase and sale of securities. It provides a ready outlet for buying and selling securities.

2. Evaluation of securities: Securities market is useful for the evaluation of securities. This enables investors to know the true worth of their holdings at any time. Comparison of companies in the same industry is possible through a securities market price list.

3. Encourages capital formation: Securities market accelerates the process of capital formation. It creates the habit of saving, investing, and risk-taking among the investing class and converts their savings into a profitable investment. It acts as an instrument of capital formation.

4. Safety in dealings: Securities market provides safety in dealings as transactions are conducted as per well-defined Rules and Regulations. The managing body of the exchange keeps control of the members. Fraudulent practices are also checked effectively.

5. Regulates company management: Listed companies have to comply with rules and regulations of the concerned securities market and work under the vigilance of various authorities.

6. Public borrowing: Securities market serves as a platform for marketing Government securities. It enables the government to raise public debt easily and quickly.

7. Clearinghouse facility: Securities market provides a clearinghouse facility to members. It settles the transactions among the members quickly and with ease. The members have to pay or receive only the net dues because of the clearinghouse facility.

8. Healthy speculation: Normal speculation is not dangerous but provides more business to the exchange. However, excessive speculation is undesirable as it is dangerous to investors & the growth of the corporate sector.

9. Economic barometer: Securities market indicates the state of health of companies and the national economy. It acts as a barometer of economic conditions.

10. Bank lending: Banks easily know the prices of quoted securities. They offer loans to customers against corporate securities.

Question 17.
What do you understand by Alternative Investment Funds? How they differ from mutual funds? [Dec. 2015 (3 Marks)]
Answer:
Alternative Investment Funds are very similar in structure compared to Mutual Funds. However, the AIF regulations ensure that AIF remains within reach of only the sophisticated and knowledgeable investors, while Mutual Funds are targeted at mainly retail investors.

Thus, AIF has the freedom to structure the fees, can undertake leverage, and have no capital requirements as they can only be brought by knowledgeable j investors. Following are the key areas of differences between AIF and AIF:

Points

Alternative Investment Fund

Mutual Fund

Meaning Alternative Investment Fund means any fund which is established by a privately pooled investment vehicle that collects funds from investors for investing it in accordance with a defined investment policy for the benefit of its investors. A mutual fund is a trust that pools the resources of like-minded investors for investment in the capital market. By investing in the units of mutual funds, the investor becomes a part-owner of the assets of the mutual funds.
Legal Structure An AIF can be a Trust/Company/ LLP/Body Corporate which is established in India A mutual fund is set up as a trust, which has a sponsor, trustees, AMC, and custodian.
Registration An AIF can seek registration under any three categories specified in the SEBI (Alternative Investment Funds) Regulations, 2012. The three-way structure of Trustees, Sponsor, AMC, has to be registered as per the SEBI (Mutual Funds) Regulations, 1996.
Fund type Category I & II AIFs should be Closed-Ended; Category III AIF can be both Closed-Ended and Open-Ended. A Mutual Fund can be both Closed-Ended and Open-Ended funds.
Minimum Tenure No scheme of an AIF can have a tenure shorter than 3 years No minimum tenure for mutual funds.
Number of Investors An AIF cannot have more than 1000 investors in any scheme. There is no such ceiling in the case of mutual funds.
Minimum Investment Required from Inves-tor Minimum investment size for an AIF is ₹ 1 Crore. However, if investors are employees/directors of the AIF or employees/directors of the Manager, then the minimum investment value is reduced to ₹ 25 lakh. No minimum investment amount specified for mutual funds.

Question 18.
A private equity fund, like a hedge fund, is an unregistered investment vehicle in which investors pool money to invest. Explain the concept of a private equity fund and distinguish it from a hedge fund. [June 2015 (5 Marks)]
Answer:
A securities market is a place where buyers and sellers of securities can enter into transactions to purchase and sell shares, bonds, debentures, etc. The securities market has two segments viz. primary market & secondary market.

Various functions performed by securities markets are as follows:
1. Continuous & ready market for securities: Securities market provides a ready and continuous market for the purchase and sale of securities. It provides a ready outlet for buying and selling securities.

2. Evaluation of securities: Securities market is useful for the evaluation of securities. This enables investors to know the true worth of their holdings at any time. Comparison of companies in the same industry is possible through a securities market price list.

3. Encourages capital formation: Securities market accelerates the process of capital formation. It creates the habit of saving, investing, and risk-taking among the investing class and converts their savings into a profitable investment. It acts as an instrument of capital formation.

4. Safety in dealings: Securities market provides safety in dealings as transactions are conducted as per well-defined Rules and Regulations. The managing body of the exchange keeps control of the members. Fraudulent practices are also checked effectively.

5. Regulates company management: Listed companies have to comply with rules and regulations of the concerned securities market and work under the vigilance of various authorities.

6. Public borrowing: Securities market serves as a platform for marketing Government securities. It enables the government to raise public debt easily and quickly.

7. Clearinghouse facility: Securities market provides a clearinghouse facility to members. It settles the transactions among the members quickly and with ease. The members have to pay or receive only the net dues because of the clearinghouse facility.

8. Healthy speculation: Normal speculation is not dangerous but provides more business to the exchange. However, excessive speculation is undesirable as it is dangerous to investors & the growth of the corporate sector.

9. Economic barometer: Securities market indicates the state of health of companies and the national economy. It acts as a barometer of economic conditions.

10. Bank lending: Banks easily know the prices of quoted securities. They offer loans to customers against corporate securities.

Question 19.
SEBI has classified Alternative Investment Fund (AIF) into broad categories i.e. Category-I, Category-II & Category-III. Discuss the key feature of AIF Categories. [June 2018 (5 Marks)]
Answer:
Registration of Alternative Investment Funds [Regulation 3]: No entity or person shall act as an Alternative Investment Fund unless it has obtained a certificate of registration from the SEBI.

Alternative Investment Funds shall seek registration in one of the categories mentioned below:
(a) Category-I AIF: It invests in start-up or early-stage ventures or social ventures or SMEs or infrastructure or other sectors or areas which the government or regulators consider as socially or economically desirable and shall include venture capital funds, SME funds, social venture funds, infrastructure funds, and such other AIF as may be specified.

(b) Category-II AIF: It does not fall in Category-I and III and does not undertake leverage or borrowing other than to meet day-to-day operational requirements.

(c) Category-Ill AIF: It employs diverse or complex trading strategies and may employ leverage including through investment in listed or unlisted derivatives.

An application for grant of the certificate shall be made in Form A as specified in the First Schedule and shall be accompanied by a non-refundable application fee as specified in Part A of the Second Schedule to be paid in the manner specified in Part B thereof.

Question 20.
Write short note on Private Equity [Dec. 2018 (3 Marks)]
Answer:
Private equity is a type of equity (finance) and one of the asset classes that take securities and debt in operating companies that are not publicly traded on a stock exchange. Private equity is essentially a way to invest in some j assets that are not publicly traded or to invest in a publicly traded asset with the intention of taking it private.

Unlike stocks, mutual funds, and bonds, private equity funds usually invest in more illiquid assets. By purchasing companies, the firms gain access to those assets and revenue sources of the company, which can lead to very high returns on investments.

Another feature of private equity transactions is their extensive use of debt | in the form of high-yield bonds. By using debt to finance acquisitions, private | equity firms can substantially increase their financial returns.

Private equity consists of investors and funds that make investments directly into private companies or conduct buyouts of public companies. Capital for S private equity is raised from retail and institutional investors and can be used to fund new technologies, expand working capital within an owned company, 1 make acquisitions, or strengthen a balance sheet. The major of private equity j consists of institutional investors and accredited investors who can commit large sums of money for long periods of time.

Private equity investments often demand long holding periods to allow for a turnaround of a distressed company or a liquidity event such as IPO or sale to a public company. Generally, private equity fundraises money from investors like Angel investors, Institutions with diversified investment portfolios like – pension funds, insurance companies, banks, funds of funds, etc.

Types of Private Equity: Private equity investments can be divided into the j following categories:
(a) Leveraged Buyout (LBO): This refers to a strategy of making equity investments as part of a transaction in which a company, business unit, or business assets is acquired from the current shareholders typically with the use of financial leverage. The companies involved in these types of transactions are typically more mature and generate operating cash flows.

(b) Venture Capital: Venture Capital is money provided by professionals who invest alongside investment, in young, rapidly growing companies that have the potential to develop into economic powerhouses.

A firm engaged in providing venture capital and related service is referred to as a venture capitalist. Venture Capital firms are generally private partnerships, or closely-held private companies, funded by private pension funds. Venture Capital is also referred to as Risk Capital.

(c) Growth Capital: This refers to equity investments, mostly minority investments, in the companies that are looking for capital to expand or restructure operations, enter new markets or finance a major acquisition without a change of control of the business.

Question 21.
Write short note on Venture Capital [Dec. 2018 (3 Marks)]
Answer:
Venture Capital is money provided by professionals who invest alongside investment, in young, rapidly growing companies that have the potential to develop into economic powerhouses.

A firm engaged in providing venture capital and related service is referred to as a venture capitalist. Venture Capital firms are generally private partnerships, or closely-held private companies, funded by private pension funds. Venture Capital is also referred to as Risk Capital.

Venture Capitalists:

  • Finance new and rapidly growing companies.
  • Purchases equity shares
  • Assist in the development of new products or services
  • Add value to the enterprise through active participation in management.

Venture Capitalists invest in:

  • First-generation businesses promoted by first-generation entrepreneurs.
  • Untried products and untested products and technology.
  • High-risk projects that have high risk but if successful have enormous rewards.

Question 22.
Write short note on Pension Fund [Dec. 2018 (3 Marks)]
Answer:
Pension Fund means a fund established by an employer to facilitate and organize the investment of employees’ retirement funds which is contributed by the employer and employees. The pension fund is a common asset pool meant to generate stable growth over the long term and provide pensions for employees when they reach the end of their working years and commence retirement.

Pension funds are commonly run by some sort of financial intermediary for the company and its employees like the NPS scheme is managed by UTIAMC (Retirement Solutions), although some larger corporations operate their pension funds in-house. Pension funds control relatively large amounts of capital and represent the largest institutional investors in many nations.

Pension funds play a huge role in the development of the economy and they play an active role in the Indian equity market. This pension fund ensures a change in their investment attitudes and in the regulatory climate, encouraging them to increase their investment level inequities and would have a massive impact on the capital market and on the economy as a whole.

Pensions broadly divided into two sectors:

  • Formal sector Pensions
  • Informal sector Pensions

Question 23.
Write short note on High Net Worth Individuals [June 2019 (3 Marks)]
Answer:
High Net-worth Individuals (HNIs) is a class of individuals who are distinguished from other retail segments based on their net wealth, assets, and investible surplus. While there is no standard put forth for the classification, the definition of HNIs varies with the geographical area as well as financial markets and institutions.

Though there is no specific definition, generally in the Indian context, individuals with over ₹ 2 Crore investible surplus may be considered to be HNIs while those with investible wealth in the range of ₹ 25 lakh to ₹ 2 Crore may be deemed as emerging HNIs.

If you are applying for IPO of equity shares in an Indian company, generally, if you apply for amounts in excess of ₹ 2 lakh, you fall under the HNI category. On the other hand, if you apply for amounts under ₹ 2 lakh, you are considered a retail investor. There may be so many ways in which HNIs are categorized J and defined; there is no single bracket that could put them under.

Question 24.
“An Alternative Investment Fund which has been granted registration under a particular category cannot change its category subsequent to registration, except with the approval of the SEBI”. Enumerate the conditions for approval of SEBI. [June 2019 (5 Marks)]
Answer:
As per Regulation 7(2) of the SEBI (Alternative Investment Funds) Regulations, 2012, “An Alternative Investment Fund which has been granted registration under a particular category cannot change its category subsequent to registration, except with the approval of the SEBI”

In this regard, the SEBI has issued circular CIR /IMD/DF/12/2013dated August 7,2013 which provides the following conditions for change in category subsequent to registration.
1. Only AIFs who have not made any investments under the category in which they were registered earlier shall be allowed to make applications for change in the category.

2. Any AIF proposing to change its category shall make an application to SEBI for the same along with application fees of ₹ 1 lakh. The application shall include the updated Form A, other updated supporting documents if any, and rationale for the proposed change. Registration fees shall not apply for such applications.

3. If the AIF has received commitments/raised funds prior to application for change in category, the AIF shall be required to send letters/emails to all its investors providing them the option to withdraw their commitments/ funds raised without any penalties/charges. Any fees collected from investors seeking to withdraw commitments/funds shall be returned to them. Partial withdrawal may be allowed subject to compliance with the minimum investment amount required under the AIF Regulations.

4. The AIF shall not make any investments other than in liquid funds/bank deposits until approval for change in category is granted by SEBI.

5. On approval of the request from SEBI, the AIF shall send a copy of the revised placement memorandum and other relevant information to all its investors.

Securities Laws and Capital Markets Questions and Answers

SEBI (Delisting of Equity Shares) Regulations, 2009 – Securities Laws and Capital Markets Important Questions

SEBI (Delisting of Equity Shares) Regulations, 2009 – Securities Laws and Capital Markets Important Questions

Question 1.
What are the conditions for voluntary delisting of securities? [Dec 2009 (3 Marks)]
Answer:
Case I: Procedure for delisting where no exit opportunity is required [Regulation 7]: In a case falling under clause 6(a):

  • The proposed delisting shall be approved by a resolution of the board of directors of the company in its meeting.
  • The company shall give public notice of the proposed delisting in at least one English national daily with wide circulation, one Hindi national daily with wide circulation, and one regional language newspaper of the region where the concerned recognized stock exchanges are located.
  • The company shall make an application to the concerned recognized stock exchange for delisting its equity shares.
  • The fact of delisting shall be disclosed in the first annual report of the company prepared after the delisting.
  • The public notice shall mention the names of the recognized stock exchanges
    from which the equity shares of the company are intended to be delisted, the: reasons for such delisting, and the fact of continuation of listing of equity shares on the recognized stock exchange having nationwide trading terminals.

An application for delisting shall be disposed of by the recognized stock ex; change within a period not exceeding 30 working days from the date of receipt of such application complete in all respects.

Case II: Conditions and procedure for delisting where exit opportunity is required [Regulation 7]:
1. Any company desirous of delisting its equity shares where exit opportunity is required to given shall observe the following provisions:
(a) The company shall obtain the prior approval of the board of directors of the company in its meeting.

(b) The company shall obtain the prior approval of shareholders of the company by a special resolution passed through postal ballot, after disclosure of all material facts in the explanatory statement sent to the shareholders in relation to such resolution. However, the special resolution shall be acted upon only if the votes cast by public shareholders in favor of the proposal amount to at least 2 times the number of votes cast by public shareholders against it.

(c) The company shall make an application to the concerned recognized stock exchange for in-principle approval of the proposed delisting in the form specified by the recognized stock exchange.

(d) The company shall within 1 year of passing the special resolution, make the final application to the concerned recognized stock exchange in the form specified by the recognized stock exchange.

2. Prior to granting approval, the board of directors of the company shall –
1. make a disclosure to the recognized stock exchanges on which the equity shares of the company are listed that the promoters/acquirers have proposed to delist the company;

2. appoint a merchant banker to carry out due diligence and make a disclosure to this effect to the recognized stock exchanges on which the equity shares of the company are listed;

3. obtain details of trading in shares of the company for a period of two years prior to the date of a board meeting by top 25 shareholders as on the date of the board meeting convened to consider the proposal for delisting, from the stock exchanges and details of off-market transactions of such shareholders for a period of 2 years and furnish the information to the merchant banker for carrying out due-diligence;

4. obtain further details in terms of Clause (5) and furnish the information to the merchant banker.

3. The board of directors of the company while approving the proposal for delisting shall certify that:

  1. the company is in compliance with the applicable provisions of securities laws;
  2. the acquirer or promoter or promoter group or their related entities are in compliance with Regulation 4(5);
  3. the delisting is in the interest of the shareholders.

4. For certification in respect of approval by the board of directors of the company, the company shall take into account the report of the merchant banker.

5. The merchant banker appointed by the board of directors of the company shall carry out due diligence upon obtaining details from the board of directors of the company. However, if the merchant banker is of the opinion that details are not sufficient for certification, the merchant banker shall obtain additional details from the board of directors of the company for such a long period as it may deem fit.

6. Upon carrying out due diligence, the merchant banker shall submit a report to the board of directors of the company certifying the following:
(a) The trading carried out by any of the acquirer or promoter or promoter group entity or their related entities was in compliance or not, with the applicable provisions of the securities laws; and

(b) Any of the acquirer or promoter or promoter group entity or persons acting in concert or their related entities have carried out or not any transaction to facilitate the success of the delisting offer which is in contravention of the provisions of Regulation 4(5).

7. An application seeking in-principle approval for delisting shall be accompanied by an audit report in respect of the equity shares sought to be delisted, covering a period of 6 months prior to the date of the application.

8. An application seeking in-principle approval for delisting shall be disposed of by the recognized stock exchange within a period not exceeding 5 working days from the date of receipt of such application complete in all respects.

9. While considering an application seeking in-principle approval for de-listing, the recognized stock exchange shall not unfairly withhold such application, but may require the company to satisfy it as to –
(a) compliance with the above regulations;
(b) the resolution of investor grievances by the company;
(c) payment of listing fees to that recognized stock exchange;
(d) the compliance with any condition of the SEBI (Listing Obligations & Disclosure Requirements) Regulations, 2015 with that recognized stock exchange having a material bearing on the interests of its equity shareholders;
(e) any litigation or action pending against the company pertaining to its activities in the securities market or any other matter having a material bearing on the interests of its equity shareholders;
(f) any other relevant matter as the recognized stock exchange may deem fit to verify.

10. A final application for delisting shall be accompanied with such proof of having given the exit opportunity, as the recognized stock exchange may require.

Question 2.
What are the rights of security holders in case of compulsory delisting of securities? [Dec 2009 (5 Marks)]
Answer:
Rights of public shareholders in case of a compulsory delisting [Regulation 23]:

  • In case of compulsory delisting, the recognized stock exchange shall appoint an independent valuer who shall determine the fair value of the delisted equity shares.
  • The recognized stock exchange shall form a panel of expert valuers from whom the valuer shall be appointed.
  • The promoter of the company shall acquire delisted equity shares from the public shareholders by paying them the value determined by the valuer, subject to their option of retaining their shares.

Question 3.
Write a short note on Compulsory Delisting [Dec 2010 (4 Marks)]
Answer:
Compulsory delisting refers to the permanent removal of securities of a listed company from a stock exchange as a penalizing measure for

  • Not complying with the requirements of the listing agreement.
  • Not complying with the requirements of provisions of the SEBI Act, 1992, SCR Act, 1956, Companies Act, 2013.

The power to compulsory delists the shares of any company can be exercised by the recognized stock exchange u/s 21A of the SCR Act, 1956.

Compulsory delisting by a stock exchange [Regulation 22 of the SEBI (Delisting of Equity Shares) Regulations, 2009]:
1. A recognized stock exchange may by passing order delist any equity shares of a company u/s 21A of the SCR Act, 1956. However, a reasonable opportunity of being heard should be given to the company before passing such an order.

2. The decision regarding compulsory delisting shall be taken by a panel to be constituted by the recognized stock exchange consisting of:
(a) Two directors of the recognized stock exchange (one of whom shall be a public representative)
(b) One representative of the investors
(c) One representative of the MCA or ROC
(d) Executive Director or Secretary of the recognized stock exchange.

3. The recognized stock exchange shall give notice of the proposed delisting in one English national daily and one regional language newspaper. Such notice must state a time of not less than 15 working days for making representations by any person who may be aggrieved by the proposed delisting. Such notice shall also be displayed on trading systems and the website of the stock exchange.

4. The recognized stock exchange shall while passing any order, consider the representations, made by the company and any representations received in response to the notice given newspapers and shall comply with the criteria specified in Schedule III of the Regulation.

5. Where the recognized stock exchange passes an order, it shall –
(a) forthwith publish notice of such delisting in the newspaper, disclosing the name and address of the company, the fair value of the delisted equity shares, and the names and addresses of promoters of the company and

(b) inform about such delisting and the surrounding circumstances to all other stock exchanges where the equity shares are listed.

Question 4.
Write a short note on Delisting of securities [Dec 2011 (4 Marks)]
Answer:
Compulsory Delisting: Compulsory delisting refers to the permanent removal of securities of a listed company from a stock exchange as a penalizing measure for:

  • Not complying with the requirements of the Listing agreement
  • Not complying with the requirements of provisions of the SEBI Act, 1992, SCR Act, 1956, Companies Act, 2013.

The power to compulsory delists the shares of any company can be exercised by the recognized stock exchange u/s 21A of the SCR Act, 1956.

Voluntary Delisting: In voluntary delisting, a listed company decides on its own to permanently remove its securities from a stock exchange by complying with provisions of the SEBI (Delisting of Equity Shares) Regulations, 2009.

Question 5.
What are the criteria for compulsory delisting by stock exchanges? [June 2012 (5 Marks)]
Answer:
Compulsory delisting refers to the permanent removal of securities of a listed company from a stock exchange as a penalizing measure for

  • Not complying with the requirements of the listing agreement.
  • Not complying with the requirements of provisions of the SEBI Act, 1992, SCR Act, 1956, Companies Act, 2013.

The power to compulsory delists the shares of any company can be exercised by the recognized stock exchange u/s 21A of the SCR Act, 1956.

Compulsory delisting by a stock exchange [Regulation 22 of the SEBI (Delisting of Equity Shares) Regulations, 2009]:
1. A recognized stock exchange may by passing order delist any equity shares of a company u/s 21A of the SCR Act, 1956. However, a reasonable opportunity of being heard should be given to the company before passing such an order.

2. The decision regarding compulsory delisting shall be taken by a panel to be constituted by the recognized stock exchange consisting of:
(a) Two directors of the recognized stock exchange (one of whom shall be a public representative)
(b) One representative of the investors
(c) One representative of the MCA or ROC
(d) Executive Director or Secretary of the recognized stock exchange.

3. The recognized stock exchange shall give notice of the proposed delisting in one English national daily and one regional language newspaper. Such notice must state a time of not less than 15 working days for making representations by any person who may be aggrieved by the proposed delisting. Such notice shall also be displayed on trading systems and the website of a stock exchange.

4. The recognized stock exchange shall while passing any order, consider the representations, made by the company and any representations received in response to the notice given newspapers and shall comply with the criteria specified in Schedule III of the Regulation.

5. Where the recognized stock exchange passes an order, it shall
(a) forthwith publish notice of such delisting in the newspaper, disclosing the name and address of the company, the fair value of the delisted equity shares, and the names and addresses of promoters of the company and

(b) inform about such delisting and the surrounding circumstances to all other stock exchanges where the equity shares are listed.

Question 6.
Write a short note on Voluntary Delisting
Answer:
Delisting not permissible in certain circumstances [Regulation 4]: No company shall apply for and no recognized stock exchange shall permit delisting of equity shares of a company:
(a) pursuant to a buy-back of equity shares by the company; or
(b) pursuant to a preferential allotment made by the company; or
(c) unless a period of 3 years has elapsed since the listing of that class of equity shares on any recognized stock exchange; or
(d) if any instruments issued by the company, which are convertible into the same class of equity shares that are sought to be delisted, are outstanding.

No promoter or promoter group shall propose delisting of equity shares of a company if any entity belonging to the promoter or promoter group has sold equity shares of the company during a period of 6 months prior to the date of the board meeting in which the delisting proposal was approved.

No company shall apply for and no recognized stock exchange shall permit delisting of convertible securities.

Delisting from all recognized stock exchanges [Regulation 5]: A company may delist its equity shares from all the recognized stock exchanges where they are listed or from the only recognized stock exchange where they are listed.

However, all public shareholders holding equity shares are given an exit opportunity in accordance with Chapter IV of the Regulation.

Delisting from only some of the recognized stock exchanges [Regulation 6]: If a company has listed its equity shares on more than one stock exchange, it may continue listing its equity shares on a particular exchange and delist its equity shares from some or all other stock exchange. Following conditions are required to be fulfilled in this regard:
(a) If the company decides to continue its listing on the stock exchange having nationwide trading terminals, no exit opportunity needs to be given to the public shareholders.

(b) If the company decides to continue its listing on the stock exchange not having nationwide trading terminals, exit opportunity needs to be given to the public shareholders.

Case I: Procedure for delisting where no exit opportunity is required [Regulation 7]: In a case falling under clause 6(a):
(a) The proposed delisting shall be approved by a resolution of the board of directors of the company in its meeting.

(b) The company shall give public notice of the proposed delisting in at least one English national daily with wide circulation, one Hindi national daily with wide circulation, and one regional language newspaper of the region where the concerned recognized stock exchanges are located.

(c) The company shall make an application to the concerned recognized stock exchange for delisting its equity shares.

(d) The fact of delisting shall be disclosed in the first annual report of the company prepared after the delisting.

The public notice shall mention the names of the recognized stock exchanges from which the equity shares of the company are intended to be delisted, the reasons for such delisting, and the fact of continuation of listing of equity shares on the recognized stock exchange having nationwide trading terminals.

An application for delisting shall be disposed of by the recognized stock exchange within a period not exceeding 30 working days from the date of receipt of such application complete in all respects.

Case II: Conditions and procedure for delisting where exit opportunity is required [Regulation 7]:
1. Any company desirous of delisting its equity shares where exit opportunity is required to given shall observe the following provisions:
(a) The company shall obtain the prior approval of the board of directors of the company in its meeting.

(b) The company shall obtain the prior approval of shareholders of the company by a special resolution passed through postal ballot, after disclosure of all material facts in the explanatory statement sent to the shareholders in relation to such resolution. However, the special resolution shall be acted upon only if the votes cast by public shareholders in favor of the proposal amount to at least 2 times the number of votes cast by public shareholders against it.

(c) The company shall make an application to the concerned recognized stock exchange for in-principle approval of the proposed delisting in the form specified by the recognized stock exchange.

(d) The company shall within 1 year of passing the special resolution, make the final application to the concerned recognized stock exchange in the form specified by the recognized stock exchange.

2. Prior to granting approval, the board of directors of the company shall
1. make a disclosure to the recognized stock exchanges on which the equity shares of the company are listed that the promoters /acquirers j have proposed to delist the company;

2. appoint a merchant banker to carry out due diligence and make a disclosure to this effect to the recognized stock exchanges on which the equity shares of the company are listed;

3. obtain details of trading in shares of the company for a period of two years prior to the date of a board meeting by top 25 shareholders as on the date of the board meeting convened to consider the proposal for delisting, from the stock exchanges and details of off-market transactions of such shareholders for a period of 2 years and furnish the information to the merchant banker for carrying out due-diligence;

4. obtain further details in terms of Clause (5) and furnish the information to the merchant banker.

3. The board of directors of the company while approving the proposal for delisting shall certify that:

  1. the company is in compliance with the applicable provisions of securities laws;
  2. the acquirer or promoter or promoter group or their related entities are in compliance with Regulation 4(5);
  3. the delisting is in the interest of the shareholders.

4. For certification in respect of approval by the board of directors of the company, the company shall take into account the report of the merchant banker.

