CS Executive – Page 4

Consumer Protection Act, 2019 – Economic, Business and Commercial Laws Important Questions

Leave a Comment / CS Executive / By Murali / April 3, 2024 April 10, 2024

Consumer Protection Act, 2019 – Economic, Business and Commercial Laws Important Questions

Question 1.
Write a short note on the Basic rights of consumers [June 2013 (3 Marks)]
Answer:
Consumer rights are defined u/s 2(9) of Consumer Protection Act, 2019 as:
Consumer rights include:

the right to be protected against the marketing of goods, products, or services which are hazardous to life and property;
the right to be informed about the quality, quantity, potency, purity, standard, and price of goods, products or services, as the case may be, so as to protect the consumer against unfair trade practices;
the right to be assured, wherever possible, access to a variety of goods, products, or services at competitive prices;
the right to be heard and to be assured that consumer’s interests will receive due consideration at the appropriate forum;
the right to seek redressal against unfair trade practice or restrictive trade practices or unscrupulous exploitation of consumers; and
the right to consumer awareness.

Question 2.
Discuss the basic rights of consumers under the Consumer Protection Act, 2019. [June 2014 (8 Marks)]
Answer:
Consumer rights are defined u/s 2(9) of Consumer Protection Act, 2019 as:
Consumer rights include:

the right to be protected against the marketing of goods, products, or services which are hazardous to life and property;
the right to be informed about the quality, quantity, potency, purity, standard, and price of goods, products or services, as the case may be, so as to protect the consumer against unfair trade practices;
the right to be assured, wherever possible, access to a variety of goods, products, or services at competitive prices;
the right to be heard and to be assured that consumer’s interests will receive due consideration at the appropriate forum;
the right to seek redressal against unfair trade practice or restrictive trade practices or unscrupulous exploitation of consumers; and
the right to consumer awareness.

Question 3.
What are the basic rights of consumers that arc sought to be promoted j and protected under the Consumer Protection Act, 2019? [June 2015 (5 Marks)]
Answer:
Consumer rights are defined u/s 2(9) of Consumer Protection Act, 2019 as:
Consumer rights include:

the right to be protected against the marketing of goods, products, or services that are hazardous to life and property;
the right to be informed about the quality, quantity, potency, purity, standard, and price of goods, products or services, as the case may be, so as to protect the consumer against unfair trade practices;
the right to be assured, wherever possible, access to a variety of goods, products, or services at competitive prices;
the right to be heard and to be assured that consumer’s interests will receive due consideration at the appropriate forum;
the right to seek redressal against unfair trade practice or restrictive trade practices or unscrupulous exploitation of consumers; and
the right to consumer awareness.

Question 4.
Write a short note on Commercial Purpose [Dec. 2009 (3 Marks)]
Answer:
(a) Not a consumer: As per the definition of ‘Consumer’ as defined under the Consumer Protection Act, 2019, if a person purchases the goods for ‘commercial purpose’ then he is not ‘Consumer’ and no benefit under the Act will be available to him.

(b) Criteria for Commercial Purpose: Goods purchased are for commercial purpose in the following conditions are satisfied

Used for profit-making activity on large scale and
There is a close and direct nexus between the purchase of goods and profit-making activity

(c) Commercial purpose does not include use by a consumer of goods bought and used by him and services availed by him exclusively for the purpose of earning his livelihood, by means of self-employment.

(d) Laxmi Engineering Works v. P.S.G. Industrial Institute: Supreme Court in Laxmi Engineering Works v. P.S. G. Industrial Institute held that the purpose for which a person has bought goods is a ‘commercial purpose’ is always a question of facts and to be decided in the facts and circumstances of each case.

If the commercial use is by the purchaser himself for the purpose of earning his livelihood by means of self-employment such purchaser of goods would yet be a consumer. The Supreme Court further observed that if a person purchased a machine to operate it himself for earning his livelihood, he would be a consumer. If such a person took the assistance of one or two persons to assist him in operating the machine, he would still be a consumer.

But if a person purchases a machine and appoints or engages another person exclusively to operate the machine, then such person would not be a consumer.