5. The merchant banker appointed by the board of directors of the company shall carry out due diligence upon obtaining details from the board of directors of the company. However, if the merchant banker is of the opinion that details are not sufficient for certification, the merchant banker shall obtain additional details from the board of directors of the company for such a long period as it may deem fit.

6. Upon carrying out due diligence, the merchant banker shall submit a report to the board of directors of the company certifying the following:
(a) The trading carried out by any of the acquirer or promoter or promoter group entity or their related entities was in compliance or not, with the applicable provisions of the securities laws; and

(b) Any of the acquirer or promoter or promoter group entity or persons acting in concert or their related entities have carried out or not any transaction to facilitate the success of the delisting offer which is in contravention of the provisions of Regulation 4(5).

7. An application seeking in-principle approval for delisting shall be accompanied by an audit report in respect of the equity shares sought to be delisted, covering a period of 6 months prior to the date of the application.

8. An application seeking in-principle approval for delisting shall be disposed of by the recognized stock exchange within a period not exceeding 5 working days from the date of receipt of such application complete in all respects.

9. While considering an application seeking in-principle approval for delisting, the recognized stock exchange shall not unfairly withhold such application but may require the company to satisfy it as to:
(a) compliance with the above regulations;
(b) the resolution of investor grievances by the company;
(c) payment of listing fees to that recognized stock exchange;
(d) the compliance with any condition of the SEBI (Listing Obligations & Disclosure Requirements) Regulations, 2015 with that recognized stock exchange having a material bearing on the interests of its equity shareholders;
(e) any litigation or action pending against the company pertaining to its activities in the securities market or any other matter having a material bearing on the interests of its equity shareholders;
(f) any other relevant matter as the recognized stock exchange may deem fit to verify.

10. A final application for delisting shall be accompanied with such proof of having given the exit opportunity, as the recognized stock exchange may require.

Question 7.
“A company cannot get itself delisted without giving sufficient opportunity to shareholders to exit.” Comment. [June 2014 (5 Marks)]
Answer:
Delisting from only some of the recognized stock exchanges [Regulation 6]: If a company has listed its equity shares on more than one stock exchange, it may continue listing its equity shares on a particular exchange and delist its equity shares from some or all other stock exchanges.

Following conditions are required to be fulfilled in this regard:
1. If the company decides to continue its listing on the stock exchange having nationwide trading terminals, no exit opportunity needs to be given to the public shareholders.

2. If the company decides to continue its listing on the stock exchange not having nationwide trading terminals, an exit opportunity needs to be given to the public shareholders.

Question 8.
Delisting not permissible in certain circumstances. Comment. [June 2015 (4 Marks)]
Answer:
Delisting not permissible in certain circumstances [Regulation 4]: No company shall apply for and no recognized stock exchange shall permit delisting of equity shares of a company:
(a) pursuant to a buyback of equity shares by the company; or
(b) pursuant to a preferential allotment made by the company; or
(c) unless a period of 3 years has elapsed since the listing of that class of equity shares on any recognized stock exchange; or
(d) if any instruments issued by the company, which are convertible into the same class of equity shares that are sought to be delisted, are outstanding.

No promoter or promoter group shall propose delisting of equity shares of a company if any entity belonging to the promoter or promoter group has sold equity shares of the company during a period of 6 months prior to the date of the board meeting in which the delisting proposal was approved.

No company shall apply for and no recognized stock exchange shall permit delisting of convertible securities.

Question 9.
Briefly explain the provisions relating to delisting of equity shares under the SEBI (Delisting of Equity Shares) Regulations, 2009. [June 2017 (4 Marks)]
Answer:
Delisting not permissible in certain circumstances [Regulation 4]: No company shall apply for and no recognized stock exchange shall permit delisting of equity shares of a company:
(a) pursuant to a buy-back of equity shares by the company; or
(b) pursuant to a preferential allotment made by the company; or
(c) unless a period of 3 years has elapsed since the listing of that class of equity shares on any recognized stock exchange; or
(d) if any instruments issued by the company, which are convertible into the same class of equity shares that are sought to be delisted, are outstanding.

No promoter or promoter group shall propose delisting of equity shares of a company if any entity belonging to the promoter or promoter group has sold equity shares of the company during a period of 6 months prior to the date of the board meeting in which the delisting proposal was approved.

No company shall apply for and no recognized stock exchange shall permit delisting of convertible securities.

Delisting from all recognized stock exchanges [Regulation 5]: A company may delist its equity shares from all the recognized stock exchanges where they are listed or from the only recognized stock exchange where they are listed.

However, all public shareholders holding equity shares are given an exit opportunity in accordance with Chapter IV of the Regulation.

Delisting from only some of the recognized stock exchanges [Regulation 6]: If a company has listed its equity shares on more than one stock exchange, it may continue listing its equity shares on a particular exchange and delist its equity shares from some or all other stock exchange. Following conditions are required to be fulfilled in this regard:
(a) If the company decides to continue its listing on the stock exchange having nationwide trading terminals, no exit opportunity needs to be given to the public shareholders.

(b) If the company decides to continue its listing on the stock exchange not having nationwide trading terminals, exit opportunity needs to be given to the public shareholders.

Case I: Procedure for delisting where no exit opportunity is required [Regulation 7]: In a case falling under clause 6(a):
(a) The proposed delisting shall be approved by a resolution of the board of directors of the company in its meeting.

(b) The company shall give public notice of the proposed delisting in at least one English national daily with wide circulation, one Hindi national daily with wide circulation, and one regional language newspaper of the region where the concerned recognized stock exchanges are located.

(c) The company shall make an application to the concerned recognized stock exchange for delisting its equity shares.

(d) The fact of delisting shall be disclosed in the first annual report of the company prepared after the delisting.

The public notice shall mention the names of the recognized stock exchanges from which the equity shares of the company are intended to be delisted, the reasons for such delisting, and the fact of continuation of listing of equity shares on the recognized stock exchange having nationwide trading terminals.

An application for delisting shall be disposed of by the recognized stock exchange within a period not exceeding 30 working days from the date of receipt of such application complete in all respects.

Case II: Conditions and procedure for delisting where exit opportunity is required [Regulation 7]:
(1) Any company desirous of delisting its equity shares where exit opportunity is required to given shall observe the following provisions:
(a) The company shall obtain the prior approval of the board of directors of the company in its meeting.

(b) The company shall obtain the prior approval of shareholders of the company by a special resolution passed through postal ballot, after disclosure of all material facts in the explanatory statement sent to the shareholders in relation to such resolution. However, the special resolution shall be acted upon only if the votes cast by public shareholders in favor of the proposal amount to at least 2 times the number of votes cast by public shareholders against it.

(c) The company shall make an application to the concerned recognized stock exchange for in-principle approval of the proposed delisting in the form specified by the recognized stock exchange.

(d) The company shall within 1 year of passing the special resolution, make the final application to the concerned recognized stock exchange in the form specified by the recognized stock exchange.

2. Prior to granting approval, the board of directors of the company shall
1. make a disclosure to the recognized stock exchanges on which the equity shares of the company are listed that the promoters /acquirers j have proposed to delist the company;

2. appoint a merchant banker to carry out due diligence and make a disclosure to this effect to the recognized stock exchanges on which the equity shares of the company are listed;

3. obtain details of trading in shares of the company for a period of two years prior to the date of a board meeting by top 25 shareholders as on the date of the board meeting convened to consider the proposal for delisting, from the stock exchanges and details of off-market transactions of such shareholders for a period of 2 years and furnish the information to the merchant banker for carrying out due-diligence;

4. obtain further details in terms of Clause (5) and furnish the information to the merchant banker.

3. The board of directors of the company while approving the proposal for delisting shall certify that:

  1. the company is in compliance with the applicable provisions of securities laws;
  2. the acquirer or promoter or promoter group or their related entities are in compliance with Regulation 4(5);
  3. the delisting is in the interest of the shareholders.

4. For certification in respect of approval by the board of directors of the company, the company shall take into account the report of the merchant banker.

5. The merchant banker appointed by the board of directors of the company shall carry out due diligence upon obtaining details from the board of directors of the company. However, if the merchant banker is of the opinion that details are not sufficient for certification, the merchant banker shall obtain additional details from the board of directors of the company for such a long period as it may deem fit.

6. Upon carrying out due diligence, the merchant banker shall submit a report to the board of directors of the company certifying the following:
(a) The trading carried out by any of the acquirer or promoter or promoter group entity or their related entities was in compliance or not, with the applicable provisions of the securities laws; and

(b) Any of the acquirer or promoter or promoter group entity or persons acting in concert or their related entities have carried out or not any transaction to facilitate the success of the delisting offer which is in contravention of the provisions of Regulation 4(5).

7. An application seeking in-principle approval for delisting shall be accompanied by an audit report in respect of the equity shares sought to be delisted, covering a period of 6 months prior to the date of the application.

8. An application seeking in-principle approval for delisting shall be disposed of by the recognized stock exchange within a period not exceeding 5 working days from the date of receipt of such application complete in all respects.

9. While considering an application seeking in-principle approval for delisting, the recognized stock exchange shall not unfairly withhold such application, but may require the company to satisfy it as to
(a) compliance with the above regulations;
(b) the resolution of investor grievances by the company;
(c) payment of listing fees to that recognized stock exchange;
(d) the compliance with any condition of the SEBI (Listing Obligations & Disclosure Requirements) Regulations, 2015 with that recognized stock exchange having a material bearing on the interests of its equity shareholders;
(e) any litigation or action pending against the company pertaining to its activities in the securities market or any other matter having a material bearing on the interests of its equity shareholders;
(f) any other relevant matter as the recognized stock exchange may deem fit to verify.

10. A final application for delisting shall be accompanied with such proof of having given the exit opportunity, as the recognized stock exchange may require.

Question 10.
SEBI in the exercise of the powers conferred by Section 31 read with Section 21A of the Securities Contracts (Regulation) Act, 1956, Section 30, Sub-section (1) of Section 11 and Sub-section (2) of Section 11A of SEBI Act, 1992 made the SEBI (Delisting of Equity Shares) Regulations, 2009. Explain the framework and complete process of delisting as per regulations. [Dec 2017 (8 Marks)]
Answer:
The term “delisting” of securities means permanent removal of securities of a listed company from a stock exchange. As a consequence of delisting, the securities of that company would no longer be traded at that stock exchange. Delisting can be voluntary or compulsory.

SEBI circulated Concept Paper on the proposed SEBI (Delisting of Securities) Regulations, 2006, asking for public comments on the proposed Regulations. SEBI received various comments, opinions, and suggestions on the subject and finally, by its publication dated 10th June 2009 in the Official Gazette, SEBI notified the much-awaited SEBI (Delisting of Equity Shares) Regulations, 2009.

Delisting from all recognized stock exchanges [Regulation 5]: A company may delist its equity shares from all the recognized stock exchanges where they are listed or from the only recognized stock exchange where they are listed.

However, all public shareholders holding equity shares are given an exit opportunity in accordance with Chapter IV of the Regulation.

Delisting from only some of the recognized stock exchanges [Regulation 6]: If a company has listed its equity shares on more than one stock exchange, it may continue listing its equity shares on a particular exchange and delist its equity shares from some or all other stock exchanges.

Following conditions are required to be fulfilled in this regard:
(a) If the company decides to continue its listing on the stock exchange having nationwide trading terminals, no exit opportunity needs to be given to the public shareholders.

(b) If the company decides to continue its listing on the stock exchange not having nationwide trading terminals, exit opportunity needs to be given to the public shareholders.

‘Recognized stock exchange having nationwide trading terminals’ means BSE, NSE, or other stock exchange specified by the SEBI in this regard.

Case I: Procedure for delisting where no exit opportunity is required [Regulation 7]: In a case falling under clause 6(a):
(a) The proposed delisting shall be approved by a resolution of the board of directors of the company in its meeting.

(b) The company shall give public notice of the proposed delisting in at least one English national daily with wide circulation, one Hindi national daily with wide circulation, and one regional language newspaper of the region where the concerned recognized stock exchanges are located.

(c) The company shall make an application to the concerned recognized stock exchange for delisting its equity shares.

(d) The fact of delisting shall be disclosed in the first annual report of the company prepared after the delisting.

The public notice shall mention the names of the recognized stock exchanges from which the equity shares of the company are intended to be delisted, the reasons for such delisting, and the fact of continuation of listing of equity shares on the recognized stock exchange having nationwide trading terminals.

An application for delisting shall be disposed of by the recognized stock exchange within a period not exceeding 30 working days from the date of receipt of such application complete in all respects.

Case II: Conditions and procedure for delisting where exit opportunity is re-quired [Regulation 7]:
1. Any company desirous of delisting its equity shares where exit opportunity is required to given shall observe the following provisions:
(a) The company shall obtain the prior approval of the board of directors of the company in its meeting.

(b) The company shall obtain the prior approval of shareholders of the company by a special resolution passed through postal ballot, after disclosure of all material facts in the explanatory statement sent to the shareholders in relation to such resolution. However, the special resolution shall be acted upon only if the votes cast by public shareholders in favor of the proposal amount to at least 2 times the number of votes cast by public shareholders against it.

(c) The company shall make an application to the concerned recognized stock exchange for in-principle approval of the proposed delisting in the form specified by the recognized stock exchange.

(d) The company shall within 1 year of passing the special resolution, make the final application to the concerned recognized stock exchange in the form specified by the recognized stock exchange.

2. Prior to granting approval, the board of directors of the company shall:
1. make a disclosure to the recognized stock exchanges on which the equity shares of the company are listed that the promoters/acquirers have proposed to delist the company;

2. appoint a merchant banker to carry out due diligence and make a disclosure to this effect to the recognized stock exchanges on which the equity shares of the company are listed;

3. obtain details of trading in shares of the company for a period of two years prior to the date of a board meeting by top 25 shareholders as on the date of the board meeting convened to consider the proposal for delisting, from the stock exchanges and details of off-market transactions of such shareholders for a period of 2 years and furnish the information to the merchant banker for carrying out due-diligence;

4. obtain further details in terms of Clause (5) and furnish the information to the merchant banker.

3. The board of directors of the company while approving the proposal for delisting shall certify that:

  1. the company is in compliance with the applicable provisions of securities laws;
  2. the acquirer or promoter or promoter group or their related entities are in compliance with Regulation 4(5);
  3. the delisting is in the interest of the shareholders.

4.For certification in respect of approval by the board of directors of the company, the company shall take into account the report of the merchant banker.

5. The merchant banker appointed by the board of directors of the company shall carry out due diligence upon obtaining details from the board of directors of the company. However, if the merchant banker is of the opinion that details are not sufficient for certification, the merchant banker shall obtain additional details from the board of directors of the company for such a long period as it may deem fit.

6. Upon carrying out due diligence, the merchant banker shall submit a report to the board of directors of the company certifying the following:
(a) The trading carried out by any of the acquirer or promoter or promoter group entity or their related entities was in compliance or not, with the applicable provisions of the securities laws; and

(b) Any of the acquirer or promoter or promoter group entity or persons acting in concert or their related entities have carried out or not any transaction to facilitate the success of the delisting offer which is in contravention of the provisions of Regulation 4(5).

7. An application seeking in-principle approval for delisting shall be accompanied by an audit report in respect of the equity shares sought to be delisted, covering a period of 6 months prior to the date of the application.

8. An application seeking in-principle approval for delisting shall be disposed of by the recognized stock exchange within a period not exceeding 5 working days from the date of receipt of such application complete in all respects.

9. While considering an application seeking in-principle approval for delisting, the recognized stock exchange shall not unfairly withhold such application, but may require the company to satisfy it as to –
(a) compliance with the above regulations;
(b) the resolution of investor grievances by the company;
(c) payment of listing fees to that recognized stock exchange;
(d) the compliance with any condition of the SEBI (Listing Obligations & Disclosure Requirements) Regulations, 2015 with that recognized stock exchange having a material bearing on the interests of its equity shareholders;
(e) any litigation or action pending against the company pertaining to its activities in the securities market or any other matter having a material bearing on the interests of its equity shareholders;
(f) any other relevant matter as the recognized stock exchange may deem fit to verify.

10. A final application for delisting shall be accompanied with such proof of having given the exit opportunity, as the recognized stock exchange may require.

Question 11.
The equity share of Ashina Buildcon Ltd. was listed on National Stock Exchange Ltd. (NSE). NSE delisted its shares by complying with SEBI guidelines on delisting. The order of delisting was passed on March 5, 2017. Kunj, one of the shareholders has not participated in the bidding process due to ill health. He wanted to tender shares on January 1, 2018. Analyze the problem in the light of the SEBI (Delisting of Equity Shares) Regulations, 2009. [Dec 2018 (4 Marks)]
Answer:
Right of remaining shareholders to tender equity shares [Regulation 21]:
1. Where pursuant to acceptance of equity shares tendered, the equity shares are delisted, any remaining public shareholder holding such equity shares may tender his shares to the promoter up to a period of at least 1 year from the date of delisting and in such a case, the promoter shall accept the shares tendered at the same final price at which the earlier acceptance of shares was made.

2. The payment of consideration for shares accepted shall be made out of the balance amount lying in the escrow account.

3. The amount in the escrow account or the bank guarantee shall not be released to the promoter unless all payments are made in respect of shares tendered.

As per facts given in the case, shares of AshinaBildcon Ltd. are delisted on 5th March 2017, and Kunj, one of the shareholders wants to tender shares on 1st Jan. 2018; he can do so as a period of 1 year has not been elapsed from the date of delisting.

Question 12.
The Board of directors of a listed company desires to delist its equity shares from all the recognized stock exchanges. The voting details through the postal ballot are as under:
Total No. of voters: 7,000 (Public: 5,000 & Promoters: 2,000)
Voting at shareholders meeting:
(a) Public shareholders:
In favor: 3,300 votes
In against : 1,700 votes
(b) All promoter shareholders have voted in favor of the resolution.
By referring to SEBI’s delisting regulation, decide upon the resolution passed by the shareholders. [June 2019 (4 Marks)] if
Answer:
As per Regulation 8 of the SEBI (Delisting of Equity Shares) Regulations, 2009, in case of delisting of shares, where exit opportunity is required to be f given, the company should obtain prior approval of shareholders by a special resolution passed through postal ballot. However, the special resolution shall be acted upon only if the votes cast by public shareholders in favor of the proposal are two times the number of votes cast against it.

As per Section 114 of the Companies Act, 2013, a resolution shall be a special resolution when the votes cast in favor of the resolution, are required to be not less than 3 times the number of the votes, if any, cast against the resolution.

As per facts given in the case,
Votes in favour of the resolution = 3,300 (public voter) + 2,000 (promoter voter) = 5,300 votes.
Votes against resolution = 1,700 votes

Thus, a special resolution is passed as per Section 114 of the Companies Act, 2013.

However, as per Regulation 8 votes cast by public shareholders in favor of the proposal are not two times the number of votes cast against it as 3,400 or more votes are required to complete this condition whereas only 3,300 votes are in favor of the resolution. Thus, the special resolution shall not be acted upon in terms of provisions of Regulation 8 of the SEBI (Delisting of Equity Shares) Regulations, 2009.

Question 13.
ABC Ltd. a company whose equity shares are listed at BSE and NSE is seeking delisting of its equity shares from both the recognized stock exchanges. It provides an exit opportunity to all public shareholders in accordance with SEBI (Delisting of Equity Shares) Regulations, 2009. Calculate the minimum number of equity shares to be acquired for the delisting offer to be successful. Also, determine the final offer price from the details given hereunder:
(i)

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

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

Bid prices (₹) Number of investors Demand (No. of shares)
550 5 2,50,000
565 8 4,00,000
575 10 2,00,000
585 4 4,00,000
595 6 1,20,000
600 5 1,30,000
605 3 2,10,000
610 3 1,40,000
615 3 1,50,000
620 1 5,00,000
48 25,00,000

Answer:
As per Regulation 6(b) of the SEBI (Delisting of Equity Shares) Regulations, 2009, if after the proposed delisting, the equity shares of the company would not remain listed on any recognized stock exchange having nationwide trading terminals then exit opportunity shall be given to all the public shareholders holding the equity shares sought to be delisted in accordance with Chapter IV.

A minimum number of equity shares to be acquired [Regulation 17(A)]: An offer made under chapter III shall be deemed to be successful only if the post-offer promoter shareholding (along with the persons acting in concert with the promoter) taken together with the shares accepted through eligible bids at the final price determined as per Schedule II, reaches 90% of the total issued shares of that class excluding the shares which are held by a custodian and j against which depository receipts have been issued overseas.

Thus, a minimum of 15,00,000 shares are required to be acquired for delisting offers to be successful.

As per Schedule II Clause, 12 of the SEBI (Delisting of Equity Shares) Regulations, 2009, the final offer price shall be determined as the price at which shares | accepted through eligible bids, that takes the shareholding of the promoter or the acquirer (along with the persons acting in concert) to 90% of the total issued shares of that class excluding the shares which are held by a custodian ! and against which depository receipts have been issued.

If the final price is accepted, then, the promoter shall accept all shares tendered where the corresponding bids placed are at the final price or at a price which j is lesser than the final price. The promoter may, if he deems fit, fix a higher final price.
SEBI (Delisting of Equity Shares) Regulations, 2009 – Securities Laws and Capital Markets Important Questions 1
The floor price of ₹ 550 per share, promoter/acquirer shareholding at 75°o and number of shares required for successful delisting are 15,00,000, the final price would be the price at which the promoter reaches the threshold of 90°o i.e. it would be ₹ 600 per share.

Securities Laws and Capital Markets Questions and Answers

Mutual Funds – Securities Laws and Capital Markets Important Questions

Mutual Funds – Securities Laws and Capital Markets Important Questions

Question 1.
Distinguish between: Front End Load & Back End Load“ [Dec. 2005 (2 Marks)]
Answer:
Following are the main points of difference between Front End Load & Back End Load:

Points Front End Load Back End Load
Meaning Front End Load means ‘entry load’ which is paid by investors while investing in mutual funds. Back End Load means ‘exit load’ which is afforded by the investors while selling units of mutual funds.
Time of payment Entry load is paid when an investor buys units of mutual funds. Exit load is paid when the investor sells units of mutual funds.
Formula NAV = Public Offer Price (1 – Front End Load) NAV = Redemption Price (1 + Back End Load)

There shall be no entry load for all mutual fund schemes. [SEBI/IMD/MC No.2/836/2011, January 07, 2011]

Question 2.
Write a short note on Asset Management Company (AMC) [June 2006 (5 Marks)]
Answer:
Asset Management Company is an entity registered under the Companies Act, to manage the money invested in the mutual fund and to operate the schemes of the mutual fund in accordance with the governing regulations.

Important points relating to Asset Management Company:

  • AMC is a company incorporated under the Companies Act, 2013.
  • Every mutual fund is required to have an AMC.
  • AMC should be approved by the SEBI.
  • AMC operates the schemes of the mutual fund.
  • AMC is charged with the responsibility of investing and managing the investor’s resources.
  • The application for the approval of the AMC shall be made in Form D.
  • The appointment of an AMC can be terminated by the majority of the trustees or by 75% of the unitholders of the scheme.
  • The AMC should have prescribed net worth.

Question 3.
Explain the various factors for judging the efficiency of mutual funds. [June 2011 (4 Marks)]
Answer:
Judging efficiency of mutual funds is done with reference to various factors such as:

  • Whether the fund is stable
  • Whether it is liquid (listed on exchanges)
  • Whether it offers an increase in NAV, consistent growth in dividend and capital appreciation
  • Whether the investment objectives are clearly laid and implemented
  • Whether the issuer has a proven track record and offers assured returns or returns not less than a percentage
  • Whether it observes investment norms to balance risks and profits

Question 4.
Discuss the accounting policies and standards that are to be mandatorily followed by the asset management companies. [June 2012 (5 Marks)]
Answer:
The AMC shall follow the accounting policies and standards as specified in mutual fund regulation to provide appropriate details of the scheme-wise disposition of the assets of the fund at the relevant accounting date and the performance during that period together with information regarding distribution or accumulation of income accruing to the unitholder in a fair and true manner.

The relevant Accounting Standards are:

  • AS-9: Revenue Recognition
  • AS-10: Accounting for Fixed Assets
  • AS-19: Lease
  • AS-29: Provisions, Contingent Liabilities Assets.

Question 5.
“Mutual funds have emerged as one of the important class of financial intermediaries which cater to the needs of retail investors.” Discuss. [Dec. 2014 (6 Marks)]
Answer:
The small investors who generally lack the expertise to invest on their own in the securities market have reinforced the saying “put not your trust in money, put your money in trust”. They prefer some kind of collective investment vehicle like, mutual funds, which pool their marginal resources, invest in securities, and distribute the returns therefrom among them on cooperative principles. The investors benefit in terms of reduced risk and higher returns arising from the professional expertise of fund managers employed by the mutual funds.

Question 6.
Explain briefly: Mutual Fund Costs [June 2017 (2 Marks)]
Answer:
There are two broad categories of mutual fund costs:
(а) Operating Expenses: Costs incurred in operating mutual funds are known operating expenses. It includes advisory fees paid to investment managers, custodial fees, audit fees, transfer agent fees, trustee fees, agents’ com-mission, etc. The break-up of these expenses is required to be reported in the schemes offer document.

When the operating expenses are divided by the average net asset, the expense ratio is arrived at. Based on the type of scheme and the net assets, operating expenses are determined within the limits indicated by SEBI (Mutual Funds) Regulations, 1996. Expenditure that is in excess of the specified limits shall be borne by the Asset Management Company, the Trustees, or the Sponsors. Operating expenses are calculated on an annualized basis but are accrued on a daily basis. Therefore, an investor face expenses prorated for the time he has invested in the fund.

(b) Sales Charges: These are called sales loads and are charged directly to the investors. Mutual funds use the sales loads for payment of the agent’s commission and expenses for distribution and marketing.

Question 7.
Write a short note on Advantages of Mutual Funds
Answer:
Following are the advantages of investing in mutual funds:
1. Professional Management: The small investor does not have the time or expertise to manage his own money. Mutual funds are run by professionals who are experts in the field of investment management. Thus, the money of small investors is in safe hands.

2. Diversification: The key to stock market investment is diversification. Diversification has the advantage of risk reduction. A well-diversified portfolio normally contains it about 10 to 15 stocks. If an individual investor has to buy, say 100 shares of each of the selected stocks, it could cost him about ₹ 2 to 3 lakhs. However, when he invests in a mutual fund a small sum say ₹ 5,000, he gets instant diversification at a fraction of the cost. This is because, as a unit holder he becomes a part-owner of the stock that the mutual fund holds. In short, mutual funds help him buy diversification off the shelf.

3. Economies of scale: Unlike small investor mutual funds makes large scale purchase and sale of shares. For example, if an investor invests in 500 shares of Reliance, a mutual fund would be investing 50,000 shares. Since they deal in large volumes, the funds are able to bargain for finer rates from the stockbrokers. Thus, if an individual investor is charged 1%, the mutual fund could be charged as low as 0.05%. As both purchase and sales take place on the stock, that means there is a net saving of 1.9%.

A low brokerage means a higher return and if we assume a return of 1.9% for a month, it means 23% p.a. (1.9% × 12)

4. Liquidity: Mutual funds are easy to buy and sell and hence provide great liquidity. Any person holding an open-ended scheme can sell the units of his mutual fund and get his money back.

5. Transparency: Mutual funds are regulated by the SEBI and hence as per SEBI regulations mutual funds have to provide various types of information periodically to the investors. Thus, there is much more transparency and the chance of investor being cheated are negligible.

6. Low Costs: Mutual funds are a relatively less expensive way to invest compared to directly investing in the capital markets because the benefits of scale in brokerage, custodial, and other fees translate into lower costs for investors.

7. Return Potential: Over the medium to long term, Mutual funds have the potential to provide a higher return as they invest in a diversified basket of selected securities.

Question 8.
Discuss briefly the risk involved in Mutual Funds. [Dec. 2009 (4 Marks)]
Answer:
The level of risk in a mutual fund depends on what it invests in. Usually, the higher the potential returns, the higher the risk will be. For example, stocks are generally riskier than bonds, so an equity fund tends to be riskier than a fixed income fund.

Some specialty mutual funds focus on certain kinds of investments, such as emerging markets, to try to earn a higher return. These kinds of funds also tend to have a greater risk of a larger drop in value.

Mutual funds may face the following risks, leading to non-satisfactory performance:

  • Excessive diversification of portfolio, losing focus on the securities of the key segments.
  • Too much concentration on blue-chip securities which are high priced and which do not offer more than average return.
  • The necessity to effect high turnover through liquidation of portfolio resulting in large payments of brokerage and commission.
  • Poor planning of investment with minimum returns.
  • Un-researched forecast on income, profits, and Government policies.
  • Fund managers being unaccountable for poor results.
  • Failure to identify clearly the risk of the scheme as distinct from the risk of the market.

Question 9.
Write a short note on Disadvantages of Fund of Funds scheme [June 2017 (3 Marks)]
Answer:
Just like any other investment, the fund of funds is not free from shortcomings. A few of the disadvantages are specified below.
1. Additional Fees: The more diversified the fund is, the greater the likelihood that the investor will incur an incentive fee on one or more of the constituent managers, regardless of overall performance.

2. Associated Risks: Risks associated with all the underlying funds get added at this level. Following are the type of risks associated with a fund of funds scheme.

3. Management Risks: Every fund manager has a particular style of diversification. This diversification style will be in perfect correlation with the number of managers involved. The views of a manager may be altogether different from the market.

4. Operational Risks: Due diligence of a scheme in itself gives rise to operational risks. Continuous monitoring is required for knowing about the performance of the funds, any possibility of fraud and to know about the investment style of the funds and any desirable or undesirable changes in it.

5. Qualitative Risks: These include risks associated with the management environment of the fund such as organizational structure, infrastructure, investment process, operational issues, etc.

Question 10.
Distinguish between: Income Oriented Schemes & Growth Oriented Schemes [June 2007 (4 Marks)]
Answer:
Following are the main points of difference between income-oriented schemes & growth-oriented schemes:

Points Front End Load Back End Load
Meaning Front End Load means ‘entry load’ which is paid by investors while investing in mutual funds. Back End Load means ‘exit load’ which is afforded by the investors while selling units of mutual funds.
Time of payment Entry load is paid when an investor buys units of mutual funds. Exit load is paid when the investor sells units of mutual funds.
Formula NAV = Public Offer Price (1 – Front End Load) NAV = Redemption Price (1 + Back End Load)

Question 11.
Distinguish between: Open-ended mutual funds & Close-ended mutual funds [Dec. 2008 (2 Marks)]
Answer:
Following are the main points of difference between open & close-ended mutual funds:

Points Income Oriented Schemes Growth Oriented Schemes
Meaning Income Oriented Schemes are the scheme of mutual funds which provides a regular and steady income to the investors. Growth Oriented Schemes are the scheme of mutual funds which provides capital appreciation to the investors.
Mode of investment Under Income Oriented Schemes funds are invested in fixed income securities such as bonds, corporate debentures, Government securities, and money market instruments. Under Growth-Oriented Schemes funds are invested in equity shares and related instruments.
Form of return Income Oriented Schemes offers fixed income to investors. Growth Oriented Schemes offers capital appreciation to the investors. When sells his units in mutual funds difference between the purchase price and sale price is capital gain.
Suitability Income Oriented Schemes are suitable for investors seeking capital stability and regular income. Growth Oriented Schemes are suitable for investors, having a long-term outlook seeking growth over a period of time.

Question 12.
Write a short note on Money Market Mutual Funds (MMMF) [Dec. 2010 (4 Marks)]
Answer:
A money market fund is a mutual fund that invests in money market instruments. Since the operations in the money market are dominated by H institutional players, the retail investor involvement in the money market is limited. For such retail investors who want to invest in the money market, money market mutual funds provide a possibility for retail investors to invest their money into the money market.

Money market instruments are forms of debt that mature in less than one year and are very liquid. The monies are invested in safer short-term securities like treasury bills, certificate deposits, commercial papers, interbank call money, etc. the returns from these schemes fluctuate according to the interest rate that is prevalent at the market at that point in time. These funds must have high liquidity and should be of the highest quality.

A money-market mutual fund is akin to a high-yield bank account but is not entirely risk-free. When investing in a money-market fund, attention should be paid to the interest rate that is being offered.

Question 13.
Distinguish between ‘open-ended mutual fund’ and ‘close-ended mutual fund’. [Dec. 2016 (4 Marks)]
Answer:
Following are the main points of difference between open & close-ended mutual funds:

Points Open-Ended Mutual Funds Close Ended Mutual Funds
Meaning Open-ended mutual funds buy and sell units on a continuous basis and allow investors to enter and exit as per their convenience. A closed-end fund is a collective investment model based on issuing a fixed number of shares that are not redeemable from the fund.
Corpus Variable corpus due to ongoing purchase and redemption. Fixed corpus: no new units can be offered beyond the limit.
Listing No listing on an exchange; transactions done directly with the fund. Listed on the stock exchange for buying and selling.
Values Only one price available namely NAV. Two values available namely NAV and the Market Trading Price.
Liquidity Highly Liquid Mostly liquid

Question 14.
Write a short note on Real Estate Mutual Fund Scheme [June 2017 (3 Marks)]
Answer:
Some of the salient features of REMFs are as under:
1. Existing mutual funds are eligible to launch real estate mutual funds if they have an adequate number of experienced key personnel/directors.

2. Sponsors seeking to set up new mutual funds, for launching only real estate mutual fund schemes, shall be carrying on business in real estate for a period not less than 5 years. They shall also fulfill all other eligibility criteria applicable for sponsoring a mutual fund.

3. Every real estate mutual fund scheme shall be close-ended and its units shall be listed on a recognized stock exchange.

4. NAV of the scheme shall be declared daily.

5. At least 35% of the net assets of the scheme shall be invested directly in real estate assets. Balance may be invested in mortgage-backed securities, securities of companies engaged in dealing in real estate assets, or in undertaking real estate development projects and other securities. Taken together, investments in real estate assets, real estate-related securities (including mortgage-backed securities) shall not be less than 75% of the net assets of the scheme.

6. Each asset shall be valued by two valuers, who are accredited by a credit rating agency, every 90 days from the date of purchase. The lower of the two values shall be taken for the computation of NAV.

7. Caps will be imposed on investments in a single city, single project, securities issued by sponsor/associate companies, etc.

8. Unless otherwise stated, the investment restrictions specified in the Seventh Scheme shall apply.

9. No mutual fund shall transfer real estate assets amongst its schemes.

10. No mutual fund shall invest in any real estate asset which was owned by the sponsor or the AMC or any of its associates during the period of last 5 years or in which the sponsor or the AMC or any of its associates hold tenancy or lease rights.

11. A real estate mutual fund scheme shall not undertake lending or housing finance activities.

12. Accounting and valuation norms pertaining to Real Estate Mutual Fund schemes have also been specified.

Question 15.
Describe various schemes of mutual funds according to investment objectives. [Dec. 2017 (5 Marks)]
Answer:
There are different investors having different expectations from their investments. Some investors may desire regular and study income on their investment, while some investors may desire, have a capital appreciation, some investors may like to get the benefit of trading in real estate, and thus, various mutual funds offer various schemes keeping view the requirements of these investors.

Various investment schemes of mutual funds are as follows:
(a) Income Oriented Schemes: The aim of income funds is to provide regular and steady income to investors. Such schemes generally invest in fixed income securities such as bonds, corporate debentures, Government securities, and money market instruments. Such funds are less risky compared to equity schemes. These funds are not affected because of fluctuations in equity markets. However, opportunities for capital appreciation are also limited in such funds.

(b) Growth Oriented Schemes: The aim of growth funds is to provide capital appreciation over the medium to long term. Such schemes normally invest a major part of their corpus inequities. Such funds have comparatively high risks. These schemes provide different options to the investors like dividend option, capital appreciation, etc., and the investors may choose an option depending on their preferences. The investors must indicate the option in the application form. The mutual funds also allow the investors to change the options at a later date. Growth schemes are good for investors having a long-term outlook seeking appreciation over a period of time.

(c) Hybrid Schemes: Such schemes covers both needs of an investor te. provide regular income as well as provide capital appreciation. Therefore, investment targets of these mutual funds are a judicious mix of both the fixed income securities like bonds and debentures and also sound equity scrips. In fact, these funds utilize the concept of balanced investment management. These funds are, thus, also known as “balanced funds”.

(d) High Growth Schemes: In the stock market, high risk gives high returns. So these funds primarily invest in high risk and high return volatile securities in the market and induce the investors with a high degree of capital appreciation. Aggressive investors willing to take excessive risks are the normal target group of such funds.

(e) Capital Protection Oriented Scheme: The investment objective of such scheme is to seek capital protection by investing a portion of the portfolio in highest rated debt securities and money market instruments and also to provide capital appreciation by investing the balance in equity and equity-related securities.

(f) Tax Saving Schemes: These schemes offer tax rebates to the investors under specific provisions of the Income Tax Act, 1961 as the Government offers tax incentives for investment in specified avenues. For example, Equity Linked Savings Schemes (ELSS). Pension schemes launched by the mutual funds also offer tax benefits. These schemes are growth-oriented and invest in pre-dominantly inequities. Their growth opportunities and risks associated are like any equity-oriented scheme.

(g) Sector-specific Schemes: These are the funds that invest in the securities of only those sectors or industries as specified in the offer documents. For example, Pharmaceuticals, Software, Fast Moving Consumer Goods (FMCG), Petroleum stocks, etc. The returns in these funds are dependent on the performance of the respective sectors. While these funds may give higher returns, they are riskier compared to diversified funds.

Investors need to keep a watch on the performance of those sectors and must exit at an appropriate time. They may also seek the advice of an expert.

(h) Real Estate Funds: A real estate fund is a type of mutual fund that primarily focuses on investing in securities offered by public real estate companies. Factors affecting the return of real estate mutual funds include the real estate market in general, housing starts, residential and commercial vacancy rates, and interest rates.

(i) Off-shore Funds: Such funds invest in securities of foreign companies with RBI permission.

(j) Leverage Funds: Leveraged funds are mutual funds using aggressive investment techniques of financial leverage, such as buying on margin, short selling, and options trading, to obtain maximum capital appreciation for investors in the fund. Leveraged funds use a variety of financial instruments from equity swaps to derivatives, such as futures contracts, to achieve their returns. Leveraged funds try to achieve returns that are more sensitive, by a specific magnitude, to market movements than non-leveraged funds. The returns for leveraged funds usually vary between two times and three times the movement in a given index or market sector.

(k) Index Funds: Index funds replicate the portfolio of a particular index such as the BSE Sensex, Nifty, etc. These schemes invest in the securities in the same weightage comprising of an index. NAVs of such schemes would rise or fall in accordance with the rise or fall in the index, though not exactly by the same percentage due to some factors are known as “tracking error” in technical terms. Necessary disclosures in this regard are made in the offer document of the mutual fund scheme. There are also exchange-traded index funds launched by the mutual funds which are traded on the stock exchanges.

(l) New Direction Funds: They invest in companies engaged in scientific and technological research such as birth control, anti-pollution, oceanography, etc.

(m) Infrastructure Debt Fund: They invest primarily in the debt securities or securitized debt investment of infrastructure companies.

Question 16.
SEBI in its guidelines related to restrictions on investments by mutual funds prescribes that the investment in equity shares or equity-related securities of a single company must not exceed 10% of the net assets of the scheme. A particular mutual fund had repeatedly exceeded this permissible limit through its associate broker. The Adjudicating Officer (AO) concerned imposed a penalty. The mutual fund approached the Court and pleaded that the limit was not exceeded intentionally and hence, it should not be penalized for such unintentional deed. As per the provisions of the Securities and
Exchange Board of India Act, 1992 and decided case laws, suggest whether the Court should set aside AO’s order inter alia on the ground that the limit was not exceeded intentionally. [Dec. 2013 (6 Marks)]
Answer:
The facts of the given case are similar to SEBIv. Shriram Mutual Fund & Others – Appeal Nos. 9523-24 of2003, wherein a penalty of ₹ 2 lakhs was imposed by Adjudicating Officer on Shriram Mutual Fund (SMF) as it had repeatedly exceeded the permissible limits of transactions through its associate broker.

On an appeal by SMF, SAT set aside Adjudicating Officer’s order inter alia on the ground that the limit was not exceeded intentionally.

SEBI filed an appeal to Supreme Court. The Supreme Court set aside the judgment of SAT and settled the issues, as under:

  • Men’s rea is not an essential ingredient for contravention of the provisions of a Civil Act.
  • The penalty is attracted as soon as a contravention of the statutory obligation as contemplated by the Act is established, and therefore the intention of the parties committing such violation becomes immaterial.
  • Unless the language of the statute indicated the need to establish the element of men’s rea, it is generally sufficient to prove that a default in complying with the statute has occurred.
  • Once the contravention is established, the penalty has to follow and only the quantum of penalty is discretionary.

Thus, SEBI will succeed in its appeal to Supreme Court.

Question 17.
What do you understand by Infrastructure Debt Fund Schemes (IDFS)? Discuss the eligibility criteria required to be fulfilled by a mutual fund for launching such a scheme. [Dec. 2013 (5 Marks)]
Answer:
“Infrastructure debt fund scheme” means a mutual fund scheme that invests primarily (minimum 90% of scheme assets) in the debt securities or securitized debt instrument of:

  • infrastructure companies or
  • infrastructure capital companies or
  • infrastructure projects or
  • special purpose vehicles created for the purpose of facilitating or promoting investment in infrastructure
  • other permissible assets or
  • revenue-generating projects of infrastructure companies or projects or special purpose vehicles.

Eligibility criteria for launching infrastructure debt fund scheme [Regulation 49N]:
1. An existing mutual fund may launch an infrastructure debt fund scheme if it has an adequate number of key personnel having adequate experience in the infrastructure sector.

2. A certificate of registration may be granted to an applicant proposing to launch only infrastructure debt fund schemes if the sponsor or the parent company of the sponsor:
(a) has been carrying on activities or business in the infrastructure financing sector for a period of not less than 5 years;

(b) fulfills the eligibility criteria as provided in Mutual Fund Regulation.

Question 18.
An inquiry officer appointed by SEBI found evidence that a particular mutual fund was indulging in short-selling and buying-selling of derivative products for speculative purposes.
You are required to answer:
(i) Can the mutual fund be held liable for the violation of any provision/rule laid down by the SEBI in this regard?
(ii) If yes, then what kind of penalties can be imposed by the inquiry officer on the mutual fund? [Dec. 2014 (5 Marks)]
Answer:
As per Regulation 45 of the SEBI (Mutual Funds) Regulations, 1996, a mutual fund may enter into short-selling transactions on a recognized stock exchange, subject to the framework relating to short selling and securities lending and borrowing specified by the SEBI.

In the given case, the mutual fund was indulging in short-selling and buying-selling of derivative products for speculative purposes, which is a clear violation of Regulation 45 of the SEBI (Mutual Funds) Regulations, 1996.

Liability for action in case of default [Regulation 68]: A mutual fund who contravenes any of the provisions of the Act, Rules, or Regulations framed thereunder shall be liable for one or more action specified therein including the action under Chapter V of the SEBI (Intermediaries) Regulations, 2008.

Question 19.
Explain briefly: Infrastructure debt fund [June 2015 (3 Marks)]
Answer:
“Infrastructure debt fund scheme” means a mutual fund scheme that invests primarily (minimum 90% of scheme assets) in the debt securities or securitized debt instrument of:

  • infrastructure companies or
  • infrastructure capital companies or
  • infrastructure projects or
  • special purpose vehicles created for the purpose of facilitating or promoting investment in infrastructure
  • other permissible assets or
  • revenue-generating projects of infrastructure companies or projects or special purpose vehicles.

Eligibility criteria for launching infrastructure debt fund scheme [Regulation 49N]:
1. An existing mutual fund may launch an infrastructure debt fund scheme if it has an adequate number of key personnel having adequate experience in the infrastructure sector.

2. A certificate of registration may be granted to an applicant proposing to launch only infrastructure debt fund schemes if the sponsor or the parent company of the sponsor
(a) has been carrying on activities or business in the infrastructure financing sector for a period of not less than 5 years;

(b) fulfills the eligibility criteria as provided in Mutual Fund Regulation.

Question 20.
Is there any advertisement code for mutual funds?[Dec. 2015 (6 Marks)]
Answer:
Advertisement Material [Regulation 30]: Advertisements shall be in conformity with the Advertisement Code as specified in the Sixth Schedule and shall be submitted to the SEBI within 7 days from the date of issue.
1. Advertisements shall be accurate, true, fair, clear, complete, unambiguous, and concise.

2. Advertisements shall not contain statements that are false, misleading, biased, or deceptive, based on assumption/projections, and shall not contain any testimonials or any ranking based on any criteria.

3. Advertisements shall not be so designed as likely to be misunderstood or likely to disguise the significance of any statement. Advertisements shall not contain statements that directly or by implication or by omission may mislead the investor.

4. Advertisements shall not carry any slogan that is exaggerated or unwarranted or slogan that is inconsistent with or unrelated to nature and risk and return profile of the product.

5. No celebrities shall form part of the advertisement.

6. Advertisements shall not be so framed as to exploit the lack of experience or knowledge of the investors. Extensive use of technical or legal terminology or complex language and the inclusion of excessive details which may detract the investors should be avoided.

7. Advertisements shall contain information that is timely and consistent with the disclosures made in the Scheme Information Document (SID), Statement of Additional Information, and the Key Information Memorandum (KIM).

8. No advertisement shall directly or indirectly discredit other advertisements or make unfair comparisons.

9. Advertisements shall be accompanied by a standard warning in legible fonts which states ‘Mutual Fund investments are subject to market risks, read all scheme related documents carefully.’ No addition or deletion of words shall be made to the standard warning.

10. In audio-visual media-based advertisements, the standard warning in visual and accompanying voice-over reiteration shall be audible in a clear and understandable manner. For example, in standard warning, both the visual and the voice-over reiteration containing 14 words running for at least 5 seconds may be considered as clear and understandable.

Misleading Statements [Regulation 31]: The offer document and advertisement materials shall not be misleading or contain any statement or opinion, which is incorrect or false.

Question 21.
Briefly explain the advertisement code prescribed for mutual funds under the SEBI (Mutual Funds) Regulations, 1996. [June 2016 (9 Marks)]
Answer:

Advertisement Material [Regulation 30]: Advertisements shall be in conformity with the Advertisement Code as specified in the Sixth Schedule and shall be submitted to the SEBI within 7 days from the date of issue.
1. Advertisements shall be accurate, true, fair, clear, complete, unambiguous, and concise.

2. Advertisements shall not contain statements that are false, misleading, biased, or deceptive, based on assumption/projections, and shall not contain any testimonials or any ranking based on any criteria.

3. Advertisements shall not be so designed as likely to be misunderstood or likely to disguise the significance of any statement. Advertisements shall not contain statements that directly or by implication or by omission may mislead the investor.

4. Advertisements shall not carry any slogan that is exaggerated or unwarranted or slogan that is inconsistent with or unrelated to nature and risk and return profile of the product.

5. No celebrities shall form part of the advertisement.

6. Advertisements shall not be so framed as to exploit the lack of experience or knowledge of the investors. Extensive use of technical or legal terminology or complex language and the inclusion of excessive details which may detract the investors should be avoided.

7. Advertisements shall contain information that is timely and consistent with the disclosures made in the Scheme Information Document (SID), Statement of Additional Information, and the Key Information Memorandum (KIM).

8. No advertisement shall directly or indirectly discredit other advertisements or make unfair comparisons.

9. Advertisements shall be accompanied by a standard warning in legible fonts which states ‘Mutual Fund investments are subject to market risks, read all scheme related documents carefully.’ No addition or deletion of words shall be made to the standard warning.

10. In audio-visual media-based advertisements, the standard warning in visual and accompanying voice-over reiteration shall be audible in a clear and understandable manner. For example, in standard warning, both the visual and the voice-over reiteration containing 14 words running for at least 5 seconds may be considered as clear and understandable.

Misleading Statements [Regulation 31]: The offer document and advertisement materials shall not be misleading or contain any statement or opinion, which is incorrect or false.

Question 22.
“Expense Ratio for a mutual fund should be as low as possible.” Explain how an increase or decrease in Total Expense Ratio (TER) shall be disclosed by Asset Management Company under SEBI (Mutual Funds) Regulations, 1996? [Pec. 2018 (5 Marks)]
Answer:
Costs incurred in operating mutual funds are known operating expenses. It includes advisory fees paid to investment managers, custodial fees, audit fees, transfer agent fees, trustee fees, agents commission, etc. The break-up of these expenses is required to be reported in the schemes offer document.

When the operating expenses are divided by the average net asset, the expense ratio is arrived at. Based on the type of scheme and the net assets, operating expenses are determined within the limits indicated by SEBI (Mutual Funds) Regulations, 1996. Expenditure that is in excess of the specified limits shall be borne by the Asset Management Company, the Trustees, or the Sponsors. Operating expenses are calculated on an annualized basis but are accrued on a daily basis. Therefore, an investor face expenses prorated for the time he has invested in the fund.

Under SEBI (Mutual Funds) Regulations, 1996, Mutual Funds are permitted to incur/charge certain operating expenses for managing a mutual fund scheme – such as sales & marketing/advertising expenses, administrative expenses, transaction costs, investment management fees, registrar fees, custodian fees, audit fees – as a percentage of the fund’s daily net assets.

This is commonly referred to as ‘Expense Ratio’. In short, the Expense ratio is the cost of running and managing a mutual fund that is charged to the scheme. All expenses incurred by a Mutual Fund, AMC will have to be managed within the limits specified under Regulation 52 of SEBI (Mutual Funds) Regulations.

For actively managed equity schemes, the total expense ratio (TER) allowed under the regulations is –

  • 2.5 % for the first ₹ 100 Crores of average weekly net assets;
  • 2.25 % for the next ₹ 300 Crores,
  • 2% for the subsequent ₹ 300 Crores and
  • 1.75 % for the balance AUM.

For debt schemes, the expense ratio permitted is 0.25% lower than that allowed for equity funds. Information on the expense ratio applicable to an MF scheme is mentioned in the Scheme Information Document. For example, an expense ratio of 1% p.a. means that each year 1% of a scheme’s total assets will be used to cover the expenses managing and operating a scheme.

In addition, mutual funds have been allowed to charge up to 30 bps more, if 30% or more of new inflows come from locations “Beyond the Top-15 (B15) cities, to widen the penetration of the mutual funds in tier – 2 and tier – 3 cities.

The expense ratio is calculated as a percentage of the Scheme’s average Net Asset Value (NAV). The daily NAV of a mutual fund is disclosed after deducting the expenses. Thus, the TER has a direct bearing on a scheme’s NAV – the lower the expense ratio of a scheme, the higher the NAV.

Question 23.
Life-Changing Assets Management Ltd., a mutual funds company desires to engage a bully wood celebrity to popularize its schemes. Explain the SEBI provisions with regard to celebrity endorsements of Mutual Funds at the industry level. [June 2019 (4 Marks)]
Answer:
SEBI vide it Circular No. CIR/IMD/DF/23/2017 dated 15.3.2017 reviewed advertising guidelines for the mutual funds.

In this respect, it has been decided to permit celebrity endorsements at the industry level, for the purpose of increasing awareness of Mutual Funds as a financial product category.

However, such celebrity endorsements of Mutual Funds at the industry level, shall be subject to the following conditions:
1. Celebrity endorsement shall be allowed only at the industry level, for the purpose of increasing awareness of Mutual Funds as a financial product category. Such celebrity endorsements should not promote a scheme of a particular Mutual Fund or be used as a branding exercise of a Mutual Fund house/AMC.

2. Expenses towards such celebrity endorsements for increasing awareness of Mutual Funds shall be limited to the amounts that are aggregated by Mutual Funds at the industry level for the purpose of conducting investor education and awareness initiatives, in terms of clause F of SEBI circular dated September 13, 2012.

3. Prior approval of SEBI shall be required for issuance of any endorsement of Mutual Funds as a financial product, which features a celebrity for the purpose of increasing awareness of Mutual Funds.

Question 24.
Based on the following data, determine the NAV of a regular income scheme.

Particulars ₹ in Lakh
Listed shares at cost (ex-dividend) 20.00
Cash in hand 1.23
Bonds & debenture at cost (of theses, bonds not listed and quoted ₹ 1 Lakh) 4.30
Other fixed interest securities at cost 4.50
Dividend accrued 0.80
Amounts payable on shares 6.32
Expenditure accrued 0.75

Number of units (₹ 10 face value) = 2,40,000 units
Current realizable value of fixed income securities of face value of ₹100 = ₹ 106.50.
All listed shares are purchased at a time when the index was 1200. On NAV date, the index is ruling at 2120. Listed bonds and debentures carry a market value of ₹ 5 lakhs on NAV date. [Dec. 2007 (8 Marks)]
Answer:
Mutual Funds – Securities Laws and Capital Markets Important Questions 1
NAV per unit = \(\frac{41.08}{2.40}\) = ₹ 17.12 per unit

Question 25.
Define ‘NAV’ and ‘offer price’. If Rahul invests ₹ 10,000 in a scheme that charges 2% front-end load at a NAV of ₹ 10 per unit, what shall be the public offer price? [Dec. 2008 (5 Marks)]
Answer:
NAV: The NAV of a mutual fund is the amount that a unitholder would receive if the mutual fund were wound up today. An investor in an MF is a part-owner of all its assets and liabilities.

NAV is calculated as follows:
The market value of assets of the fund minus Liabilities attributable to those assets
Example: If the total assets of a scheme are ₹ 500 Lakhs and its outside liabilities are ₹ 50 Lakh, the NAV ₹ 450 Lakh.