Question 5.
Jolly Ltd. maintained a guest house or the use of its managing director and other executives. It entered into an agreement with a firm for the installation of the central air-conditioning system. The system installed did not function, developed snags and there was leakage of water from the ducting system. The company filed a complaint claiming compensation for deficiency in service under the Consumer Protection Act, 2019. Will it succeed? Give reasons with reference to case law, if any. [June 2010 (5 Marks)]
Answer:
(a) Facts of Case: Jolly Ltd. maintained a guest house for the use of its managing director and other executives. It entered into an agreement with a firm for the installation of the central air-conditioning system. The system installed did not function, developed snags and there was leakage of water from the ducting system. The company filed a complaint claiming compensation for deficiency in service under the Consumer Protection Act, 2019.

(b) Provision: In J.K. Puri Engineers v. Mohan Breweries & Distilleries Ltd., it was held that even where the goods are purchased for commercial purpose, if there is a warranty, as in this case, for its maintenance, the purchaser becomes a consumer in respect of the services rendered or to be rendered by the manufacturer or supplier during the warranty period.

The complainant is, therefore, a consumer. The system was installed only to provide comfort to directors and other executives who have not been used for commercial purposes. Further the complainant had drawn the attention of the service provider and there was no reply from them for quite some time, there was thus a gross deficiency in service.

Question 6.
Write a short note on Commercial Purpose [Dec. 2012 (3 Marks)]
Answer:
(a) Not a consumer: As per the definition of ‘Consumer’ as defined under the Consumer Protection Act, 2019, if a person purchases the goods for ‘commercial purpose’ then he is not ‘Consumer’ and no benefit under the Act will be available to him.

(b) Criteria for Commercial Purpose: Goods purchased are for commercial purpose in the following conditions are satisfied

Used for profit-making activity on large scale and
There is a close and direct nexus between the purchase of goods and profit-making activity

But if a person purchases a machine and appoints or engages another person exclusively to operate the machine, then such person would not be a consumer.

Question 7.
Ramesh, an industrial employee contributing to ESI Fund was treated in an ESI hospital. Due to a negligent diagnosis at the hospital, his condition deteriorated and he had to be shifted to a private hospital. He filed a complaint before the Consumer Disputes Redressal Forum seeking compensation from the ESI hospital. His complaint was dismissed on the ground that medical service rendered by the ESI hospital was gratuitous in nature. The State Commission and the National Commission upheld the decision of the District Forum. Ramesh intends to prefer an appeal before the Supreme Court. Will he succeed? Give reasons. [June 2013 (5 Marks)]
Answer:
(a) Facts of Case: Ramesh, an industrial employee contributing to ESI Fund was treated in an ESI hospital. Due to a negligent diagnosis at the hospital, his condition deteriorated and he had to be shifted to a private hospital. He filed a complaint before the Consumer Disputes Redressal Forum seeking compensation from the ESI hospital. His complaint was dismissed on the ground that medical service rendered by the ESI hospital was gratuitous in nature.

(b) Provision: Supreme Court in Kishore Lalv. Chairman, Employees State Insurance Corporation held that appellant is a consumer within the ambit of Section 2(7) of the Consumer Protection Act, 2019 and the medical service rendered in the ESI hospital/dispensary by the respondent Corporation falls within the ambit of section 2(42) of the Consumer Protection Act and, therefore, the consumer forum has jurisdiction to adjudicate upon the case of the appellant. The jurisdiction of the consumer forum is not ousted by virtue of section 75 of the Employees’ State Insurance Act, 1948.

Question 8.
Explain the meaning of the term ‘consumer as defined in the Consumer Protection Act, 1986. [June 2016 (5 Marks)]
Answer:
Consumer [Section 2(7)]: Consumer means any person who:

Buys goods for a consideration and includes the user of goods but does not include a person who obtains such goods for resale or for any commercial purpose or
Hires or avails of services for a consideration and includes a beneficiary of services.

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.

Goods bought or services availed if for commercial purpose then the person is outside the ambit of definition of Consumer.