Offer price: It means public offer price ie. money payable by an investor for buying an unit of mutual fund.
NAV = Public Offer Price (1 – Front End Load)
Let the Public Offer Price be ‘x’
10 = x (1 – 0.02)
10 = x – 0.02x
10 = 0.98
x = \(\frac{10}{0.98}\)
x = Public Offer Price = 10.20

Question 26.
The redemption price of a mutual fund unit is ₹ 48 while the front end loader and back end load charges are 2% and 3% respectively. You are required to calculate:
(i) Net asset value per unit and
(ii) Public offer price of the unit [June 2010 (7 Marks)]
Answer:
NAV = Redemption Price (1 + Back End Load)
Let the NAV be x
x = 48 (1 + 0.03)
x = 48 + 1.44
x = NAV = 49.44

Let the Public Offer Price be ‘x’
NAV = Public Offer Price (1 – Front End Load)
49.44 = x (1 -0.02)
49.44 = x – 0.02x
49.44 = 0.98x
x = \(\frac{49.44}{0.98}\)
x = Public Offer Price = 50.45

Question 27.
The redemption price of a mutual fund unit is ₹ 48 while the front end loader and back end load charges are 2% and 3% respectively. You are required to calculate:
(i) Net asset value per unit and
(ii) Public offer price of the unit [June 2014 (7 Marks)]
Answer:

NAV = Redemption Price (1 + Back End Load)
Let the NAV be x
x = 48 (1 + 0.03)
x = 48 + 1.44
x = NAV = 49.44

Let the Public Offer Price be ‘x’
NAV = Public Offer Price (1 – Front End Load)
49.44 = x (1 -0.02)
49.44 = x – 0.02x
49.44 = 0.98x
x = \(\frac{49.44}{0.98}\)
x = Public Offer Price = 50.45

Question 28.
Calculate the value of the right, if [Dec. 2014 (3 Marks)]

Number of right shares offered 6,000
Number of shares held 3,000
Ex-right price ₹ 32
Right offer price ₹ 25
Face value of shares ₹ 10

Answer:
Value of right = \(\frac{\text { Right shares offered }}{\text { Number of shares held }}\) × (Ex-right price – Right offer price)
= \(\frac{6,000}{3,000}\) × (32 – 25)
Value of right = 14

Question 29.
Super mutual fund has launched a scheme named ‘Super Bonanza’. The net asset value (NAV) of the scheme is ₹ 12.00 per unit. The redemption price is ₹ 11.65 per unit and the offer price is ₹ 12.50 per unit.
You are required to calculate:
(i) Front-end load
(ii) Back-end load [June 2015 (6 Marks)]
Answer:
NAV = Redemption Price (1 + Back End Load)
Let the Back End Load be x
12 = 11.65(1 + x)
12 = 11.65 + 11.65x
0.35 = 11.65x
x = \(\frac{0.35}{11.65}\)

x = Back End Load = 0.03 i.e. 3%
Let the Front End Load be ‘x ’
NAV = Public Offer Price (1 – Front End Load)
12 = 12.50(1 – x)
12 = 12.50- 12.50x
0.50 = 12.50x
x = \(\frac{0.50}{12.50}\)
x = Front End Load = 0.04 ie. 4%

Question 30.
Calculate the value of the right, if [June 2015 (3 marks)]

Number of right shares offered 2,500
Number of shares held 1,000
Ex-right price ₹ 18
Right offer price ₹ 15
Face value of shares ₹ 10

Answer:
Value of right = \(\frac{\text { Right shares offered }}{\text { Number of shares held }}\) × (Ex-right price – Right offer price)
= \(\frac{2,500}{1,000}\) × (15 – 10)
Value of right = 12.5

Question 31.
Somnath Ltd. has a share capital of 50,000 equity shares of ₹ 100 each. Market value is ₹ 250 per share. Does the company decide to make a rights issue to the existing shareholders in proportion to one new rights share of ₹ 100 at a premium of ₹ 30 per share for every 5 shares held? Calculate the value of rights. [Dec. 2015 (6 Marks)]
Answer:
Value of right = \(\frac{\text { Right shares offered }}{\text { Number of shares held }}\) × (Ex-right price – Right offer price)
= \(\frac{1}{5}\) × (250 – 130)
Value of right = 24

Question 32.
Compute NAV and rate of return for a unitholder who bought a unit at ₹ 17.60 and received a dividend of ₹ 2 per unit during the period. The face value of the unit is ₹ 10. Other details are as under: [Dec. 2016 (4 Marks)]

₹ in Crore
The market value of funds portfolio 4,200
Size of the scheme 2,000
Accrued income 100
Receivables 100
Accrued expenses 275
Liabilities 150

A number of outstanding units: 200 Crore.
Answer:

Particulars ₹ in Crore
Assets
The market value of funds portfolio 4,200
Size of the scheme 2,000
Accrued income 100
Receivables 100
Accrued expenses (275)
Liabilities (150)
NAV 3,975

Mutual Funds – Securities Laws and Capital Markets Important Questions 2
Where,
D1 = Dividend
CG1 = Capital Gain
NAV1 = Net Asset Value at the end
NAV0 = Net Asset Value at the beginning

Question 33.
The redemption price of a mutual fund unit is ₹ 48 while the front-end load and back-end load charges are 2% and 3% respectively.
Compute:
(i) NAV per unit and
(ii) Public offer price of the unit. [June 2017 (4 Marks)]
Answer:
NAV = Redemption Price (1 + Back End Load)
Let the NAV be x ’
x = 48(1 + 0.03)
x = 48 + 1.44
x – NAV = 49.44

Let the Public Offer Price be x’
NAV = Public Offer Price (1 – Front End Load)
49.44 = x(1 – 0.02)
49.44 = x – 0.02x
49.44 = 0.98x

x = \(\frac{49.44}{0.98}\)
x = Public Offer Price = 50.45

Question 34.
Calculate the value of right If [June 2017 (4 Marks)]

A number of shares offered (n): 3,000
A number of shares held (m): 1,800
Ex-right price (Pex): ₹ 24
Right offer price (P): ₹ 21
Face value of shares: ₹ 10

Answer:
In case of mutual fund value of right shares is calculated by the following formula:
Value of right = \(\frac{\text { Right shares offered }}{\text { Number of shares held }}\) × (Ex-right price – Right offer price)
= \(\frac{3,000}{1,800}\) × (24 – 21)
Value of right = 5

Question 35.
A mutual fund had repeatedly exceeded the permissible limits of transactions through its associate brokers in terms of Regulation 25(7)(a) of SEBI (Mutual Funds) Regulations. Consequently, a penalty of Rupees Two lakh was imposed by an Adjudicating officer of SEBI on this mutual fund. Mutual Fund pleaded for waiver of penalty stating that the limit was not exceeded intentionally. Is this penalty justified? Discuss in reference to the relevant case. [June 2017 (5 Marks)]
Answer:

The facts of the given case are similar to SEBIv. Shriram Mutual Fund & Others – Appeal Nos. 9523-24 of2003, wherein a penalty of ₹ 2 lakhs was imposed by Adjudicating Officer on Shriram Mutual Fund (SMF) as it had repeatedly exceeded the permissible limits of transactions through its associate broker.

On an appeal by SMF, SAT set aside Adjudicating Officer’s order inter alia on the ground that the limit was not exceeded intentionally.

SEBI filed an appeal to Supreme Court. The Supreme Court set aside the judgment of SAT and settled the issues, as under:

  • Men’s rea is not an essential ingredient for contravention of the provisions of a Civil Act.
  • The penalty is attracted as soon as a contravention of the statutory obligation as contemplated by the Act is established, and therefore the intention of the parties committing such violation becomes immaterial.
  • Unless the language of the statute indicated the need to establish the element of men’s rea, it is generally sufficient to prove that a default in complying with the statute has occurred.
  • Once the contravention is established, the penalty has to follow and only the quantum of penalty is discretionary.

Thus, SEBI will succeed in its appeal to Supreme Court.

Question 36.
Following is the information pertaining to the portfolio of Dolex Mutual
Fund:

Stock No. of shares Current Market Price
L&T 1,10,000 2,685.45
Cipla 3,12,000 259.95
Wipro 4,50,000 523.10
HDFC 3,90,000 883.30
Tata Steel 2,99,000 502.75

The fund has not borrowed any money, but its accrued management fee with the portfolio manager currently total ₹ 30,00,000. The number of units outstanding is 10,75,73,000. Compute the value of the portfolio and NAV. [June 2018 (4 Marks)]
Answer:
Mutual Funds – Securities Laws and Capital Markets Important Questions 3
Mutual Funds – Securities Laws and Capital Markets Important Questions 4
NAV = \(\frac{1,10,37,08,150}{10,75,73,000}\) = 10.26 per unit

Question 37.
A mutual fund has a NAV of ₹ 11.50 at the beginning of the year. At the end of the year, NAV increases to ₹ 12.10. Meanwhile, the fund distributes ₹ 0.80 as dividend and ₹ 0.70 as capital gains.
(i) What is the fund’s return during the year?
(ii) Had these distributions been re-invested at an average NAV of ₹ 11.80, what is the return for 200 units? [Dec 2018 (5 Marks)]
Answer:
Return = \(\frac{\mathrm{D}_{1}+\mathrm{CG}_{1}+\left(\mathrm{NAV}_{1}-\mathrm{NAV}_{0}\right)}{\mathrm{NAV}_{0}}\) × 100
= \(\frac{0.80+0.70+(12.10-11.50)}{11.50}\) × 100
= 18.26%

Dividend & capital gain amount to be reinvested = (0.80 + 0.70) × 200 = 300
Fresh units = \(\frac{300}{11.80}\) = 25.42
Total units = 200 + 25.42 = 225.42
Total value at the year end = 225.42 × 12.10 = 2,728
Purchase cost = 200 × 11.50 = 2,300
Return = \(\frac{2,728-2,300}{2,300}\) × 100
= 18.61%

Question 38.
A Mutual Fund having 300 units has shown Net Asset Value (NAV) of ₹ 8.75 and ₹ 9.45 at the beginning and at the end of the year respectively. The Mutual Fund has given two options:
(i) Pay ₹ 0.75 per unit as dividend and ₹ 0.60 per unit as capital appreciation; or
(ii) These distributions are to be reinvested at an average NAV of ₹ 8.65 per unit.
What difference it would make in terms of return available and which option is preferable? [June 2019 (5 Marks)]
Answer:
Return = \(\frac{\mathrm{D}_{1}+\mathrm{CG}_{1}+\left(\mathrm{NAV}_{1}-\mathrm{NAV}_{n}\right)}{\mathrm{NAV}_{0}}\) × 100
= \(\frac{0.75+0.60+(9.45-8.75)}{8.75}\) × 100
= 23.43%
Dividend and capital gain amount to be reinvested = (0.75 + 0.60) × 300 = 405
Fresh units = \(\frac{405}{8.65}\) = 46.82
Total units = 300 + 46.82 = 346.82
Total value at the year end = 346.82 × 9.45 = 3278
Purchase cost = 300 × 8.75 = 2,625

Return= \(\frac{3,278-2,625}{2,625}\) × 100
= 24.88%
Option to reinvest is preferable.

Securities Laws and Capital Markets Questions and Answers

Virtual Meetings – Company Law Important Questions

Virtual Meetings – Company Law Important Questions

Question 1.
Distinguish between: ‘E-voting’ and ‘voting by show of hands. (June 2017) (4 marks)
Answer:

Basis of Distinction ‘E-voting’ ‘Voting by show of hands
Governing Section Section 108 of the Companies Act, 2013 makes provisions relating to E-voting. Section 107 of the Companies Act, 2013 makes provisions relating to the show of hands.
Applicability The Central Government may prescribe the class or classes of companies and the manner in which a member may exercise his right to vote by electronic means. At any general meeting, a resolution put to the vote of the meeting shall in the first instance be decided on a show of hands.
Physical Presence Requirement The physical presence of members at meetings is not necessary in the case of e-voting. The physical presence of members at meetings is necessary in case of voting by show of hands.
Mandatory Every Listed Company or a company having not less than 1000 members shall provide to its member’s facility to vote on resolutions by electronic means. Voting by Show of hands can be adopted by any Company and it is optional.

Question 2.
The Board of directors of Vedic Ltd. desirous of transacting certain matters through video conferencing seeks your advice on the matters which cannot be dealt with through video conferencing. Advise the Board (June 2015) (4 marks)
Answer:
1. Manner of participation in Board Meetings [Section 173(2) of the Companies Act, 2013]:
The participation of directors in a meeting of the Board may be either in person (personally present) or through video conferencing or other audio-visual means.

2. Rule 4 of the Companies (Meeting of Board and its Powers) Rules, 2014, following matters shall not be dealt with in a meeting through video conferencing or other audiovisual means:

  1. the approval of the annual financial statements;
  2. the approval of the Board’s report;
  3. the approval of the prospectus;
  4. the Audit Committee Meetings for consideration of financial statement including consolidated financial statement, if any, to be approved by the Board under sub-section (1) of section 134 of the Act; and
  5. the approval of the matter relating to amalgamation, merger, demerger, acquisition, and takeover.

Where there is quorum presence in a meeting through the physical presence of directors, any other director may participate in conferencing through video or other audio-visual means.

Thus, the Board of directors of Vedic Ltd. desirous of transacting certain matters through video conferencing must refer to the provisions of rule 4 of the Companies (Meeting of Board and its Powers) Rules, 2014 on matters which cannot be dealt with through video conferencing.

Note: As per Companies (Meetings of Board and its Powers) Second Amendment Rules, 2020, For the period beginning from 19th March 2020 and ending on the 31st December 2020, the meetings on matters discussed above may be held through video conferencing or other audiovisual means.

Question 3.
XYZ Ltd. has 6 directors on its Board of Directors. Out of 6 directors, 5 are foreigners and they reside in America. The company wants to convene its Board Meeting in Mumbai but all the 5 directors of pre-occupied and are not in a position to travel to India. Advise the company regarding the conduct of such a board meeting as per provisions of the Companies Act, 2013 and relevant rules. Will the same rules are provisions applicable in case the company wants to approve annual financial statements in the board meeting? (December 2017) (4 marks)
Answer:
1. Manner of participation in Board Meetings [Section 173(2) of the Companies Act, 2013]:
The participation of directors in a meeting of the Board may be either in person (personally present) or through video conferencing or other audio-visual means.

2. Rule 4 of the Companies (Meeting of Board and Its Powers) Rules, 2014, following matters shall not be dealt with in a meeting through video conferencing or other audiovisual means:

  1. the approval of the annual financial statements;
  2. the approval of the Board’s report;
  3. the approval of the prospectus;
  4. the Audit Committee Meetings for consideration of financial statement including consolidated financial statement, if any, to be approved by the Board under sub-section (1) of section 134 of the Act; and
  5. the approval of the matter relating to amalgamation, merger, demerger, acquisition, and takeover.

Where there is quorum presence in a meeting through the physical presence of directors, any other director may participate in conferencing through video or other audio-visual means.

Thus, XYZ Ltd. can hold the meeting of its directors through video conferencing or other audio-visual means. But, XYZ Ltd cannot pass a motion relating to approval of the annual financial statements in such meeting.

Note: As per Companies (Meetings of Board and its Powers) Second Amendment Rules, 2020, For the period beginning from 19th March 2020 and ending on the 31st December 2020, the meetings on matters discussed above may be held through video conferencing or other audiovisual means.

Question 4.
Jolly Retails Ltd. issued a notice for the meeting of its Board of directors scheduled for on 5th June 2019 at its corporate office. One of the directors intimated that he would be participating in the meeting through video conferencing. The Secretary contended that the meeting cannot participate through video conferencing and that the concerned director cannot insist that the company should provide video conferencing facilities for attending the board meeting. Is the contention of the Secretary tenable as per the provisions of the Companies Act, 2013? Discuss relevant case laws, if any. (June 2019) (5 marks)
Answer:
1. As per the provisions of Section 173(2) of Companies Act, 2013, the participation of directors in a meeting of the Board may be either in person (personally present) or through video conferencing or other audio visual means. However, where there is quorum in a meeting through the physical presence of directors, any other director may participate through video conferencing or other audio visual means in such meeting on any specified matter.

2. The system of video conferencing or other audio-visual means must be capable of recording and recognizing the participation of the directors and of recording and storing the proceedings of such meetings along with date and time.

3. Rule 4 of the Companies (Meeting of Board and its Powers) Rules, 2014, following matters shall not be dealt with in a meeting through video conferencing or other audiovisual means:

  1. the approval of the annual financial statements;
  2. the approval of the Board’s report;
  3. the approval of the prospectus;
  4. the Audit Committee Meetings for consideration of financial statement including consolidated financial statement, if any, to be approved by the Board under sub-section (1) of section 134 of the Act; and
  5. the approval of the matter relating to amalgamation, merger, demerger, acquisition, and takeover.

Hence, the contention of the secretary that the director cannot participate in a Board meeting through video conferencing is not acceptable.

Note: As per Companies (Meetings of Board and its Powers) Second Amendment Rules, 2020, For the period beginning from 19th March 2020 and ending on the 31st December 2020, the meetings on matters discussed above may be held through video conferencing or other audiovisual means.

Question 5.
Referring to the provision of Companies Act, 2013 advise the directors of a company in the following matters :
(i) The company wishes to obtain approval of the financial statement in a meeting held through video conferencing.
(if) Due to urgency, the company wants to get its prospectus approved in a meeting held through video conferencing. (June 2019) (4 marks)
Answer:
In accordance with Rule 4 of the Companies (Meetings of Board and its Powers) Rules, 2014 following matters shall not be dealt with in a meeting through video conferencing or other audiovisual means:

  • Approval of the annual financial statements.
  • Approval of the Board’s Report.
  • Approval of the Prospectus.
  • Audit Committee Meetings for consideration of financial statement including consolidated financial statement, if any, to be approved by the Board under section 134(1) of the Companies Act, 2013.
  • Approval of the matter relating to amalgamation, merger, demerger, acquisition, and takeover.

In view of the above provisions, the answer to the given case is as follows:

  1. The Company cannot approve financial statements in a meeting held through video conferencing.
  2. The company cannot approve a prospectus in a meeting held through video conferencing even though approval of such prospectus is urgent. The company must hold a physical meeting of the Board of Directors to approve the prospectus of the Company.

Note: As per Companies (Meetings of Board and its Powers) Second Amendment Rules, 2020, For the period beginning from 19th March 2020 and ending on the 31st December 2020, the meetings on matters discussed above may be held through video conferencing or other audiovisual means.

Question 6.
Enumerate the difficulties encountered in holding “Virtual Meetings of Members”. (June 2019) (4 marks)
Answer:
Difficulties in holding Virtual Meetings of Members:

  • Security of the systems used.
  • Streaming with quality without interruption.
  • Providing secure login and shareholder authentication for attendance, with ease of access for shareholders, and remote voting.
  • Combined registration, voting, and reporting software.
  • Customized instant results screen and detailed audit reporting.
  • Data Security of Logins and Passwords.
  • Allowing the shareholders, the choice of device.
  • The technology used must give all shareholders a reasonable opportunity to participate.
  • The technology must be secure and must provide reasonable measures for verifying/validating those allowed to attend and vote at the meeting.
  • The company must provide a digital record of the meeting.

CS Executive Company Law Questions and Answers

Charges – Company Law Important Questions

Charges – Company Law Important Questions

Question 1.
Distinguish Between: ‘Mortgage’ and ‘Charge’. (June 2013, December 2016) (4 marks)
Answer:

S. No. Mortgage Charge
1. A mortgage is created by the act of the parties. 1. A charge may be created either through the act of parties or by the operation of law.
2. A mortgage requires registration under the Transfer of Property Act, 1882. 2. A charge created by the operation of law does not require registration. But a charge created by an act of parties requires registration.
3. A mortgage is for a fixed term. 3. The charge may be in perpetuity.
4. A mortgage is a transfer of an interest in specific immovable property. 4. A charge only gives a right to receive payment out of a particular property.
5. A mortgage is good against subsequent transfers mortgage is good against subsequent transferees. 5. A charge is good against subsequent transferees with notice
6. A simple mortgage carries personal liability unless excluded by express contract. 6. In case of a charge, no personal liability is created. However, where a charge is the result of a contract, there may be a personal remedy

Question 2.
Distinguish between: ‘Notice of a Charge’ and ‘satisfaction of a charge’. (June 2016) (4 marks)
Answer:

Points Notice of a Charge Satisfaction of a Charge
Meaning When a company took a loan against some of the property of the Company, giving it as security then Company is required to notify the ROC, known as a notice of charge. When a company repays a loan and relives the security against which the loan was raised then the company is required to notify the ROC, known as Notice of satisfaction of charge.
Certificate of Registration
  • Where a charge is registered with the ROC, he shall issue a certificate of registration of such charge in Form No. CHG.2.
  • Where particulars of the modification of charge are registered with the ROC, he shall issue a certificate of modification of charge in Form No. CHG. 3.
Where a satisfaction of charge is filed and the registrar enters a memorandum of satisfaction, he shall issue a certificate of registration of satisfaction of charge in Form No. CHG 5.
Form For Notice to Registrar of Companies (ROC)
  • For Other than Debenture:
    In case of registration of charge, the particulars of the charge together with a copy of the instrument, if any, creating or modifying the charge in Form No CHG. 1 duly signed by the Company and Charge-holder with prescribed fees; or
  • For Debentures:
    In case of registration of charge, the particulars of the charge together with a copy of the instrument, if any, creating or modifying the charge in Form No CHG. 9 duly signed by the Company and charge-holder with prescribed fees.
The company shall give intimation to the registrar of the payment or satisfaction in full of any charge within a period of 30 days from the date of such payment or satisfaction in Form No. CHG. 4 with prescribed fees.

Question 3.
Write a short note On Essentials of Mortgage. (December 2011) (4 Marks)
Answer:
When some immovable property is offered as security for repayment of the loan, the transaction is called a mortgage.

Mortgages are advance against immovable property Mortgage has the following essentials:

  • Transfer of an interest in specific immovable property
  • Property must be specific and mentioned in the mortgage deed.
  • The transaction is for the purpose of security of payment of the loan or for the performance of an obligation, which may give rise to a pecuniary liability.

Question 4.
Write a short note on Consequences of Non-registration of a Charge (June 2014) (4 Marks)
Or
What are the consequences of non-registration of a charge which requires registration under Section 77? (December 2010) (5 Marks)
Or
Daisy Ltd. a company registered under the Companies Act, 2013, has failed to register a charge which requires registration under Section 77 and the charge is not registered as per Section 77. What will be the consequences of such non-registration? (June 2011) (4 Marks)
Answer:
Following are the consequences in case of Non-Registration of Charges:
1. Charge becomes Void.

  • A charge which is compulsorily required to be registered but which is not registered is void.
  • This does not mean that the creditors cannot recover their dues. It only means that the benefit of security charged is not available to them.

2. Repayment of Money.

  • Although the security becomes void by non-registration, it does not affect the contract or obligation of the Company to repay the money thereby secured.

3. Punishment Under Section 86

  • Non-registration of particulars of the charge is punishable with a fine.
  • If any company is in default in complying with any of the provisions, the company shall be liable to a penalty of INR 5,00,000.
  • Every officer of the company who is in default shall be liable to a penalty of INR 50,000.

Question 5.
What is the effect of crystallization of a floating charge? (June 2010) (8 Marks)
Or
What is meant by “floating charge” and how it would be crystallized? (June 2014)(4 marks)
Or
Explain whether a Floating Charge attached to the company’s property generally remains dormant till it crystallizes or becomes fixed. (June 2019) (3 Marks)
Answer:
1. Floating Charges:

  • Floating Charge does not attach to any definite property but covers the property of a circulating and fluctuating nature such as stock-in-trade, debtors, etc.
  • It attaches to the property charged in the varying conditions which happen from time to time.
  • Such a charge remains dormant until the person in whose favor charge is created takes steps to crystallize the floating charge.

2. A floating charge crystallizes or becomes fixed in the following situations:

  • Where the Company ceases to carry on the business, whether the principal money has become payable or not unless the debenture or trust deed contains the stipulation to the contrary.
  • On commencement of winding up of the Company.
  • If a debenture holder, having become entitled to realize the securities by reason of the fact that the principal money has become payable, intervenes for the purpose by appointing a receiver or by making an application to the Court for appointment of a receiver.
  • On the happening of the event specified in the deed.

3. Effect of Crystallisation:

  • On crystallization, the floating charge converts itself into a fixed charge.
  • It acquires priority over any subsequent equitable charge and other unsecured creditors.
  • However, preferential creditors having priority for payment over secured creditors in the winding-up get priority over the claims of the debentures holders having floating charge.

Question 6.
Explain clearly the meaning of the terms “fixed charge” and “floating charge”. State circumstances under which a “floating charge” automatically becomes ‘fixed’? (December 2015) (4 marks)
Answer:
1. Meaning of Fixed Charge:

  • Fixed Charge is a charge against a specific identifiable and defined property.
  • Fixed Charge is also known as a specific charge.
  • The property under charge is identified at the time of the creation of the charge.

2. Meaning of Floating Charge:

  • A Floating Charge does not attach to any definite property but covers the property of a circulating and fluctuating nature such as stock-in-trade debtors, etc.
  • A Floating Charge is available only to companies as borrowers.
  • It attaches to the property charged in the varying conditions which happen from time to time.

3. Circumstances: A Floating charge crystallizes or become fixed in the following situations:

  • Where the Company ceases to carry on the business, whether the principal money has become payable or not unless the debenture or trust deed contains the stipulation to the contrary.
  • On commencement of winding up of the Company.
  • If a debenture holder, having become entitled to realize the securities by reason of the fact that the principal money has become payable, intervenes for the purpose by appointing a receiver or by making an application to the Court for appointment of a receiver.
  • On the happening of the event specified in the deed.

Question 7.
A charge created orally shall also require registration. Comment (June 2010) (1 Mark)
Answer:
The statement is correct. All types of charges created by a company on its assets or property require registration.

Question 8.
A company may create a mortgage or a charge, including a floating charge, on any of its book debts. Comment (December 2011) (1 Mark)
Answer:
The statement is correct. The Company can create a mortgage or charge, including a floating charge on any of its book debts.

Question 9.
A charge created always requires registration under line Transfer of Property Act, 1882. Comment (June 2012) (1 Mark)
Answer:
The statement is incorrect. A charge created does not require registration under the Transfer of Property Act, 1882 but it is required to be registered under the Companies Act, 2013.

Question 10.
Rose Ltd. raised a loan from a State Financial Institution by creating hypothecation of book debts and also future debts of the Company. Incidentally, the charge was not registered with the Registrar of Companies concerned. State Financial Institution demanded a certificate of registration of charge for the amount of loan so granted by it. The directors of the Company replied to the State Financial institution that the charge need not be registered for hypothecation of book debts. Is the action of the directors valid? Give reasons. (December 2014) (4 Marks)
Answer:
1. According to Section 2(16) of the Act, “charge” means an interest or lien created on the property or assets of a company or any of its undertakings or both as security and includes a mortgage.

2. Registration of Charges- Section 77(1): Any charge created
(a) within or outside India,
(b) on its property or assets or any of its undertakings,
(c) whether tangible or otherwise, and situated in or outside India shall be registered in Form No. CHG.l.

3. In light of the above-discussed provisions of Section 2(16) and Section 77(1) of the Companies Act, 2013, the raising of a loan from a State Financial Institution by creating hypothecation of book debts and also future debts of the company amount to charge within the definition of Charge under Section 2(16) and needed to be registered under section 77.

4. Thus, the contention of directors of Rose Ltd. is incorrect and not tenable.

5. If Rose Ltd. fails to register the charge under Section 77 then the State Financial Institution can get it registered as per section 78 of the Companies Act, 2013. The State Financial Institution shall be entitled to recover from the company the amount of any fees or additional fees paid by him to the Registrar for the purpose of registration of charge.

Question 11.
XYZ Limited has an office building in London. The Company has been granted a term loan of INR 15 Crore from a Bank. The Company wants to mortgage office building of London. Examining the provisions of the Com¬panies Act, 2013, Answer the following:
(i) Whether the Company can mortgage the above office building?
(ii) Whether a charge can be created for property situated outside India? (June 2017) (4 Marks)
Answer:
1. As per the provisions of Section 77(1):
Any charge created
(a) within or outside India,
(b) on its property or assets or any of its undertakings,
(c) whether tangible or otherwise, and situated in or outside India shall be registered in Form No. CHG.l.

2. As per the provisions of Section 179(3), the Board of Directors of the Company can exercise borrowing power.

3. In light of the above-discussed provisions of the Companies Act, 2013:

  1. XYZ Ltd. can mortgage its office building in London and can avail borrowings as per Section 179(3).
  2. All types of charges tire required to be registered under the Companies Act, 2013, whether created within or outside India under Section 77(1).

Question 12.
KAJ Limited, a company incorporated under the Companies Act, 2013 wants to go for the issue of secured debentures. Referring to relevant provisions and Rules, state the conditions to be satisfied before the company course for such issue of debentures. Will you answer with different in case search issue of debenture is by a government company where the Central Government has given a guarantee? (December 2017) (4 marks)
Answer:

  • As per Section 71, the company issue secured debentures subject to prescribed terms and conditions.
  • Rule 18 of the Companies (Share Capital and Debentures) Rules, 2014, make the following provision in this regard.

The company shall not issue secured debenture, unless it complies with the following conditions, namely:
1. An issue of secured debentures may be made, provided the date of its redemption shall not exceed ten years from the date of issue. Provided that the following classes of companies may issue secured debentures for a period exceeding ten years but not exceeding thirty years:

  1. Companies engaged in setting up of infrastructure projects;
  2. Infrastructure Finance Companies;
  3. Infrastructure Debt Fund Non-Banking Financial Companies.
  4. Companies permitted by a Ministry or Department of the Central Government or by Reserve Bank of India or by the National Hous¬ing Bank or by any other statutory authority to issue debentures for a period exceeding ten years

2. Such an issue of debentures shall be secured by the creation of a charge on the properties or assets of the company or its subsidiaries or its holding company or its associate’s companies, having a value which is sufficient for the due repayment of the number of debentures and interest thereon.

3. The company shall appoint the debenture trustee before the issue of prospectus or letter of offer for subscription of its debentures and not later than sixty days after the allotment of the debentures, execute a debenture trust deed to protect the interest thereon.

4. The security for the debentures by way of a charge or mortgage shall be created in favor of the debenture trustee on:

  1. any specific movable property of the company or its holding company or subsidiaries or associate companies or otherwise;
  2. any specific immovable property wherever situate, or any interest therein.

However, in the case of a non-banking financial company, the charge or mortgage may be created on any movable property.

Yes, the answer will be different if the issue of debentures is by a Government Companies which is fully secured by a guarantee given by the Central Government or one or more State Government or by both, the requirement for the creation of charge shall not apply. Further, in case of any loan taken by a subsidiary company from any bank or financial institution the charge or mortgage may also be created on the properties or assets of the holding company.

Question 13.
The authorized share capital of Shine Ltd. is INR 50 Lakh. The paid-up capital of the Company is INR 20 Lakh. The Board of Directors at its 100th Meeting held in the residence of the Managing Director of the Company resolved to create a charge on the uncalled share capital of INR 30 Lakh. With ref¬erence to the provisions of the Companies Act, 2013 ascertain if the resolution is valid. (June 2018) (4 marks)
Answer:
1. A company does not have the implied power of charging its uncalled share capital. If the Memorandum of Association or Article of Association au¬thorize it to charge then the Company may charge its uncalled capital. The Memorandum may give an express power to charge uncalled capital, or the power may be so wide that it can be inferred by implication.

2. In the decided case of Newton v. Debenture Holders of Anglo-Australian Investment Co. (1895) A.C. 224, the MOA authorized the Company to borrow upon any security of the Company. It was held that the power was wide enough to include a charge on uncalled capital.

3. As per the decided case referred above, the Board of Shine Ltd. cannot create a charge on its uncalled capital unless there are provisions in the Articles of Associations of the Shine Ltd. to create a charge on uncalled capital. The Company not having any implied power to do so.

CS Executive Company Law Questions and Answers

Registers and Records – Company Law Important Questions

Registers and Records – Company Law Important Questions

Question 1.
Enumerate the difference between statutory books and statistical books of a company. (December 2008) (June 2012) (4 marks)
Answer:

Basis of Distinction Statutory Books Statistical Books
Meaning As per the provisions under the Companies Act, 2013, certain books must be maintained by the company which is known as statutory books. As per the provisions of the Companies Act, 2013, in addition to books of account and statutory books, companies usually maintain certain books which are known as Statistical Books.
Nature Statutory Book maintenance is compulsory. Statistical book maintenance is optional.
Place to keep Statutory Books must be kept at the Registered Office of the Company. Statistical Books must be kept at any place other than the registered office of the Company.
Examples
  • Register of Charge
  • Register of Directors and Key Managerial Personnel and their shareholding.
  • Register of Loans and investments made to other body corporate.
  • Share callbook
  • Register of Share Certificates.
  • Agenda Book
  • Register of Power of Attorney.

Question 2.
List out the various registers required to be maintained statutorily under the Companies Act, 2013. (June 2009) (8 marks)
Answer:
The Companies Act, 2013, lays down that every company must maintain and keep books, registers, and copies of returns, documents, etc. at its registered office. These books are known as Statutory Books. Some of the statutory registers are required to be kept open by the company for inspection by directors, members, creditors of the company, and other persons. The company is also required to allow extracts to be taken from certain documents, registers, returns, etc., and furnish copies of certain documents on demand by a member or by any other person on payment of specified fees.

Every company incorporated under the Act is required to keep at its registered office, inter alia, the following statutory books, and registers:
1. Register of sweat equity shares. [Section 54 and Rule 8( 14)of Companies (Share Capital and Debentures Rules, 2014]

2. Register of Employee Stock Options. [Section 62(1 )(b) Rule 12 of Companies(Share Capital and Debentures) Rules, 2014]

3. Register of securities bought back. [Section 68(9) and Rule 17(12) of companies (Share Capital and Debenture) Rules, 2014]

4. Register of deposits. [Section 73 and Rule 14 of Companies (Acceptance of Deposits) Rules, 2014]

5. Register of charges. [Section 85 and Rule 7 of Companies (Registration of Charges) Rules, 2014]

6. Register of members. [Section 88(1 )(a) and Rule 3 of Companies(Management and Administration) Rules, 2014]

7. Register of debenture-holders. [Section 88(l)(b) & (c) and Rule 4 of Companies (Management and Administration) Rules, 2014]

8. Foreign register. [Section 88 (4) and Rule 7 of Companies (Management and Administration) Rules, 2014].

9. Register of Renewed and Duplicate Share Certificates. [Rule 6 of the Companies (Share Capital and Debentures) Rules,2014]

10. Register of Significant beneficial owners in a company. (Section 90 of Companies Act).

11. Register of Postal Ballot. [Section 110 and Rule 22 of the Companies (Management and Administration) Rules, 2014]

12. Books containing minutes of General Meeting and of Board and of Committees of Directors. [Section 118]

13. Books of account. [Section 128]

14. Register of Directors/Key Managerial Personnel. [Section 170(1)]

15. Register of investments in securities not held in the company’s name. [Sec-tion 18 and Rule 14 of Companies (Meetings of Board and its Powers) Rules, 2014]

16. Register of loans, guarantees given and security provided or making the acquisition of securities [Section 186(9) and Rule 12 of Companies (Meetings of Boards and its Powers) Rules, 2014]

17. Register of contracts with companies/firms in which directors are interested. [Section 189(5) and Rule 16 of Companies (Meetings of Boards and its Powers) Rules, 2014]

Question 3.
The Chairman of your company wants to know the procedure of con-donation of delay by the Central Government in filing the documents with the ROC. As a Company Secretary, prepare a note for consideration of the Chairman. (December 2013) (8 marks)
Answer:
Under Section 460 of the Companies Act, 2013, the Central Government may for reasons to be recorded in writing, condone the delay in the following cases:
(a) where any application required to be made to the Central Government under any provision of this Act in respect of any matter is not made within the time specified therein, that Government may, for reasons to be recorded in writing, condone the delay; and

(b) where any document required to be filed with the Registrar under any provision of this Act is not filed within the time specified therein, the Central Government may, for reasons to be recorded in writing, condone the delay.

Procedure for Condonation of delay by Central Government in relation to the filing of documents with Registrar of Companies

  1. Convene a Board Meeting.
  2. Pass Board Resolution for seeking condonation of delay in filing the document.
  3. Submit an application to the Central Government along with the reasons for such delay.
  4. The application should be accompanied by a copy of the Board Resolution seeking condonation of delay, latest audited balance sheet, and profit and loss account certified copy of the memorandum and articles of association and filing fees.
  5. The Central Government may for reasons to be recorded in writing condone the delay.

Question 4.
Minutes of the meetings of the company shall be preserved for a period of not less than eight years. Comment with reference to the provisions of the Companies Act, 2013. (December 2018) (3 marks)
Answer:
1. As per Section 118 of the Companies Act, 2013, minutes books shall be preserved permanently and kept in the custody of the company secretary or any director duly authorized by the board shall be kept in the registered office or such place as the members may decide by passing special resolution pursuant to the requirement of Section 88 read with Section 94.

2. The minutes should be preserved permanently.
Thus, the given Statement is Incorrect.

Question 5.
Director, Ravi, was appointed on 1st July 2018. On 2nd July 2018, he wrote to the Managing Director of the company to inspect the minutes of the board meeting held on 1st August 2017. The Managing Director refused as he was not a director at that time. Ravi attended a meeting held on 1st September 2018 and resigned on 3rd October 2018. On 4th October 2018, he wrote to the Managing Director to send him a copy of the signed minutes of the meeting held on 1st September 2018. Again, the Managing Director refused. Are the actions of the Managing Director valid under the Companies Act, 2013/Secretarial Standards? Comment. (December 2018) (4 marks)
Answer:
As per the provisions of the Secretarial Standard-1: Meetings of the board of directors makes the following provisions regarding the inspection of the minutes by the directors of the company:

  • The Minutes of Meetings of the Board and any Committee thereof can be inspected by the directors.
  • A Director is entitled to inspect the Minutes of the Meetings held during the period of his Directorship, even after he ceases to be a Director.

As per the above-discussed provisions of Secretarial Standard-1:

  1. Ravi, the director of the company can inspect the minutes of a board meeting held before the period of his directorship.
  2. Ravi, director of the company can inspect the minutes of a board meeting held, even after he ceases to be a director.

CS Executive Company Law Questions and Answers

Constitution of India – Jurisprudence, Interpretation & General Laws Important Questions

Constitution of India – Jurisprudence, Interpretation & General Laws Important Questions

Question 1.
The preamble to the Constitution of India sets out the aims and aspirations of the people of India. Comment. [Dec 2007 (4 Marks)]
Or
The true place of a preamble in a statute was at one time the subject of conflicting decisions. Is such an opinion still prevailing? Discuss, citing case law.
[December 2012 (6 Marks)]
Answer:
The preamble says briefly the objects, purposes intended to be served by the statute. The preamble to the Constitution sets out the aims and aspirations c j of the people of India. It is a part of the Constitution. The preamble declares India to be a Sovereign, Socialist, Secular, Democratic Republic and secures to all its citizens Justice, Liberty, Equality, and Fraternity.

It is declared that the § Constitution has been given by the people to themselves, thereby affirming the f republican character of the polity and the sovereignty of the people. The polity assured to the people of India by the Constitution is described in the preamble as a Sovereign, Socialist, Secular, and Democratic Republic.

Significance of the Preamble to the Constitution of India

  1. We, the people: The phrase “we, the people “has been taken from the Constitution of the USA. This means, the Constitution of India has been framed and enacted by the people of India the power to make the Constitution had been achieved by the people of India with great efforts. It was not derived by any external force.
  2. The principle “Government of the People, by the People and for the people ” can be seen in the Preamble.
  3. Democratic: Ours is a democratic country. Every citizen of India, who is aged 18 years and above is entitled to vote, irrespective of his caste, religion, race, sex, economic position. From the village level to parliament level, there will be elections meant for 5 years. While democracy failed in our surrounding countries, it is very much successful in our country.
  4. Secular: Secularism is the structure of our Constitution. Our government respects all religions. It does not uplift or degrade any particular religion.

The State has no religion itself. While our surrounding countries have adopted particular religions; India has not adopted any religion.

Example: Pakistan (Islam), Bangladesh (Islam), Nepal (Hinduism), Sri Lanka (Buddhism), Burma (Buddhism), etc.

Justice: The Preamble intends that justice must be given to every citizen irrespective of poverty, richness, caste, religion, sex, power, political power. There are several examples that our country adheres to this principle very strongly. The Supreme Court decision in Indira Gandhi. RajNarain shows that the Prime Minister and ordinary citizens are equal. Similarly, R V. Narasimha Rao is being prosecuted for the allegations of bribery, forgery, etc. It shows the independent judiciary in India.

Question 2.
“Constitution of India establishes a federation with strong centralizing tendency”. Discuss. [June 2004 (8 Marks)]
Or
“Constitution of India is basically federal with strong unitary features.” Discuss. [June 2010 (8 Marks)]
Answer:
The Constitution of India is basically federal but with certain unitary features. The majority of the Supreme Court judges in Kesavananda Bharati v. the State of Kerala were of the view that the federal features form the basic structure of the Indian Constitution.

However, there is some controversy as to whether the Indian Constitution establishes a federal system or it stipulates a unitary form of Government with some basic federal features. To decide whether our Constitution is federal, unitary, or quasi-federal, one has to consider the con¬tents of our Constitution. Thus, to decide whether our constitution is federal or unitary, it will be better to have look over these systems and constitution.

The federal system has the following essential characteristics:

  • Dual government – one at the center and one each for the States
  • Distribution of powers between Central and State Government
  • Supremacy of the constitution
  • Written constitution
  • Not easy to amend the constitution
  • Authority of Courts

The political system introduced by our Constitution possesses all the aforesaid essentials of a federal polity as both the Union and the State Governments and their respective organs derive their authority from the Constitution and it is not competent for the States to secede from the Union.

There is a division of legislative and executive powers between the Union and the State Governments. Lastly, the Supreme Court stands at the head of our judiciary to guard against the violation of the constitutional provisions. The Supreme Court decides disputes between the Union and the States, or the States inter and interprets finally the provisions of the Constitution.

However, the Indian Constitution does not follow strictly the pure federal system. If we look from another side, our constitution is mainly central and the Central Government has a large sphere of action and thus plays a more dominant role than the states.

Unitary Character:

  • The President of India is the constitutional head. He is the executive of Union. Appointments of Governors are made by him.
  • Appointment and transfer of the Chief Justice and Judges of the High Court are made by the president.
  • Parliament has supreme rights in legislative matters.
  • Parliament has the power to make a law of State Lists under special circumstances.
  • Central Government has the power to issue directions to State Government.
  • States are dependent on the center for aid as their financial resources are inadequate.

Judicial view: The question as to whether the Indian Constitution has a federal form of Government or a unitary constitution with some federal features came up in various cases before the Supreme Court. But in most cases, the observations have been made in a particular context and have to be understood accordingly. The question rests mostly on value judgment ie. on one’s own philosophy.

Thus, the Constitution of India is federal but with striking unitary features.

Question 3.
To what extent does the Indian Constitution differ from the federal system of other countries? [Dec 2014 (8 Marks)]
Answer:
The Constitution of India is basically federal but with certain unitary features. The majority of the Supreme Court judges in Kesavananda Bharati v. the State of Kerala were of the view that the federal features form the basic structure of the Indian Constitution.

The federal system has the following essential characteristics:

  • Dual government – one at the center and one each for the States
  • Distribution of powers between Central and State Government
  • Supremacy of the constitution
  • Written constitution
  • Not easy to amend the constitution
  • Authority of Courts

The political system introduced by our Constitution possesses all the aforesaid essentials of a federal polity as both the Union and the State Governments and their respective organs derive their authority from the Constitution and it is not competent for the States to secede from the Union.

There is a division of legislative and executive powers between the Union and the State Governments. Lastly, the Supreme Court stands at the head of our judiciary to guard against the violation of the constitutional provisions. The Supreme Court decides disputes between the Union and the States, or the States inter and interprets finally the provisions of the Constitution.

However, the Indian constitution does not follow strictly the pure federal system, j If we look from another side, our constitution is mainly central and the Central Government has a large sphere of action and thus plays a more dominant role | than the states.

Question 4.
What do you understand by the expression ‘State’ under Part-III of the Constitution of India? Expiate with the help of decided case law on the point. [Dec 2011 (6 Marks)]
Answer:
State [Article 12]: The term ‘State’ includes:
(a) Government and Parliament of India;
(b) Government and legislature of each state;
(c) All local and other authorities:

  • within the territory of India
  • under the control of the Government of India.

Important case laws:

  1. The expression ‘local authorities ‘refers to authorities like Municipalities, District Boards, Panchayat, Port Trust, Mining, Settlement Boards, etc. [Rashid Ahmed v. M B. Kairana]
  2. The expression ‘other authorities’ includes all authorities created by Constitution or statute. It is not necessary that such authorities should be engaged in performing governmental or sovereign functions. [Electricity Board, Rajasthan v. Mohan Lai]
  3. The expression ‘other authorities ’ includes all those bodies which are acting as agencies or instrumentalities of the government. [R. D. Shetty v. International Airport Authorities]
  4. It has been held that the university is an authority. [the University of Madras v. Shanta Bai]
  5. President is ‘State’ when making an order under Article 359. [Haroobhai v. the State of Gujarat]

Question 5.
Discuss the test laid down by the Supreme Court of India to determine the entity of “State”, whether it Is ‘instrumentality or agency of State’. [Dec 2018 (5 Marks)]
Answer:
In Ajay Hasia v. Khalid Mujib, the Supreme Court has enunciated the following test for determining whether an entity is an instrumentality or agency of the State:

  1. Share Capital: If the entire share capital of the Corporation is held by the Government, it would go a long way towards indicating that the corporation is an instrumentality or agency of the Government
  2. Financial Assistance: Where the financial assistance of the State is so much as to meet almost the entire expenditure of the corporation it would afford some indication of the corporation being impregnated with government character.
  3. Monopoly Status: Whether the corporation enjoys a monopoly status that is conferred or protected by the State.
  4. State control: The existence of deep and pervasive State control may afford an indication that the corporation is a State agency or an instrumentality.
  5. Functions: If the functions of the corporation are of public importance and closely related to government functions, it would be a relevant factor in classifying a corporation as an instrumentally or agency of government.
  6. Department of government: If a department of government is transferred to a corporation, it would be a strong factor supporting an inference of the corporation being an instrumentality or agency of government.

Question 6.
What do you mean by the doctrine of waiver of rights under the Constitution of India? [Dec 2009 (4 Marks)]
Answer:
The doctrine of waiver of rights is based on the premise that a person is his best judgment and that he has the liberty to waive the enjoyment of such rights as are conferred on him by the State. However, the person must have the knowledge of his rights and that the waiver should be voluntary.

The doctrine was discussed in Basheshar Nath v. Income Tax Commissioner, where the majority expressed their view against the waiver of fundamental rights. It was held that it was not open to citizens to waive any of the fundamental rights.

Question 7.
Discuss In brief the doctrine of severability. [June 2013 (8 Marks)]
Answer:
Laws inconsistent with or in derogation of the fundamental rights [Article 13]:
All laws in force in the territory of India immediately before the commencement of the Constitution, in so far as they are inconsistent with the provisions of Part III (Fundamental Rights), shall, to the extent of such inconsistency, be void.
1. The State shall not make any law which takes away or abridges the rights conferred by Part II and any law made in contravention of this clause shall, to the extent of the contravention, be void.

2. One thing to be noted in Article 13 is that it is not the entire law that is affected by the provisions in Part HI, but the law becomes invalid only to the extent to which it is inconsistent with the Fundamental Rights. So only that part of the law will be declared invalid which is inconsistent, and the rest of the law will stand.

However, on this point a clarification has been made by the Courts that an invalid part of the law shall be severed and declared invalid if really it is severable, ie., if after separating the invalid part the valid part is capable of giving effect to the legislature’s intent, then only it will survive, otherwise the Court shall declare the entire law as invalid. This is known as the rule of severability.

3. The doctrine has been applied invariably to cases where it has been found possible to separate the invalid part from the valid part of an Act. Article 13 only says that any law which is inconsistent with the fundamental rights is void “to the extent of inconsistency” and this has been interpreted to imply that it is not necessary to strike down the whole Act as invalid if only a part is invalid and that part can survive independently.

In A.K. Gopalan v. the State of Madras, the j ‘ Supreme Court ruled that where an Act was partly invalid, if the valid portion § was severable from the rest, the valid portion would be maintained, provided j| that it was sufficient to carry out the purpose of the Act.

Question 8.
What is the scope of Article 14 of the Constitution of India? To what extent is It correct to say that Article 14 forbids class legislation, but does not forbid classification? [June 2012(8 Marks)]
Answer:
Equality before the law [Article 14]: The State shall not deny to any person equality before the law or the equal protection of the laws within the territory of India.

The expression ‘equality before the 1aw is a declaration of equality of all persons within the territory of India, implying thereby the absence of any special privilege in favor of any individual.

Equality before the law means that amongst equals the law should be equal.

That means like should be treated alike and among unequal same laws shall not be applicable.

Interpreting the scope of the Article, the Supreme Court of India held that:

  • Equal protection means equal protection under equal circumstances.
  • The State can make a reasonable classification for purposes of legislation.
  • The presumption of reasonableness is in favor of the legislation.
  • The burden of proof is on those who challenge the legislation.

Legislative Classification: A right conferred on persons that they shall not be denied equal protection of the laws does not mean the protection of the same laws for all. It is here that the doctrine of classification steps in and gives content and significance to the guarantee of the equal protection of the laws.

To separate persons similarly situated from those who are not, legislative classification or distinction is made carefully between persons who are and who are not similarly situated. The Supreme Court in a number of cases has upheld the view that Article 14 does not rule out classification for purposes of legislation. Article 14 does not forbid classification or differentiation which rests upon reasonable grounds of distinction.

The Supreme Court in State of Bihar v. Bihar State ‘Plus-2 ’ lectures Associations, held that now it is well settled and cannot be disputed that Article 14 of the Constitution guarantees equality before the law and confers equal protection of laws. It prohibits the state from denying persons or class of persons equal treatment; provided they are equals and are similarly situated. It, however, does not forbid classification. In other words, what Article 14 prohibits is discrimination and not classification if otherwise, such classification is legal, valid, and reasonable.

Test of valid classification: Since a distinction is to be made for the purpose of enacting legislation, it must pass the classical test enunciated by the Supreme Court in State of West Bengal v. Anwar Ali Sarkar.

Permissible classification must satisfy two conditions, namely:

  1. It must be founded on an intelligible differentia that distinguishes persons or things that are grouped together from others left out of the group.
  2. The differentia must have a rational nexus with the object sought to be achieved by the statute in question.
    The classification may be founded on different bases, such as geographical, or according to objects or occupation or the like. What is necessary is that there must be a nexus between the basis of classification and the object of the Act under consideration. A legal and valid classification may be based on educational qualifications.

A law based on a permissible classification fulfills the guarantee of the equal protection of the laws and is valid. On the other hand, if it is based on an impermissible classification it violates that guarantee and is void.

Reiterating the test of reasonable classification, the Supreme Court in Dharam Dutt. Union of India held that laying down of intelligible differentia does not, however, mean that the legislative classification should be scientifically perfect or logically complete.

Question 9.
“Article 14 of the Constitution of India does not rule out classification for purposes of legislation; what it requires is a valid classification for the same.” Explain. [Dec 2013 (8 Marks)]
Answer:
Legislative Classification: A right conferred on persons that they shall not be denied equal protection of the laws does not mean the protection of the same laws for all. It is here that the doctrine of classification steps in and gives content and significance to the guarantee of the equal protection of the laws.

To separate persons similarly situated from those who are not, legislative classification or distinction is made carefully between persons who are and who are not similarly situated. The Supreme Court in a number of cases has upheld the view that Article 14 does not rule out classification for purposes of legislation. Article 14 does not forbid classification or differentiation which rests upon reasonable grounds of distinction.

The Supreme Court in State of Bihar v. Bihar State ‘Plus-2 ’ lectures Associations, held that now it is well settled and cannot be disputed that Article 14 of the Constitution guarantees equality before the law and confers equal protection of laws.

It prohibits the state from denying persons or class of persons equal treatment; provided they are equals and are similarly situated. It, however, does not forbid classification. In other words, what Article 14 prohibits is discrimination and not classification if otherwise, such classification is legal, valid, and reasonable.

Test of valid classification: Since a distinction is to be made for the purpose of enacting legislation, it must pass the classical test enunciated by the Supreme Court in State of West Bengal v. Anwar Ali Sarkar.

Permissible classification must satisfy two conditions, namely:

  1. It must be founded on an intelligible differentia that distinguishes persons or things that are grouped together from others left out of the group.
  2. The differentia must have a rational nexus with the object sought to be achieved by the statute in question.
    The classification may be founded on a different basis, such as geographical, or according to objects or occupation or the like. What is necessary is that there must be a nexus between the basis of classification and the object of the Act under consideration. A legal and valid classification may be based on educational qualifications.

A law based on a permissible classification fulfills the guarantee of the equal protection of the laws and is valid. On the other hand, if it is based on an impermissible classification it violates that guarantee and is void.

Reiterating the test of reasonable classification, the Supreme Court in Dharam Dutt. Union of India held that laying down of intelligible differentia does not, however, mean that the legislative classification should be scientifically perfect or logically complete.

Question 10.
Article 14 of the Constitution of India says that the state shall not deny to any person equality before the law or the equal protection of laws within the territory of India. Explain it. Refer to the relevant Judgments. [June 2019 (8 Marks)]
Answer:
Equality before the law [Article 14]: The State shall not deny to any person equality before the law or the equal protection of the laws within the territory of India.

“Equality before the law” is an expression of English Common Law while “equal protection of laws” owes its origin to the American Constitution.

The expression ‘equality before the law’ is a declaration of equality of all persons within the territory of India, implying thereby the absence of any special privilege in favor of any individual.

Equality before the law means that amongst equals the law should be equal. That means like should be treated alike and among unequal same laws shall not be applicable.

Both the phrases aim to establish what is called the “equality to status and of opportunity” as embodied in the Preamble of the Constitution. While equality before the law is a somewhat negative concept implying the absence of any special privilege in favor of any individual and the equal subjection of all classes to the ordinary law, equal protection of laws is a more positive concept employing equality of treatment under equal circumstances.

Thus, Article 14 stands for the establishment of a situation under which there is the complete absence of any arbitrary discrimination by the laws themselves or in their administration.