Explanation: Commercial purpose does not include use by a consumer of goods bought and used by him and services availed by him exclusively for the purpose of earning his livelihood, by means of self-employment.

Eg: Mr. Ramlal purchased a car for his son for then Ramlal as well as a son both are a consumer.

Question 9.
Ramesh purchased a tractor from Mahi Ltd. for tilling the land but he used it in idle time for transportation of agricultural produce on hire. Some defects were developed in the engine of the tractor. He complained to Mahi Ltd., but all in vain. Then he filed a suit in Consumer Disputes ‘ Redressal Forum for damages caused by the defects.
Mahi Ltd. pleaded that Ramesh is not a ‘consumer’ within the definition j of section 2(7) of the Consumer Protection Act, 2019, as he is using the tractor for commercial purposes. Whether Ramesh will succeed in his case? Refer to relevant provisions of the law in support of your answer with reference to case law, if any. [June 2016 (5 Marks)]
Answer:
Facts of Case: Ramesh purchased a tractor from Mahi Ltd. for tilling the land but he used it in idle time for transportation of agricultural produce on hire. Some defects were developed in the engine of the tractor. He complained to Mahi Ltd., but all in vain. Then he filed a suit in Consumer Disputes Redressal Forum for damages caused by the defects. Mahi Ltd. pleaded that Ramesh is not a ‘consumer within the definition of section 2(7) of the Consumer Protection Act, 2019, as he is using the tractor for commercial purposes.

Provision: As per the definition of ‘Consumer’ as defined under the Consumer Protection Act, 2019, if a person purchases the goods for ‘commercial purpose’ then he is not ‘Consumer’ and no benefit under the Act will be available to him.

Commercial purpose does not include use by a consumer of goods bought and used by him and services availed by him exclusively for the purpose of earning his livelihood, by means of self-employment.

In Bhupendra Jang Bahadur Guna v. Regional Manager & Others, it was held that a tractor purchased primarily to till the land of the purchaser and let out on hire during the idle time to till the lands of others would not amount to commercial use.

Conclusion: Thus, Ramesh is ‘Consumer’ under the Consumer Protection Act, 1986 and he can file the claim if there is any defect in the tractor.

Question 10.
Romanian purchased a car by taking a loan from a bank and gave post-dated cheques to the bank not only in respect of repayment of loan installments but also towards premium of insurance policy for succeeding 3 years. On the expiry of the policy in the first year, the bank failed to get the policy renewed for the second year. In the meantime, the car met with an accident. Raman brought an action against the bank for ‘deficiency in service’ under the Consumer Protection Act, 2019. Will he succeed? [Dec. 2009 (5 Marks)]
Answer:
In Pradeep Kumar Jain v. CitiBank, the Supreme Court held that there is no deficiency in service because the obligation to renew the policy was on the appellant alone. But merely passing on two cheques to the bank for being paid to the insurance company the appellant would not absolve himself of his liability to renew the policy. The appellant also has certain duties to discharge in the matter of obtaining the policy and cannot merely pass the blame to someone else.

Question 11.
Prakash, aged 37 years, was traveling from Mumbai to Delhi by air. When he occupied his seat in the aircraft, an announcement was made that his luggage was lying on the ground unidentified and that he should disembark to identify his luggage. When Prakash was stepping down from the aircraft, the ladder was suddenly removed as a result of which he fell down sustaining bodily injuries causing 10% disablement. As against the claim of ₹ 10 lakhs filed by Prakash towards compensation, the airlines were willing to pay ₹ 40,000 which according to it was the maximum statutory liability of the airlines under the Carriage by Air Act, 1972. However, the State Commission awarded ₹ 4 lakh towards compensation and an additional ₹ 1 lakh for mental agony and distress plus costs. Is the order passed by the State Commission justified? If so, give reasons and refer to the decided case law. [Dec. 2010 (5 Marks)]
Answer:
In Station Manager, Indian Airlines v. Dr. Jiteswar Ahir, when the complainant-passenger occupied his seat in the aircraft, an announcement was made that his luggage was lying on the ground unidentified and that he should disembark to identify his luggage.