Interpreting the scope of the Article, the Supreme Court of India held that:

  1. Equal protection means equal protection under equal circumstances.
  2. The State can make a reasonable classification for purposes of legislation.
  3. The presumption of reasonableness is in favor of the legislation.
  4. The burden of proof is on those who challenge the legislation. Explaining the scope of reasonable classification, the Court held that “even one corporation or a group of persons can be taken to be a class by itself for the purpose of legislation provided there is sufficient basis or reason for it. The onus of proving that there were also other companies similarly situated and this company alone has been discriminated against, was on the petitioner”.

Article 14 prevents discriminatory practices only by the State and not by individuals. For instance, if a private employer like the owner of a private business concern discriminates in choosing his employees or treats his employees unequally, the person discriminated against will have no judicial remedy.

A remarkable example of the application of the principle of equality under the Constitution is the decision of the Constitution Bench of the Supreme Court in R. K. Garg v. Union of India. The legislation under attack was the Special Bearer Bonds (Immunities and Exemptions) Act, 1981. It permitted investment of black money in the purchase of these Bonds without any questions being asked as to how this money came into the possession.

In public interest litigation, it was contended that Article 14 had been violated because honest taxpayers were adversely discriminated against by the Act, which legalized evasion. But the Supreme Court rejected the challenge, taking note of the magnitude of the problem of black money which had brought into being a parallel economy.

In Air India v. Nergesh Meerza & Others, the Air India crew running the flights consisting of Pilots, FPs, and In-flights Pursers, on the one hand, the Air Hostesses, Check Air Hostesses, Additional Air Hostesses and Chief Air Hostesses on the other hand. The modes of appointment, service conditions were different for Pilots and Air Hostesses. The posts of Air Hostesses were purely reserved for young, attractive, and unmarried ladies from the ages 18 to 25 years. An Air Hostess should retire from the service on her attaining the age of 30 years or when she would get married whichever is earlier.

However, for the male crew, the retirement age was prescribed as 58 years and there was no restriction on marriage. Air Hostesses filed their grievances. The Supreme Court gave the judgment in favor of the Air Hostesses opining that too much gender discrimination was shown by the Air India Corporation.

Question 11.
Preferential treatment to certain persons belonging to backward classes in the form of reservation in education and jobs as provided in Articles 15(4) & 16(4) of the Constiiilbn of India is a means of ensuring the canon of equality enshrined in the preamble of the Constitution of India. Evaluate the statement. [Dec 2006 (8 Marks)]
Answer:
Prohibition of discrimination [Article 15]: This article prohibits the State from discriminating against any citizen on grounds only of religion, race, caste, sex, place of birth, or any of them.

Further, no citizen shall be subjected to any disability, restriction, or condition with regard to:
(a) Access to shops, public restaurants, hotels, and places of public entertainment; or
(b) The use of wells, tanks, bathing ghats, roads,s and places of public resort, maintained wholly or partially out of State funds or dedicated to the use of the general public.

Exception: The State can make special provisions for women and children. The State can make special provision for the advancement of:

  • Socially and educationally backward classes of citizens
  • Scheduled casts and
  • Scheduled tribes

Protective discrimination: In the eye of the law, there is no discrimination between man or woman. So, for a post of a clerk or Prime Minister man or woman are a competent person. There is no discrimination between them. But in fact, a man is physically stronger than a woman.

Therefore, keeping the weak physical position of the woman and children, the State is authorized by Article 15(3) to make any special provisions for their benefit. It is called ‘protective discrimination. Similarly for the advancement of the educationally and socially backward classes of people SC’s and ST’s the State is empowered to make special provisions protecting them under Article 15(4).

Question 12.
Akshay was denied public employment on the ground of place of birth. Discuss the remedy available to Akshay under the provisions of the Constitution of India. [Dec 2002 (5 Marks)]
Answer:
If someone is denied public employment on grounds of his caste, religion, or place of birth, he can use Article 16 of the Constitution for opposing such action. Article 16 guarantees to all citizens equality of opportunity in matters relating to the employment or appointment of office under the State. It also prohibits discrimination against a citizen on the grounds of religion race caste, sex descent, place of birth, or residence. Hence, Akshay can use the protection of this article and seek redressal.

Question 13.
Write a short note on the Abolition of untouchability
Answer:
Abolition of Untouchability [Article 17]: “Untouchability” is abolished and its practice in any form is forbidden. The enforcement of any disability arising out of “Untouchability” shall be an offense punishable in accordance with the law.

In 1955 Parliament enacted the Untouchability (Offences) Act, 1955. In 1976, the Act was amended and renamed as the “Protection of Civil Rights Act, 1955” making changes in the existing law namely, all offenses to be treated as non-compoundable and offenses punishable up to 3 months to be tried summarily; punishment of offenses enhanced; preaching of untouchability or it’s just made an offense; machinery envisaged for better administration and enforcement of its provisions.

Question 14.
Write a short note on the Abolition of titles
Answer:
Abolition of titles [Article 18]:

  • No title, not being a military or academic distinction, shall be conferred by the State.
  • No citizen of India shall accept any title from any foreign State.
  • No person who is not a citizen of India shall, while he holds any office of profit or trust under the State, accept without the consent of the President any title from any foreign State.
  • No person holding any office of profit or trust under the State shall, without the consent of the President, accept any present, emolument, or office of any kind from or under any foreign State.

Article 18 is more a prohibition rather than a fundamental right. British Government used to confer titles upon persons who showed special allegiance to them. Many persons were made:

  • Sir,
  • Raj Bahadur,
  • Rai Saheb,
  • Knight, etc.

These titles had the effect of creating a class of certain persons that were regarded superior to others and thus had the effect of perpetuating inequality. To do away with that practice, Article 18 provides for the abolition of such titles.

Question 15.
“The right of freedom of speech and expression under Article 19(l)(a) of the Constitution of India is not an absolute right but subject to reasonable restrictions.” Discuss. [Dec 2009 (8 Marks)]
Answer:

  1. Freedom of speech, considered the basic freedom by most philosophical thinkers, consists of several facets, including the right to express one’s opinion unhindered, unfettered by the fear of retribution.
  2. It is one of the most basic elements for a healthy, open-minded democracy. It allows people to freely participate in the social and political happenings of their country.
  3. The right of freedom to of speech and expression is not completely unchecked. Article 19(2) allows for reasonable restrictions to be imposed on all fundamental rights, including that of freedom to speech and expression.
  4. The right to speech and expression includes the right to make a good or bad speech and even the right not to speak. One may express oneself even by signs. Freedom of speech and expression means the right to express one’s convictions and opinions freely by word of mouth, writing, printing, pictures, or any other mode.

Restriction on freedom of making speech & expression [Article 19(2)]: The State may impose by law reasonable restrictions on the freedom of speech and expression. Such restrictions may relate to:

  • Security of the State
  • Friendly relations with foreign states
  • Public order
  • Decency or morality
  • Contempt of Court
  • Defamation
  • Sovereignty and integrity of India

Reasonable restrictions under these heads can be imposed only by a duly enacted law and not by executive action. [Express News Papers Pvt. Ltd. v. Union of India]

Question 16.
“Right to fundamental freedoms is not absolute.” Elaborate. [June 2014 (6 Marks)]
Answer:
Article 19(1) of the Constitution, guarantees to the citizens of India six freedoms. Accordingly, all citizens shall have the right:
(a) To freedom of speech & expression
(b) To assemble peaceably & without arms
(c) To form association or unions
(d) To move freely throughout the territory of India
(e) To reside and settle in any part of the territory of India
(f) Etr acquire, hold and dispose of- of property [Deleted by 44th Amendment in 1978]
(g) To practice any profession, or to carry on any occupation, trade, or business Reasonable restrictions: These freedoms are basic rights that are recognized as the natural rights inherent in the status of a citizen. At the same time, none of these freedoms is absolute but subject to reasonable restrictions. The Constitution under Article 19(2) to 19(6) permits the imposition of restrictions on these freedoms subject to the following conditions:

  • The restriction can be imposed by law and not by purely executive order.
  • The restriction must be reasonable.
  • The restriction must be imposed for achieving objects specified in Article 19(l)(fl) to (g).

The onus of proving to the satisfaction of the Court that the restriction is reasonable upon the State.

Question 17.
An organization of some persons belonging to a particular community sat on a dharna near Jan tar Mantar in New Delhi and later on moved towards Parliament House raising slogans against the Government to press for their demands. This led to a traffic jam. The government had imposed a ban on demonstrations near and at the Parliament House. The organization filed a petition in the High Court against the ban, pleading infringement of their fundamental right of freedom. Will the petition be admitted? Give reasons. [June 2008 (4 Marks)]
Answer:
Article 19(l)(b) gives the right to citizens to assemble peacefully and without arms. However, apart from the fact that the assembly must be peaceful and without arms, the State is also authorized to impose reasonable restrictions on this right in the interests of:

  • Sovereignty & integrity of India, or
  • Public order.

As facts given in the case, an organization of a business community staged processions, demonstrations, and agitations before the secretariat of the State Government on busy roads to press for their demands. This caused a traffic jam which is against the public order and the State can definitely impose a ban on such demonstrations.

As the ban on demonstration is valid, the petition will get rejected by the High Court.

Question 18.
The government of Madhya Pradesh passed a law prohibiting the manufacture of bidis in the villages during the agricultural season. No person residing in the village could employ any other person nor engage himself in the manufacture of bidis during the agricultural season. The objective of the provision was to ensure an adequate supply of labor for agricultural purposes. A bidi manufacturer could not even engage labor from outside the State, and so, had to suspend the manufacture of bidis during the agricultural season. Even villagers incapable of engaging in agriculture, like old persons, women, and children, etc., who supplemented their income by engaging themselves in manufacturing bidis were prohibited without any reason. Decide whether a law passed by the Government of Madhya Pradesh is constitutionally valid. [Dec 2009 (5 Marks)]
Answer:
Article 19(l)(g) of the constitution guarantees to all citizens freedom to practice any profession, or to carry any occupation, trade, or business. Such freedom is not absolute but subject to reasonable restrictions as may be imposed by the State. However, such restriction must be reasonable and can be imposed only by a duly enacted law and not by executive action. [Express News Papers Pvt. Ltd. v. Union of India]

The facts of the case are similar to Chintaman Rao v. the State of Madhya Pradesh, wherein the Supreme Court held the Central Provinces & Berar Regulation of Manufacture of Bidis (Agricultural Purpose) Act, 1948 invalid and unconstitutional because it totally prohibited the manufacture of bidis during the agricultural season in certain parts of the State.

Thus, a law passed by the Government of Madhya Pradesh is unconstitutional and invalid.

Question 19.
What are the restrictions on right to freedom of speech and expression under Article 19 of the Constitution of India? [Dec 2018 (4 Marks)]
Answer:
Restriction on freedom of making speech & expression [Article 19(2)]: The State may impose by law reasonable restrictions on the freedom of speech and expression. Such restrictions may relate to:

  • Security of the State
  • Friendly relations with foreign states
  • Public order
  • Decency or morality
  • Contempt of Court
  • Defamation
  • Sovereignty and integrity of India

Reasonable restrictions under these heads can be imposed only by a duly enacted law and not by executive action. [Express News Papers Pvt. Ltd. v. Union of India]

Question 20.
Explain the freedom of association under the Constitution of India. What reasonable restrictions have been imposed on this freedom under Article 19 of the Constitution of India? [June 2019 (5 Marks)]
Answer:
Freedom of association [Article 19( 1 )(c)]: Freedom of association includes freedom to hold meetings and to take out processions without arms. The right to form associations for unions is also guaranteed so that people are free to have the members entertaining similar views. This right is subject to a reasonable restriction which the State may impose in the interests of:

  • Sovereignty and integrity of India or
  • Public order or
  • Morality.

Question 21.
What do you mean by double jeopardy? [Dec 2009 (4 Marks)]
Answer:
Double jeopardy means no one should be imprisoned or penalized two times for the same offense.
Protection against double jeopardy [Article 20(2)]: No person can be prosecuted and punished for the same offense more than once.

It is, however, to be noted that the conjunction ‘and is used between the words “prosecuted and punished” and therefore, if a person has been let off after prosecution without being punished, he can be prosecuted again.

Question 22.
“Article 20 of the Constitution of India guarantees protection against self¬incrimination”. Explain briefly. [Dec 2018 (4 Marks)]
Answer:
Protection against self-incrimination [Article 20(3)]: A person accused of any offense cannot be compelled to be a witness against himself. In other words, an accused cannot be compelled to state anything which goes against him. But it is to be noted that a person is entitled to this protection, only when all the three conditions are fulfilled:

  • He must be accused of an offense.
  • There must be a compulsion to be a witness.
  • Such compulsion should result in his giving evidence against himself.

So, if the person was not an accused when he made a statement or the statement was not made as a witness or it was made by him without compulsion and does not result as a statement against him, then the protection available under this provision does not extend to such person or to such statement.

Question 23.
“Article 21 of the Constitution of India has been so transformed by the judiciary that it now encompasses all conceivable rights within its ambit.” Discuss. [Dec 2011 (8 Marks)]
Answer:
Protection of life and personal liberty [Article 21]: No person shall be deprived of his life or personal liberty except according to procedure established by law.

The majority in the case of A.K. Gopalan v. the State of Madras gave a narrow meaning to the expression ‘personal liberty’ within the subject matter of Articles 20 to 22 by confining it to the liberty of the person (that is, of the body of a person). The majority of the judges also took a narrow view of the expression ‘procedure established by law in this case.

The restricted interpretation of the expression ‘personal liberty’ preferred by the majority judgment in A.K. Gopalan’s case namely, that the expression ‘personal liberty’ means only liberty relating to or concerning the person or body of the individual, has not been accepted by the Supreme Court in subsequent cases.

That the expression ‘personal liberty’ is not limited to bodily restraint or to confinement to prison, only is well illustrated in Kharak Singh v. State of U.P. In that case the question raised was of the validity of the police regulations authorizing the police to conduct what are called as domiciliary visits against bad characters and to have surveillance over them.

The court held that such visits were an invasion, on the part of the police, of the sanctity of a man’s home and an intrusion into his personal security and his right to sleep, and therefore violative of the personal liberty of the individual, unless authorized by a valid law. As regards the regulations authorizing surveillance over the movements of an individual the court was of the view that they were not bad, as no right to privacy has been guaranteed in the Constitution.

In Satwant Singh Sawhney v. A.P.O., New Delhi, it was held that the right to travel is included within the expression ‘personal liberty and, therefore, no person can be deprived of his right to travel, except according to the procedure established by law. Since a passport is essential for the enjoyment of that right, the denial of a passport amounts to deprivation of personal liberty.

In the absence of any procedure prescribed by the law of land sustaining the refusal of passport to a person, its refusal amounts to an unauthorized deprivation of personal liberty guaranteed by Article 21 This decision was accepted by the Parliament, and the infirmity was set right by the enactment of the Passports Act, 1967.

1. In Maneka Gandhi’s case, the Supreme Court overruled its judgment in the Gopalan Case. It stated that protection under Article 21 should be available not only against arbitrary executive action but also against arbitrary legislative action by introducing the American concept of ‘due process of law’. It pronounced the expression ‘Personal Liberty’ is of the widest amplitude and it covers a wide range of rights that go to constitute the personal liberties of a man.

2. In Maneka Gandhi’s case, it was held that before a person may be deprived of his liberty there must be:

  • A valid law
  • The law must provide a procedure.
  • The procedure must be just, fair and reasonable.
  • The law must be reasonable.

The Court’s decision in Maneka Gandhi Case has been reaffirmed in the subsequent cases also.

Thus, it was held that the right to live is not merely confined to physical existence but includes the right to live with human dignity. This was given rise to many fundamental rights.

All these rights although not enshrined in the constitution but found their root in Article 21. Some of these rights are:

  • Right to bail.
  • Right against the use of third-degree methods by police.
  • Right of the detained person to have an interview with his lawyer and family members.
  • Right to travel abroad.

Question 24.
Discuss ‘the procedure established by law’ under Article 21 of the Constitution of India with decided case laws. [Dec 2018 (8 Marks)]
Answer:
In Maneka Gandhi’s case, the Supreme Court overruled its judgment in the Gopalan Case. It stated that protection under Article 21 should be available not only against arbitrary executive action but also against arbitrary legislative action by introducing the American concept of ‘due process of law’. It pronounced the expression ‘Personal Liberty’ is of the widest amplitude and it covers a wide range of rights that go to constitute the personal liberties of a man.

1. In Maneka Gandhi’s case, it was held that before a person may be deprived of his liberty there must be:

  • A valid law
  • The law must provide a procedure.
  • The procedure must be just, fair and reasonable.
  • The law must be reasonable.

The Court’s decision in Maneka Gandhi Case has been reaffirmed in the subsequent cases also.

Thus, it was held that the right to live is not merely confined to physical existence but includes the right to live with human dignity. This was given rise to many fundamental rights.

All these rights although not enshrined in the constitution but found their root in Article 21. Some of these rights are:

  • Right to bail.
  • Right against the use of third-degree methods by police.
  • Right of the detained person to have an interview with his lawyer and family members.
  • Right to travel abroad.

Question 25.
Write a short note on the Right to education
Answer:
Right to education [Article 21A]: The State shall provide free and compulsory education to all children of the age of 6 to 14 years in such manner as the State may, by law, determine.

The Constitution (Eighty-sixth Amendment) Act, 2002 inserted Article 21A in the Constitution of India to provide free and compulsory education of all children in the age group of 6 to 14 years as a Fundamental Right in such a manner as the State may, by law, determine.

The Right of Children to Free & Compulsory Education Act, 2009 [RTE Act, 2009], which represents the consequential legislation envisaged under Article 21 A, means that every child has a right to full-time elementary education of satisfactory and equitable quality in a formal school which satisfies certain essential norms and standards.

Question 26.
Write a short note on Safeguards in a law providing for preventive detention. [Dec 2006 (6 Marks)]
Or
What is meant by ‘preventive detention? What are the safeguards available against preventive detention? [June 2013 (6 Marks)]
Answer:
Preventive detention means the detention of a person without trial. The object of preventive detention is not to punish a person for having done something but to intercept him before he does it and to prevent him from doing it. No offense is proved nor any charge formulated and yet a person is detained because he is likely to commit an act prohibited by law.

Protection against arrest and detention in certain cases [Article 22]:
1. No person who is arrested shall be detained in custody without being informed, as soon as may be, of the grounds for such arrest nor shall he > be denied the right to consult, and to be defended by, a legal practitioner •§ of his choice. f

2. Every person who is arrested and detained in custody shall be produced before the nearest Magistrate within a period of 24 hours of such arrest excluding the time necessary for the journey from the place of arrest to the court of the Magistrate.

3. No such person shall be detained in custody beyond the period of 24 hours without the authority of a magistrate.
Safeguards against Preventive Detention:

4. No law providing for preventive detention shall authorize the detention of a person for a longer period than 3 months unless:
(a) An Advisory Board consisting of persons who are, or have been, or are qualified to be appointed as, Judges of a High Court has reported before the expiration of the said period of 3 months that there is in its opinion sufficient cause for such detention.
(b) Such person is detained in accordance with the provisions of any law made by Parliament.

5. When any person is detained in pursuance of an order made under any law providing for preventive detention, the authority making the order shall, as soon as may be, communicate to such person the grounds on which the order has been made and shall afford him the earliest opportunity of making a representation against the order.

Question 27.
Discuss the right against exploitation as guaranteed under the Constitution of India. [Dec 1997 (12 Marks)]
Answer:
Right against exploitation [Article 23]: Traffic in human beings and beggars and other similar forms of forced labor are prohibited and any contravention of this provision shall be an offense punishable in accordance with the law.

As per Article 23, traffic in human beings and beggars and other similar forms of forced labor are prohibited. Thus the traditional system of beggars particularly in villages becomes unconstitutional and a person who is asked to do any labor without payment or even a laborer with payment against his desire can complain against the violation of this fundamental right.

‘Traffic’ in human beings means to deal in men and women like goods, such as to sell or let or otherwise dispose of them. ‘Beggar’ means involuntary work without payment.

The State can impose compulsory service for public purposes such as conscription for defense or social service etc. While imposing such compulsory service the State cannot make any discrimination on grounds only of religion, race, caste or class, or any of them. [Article 23(2)]

Prohibition of employment of children factories etc. [Article 24]: No child below the age of 14 years shall be employed to work in any factory or mine or engaged in any other hazardous employment.

Article 39(e) imposes an obligation upon the State to ensure that the health and strength of the workers, men, and women, and the tender age of children are not abused and the citizens are not forced by economic necessity to enter avocations unsummed to their age, strength, etc.

Accordingly, keeping in view the provision of Article 24 read with Article 39(e) following laws have been enacted or amended suitability:

  • Child Labour (Prohibition & Regulations) Act, 1986
  • Children (Pledging of Labour) Act, 1933
  • Factories Act, 1948
  • Mines Act, 1952
  • Apprentice Act, 1961.

Question 28.
“India is a secular State.” Explain the provisions of the Constitution of India in this regard. Discuss the right to freedom to profess and propagate religion and limitations thereto. [June 2002 (12 Marks)]
Answer:
Secularism is the structure of our Constitution. Our government respects all religions. It does not uplift or degrade any particular religion. The State has no religion itself. While our surrounding countries have adopted particular religions; India has not adopted any religion.

Example: Pakistan (Islam), Bangladesh (Islam), Nepal (Hinduism), Sri Lanka (Buddhism), Burma (Buddhism), etc.

The Constitution of India stands for a secular State. The State has no official religion. Secularism pervades its provisions which give full opportunity to all persons to profess, practice, and propagate the religion of their choice.

The Supreme Court in State of Karnataka v. Dr. Praveen Bhai Thogadia held that secularism means that State should have no religion of its own and each person, whatever his religion, must get an assurance from the State that he has the protection of law to freely profess, practice and propagate his religion and freedom of conscience.

Provisions as to secularism are given in Article 25 to 28 of the Constitution of India which provides as follows:
Article 25 provides that all persons are entitled to freedom of conscience and the right freely to profess to practice religion.

Article 26 provides that subject to public order, morality, and health, every religious denomination or any section thereof shall have the right:

  • To establish and maintain institutions of religious and charitable purposes
  • To manage its own affairs in matters of religion
  • To own and acquire movable and immovable property
  • To administer such property in accordance with few.

Article 27 provides that no person shall be compelled to pay any taxes, the proceeds of which are specifically appropriated in payment of expenses for the promotion or maintenance of any particular religion or religious denomination.

Article 28 provides that no religious instruction shall be provided in any educational institution wholly maintained out of State funds.

Question 29.
Describe the right of minorities to establish and administer educational institutions as enshrined in the Constitution of India. [June 2013 (6 Marks)]
Answer:
Right of minorities to establish and administer educational institutions [Article 30]: All minorities, whether based on religion or on language, shall have the right to establish and administer educational institutions of their choice.

In making any law providing for the compulsory acquisition of any property of an educational institution established and administered by a minority, the State shall ensure that the amount fixed by or determined under such law for the acquisition of such property is such as would not restrict or abrogate the right guaranteed under that clause.

The State shall not, in granting aid to educational institutions, discriminate against any educational institution on the ground that it is under the management of a minority, whether based on religion or language.

In T.M.A. Pai Foundation v. the State of Karnataka, is an eleven Bench decision dealing with the right of minorities to establish and administer educational institutions, the Supreme Court held that minority includes both linguistic and religious minorities and for determination of minority status, the unit would be the State and not the whole of India.

Further, the right of minorities to establish and administer educational institutions (including professional education) was not absolute and regulatory measures could be imposed for ensuring educational standards and maintaining excellence thereof. Rights of minorities included the right to determine the procedure and method of admission and selection of students, which should be fair and transparent, and based on merit.

Question 30.
Examine the amenability of fundamental rights.
Answer:
The elementary question in controversy has been whether Fundamental Rights are amendable so as to take away the basic rights guaranteed by the Constitution. Another controversy deals with the extent, scope, and authority of £j Parliament to amend the Constitution.

The answer has been given by the Supreme Court from time to time, sometimes under immense pressure, and can be understood in the light of the following cases:
1. Shankari Prasad v. Union of India: The validity of the First Amendment to the Constitution was challenged on the ground that it purported to abridge the fundamental rights. The Supreme Court held that the power to amend the Constitution, including Fundamental Rights is contained in Article 368. An amendment is not a law within the meaning of Article 13(2). An amendment is valid even if it abridges any fundamental Right. This decision was approved by the majority judgment in Sajjan Singh v. the State of Rajasthan.

2. Golaknath v. State of Punjab AIR 1967 SC 1643: The Supreme Court prospectively overruled its decision in Shankari Prasad and Sajjan Singh cases and held Fundamental Rights are outside the amendatory process if the amendment takes away or abridges any of the rights.

It also added that Article 368 merely lays down the procedure for the purpose of amendment. Further, the Court said that an amendment is a law under Article 13(2) of the Constitution of India, and if it violates any fundamental right, it may be declared void.

3. To nullify the effect of the Golaknath case, Parliament passed the Constitution (24th Amendment) Act in 1971 introducing certain changes in Article 13 and Article 368, so to assert the power of Parliament to amend the Fundamental Rights.

4. Kesavanand Bharti v. the State of Kerala’. The Supreme Court upheld the validity of the 24th Constitutional Amendment holding that Parliament can amend any part of the Constitution including the Fundamental Rights. But the Court made it clear that Parliament cannot alter the basic structure or the framework of the Constitution.

5. To neutralize the effect of this limitation, the Constitution (42nd Amend¬ment) Act, 1976 added two new clauses to Article 368. By new Clause (4), it has been provided that no amendment of the Constitution made before or after the 42nd Amendment Act shall be questioned in any Court on any ground. New Clause (5) declares that there shall be limitation whatever on the Constitutional power of parliament to amend by way of addition, variation, or repeal the provisions of this Constitution made under Article 368.

6. Minerva Mills v. Union of India: The Supreme Court unanimously held that Clauses (4) & (5) of Article 368 and Section 55 of the 42nd Amendment Act as unconstitutional transgressing the limits of the amending power and damaging or destroying the basic structure of the Constitution.

7. Woman Rao v. Union of India: The Supreme Court held that the amend¬ments to the Constitution made on or after 24.4.1973 by which 9th Schedule as amended from time to time by inclusion of various Acts, regulations therein were open to challenge on the ground that they, or anyone or more of them are beyond the constitutional power of Parliament since they damage the basic or essential features of the Constitution or its basic structure.

Question 31.
Is it correct to say that Directive Principles of State Policy have to conform to and run as subsidiary to Fundamental Rights? Discuss. [June 20If (6 Marks)]
Answer:
1. Fundamental Rights are defined as the basic human rights of all citizens. These rights, defined in Part III of the Constitution, apply irrespective of race, place of birth, religion, caste, creed, or sex. They are enforceable by the Courts.

2. Directive Principles of State Policy are guidelines for the framing of laws by the government. These provisions, set out in Part IV of the Constitu¬tion, are not enforceable by the Courts, but the principles on which they are based are fundamental guidelines for governance that the State is expected to apply in framing and passing laws.

3. Since Directive Principles are not enforceable by Court, their non-obser¬vance does not create any legal consequences. But any law implementing Directive Principles has to conform to Fundamental Rights.

4. In the State of Madras v. Champakam Dorajrajan, Supreme Court held that Directive Principles have to conform and run as a subsidiary to Fundamental Rights because the latter is enforceable in courts while the former is not. However, this position was changed later. Being part of the same constitution, both Fundamental Rights and Directive Principles are equally important and neither of them is superior or inferior to the other. They are in fact complementary and supplementary to each other. Both should be given effect as far as possible.

5. Though Parliament is competent to amend the constitution in order to enable the state to implement Directive Principles, it should ensure that the basic structure of the Constitution is not affected.

6. Constitution is based on the bedrock of balance between the Directive Principles and Fundamental Rights and to give absolute primacy to one over the other would disturb this balance. Both can co-exist harmoniously.

Question 32.
Discuss the fundamental duties imposed on citizens of India. [June 2012 (6 Marks)]
Answer:
Fundamental Duties [Article 51 A]: It shall be the duty of every citizen of India:

  1. To abide by the Constitution and respect its ideals and institutions, the National Flag and the National Anthem.
  2. To cherish and follow the noble ideals which inspired our national struggle for freedom.
  3. To uphold and protect the sovereignty, unity, and integrity of India.
  4. To defend the country and render national service when called upon to do so.
  5. To promote harmony and the spirit of common brotherhood amongst all the people of India transcending religious, linguistic, and regional or sectional diversities.
  6. To renounce practices derogatory to the dignity of women.
  7. To value and preserve the rich heritage of our composite culture.
  8. To protect and improve the natural environment including forests, lakes, rivers, and wildlife, and to have compassion for living creatures.
  9. To develop the scientific temper, humanism, and the spirit of inquiry and reform.
  10. To safeguard public property and to abjure violence.
  11. To strive towards excellence in all spheres of individual and collective activity so that the nation constantly rises to higher levels of endeavor and achievement.
  12. Who is a parent or guardian to provide opportunities for education to his child or, as the case may be, ward between the age of 6 and 14 years?

Question 33.
Discuss the ordinance-making powers of the President of India and of the Governor of a State as provided in the Constitution of India. [Dec 2010 (6 Marks)]
Answer:
Power of President to promulgate Ordinances during recess of Parliament [Article 123]: The President shall have the power to legislate by ordinances at a time when it is not possible to have parliamentary enactment on the subject immediately. This power can be used by the President to meet a sudden situation arising in the country when parliament is not in session and which it cannot deal with under the ordinary law.

Ordinance making power of the President has the following peculiarities:

  1. An Ordinance promulgated under Article 123 shall have the same force and effect as an Act of Parliament.
  2. Such ordinance shall be laid before both Houses of Parliament.
  3. Such ordinance shall cease to operate at the expiration of 6 weeks from the reassembly of Parliament or if resolutions disapproving it are passed by both Houses, upon the passing of the second of those resolutions.
  4. When two houses of parliament assemble on two different dates, the period of 6 weeks is to be reckoned from the latter of two dates.
  5. Such ordinance may be withdrawn by the President at any time.
  6. Such ordinance-making power has to be exercised by the President on the advice of the Council of Ministers.

Power of Governor to promulgate ordinances during recess of Legislature [Article 213]:
The Governor’s power to make Ordinances given in Article 213 is similar to the Ordinance making power of the President and has the force of an Act of the State Legislature.

Governor can make Ordinance only when the State Legislature or either of the two Houses (where it is bicameral) is not in session. He must be satisfied that circumstances exist which render it necessary to take immediate action.

Ordinance making power of the President has the following peculiarities:

  1. An Ordinance promulgated under this article shall have the same force and effect as an Act of the Legislature of the State assented to by the Governor.
  2. The Ordinance must be laid before the state legislature (when it reassembles) and shall automatically cease to have effect at the expiration of 6 weeks from the date of the re-assembly unless disapproved earlier by that legislature.
  3. While exercising this power Governor must act with the aid and advice of the Council of Ministers.

Question 34.
Describe the power of the President of India to promulgate ordinances. [Dec 2013 (6 Marks)]
Answer:
Power of President to promulgate Ordinances during recess of Parliament [Article 123]: The President shall have the power to legislate by ordinances at a time when it is not possible to have parliamentary enactment on the subject immediately. This power can be used by the President to meet a sudden situation arising in the country when parliament is not in session and which it cannot deal with under the ordinary law.

Ordinance making power of the President has the following peculiarities:

  1. An Ordinance promulgated under Article 123 shall have the same force and effect as an Act of Parliament.
  2. Such ordinance shall be laid before both Houses of Parliament.
  3. Such ordinance shall cease to operate at the expiration of 6 weeks from the reassembly of Parliament or if resolutions disapproving it are passed by both Houses, upon the passing of the second of those resolutions.
  4. When two houses of parliament assemble on two different dates, the period of 6 weeks is to be reckoned from the latter of two dates.
  5. Such ordinance may be withdrawn by the President at any time.
  6. Such ordinance-making power has to be exercised by the President on the advice of the Council of Ministers.

Question 35.
Explain powers of the Parliament to enact laws on subjects enumerated in the State List. [June 2011 (8 Marks)]
Answer:
State legislatures have been given exclusive powers to make laws with respect to subjects enumerated in List-II i.e. State List. But the Constitution of India makes a few exceptional circumstances when parliament can makes laws on the state list also. The exceptional circumstances are as follows.

National interest [Article 249]: Parliament can make a law with respect to a matter enumerated in the State list if Rajya Sabha declares by a resolution supported by 2/3rd of its members present and voting that is necessary or expedient in the national interest that Parliament should make a law on that matter.

Such resolution shall remain in force for a period not exceeding 1 year. However, a fresh resolution can be passed at the end of 1 year, and that way the law of parliament can be continued to remain in force for any number of years. The law passed by Parliament under the provisions ceases to have effect automatically after 6 months of the expiry of the resolution.

Proclamation of Emergency [Article 250]: While the proclamation of emergency is in operation, Parliament shall have the power to make laws for the whole or any part of the territory of India on any matter in the State. Such a law will have effect only up to the expiry of 6 months after the proclamation ceases to operate.

On request of two or more States [Article 252]: If two or more States are desirous that on any particular item included in the State List there should be common legislation then they can make a request to a Parliament to make a law on such subject. The law so made may be adopted by other States also by passing resolutions in their legislatures. To take an example, Parliament passed the Prize Competitions Act, 1955 under these provisions.

To enforce international agreements [Article 253]: Constitution authorizes Parliament to make law on any subject included in any list to implement:

  • Any treaty, agreement, or convention with any other country or countries, or
  • Any decision made at any international conference, association, or other body.

Breakdown of Constitutional Machinery in a State [Articles 356 & 357]:
Parliament can make law with respect to all State matters as regards a State in which there is a breakdown of constitutional machinery and is under the presidential rule.

Question 36.
Describe in brief the powers of Parliament to make laws on the subjects enumerated in the State List. [Dec 2012 (6 Marks)]
Answer:
State legislatures have been given exclusive powers to make laws with respect to subjects enumerated in List-II i.e. State List. But the Constitution of India makes a few exceptional circumstances when parliament can makes laws on the state list also. The exceptional circumstances are as follows.

National interest [Article 249]: Parliament can make a law with respect to a matter enumerated in the State list if Rajya Sabha declares by a resolution supported by 2/3rd of its members present and voting that is necessary or expedient in the national interest that Parliament should make a law on that matter.

Such resolution shall remain in force for a period not exceeding 1 year. However, a fresh resolution can be passed at the end of 1 year, and that way the law of parliament can be continued to remain in force for any number of years. The law passed by Parliament under the provisions ceases to have effect automatically after 6 months of the expiry of the resolution.

Proclamation of Emergency [Article 250]: While the proclamation of emergency is in operation, Parliament shall have the power to make laws for the whole or any part of the territory of India on any matter in the State. Such a law will have effect only up to the expiry of 6 months after the proclamation ceases to operate.

On request of two or more States [Article 252]: If two or more States are desirous that on any particular item included in the State List there should be common legislation then they can make a request to a Parliament to make a law on such subject. The law so made may be adopted by other States also by passing resolutions in their legislatures. To take an example, Parliament passed the Prize Competitions Act, 1955 under these provisions.

To enforce international agreements [Article 253]: Constitution authorizes Parliament to make law on any subject included in any list to implement:

  • Any treaty, agreement, or convention with any other country or countries, or
  • Any decision made at any international conference, association, or other body.

Breakdown of Constitutional Machinery in a State [Articles 356 & 357]:
Parliament can make law with respect to all State matters as regards a State in which there is a breakdown of constitutional machinery and is under the presidential rule.

Question 37.
Discuss in brief the rule of colorable legislation. [Dec 2009 (4 Marks)]
Answer:
The doctrine of colorable legislation is based upon the maximum that “you cannot do indirectly what you cannot do directly”. If a legislature has no competence to pass a law on a subject, it cannot pass a law on that subject J by merely purporting to within the limits of its power. Such legislation is called colorable legislation. It applies to delegated legislation and subordinate legislation also.

Example: Railway is the subject mentioned in the union list. Only the parliament j8 has the power to make a law on railways. If any State Legislature makes any law pertaining to the railway, it becomes invalid. It is called colorable legislation.

Question 38.
Explain the ‘pith and substance’ rule with the help of decided cases. [June 2014 (4 Marks)]
Answer:
The rule of pith & substance means that where the law in reality and substance falls within an item on which the legislature which enacted that law is competent to legislate, then such law shall not become invalid merely because it incidentally touches a matter outside the competence of the legislature.

Entry 6 of List II deals with “Public Health and Sanitation”. Rajasthan Legislature passed a law restricting the use of sound amplifiers. The law was challenged on the ground that it dealt with a matter which fell in Entry 81 of List I which reads: “Post and telegraphs, telephones, wireless broadcasting and other like forms of communication” and therefore, the State Legislature was not competent to pass it.

The Supreme Court rejected this argument on the ground that the object of the law was to prohibit unnecessary noise affecting the health of the public and not to make a law on broadcasting, etc. Therefore, the pith and substance of the law was “public health” and not “broadcasting”. [G. Chawla v. the State of Rajasthan]

Question 39.
Rajasthan Legislature passed a law restricting the use of sound amplifiers. The law was challenged on the ground that it deals with a matter which falls in entry 81 of List-I under the Constitution of India which reads:
“Post and telegraphs, telephones, wireless broadcasting and other like forms of communication” and therefore, the State Legislature was not competent to pass it. Examine the proposition in the light of “Pith and Substance Rule” referring to the case law on this point. [Dec. 2019 (5 Marks)]
Answer:
The rule of pith & substance means that where the law in reality and substance falls within an item on which the legislature which enacted that law is competent to legislate, then such law shall not become invalid merely because it incidentally touches a matter outside the competence of the legislature.

Entry 6 of List II reads “Public Health and Sanitation”. Rajasthan Legislator passed a law restricting the use of sound amplifiers. The law was challenged on the ground that it dealt with a matter which fell in Entry 81 of List I which reads: “Post and telegraphs, telephones, wireless broadcasting and other like forms of communication” and therefore, the State Legislature was not competent to pass it.

The Supreme Court rejected this argument on the ground that the object of the law was to prohibit unnecessary noise affecting the health of the public and not to make a law on broadcasting, etc. Therefore, the pith and substance of the law was “public health” and not “broadcasting”. [G. Chawla v. the State of Rajasthan]

Question 40.
The creation of monopoly rights in favor of a person or body of persons to carry on any business prima facie affects the freedom of trade. Can the State create a monopoly in favor of itself? Answer citing case law, if any. [Dec2012 (8 Marks)]
Answer:
Freedom of trade, commerce & intercourse [Article 301]: Trade, commerce, and intercourse throughout the territory of India shall be free.

The creation of monopoly rights in favor of a person or body of persons to carry on any business prima facie affects the freedom of trade. But in certain circumstances, it can be justified.

Article 19(6)(ii) makes it clear that the freedom of profession, trade, or business will not be understood to mean to prevent the state from undertaking either directly or through a corporation owned or controlled by it, any trade, business, industry or service, whether to the exclusion, complete or partial, citizens or otherwise.

If a law is passed creating a State monopoly the Court should enquire “what are the provisions of the said law which are basically and essentially necessary for creating the state monopoly Article 19(6)(ii) protects only the essential and basic provisions. If there are other provisions that are subsidiary or incidental to the operation of the monopoly they do not fall under Article 19(6)(ii). It was held in R.C. Cooper v.

Union of India, [known as Bank Nationalization case], that the impugned law which prohibited the named banks from carrying the banking business was a necessary incident of the business assumed by the Union and hence was not liable to be challenged under Article 19(6)(ii) in so far as it affected the right of a citizen to carry on business.

Question 41.
Explain the writ jurisdictions of the Supreme Court and High Courts as provided in the Constitution of India. [June 2010 (8 Marks)]
Answer:
Jurisdiction of the Supreme Court:

  1. Supreme Court is the highest Court in the country both for matters of ordinary law and for interpreting the Constitution.
  2. Supreme Court is an institution created by the Constitution.
  3. Supreme Court entertains appeals (in civil and criminal and other cases) from High Courts and certain Tribunals.
  4. Supreme Court has also writ jurisdiction for enforcing Fundamental Rights.
  5. Supreme Court can advise the President on a reference made by the H President on questions of fact and law. It has a variety of other special y jurisdictions.

Jurisdiction of High Courts:

  1. High Court that functions under the Constitution were not created for the first time by the Constitution. Some High Courts existed before the Constitution, although some new High Courts have been created after 1950.
  2. The High Courts in British ruling were established under the Indian High Courts Act, 1861 (an Act of the UK Parliament). The remaining High Courts were established or continued under the Constitution or under special Acts.
  3. High Courts for each State have appellate, civil, and criminal jurisdiction over lower courts.
  4. High Courts have writ jurisdiction to enforce fundamental rights and for certain other purposes.
  5. Some High Courts Bombay, Calcutta, and Delhi have ordinary original civil jurisdiction (le. jurisdiction to try regular civil suits) for their respective cities.
  6. High Courts can also hear references made by the Income Tax Appellate Tribunal under the Income Tax Act, 1961 and other tribunals.

Question 42.
In case, Hamid was terminated from the police service. Hamid filed a will petition against termination order on (the ground that a reasonable opportunity (if being heard was not given to him by the government. The writ petition was dismissed by the Court as the government proved that a reasonable opportunity of being heard had been given to the petitioner. Afterward, Hamid filed another writ petition on the ground that as he was appointed by the Director-General of Police, termination by the order of Deputy Inspector General of Police was in violation of Article 311(1) of the Constitution of India. Decide the validity of the second writ petition. [June 2009 (5 Marks)]
Answer:
According to the principle of res judicata, once a matter is finally decided by a competent Court, no party can be permitted to reopen it in subsequent litigation.

In this case, the Court has dismissed the petition as the government proved that a reasonable opportunity of being heard had been given to the petitioner. Thus, the matter is heard and finally decided by Court hence it will be covered by the principle of res judicata and the subsequent writ will be dismissed.

Thus, the doctrine of res judicata prevents taking matters again and again for the same case on the basis of different reasons or grounds. Grounds mentioned in the second petition that termination by the order of Deputy Inspector General of Police was in violation of Article 311(1) of the Constitution of India could have been stated in the first petition also along with the ground that he had not been given the opportunity of being heard. But Hamid did not do so and hence his subsequent petition will be barred by the principle of res judicata.

Question 43.
Article 32 of the Constitution of India empowers the Supreme Court to enforce the fundamental rights guaranteed under Part III of the Constitution of India. Explain how the provisions of Article 32 of the Constitution of India have helped in the enforcement of fundamental rights. [Dec 2010 (8 Marks)]
Answer:
Under the Constitution by virtue of Article 226, every High Court has the power to issue directions or orders or writs including writs in the nature of Habeas corpus, Mandamus, Prohibition, Certiorari, and Quo-warranto for the enforcement of fundamental rights or for any other purpose. The power is exercisable by each High Court throughout the territory in relation to which it exercises jurisdiction.

The Supreme Court could be moved by appropriate proceedings for the issue of directions or orders or writs for the enforcement of fundamental rights guaranteed. Article 32 itself is a fundamental right, the Constitutional remedy of the writ is available to anyone whose fundamental rights are infringed by State action.

Question 44.
Write in brief the importance of the writ of habeas corpus. [June 2011 (6 Marks)]
Answer:
Habeas corpus = to have a body
A writ of Habeas Corpus is in the nature of an order by Court calling upon the person who has detained another to produce the latter before the Court in order to let the Court know on what ground he has been confined and set him free if there is no a legal justification for the imprisonment.

Who can make an application: An application of habeas corpus can be made by any person on behalf of the detained person as well as the detained person himself. If any person is arrested or kept under unauthorized detention, the friends or relatives of that person can approach the Supreme Court under Article 32 or to High Court under Article 226.
The disobedience to this writ is met with punishment for contempt of Court under the Contempt of Courts Act.

Question 45.
“Writ of habeas corpus is a bulwark of personal liberty.” Justify this statement in light of the provisions stated in the Constitution of India. [June 2014 (8 Marks)]
Answer:
Habeas corpus = to have a body
A writ of Habeas Corpus is in the nature of an order by Court calling upon the person who has detained another to produce the latter before the Court in order to let the Court know on what ground he has been confined and set him free if there is no a legal justification for the imprisonment.

Who can make an application: An application of habeas corpus can be made by any person on behalf of the detained person as well as the detained person himself. If any person is arrested or kept under unauthorized detention, the friends or relatives of that person can approach the Supreme Court under Article 32 or to High Court under Article 226.
The disobedience to this writ is met with punishment for contempt of Court under the Contempt of Courts Act.

Question 46.
Write a short note on writ of ‘Quo Warranto’. [Dec. 2019 (4 Marks)]
Answer:
Quo warranto = What is your authority?
The writ of Quo warranto is issued to call upon the holder of a public office to show to the Court that under what authority is beholding the office in question. If it is found on investigation that he is not entitled to the office, the court may restrain him from acting in the office and also declare the office to be vacant. All High Courts & Supreme Court can issue this writ.

Following are some important points relating to a writ of Quo Warranto:

  • Writ of Quo Warranto can be issued if the officeholder is a public office.
  • The public office must be an independent and substantive character.
  • The public office must be a statutory or constitutional body.
  • The writ may be issued in respect of the office of the Prime Minister, Chief Minister, Judge of the High Court, President of Zilla Parishad, Speaker of the Parliament or State Legislature, University officials, etc.
  • The writ cannot be issued against a private person or where the alternative remedy is available to the person.

Question 47.
“A declaration of fundamental rights is meaningless unless there Is an effective judicial remedy for their enforcement.” Comment on this statement explaining the judicial remedies provided in the Constitution of India. [Dec 2014 (6 Marks)]
Answer:
Under the Constitution by virtue of Article 226, every High Court has the power to issue directions or orders or writs including writs in the nature of Habeas corpus, Mandamus, Prohibition, Certiorari, and Quo-warranto for the enforcement of fundamental rights or for any other purpose. The power is exercisable by each High Court throughout the territory in relation to which it exercises jurisdiction.

The Supreme Court could be moved by appropriate proceedings for the issue of directions or orders or writs for the enforcement of fundamental rights guaranteed. Article 32 itself is a fundamental right, the Constitutional remedy of the writ is available to anyone whose fundamental rights are infringed by State action.

Question 48.
Write short link’s on:
1. Writ of Mandamus
2. Writ of Prohibition
3. Writ of Certiorari
4. Writ of Quo Warranto
Answer:
1. Writ of Mandamus

  • The word ‘Mandamus’ literally means we command.
  • It is a command issued by Supreme Court or High Court to any person, corporation, inferior court, or government who has to perform statutory duty but who fails to do so.
  • Writ of Mandamus cannot be issued against
    (a) Private person
    (b) President and Governor of State – Article 361

2. Writ of Prohibition

  1. A writ of prohibition is issued by Supreme Court or High Court to an inferior court or Tribunal to refrain from doing something which it is about to do.
  2. It is based on the principle that prevention is better than cure
  3. It is generally issued before the trial of the case or during the pendency of the proceeding before the order is made.
  4. While mandamus commands activity, prohibition commands inactivity.

3. Writ of Certiorari

  1. Certiorari means ‘to be certified’ or ‘to be more fully informed of’
  2. It can be issued by Supreme Court or High Court to the inferior Court or any authority, whenever any authority or court:
    (a) Has abuse of jurisdiction
    (b) Has acted without authority
    (c) Has violated the principle of natural justice
    (d) Has committed a prima facie error on the report or decision.
    (e) Has violated Fundamental Rights available to citizens under Part
  3. Supreme Court can issue a writ of certiorari to any high court correcting erroneous decisions
  4. The object of both the writs of prohibition and of certiorari is the same, prohibition is available at an earlier stage whereas certiorari is available at a later stage.

4. Writ of Quo-warranto

  1. Quo-warranto means ‘What is your authority?’
  2. This writ prevents a person from continuing in public office who has wrongfully usurped the office. It calls upon the holder of a public office in question.
  3. If on the investigation, it is found that he is not entitled to public office, the court may restrain him from acting and order him to vacate office.
  4. It is issued when the office is of public and of a substantive nature and is created by statute or by the Constitution itself.
  5. The writ may be issued in respect of the office of Prime Minister, Judge of High Court, Speaker of Parliament, University officials, etc.
  6. This writ can’t be issued against a private person or where the alternative remedy is available to the person.

Question 49.
Explain ‘delegated legislation. State the circumstances in which delegated legislation is possible. [Dec 2011 (6 Marks)]
Answer:
Delegated or subordinate legislation means rules of law made under the authority of an Act of Parliament. Although lawmaking is the function of the legislature, it may, by a statute, delegate its power to other bodies or persons. The statute which delegates such power is known as Enabling Act. By Enabling Act the legislature lays down be broad guidelines and detailed rules are enacted by the delegated authority. Delegated legislation is permitted by the Indian Constitution. It exists in form of bye rules, regulations, orders, by-laws, etc.

Legislation is either supreme or subordinates. The supreme legislation is that which proceeds from supreme or sovereign power in the State and therefore capable of being repealed, annulled, or controlled by legislative authority. Subordinate legislation is that which proceeds from any authority other than the sovereign power, and is, therefore, dependent for its continued existence and validity on some sovereign or supreme authority.

Question 50.
What is ‘delegated legislation? What are the limits under which powers of delegated legislation may be exercised?
Answer:
Delegated or subordinate legislation means rules of law made under the authority of an Act of Parliament. Although lawmaking is the function of the legislature, it may, by a statute, delegate its power to other bodies or persons. The statute which delegates such power is known as Enabling Act. By Enabling Act the legislature lays down be broad guidelines and detailed rules are enacted by the delegated authority. Delegated legislation is permitted by the Indian Constitution. It exists in form of bye rules, regulations, orders, by-laws, etc.

Classification of Subordinate Legislation:
Executive: Though the main function of the executive is to enforce laws, but in certain cases, the power of making rules is delegated to the various departments of the government, which is called subordinate delegated legislation. Thus, the rules framed by the Government under the various Municipal Acts fall under this category.

Judicial: It means rules of procedure made by superior courts for their own guidance under authority delegated to them for the purpose. In other words, the superior courts have the power of making rules for the regulation of their own procedures. The High Courts are authorized to frame rules for regulating the procedure to be followed in Courts. Some such rules have been framed by the High Court under the Guardians of Wards Act, Insolvency Act, and Succession Act, etc.

Municipal: Sometimes municipal authorities are provided with the power of establishing special laws for the districts under their control. They are allowed to make bye-laws for limited purposes within their areas. These are legislation of local bodies such as municipalities or corporations.

Autonomous: Under this head falls the regulations that autonomous bodies such as Universities make in respect of matters which concern themselves.

Colonial Legislation: The law made by colonies under the control of some other nation, which are subject to supreme legislation of the country under whose control they are.

Question 51.
Write a short note on Money Bills
Answer:
A money bill is a bill that contains provisions of imposition or abolition of taxes or charging expenditure out of the Consolidated Fund of India. A Money Bill can only be introduced in Lok Sabha and that too with the prior permission of the President. A money bill after being passed in Lok Sabha is sent to Rajya Sabha. Rajya Sabha can’t amend the money bill, it can only suggest changes.

It is to the discretion of Lok Sabha whether to accept any or all the suggestions or reject all. Rajya Sabha has to send Money Bill back to Lok Sabha within 14 days, otherwise, it is deemed to be passed by both the houses and sent to President for assent. Speaker of Lok Sabha has a special power that it is his decision when to consider a bill as Money Bill.

Question 52.
Write a short note on Ad hoc and Standing Committees
Answer:
Parliamentary Committees are of two kinds:

  • Ad hoc Committees
  • Standing Committees.

Ad hoc Committees: Ad hoc Committees are appointed for a specific purpose and they cease to exist when they finish the task assigned to them and submit a report.

Examples of ad hoc committees:

  • Committees on Bills (Select and Joint).
  • Railway Convention Committee.
  • Committees on the Draft Five Year Plans.
  • Hindi Equivalents Committee.

Standing Committees: Standing Committees are permanent committees. Each House of Parliament has Standing Committees. Examples of standing committees:

  • Business Advisory Committee.
  • Committee on Petitions.
  • Committee of Privileges.
  • Rules Committee.

Jurisprudence, Interpretation & General Laws Questions and Answers

Indian Evidence Act, 1872 – Jurisprudence, Interpretation & General Laws Important Questions

Indian Evidence Act, 1872 – Jurisprudence, Interpretation & General Laws Important Questions

Indian Evidence Act, 1872 – Jurisprudence, Interpretation & General Laws Important Questions

Question 1.
Distinguish between: ‘Relevant Facts’ & ‘Facts In issue’ [Dec2011 (4 Marks)]
Answer:
Relevant Fact [Section 3]: One fact is said to be relevant to another when one is connected with the other in any of the ways referred to in the provisions of this Act relating to the relevancy of facts.

Where in a case direct evidence is not available to prove a fact in issue then it may be proved by any circumstantial evidence and in such a case every piece of circumstantial evidence would be an instance of a “relevant fact”.

Sections 6 to 55 of the Indian Evidence Act, 1872 deal with the relevancy of facts. A fact is also known as factum plans or a fact that proves.

Facts in issue [Section 3]: Facts in issue means and includes any fact from which, either by itself or in connection with other facts, the existence, non-existence, nature or extent of any right, liability, or disability, asserted or denied in any suit or proceedings, necessarily follows.

Explanation: Whenever, under the provisions of the law for the time being in force relating to Civil Procedure, any Court records an issue of fact, the fact to be asserted or denied in the answer to such issue is a fact in issue.

Question 2.
Satyam is facing trial for the charge of committing the murder of Raja at Pune at 5.00 p.m. on 5th November 2019. Satyam wants to prove that he had a telephonic conversation with Nalin, from Delhi on 5th November 2019 at about 3.30 p.m. Will he be permitted to do so? [Dec. 2000 (5 Marks)]
Answer:
As per Section 11 of the Indian Evidence Act, 1872, a fact that is inconsistent with fact in issue, is a relevant fact. The fact that Satyam had a telephonic conversation with Nalin from Delhi on 5th November 2019 at about 3.30 p.m. is inconsistent with the fact that he was present on the date of murder i.e. 5th November 2019 in Pune at 5.00 p.m.

Question 3.
Enjoy, after learning that Chander had been murdered by Bijoy, went to the spot and found that the body of Chander was being taken to the house of Chander by four persons who told him that Bijoy had murdered Chander and he had run away. Is the statement of Ajoy that he was told by four persons that Bijoy had murdered Chander and run away admissible as evidence? [Dec. 2004 (6 Marks)]
Answer:
As per Section 6 of the Indian Evidence Act, 1872, facts which, though not in issue are so connected with the fact in issue as to form part of the same transaction, are relevant, whether they occurred at the same time and place or at different time and place.

In this case, Ajoy is a bystander he was told by other bystanders that Bijoy had murdered Chander and run away. Hence, this is not admissible as evidence | as it will be considered as hearsay.

Question 4.
Write a short note on Rule of res gestae [June 2011 (4 Marks)]
Answer:
There are certain facts which though not in issue, are so connected with a fact in issue as to form part of the same transaction. This is known as the rule of res gestae.

Section 6 embodies the rule of admission of evidence relating to what is commonly known as res gestae.

Relevancy of facts forming part of the same transaction [Section 6]: Facts which, though not in issue are so connected with the fact in issue as to form part of the same transaction, are relevant, whether they occurred at the same time and place or at different time and place.

Example: A is accused of the murder of B by beating him. Whatever was said or done by A or B or the bystanders at the beating, or so shortly before or after is as to form part of the transaction, is a relevant fact.

The above section lays down the rule which in English textbooks is treated under the head of res gestae.

The essence of the doctrine of res gestae is that the facts which, though not in issue are so connected with the fact in issue as to form part of the same transaction and thereby become relevant like the fact in issue.

Question 5.
A was tried for the murder of B whose body was found in a well and the ornaments that B was wearing were missing from his body. A, while in police custody, during the investigation said that he had removed the ornaments, pushed B into the well and had pledged the ornaments with C. In consequence of this statement, the ornaments were recovered from C. Discuss the admissibility of A’s statement. [June 2002 (5 Marks)]
Answer:
As per Section 27 of the Indian Evidence Act, 1872, when any fact is deposed to as discovered in consequences of information received from a person accused of any offence, in the custody of a police officer, so much of such information, whether it amounts to a confession or not, as relates distinctly to the fact thereby discovered, may be proved. The effect is that so much of the information as relates distinctly to the fact thereby discovered is admissible in evidence.

In the given case, A had given three information’s, namely:

  • He had removed the ornaments.
  • He pushed B into the well.
  • He pledged the ornaments with C.

In consequence of the statement of A, the ornaments were recovered from C. However, only the last information that he pledged the ornaments with C is discovered and hence, it can be proved by A’s admission. The other two pieces of information’s do not distinctly relate to the recovery of ornaments from C. Hence, they cannot be proved by A’s admission.

Question 6.
Anand is on trial for the murder of Chanchal. There is evidence to show that Chanchal was murdered by Anand and Birender and that Birender said, “Anand and I murdered Chanchal.” Can the Court take into consideration this statement against Anand? Will your reply be different in case there is a joint trial against Anand and Birender? Give reasons.[June 2005 (6 Marks)]
Answer:
According to Section 30 of the Indian Evidence Act, 1872, when more persons than one are being tried jointly for the same offence, and a confession made by one of such persons affecting himself and some other of such persons is proved, the Court may take into consideration such confession as against such other person as well as against the person who makes such confession.

In the given case, Anand and Birender are not jointly tried hence Court cannot take into consideration this statement given by Birender against Anand.

If they are jointly tried then Court may take into consideration the confession of Birender as against Anand as well as Birender.

Question 7.
An accused person makes a confessional statement to the police officer in the hearing and presence of a private person. Can the private person give evidence of the confessional statement made by the accused person so as to be proved against the accused? [June 2006 (5 Marks)]
Answer:
As per Section 25 of the Indian Evidence Act, 1872, no confession made to a police officer shall be proved as against a person accused of any offence.

As per Section 26, no confession made by any person whilst he is in the custody of a police officer unless it is made in the immediate presence of a Magistrate shall be proved as against such person.

In the given case, there is no Magistrate present; hence, the private person cannot give evidence of the confessional statement of the accused so that it can be proved against the accused.

Question 8.
On 20th March, Kamal told his wife that he was going to Berhampore, as Pankaj’s wife has written a letter and asked him to come and receive payments due to him. On 21st March, Kama! left his house in time to catch a train for Berhampore, where Pankaj lived with his wife. On 23rd March, Kamal’s dismembered body was found in a box that had been purchased for Pankaj. Decide whether, on the trial of Pankaj for the murder of Kamal, the statement made by Kamal to his wife was admissible in evidence. If so, on what grounds? [June 2009 (6 Marks)]
Answer:
In Indian law, for admissibility of a statement as a dying declaration, it is not necessary that at the time when the deceased made the statement there must be a danger to his death and he must also entertain a reasonable apprehension of his death.

The statement of Kamal is admissible in evidence as to his dying declaration as per Section 32 of the Indian Evidence Act, 1872 because it throws light upon the probable cause of his death or as to any of the circumstances of the transaction which resulted in his death.

Therefore, although at the time Kamal made the statement, there was no danger to his life, yet this statement can be accepted in evidence as to the dying declaration of Kamal.

Question 9.
Mohan and Sohan are jointly tried for the murder of Rohan. It is proved that Mohan said, Sohan and I murdered Rohan. Can the court consider the effect of this confession as against Sohan? Give reasons. [June 2013 (5 Marks)]
Answer:
Provision: According to Section 30 of the Indian Evidence Act, 1872, when more persons than one are being tried jointly for the same offence, and a confession made by one of such persons affecting himself and some other of such persons is proved, the Court may take into consideration such confession as against such other person as well as against the person who makes such confession.

Facts:

  1. Mohan and Sohan are jointly tried for the murder of Rohan.
  2. It is proved that Mohan said, “Sohan and I murdered Rohan.
  3. Mohan and Sohan are co-accused and are jointly tried

Conclusion: Court can take into consideration the statement given by Mohan against Sohan.

Question 10.
Distinguish between: Confession & Admission [Dec. 2009 (4 Marks)]
Answer:
Following are the main points of distinction between confession & admission:

Points Confession Admission
Meaning A confession is a statement made by an accused person admitting that he has committed an offence. Admission is a statement that suggests any inference as to any ‘fact in issue’ or ‘relevant fact’.
Who makes A confession is made by an accused. Admissions can be made by other persons also.
Proceedings Confession finds a place in criminal proceedings. Admissions are generally used in civil proceedings, yet they may be used in criminal proceedings.
Treatment Every confession is an admission. Every admission in a criminal case is not a confession.
Culpatory Confession statement is culpatory. Admission is exculpatory.
Proved Confession is proved only for purposes mentioned in the Indian Evidence Act, 1872. Admitted facts need not be proved.
Where inadmissible A confession is inadmissible in evidence if it has been made under-promise, threat or due to inducement. No such conditions are applicable to an admission.
Effect A confession always goes against the person making it. An admission, on the contrary, may be used on behalf of the perse n making it under the exception provided in Section 21.

Question 11.
A confession made by an accused on the faith of a promise made by the police officer making the investigation that he would get off if he made a disclosure of the offence committed by him or would get a pardon. Whether such a confession made by the accused is admissible in evidence? Answer citing the relevant provisions of law. [Dec 2011 (6 Marks)]
Answer:
As per Section 24 of the Indian Evidence Act, 1872, a confession is irrelevant as an admission if it is made to a person in authority in consequence of some inducement, threat or promise held out by him in reference to the charge against the accused. Further Section 25 provides that confession made to a police officer shall not be proved against a person accused of any offence. Hence, a confession made by the accused person to a police officer is inadmissible in evidence.

Question 12.
Distinguish between: ‘Admissions’ and ‘confessions’ under the Indian Evidence Act, 1872. [Dec 2013 (4 Marks)]
Answer:
Following are the main points of distinction between confession & admission:

Points Confession Admission
Meaning A confession is a statement made by an accused person admitting that he has committed an offence. Admission is a statement that suggests any inference as to any ‘fact in issue’ or ‘relevant fact’.
Who makes A confession is made by an accused. Admissions can be made by other persons also.
Proceedings Confession finds a place in criminal proceedings. Admissions are generally used in civil proceedings, yet they may be used in criminal proceedings.
Treatment Every confession is an admission. Every admission in a criminal case is not a confession.
Culpatory Confession statement is culpatory. Admission is exculpatory.
Proved Confession is proved only for purposes mentioned in the Indian Evidence Act, 1872. Admitted facts need not be proved.
Where inadmissible A confession is inadmissible in evidence if it has been made under-promise, threat or due to inducement. No such conditions are applicable to an admission.
Effect A confession always goes against the person making it. An admission, on the contrary, may be used on behalf of the perse n making it under the exception provided in Section 21.

Question 13.
Distinguish between ‘Admission’ and ‘Confession’ under Indian Evidence Act, 1872. [Dec 2018 (4 Marks)]
Answer:
Following are the main points of distinction between confession & admission:

Points Confession Admission
Meaning A confession is a statement made by an accused person admitting that he has committed an offence. Admission is a statement that suggests any inference as to any ‘fact in issue’ or ‘relevant fact’.
Who makes A confession is made by an accused. Admissions can be made by other persons also.
Proceedings Confession finds a place in criminal proceedings. Admissions are generally used in civil proceedings, yet they may be used in criminal proceedings.
Treatment Every confession is an admission. Every admission in a criminal case is not a confession.
Culpatory Confession statement is culpatory. Admission is exculpatory.
Proved Confession is proved only for purposes mentioned in the Indian Evidence Act, 1872. Admitted facts need not be proved.
Where inadmissible A confession is inadmissible in evidence if it has been made under-promise, threat or due to inducement. No such conditions are applicable to an admission.
Effect A confession always goes against the person making it. An admission, on the contrary, may be used on behalf of the perse n making it under the exception provided in Section 21.

Question 14.
‘Confession caused by inducement, threat or promise is irrelevant. Explain briefly. [June 2019 (4 Marks)]
Answer:
As per Section 24 of the Indian Evidence Act, 1872, a confession made by an accused person is irrelevant in a criminal proceeding, if the making of the confession appears to the Court to have been caused by any inducement, threat or promise to have reference to the charge against the accused person, proceeding from a person in authority and sufficient, in the opinion of the Court, to give the accused person grounds which would appear to him reasonable for supposing that by making it he would gain any advantage or avoid any evil of a temporal nature in reference to the proceedings against him.

Question 15.
Explain Expert Opinion under the Indian Evidence Act, 1872. [June 2012 (4 Marks)]
Answer:
Opinion of experts [Section 45]: When the Court has to form an opinion upon a point of foreign law or of science or art, or as to the identity of handwriting or finger impressions, the opinions upon that point of persons specially skilled in such foreign law, science or art, or in questions as to the identity of handwriting or finger impressions are relevant facts. Such persons are called experts.

Examples:
(a) The question is, whether the death of A was caused by poison.
The opinions of experts as to the symptoms produced by the poison by which A is supposed to have died are relevant.

(b) The question is, whether a certain document was written by X.
Another document is produced which is proved or admitted to have been written by X. The opinions of experts on the question of whether the two documents were written by the same person or by different persons, are relevant.

Question 16.
Opinion of experts under section 45 of the Indian Evidence Act, 1872. [June 2019 (4 Marks)]
Answer:
Opinion of experts [Section 45]: When the Court has to form an opinion upon a point of foreign law or of science or art, or as to the identity of handwriting or finger impressions, the opinions upon that point of persons specially skilled in such foreign law, science or art, or in questions as to the identity of handwriting or finger impressions are relevant facts. Such persons are called experts.

Examples:
(a) The question is, whether the death of A was caused by poison.
The opinions of experts as to the symptoms produced by the poison by which A is supposed to have died are relevant.

(b) The question is, whether a certain document was written by X.
Another document is produced which is proved or admitted to have been written by X. The opinions of experts on the question of whether the two documents were written by the same person or by different persons, are relevant.

Question 17.
“Hearsay evidence is no evidence”. Explain this rule of law. Is hearsay evidence ever admissible? [Dec 2000 (8 Marks)]
Answer:
Section 59 of the Indian Evidence Act, 1872 provides that, except the contents of the document, all other facts may be proved by oral evidence.

Section 60 enacts that, oral evidence must not be indirect or hearsay. The term ‘hearsay’ is not mentioned in the legislation, it is in constant use in the Court of law. In a larger context, it can be termed as statements oral or written reported to have been made by persons, not called witnesses.

Example: Amar gives the evidence in the Court that “he had seen Baban while making the murder of Chirag”. It is direct evidence and is admissible.

However, if Amar gives the evidence that he has heard from someone that “Baban murdered Chirag” is hearsay evidence and is not admissible.

Reasons for rejection of hearsay evidence: There are many reasons for rejection of hearsay evidence, among them, being:

  • The irresponsibility of the original declarant.
  • Depreciation of truth in the process of repetition.
  • Chances for fraud on its admission.
  • Waste of time involved in listening to idle rumour etc.

Hearsay evidence is therefore not ordinarily accepted in line with the principle that best available evidence should be brought before the Court. Section 60 puts an embargo on the reception of hearsay evidence. However, it does not apply when the object is not to establish the truth of one’s statement but only to establish the fact that one did make a statement.

Question 18.
Explain: Circumstantial Evidence [Dec 2009 (2 Marks)]
Answer:
Circumstantial evidence is evidence that strongly suggests something but does not exactly prove it. Circumstantial evidence simply helps people draw inferences about a fact or the events that took place. This type of evidence is, on its own, considered to be weak or ineffective, so it is used in conjunction with direct evidence in both criminal and civil cases. Whether or not the Court makes the intended inference has a major impact on the outcome of the case.

Example: Meena testifies in Court that she saw Rohan standing over a man with a bloody knife in his hand. Menna did not see Rohan stab the victim, so she can only testify and describe what she saw. This circumstantial evidence j is likely not enough by itself to convict Rohan, so the prosecution provides J other evidence which, when added to Meena’s testimony, leads the Court to j the conclusion that Rohan stabbed the victim.

Question 19.
Distinguish between: Primary Evidence & Secondary Evidence [June 2010 (4 Marks)]
Answer:
Primary Evidence [Section 62]: Primary evidence means the document itself produced for the inspection of the Court.

Secondary Evidence [Section 63]: Secondary evidence is generally in the form of compared copies, certified copies or copies made by such mechanical processes as in themselves ensure accuracy.

Secondary evidence means and includes:

  • certified copies;
  • copies made from the original by mechanical processes which in themselves insure the accuracy of the copy, and copies compared with such copies;
  • copies made from or compared with the original;
  • counterparts of documents as against the parties who did not execute them;
  • oral accounts of the contents of a document given by some person who has himself seen it.

Question 20.
Write a short note on Circumstantial Evidence [Dec 2010 (4 Marks)]
Answer:
Circumstantial evidence is evidence that strongly suggests something but does not exactly prove it. Circumstantial evidence simply helps people draw inferences about a fact or the events that took place. This type of evidence is, on its own, considered to be weak or ineffective, so it is used in conjunction with direct evidence in both criminal and civil cases. Whether or not the Court makes the intended inference has a major impact on the outcome of the case.

Example: Meena testifies in Court that she saw Rohan standing over a man with a bloody knife in his hand. Menna did not see Rohan stab the victim, so she can only testify and describe what she saw. This circumstantial evidence j is likely not enough by itself to convict Rohan, so the prosecution provides J other evidence which, when added to Meena’s testimony, leads the Court to j the conclusion that Rohan stabbed the victim.

Question 21.
Write a short note on Primary Evidence & Secondary Evidence [June 2011 (4 Marks)]
Answer:
Primary Evidence [Section 62]: Primary evidence means the document itself produced for the inspection of the Court.

Secondary Evidence [Section 63]: Secondary evidence is generally in the form of compared copies, certified copies or copies made by such mechanical processes as in themselves ensure accuracy.

Secondary evidence means and includes:

  • certified copies;
  • copies made from the original by mechanical processes which in themselves insure the accuracy of the copy, and copies compared with such copies;
  • copies made from or compared with the original;
  • counterparts of documents as against the parties who did not execute them;
  • oral accounts of the contents of a document given by some person who has himself seen it.

Question 22.
What is ‘documentary evidence’ under the Indian Evidence Act, 1872? Explain briefly. [Dec 2018 (4 Marks)]
Answer:
Documentary Evidence: A “document” means any matter expressed or described upon any substance by means of letters, figures or marks, or by more than one of those means, intended to be used, or which may be used for the purpose of recording that matter. Documents produced for the inspection of the Court is called documentary evidence.

Proof of contents of documents [Section 61]: The contents of documents may be proved either by primary or by secondary7 evidence.

Question 23.
Explain the special provisions as to Evidence relating to Electronic Record under the provisions of the Indian Evidence Act, 1872. [Dec 2019 (4 Marks)]
Answer:
Section 65A of the Indian Evidence Act, 1 872 provides that the contents of electronic records ma\ be proved in accordance with the provisions of Section 65B.

Under Section 65B( 1) any information contained in an electronic record which is printed on a paper, stored, recorded or copied in optical or magnetic media produced by a computer shall be deemed to be also a document if the conditions mentioned in this Section are satisfied in relation to the information and computer in question and shall be admissible in any proceedings, without further proof or production of the original, as evidence of any contents of the original or of any fact stated therein of which direct evidence would be admissible. The conditions in respect of a computer output related above, have 1 been stipulated under Section 65B(2) of the Evidence Act.

Question 24.
A, a client, says to B, an advocate, “I have committed a murder and want you to defend me”. Whether the advocate can disclose the aforesaid j communication to the court or to the police?
Answer:
As per Section 126 of the Indian Evidence Act, 1872, no barrister, attorney, [ pleader or vakil shall at any time be permitted, to disclose any communication made to him in the course and for the purpose of his employment. However, disclosure is permitted with his client’s express consent.

Accordingly, in the given case the communication of A to B cannot be disclosed by B.

Question 25.
Kamini informed Ajay in the year 2001 that she had committed theft of the jewellery of her neighbour. Thereafter, Kamini and Ajay were married on 4 2002. In the year 2003, criminal proceedings were instituted against Kamini r in respect of the theft of jewellery. Ajay is called to give evidence in the case. Decide whether Ajay can disclose the communication made to him by Kamini. [June 2010 (5 Marks)]
Answer:
As per Section 122 of the Indian Evidence Act, 1872, no person who is or has been married shall be compelled to disclose any communication made to him during marriage by any person to whom he is or has been married. No such person shall be permitted to disclose any such communication, unless the person, who made it, or his representative, consents.

Thus, the communication made by Kamini or Ajay during married life is a privileged one and Ajay cannot be compelled or permitted to disclose the same in the capacity of a witness.

In this case, Kamini gave the information to Ajay in 2014, but they got married in 2015. Thus, communication is made ‘before marriage’ and not ‘during the marriage’. Hence, Ajay can give evidence and disclose the communication made to him by Kamini because Kamini communicated with Ajay before her marriage with Ajay.

Question 26.
There are some facts of which evidence cannot be given, though they are relevant. They are also referred to as ‘privileged communications’. Discuss briefly. [Dec 2014 (4 Marks)]
Answer:
There are some facts of which evidence cannot be given though they are relevant, such as facts coming under Sections 121 to 127, where evidence is prohibited under those sections.

They are discussed as follows:
1. Privilege of Judge or Magistrate [Section 121]: No Judge or Magistrate shall be compelled to answer any question as to his own conduct in Court or as to anything that has come to his knowledge in Court as a Judge
or
Magistrate. But he can be compelled to give evidence on a special order of Superior Court.

2. Communications during marriage [Section 122]: No person who is or has been married shall be compelled to disclose any communication made to him during marriage by any person to whom he is or has been married.

No such person shall be permitted to disclose any such communication, unless the person, who made it, or his representative, consents.

However, in suits between married persons or proceedings in which one married person is prosecuted for any crime committed against the other disclosure of communication will be allowed.

3. Evidence as to affairs of State [Section 123]: No one shall be permitted to give any evidence derived from unpublished official records relating to any affairs of State. However, with the permission of the officer at the head of the department evidence as to unpublished official records can be given.

4. Official communications [Section 124]: No public officer shall be compelled to disclose communications made to him in official confidence when he considers that the public interests would suffer by the disclosure.

5. Information as to the commission of offences [Section 125]: No Magistrate or Police Officer shall be compelled to say when he got any information as to the commission of any offence, and no Revenue-Officer shall be compelled to say when he got any information as to the commission of any offence against the public revenue.

6. Professional communication [Section 126]: No barrister, attorney, pleader or vakil shall at any time be permitted, to disclose any communication made to him in the course and for the purpose of his employment. However, disclosure is permitted with his client’s express consent.

However, nothing in this section shall protect from disclosure:

  • Any such communication made in furtherance of any illegal purpose.
  • Any fact observed showing that any crime or fraud has been com¬mitted since the commencement of his employment.

It is immaterial whether the attention of such barrister, pleader, attorney or vakil was or was not directed to such fact by or on behalf of his client.

Question 27.
The ‘Privileged Communications’ are based on Public Policy and a witness cannot be compelled to answer the same during the evidence in the Court or before any other authority. Explain in brief. [June 2019 (5 Marks)]
Answer:
There are some facts of which evidence cannot be given though they are relevant, such as facts coming under Sections 121 to 127, where evidence is prohibited under those sections.

They are discussed as follows:
1. Privilege of Judge or Magistrate [Section 121]: No Judge or Magistrate shall be compelled to answer any question as to his own conduct in Court or as to anything that has come to his knowledge in Court as a Judge
or
Magistrate. But he can be compelled to give evidence on a special order of Superior Court.

2. Communications during marriage [Section 122]: No person who is or has been married shall be compelled to disclose any communication made to him during marriage by any person to whom he is or has been married.

No such person shall be permitted to disclose any such communication, unless the person, who made it, or his representative, consents.

However, in suits between married persons or proceedings in which one married person is prosecuted for any crime committed against the other disclosure of communication will be allowed.

3. Evidence as to affairs of State [Section 123]: No one shall be permitted to give any evidence derived from unpublished official records relating to any affairs of State. However, with the permission of the officer at the head of the department evidence as to unpublished official records can be given.

4. Official communications [Section 124]: No public officer shall be compelled to disclose communications made to him in official confidence when he considers that the public interests would suffer by the disclosure.

5. Information as to the commission of offences [Section 125]: No Magistrate or Police Officer shall be compelled to say when he got any information as to the commission of any offence, and no Revenue-Officer shall be compelled to say when he got any information as to the commission of any offence against the public revenue.

6. Professional communication [Section 126]: No barrister, attorney, pleader or vakil shall at any time be permitted, to disclose any communication made to him in the course and for the purpose of his employment. However, disclosure is permitted with his client’s express consent.

However, nothing in this section shall protect from disclosure:

  • Any such communication made in furtherance of any illegal purpose.
  • Any fact observed showing that any crime or fraud has been com¬mitted since the commencement of his employment.

It is immaterial whether the attention of such barrister, pleader, attorney or vakil was or was not directed to such fact by or on behalf of his client.

Question 28.
Ragini told Rajendra in the year 2007 that she had committed theft of the jewellery of her neighbour Asha. Thereafter, Ragini and Rajendra were married in the year 2008. In the year 2009, criminal proceedings were instituted against Ragini in respect of the theft of the said jewellery. Rajendra is summoned to give evidence in the said criminal proceedings. Decide whether Rajendra can disclose the communication made to him by Ragini in the year 2007, in the criminal proceedings in respect of the theft of the jewellery. [June 2013 (5 Marks)]
Answer:
Provision: Section 122 of the Indian Evidence Act, 1872 says communication between the husband and the wife during marriage is privileged and its disclosure cannot be enforced.

Facts:

  1. Ragini told Rajendra in the year 2007 that she had committed theft of j the jewellery of her neighbour Asha.
  2. Ragini and Rajendra were married in the year 2008.

Ref. Case Law: Nagaraj vs. State of Karnataka In M.C. Verghese v. T J. Ponnam

Conclusion: Hence, such a communication cannot be treated as privileged information, and Rajendra can disclose such communication made to him by Ragini.

Question 29.
What is the principle of estoppel under the Indian Evidence Act, 1872? [Dec 2008 (4 Marks)]
Answer:
Estoppel [Section 115]: When one person has, by his declaration, act or omission, intentionally caused or permitted another person to believe a thing to be true and to act upon such belief, neither he nor his representative shall be allowed, in any suit or proceeding between himself and such person or his representative, to deny the truth of that thing.

Example: A intentionally and falsely leads B to believe that certain land belongs to A, and thereby induces B to buy and pay for it. The land afterwards becomes the property of A, and A seeks to set aside the sale on the ground that, at the time of the sale, he had no title. He must not be allowed to prove his want of title.

The principle of Estoppel is based on the maxim ‘allegations Contratia non-estaudiendus i.e. a person alleging contrary facts should not be heard. It says that man cannot approbate and reprobate, or that a man cannot blow hot and cold, or that a man shall not say one thing at one time and later on say a different thing.

Question 30.
Write a short note on Rules relating to presumptions [Dec 2010 (4 Marks)]
Answer:
The court may presume the existence of certain facts [Section 114]: The Court may presume the existence of any fact which it thinks likely to have happened, regard being had to the common course of natural events, human conduct and public and private business, in their relation to the facts of the particular case.

  1. Presumptions are inferences that are drawn by the court with respect to the existence of certain facts.
  2. When certain facts are presumed to be in existence the party in whose favour they are presumed to exist need not discharge the burden of proof with respect to it. This is an exception to the general rule that the party which alleges the existence of certain facts has the initial burden of proof but presumptions do away with this requirement.
  3. Presumptions can be defined as an affirmative or negative inference drawn about the truth or falsehood of a fact by using a process of prob¬able reasoning from what is taken to be granted.
  4. A presumption is said to operate where certain fact is taken to be in existence even there is no complete proof.
  5. A presumption is a rule where if one fact which is known as the primary fact is proved by a party then another fact which is known as the presumed fact is taken as proved if there is no contrary evidence of the same.
  6. The presumption is a rule which is used by judges and courts to draw inference from a particular fact or evidence unless such an inference is said to be disproved.

Presumptions can be classified into certain categories:

  • Presumptions of fact
  • Presumptions of law
  • Mixed Presumptions

Question 31.
Explain in brief ‘Principle of Estoppel’ under Indian Evidence Act, 1872. [Dec 2018 (4 Marks)]
Answer:
Estoppel [Section 115]: When one person has, by his declaration, act or omission, intentionally caused or permitted another person to believe a thing to be true and to act upon such belief, neither he nor his representative shall be allowed, in any suit or proceeding between himself and such person or his representative, to deny the truth of that thing.

Example: A intentionally and falsely leads B to believe that certain land belongs to A, and thereby induces B to buy and pay for it. The land afterwards becomes the property of A, and A seeks to set aside the sale on the ground that, at the time of the sale, he had no title. He must not be allowed to prove his want of title.

The principle of Estoppel is based on the maxim ‘allegations Contratia non-estaudiendus i.e. a person alleging contrary facts should not be heard. It says that man cannot approbate and reprobate, or that a man cannot blow hot and cold, or that a man shall not say one thing at one time and later on say a different thing.

Jurisprudence, Interpretation & General Laws Questions and Answers