According to the complainant he moved towards the rear door, and finding that the step ladder was atI attached to the aircraft door, he stepped out onto the staircase but before 1 he could actually put his entire body weight on the staircase the ladder was suddenly removed as a result of which he fell down on the ground and sustained bodily injuries which were reported to be about 10%.

As against g the complainant’s claim of ₹ 10 lakhs the airline was willing to pay ₹ 40,000 5 as compensation which according to them was the maximum statutory x liability of the Corporation under the Carriage by Air Act, 1972. The State Commission, after examining witnesses and the medical boards report held that there was a dangerous deficiency in service and having regard to the expert opinion and other medical reports, ordered payment of compensation of ₹ 4 lakhs and ₹ 1 lakh for mental agony and distress plus costs.

In appeal by the Corporation, the National Commission, upholding the State Commissions order, held that in terms of regulations relied upon by the appellant-Corporation, if it was proved that the accident caused to the complainant had resulted in permanent disablement, incapacitating him from engaging in or being occupied with his usual duties or his business or occupation.

Question 12.
Mohan made a deposit of ₹ 1.50 lakh with the Housing Board for a house proposed to be built by it. There was a stipulation that the house would be completed within 2 years. The house could not be completed and possession was not handed over as promised. The Housing Board pleaded that construction was not up to the mark and expected level because of the use of low-cost technology. Expressing regret, the Housing Board suggested that it was prepared to refund the deposit amount adding that there was no provision to pay any interest charges.
Mohan is not satisfied with the explanation and intends to approach the Consumer Disputes Redressal Forum for a claim of the refund amount, interest, and compensation if any. Will Mohan succeed? Refer to decided case law, if any. [June 2011 (5 Marks)]
Answer:
Facts of Case: Mohan made a deposit of ₹ 1.50 lakh with the Housing Board for a house proposed to be built by it. There was a stipulation that the house would be completed within 2 years. The house could not be; completed and possession was not handed over as promised.

The Housing j Board pleaded that construction was not up to the mark and expected level because of the use of low-cost technology. Expressing regret, the Housing j Board suggested that it was prepared to refund the deposit amount adding that there was no provision to pay any interest charges.

Mohan is not satisfied with the explanation and intends to approach the Consumer Disputes Redressal Forum for a claim of the refund amount, interest, and compensation if any.

Provision: In S.P. Dhavaskarv. Housing Commissioner, Karnataka Housing j Board, wherein it was held by the National Commission that a person who had deposited huge sums could not be asked to take back refund after 2, years without interest or to opt for the alternative house at increased price x which might be beyond his financial capacity.

Conclusion: The Housing Board has been grossly negligent in rendering services and it cannot return deposits without interest. Therefore, Mohan j will succeed in his claim.

Question 13.
AVri’lc a short note on Deficiency in service [June 2012 (3 Marksj]
Answer
Deficiency [Section 2(11)]: Deficiency means any fault, imperfection, shortcoming, or inadequacy in the quality, nature, and manner of performance which is required to be maintained by or under any law for the time being in force or has been undertaken to be performed by a person in pursuance of a contract or otherwise in relation to any service and includes:

Any act of negligence or omission or commission by such person which causes loss or injury to the consumer; and
Deliberate withholding of relevant information by such person to the consumer

Example: A delay in delivery of article or non-delivery is a deficiency in service by the organization engaged in courier service. However, the courier can limit the damage payable by having terms of the contract.

Question 14.
A school owned a swimming pool and offered swimming facilities to j the public on payment of fees. The school conducted summer swimming training camps to train children in swimming and for this purpose had engaged a trainer/coach.
Mohan had enrolled his son for learning how to swim. One day while swimming, the child died due to drowning. The school authorities maintained j that the trainer/coach was fully qualified for the job and challenged the complainant’s claim for compensation in the consumer disputes redressal forum. Should the school authorities be held liable to pay compensation for ‘deficiency in service’? Who is entitled to receive compensation? Give reasons. [Dec. 2012 (5 Marks)]
Answer:
Provision: In the case of Sashikant Krishnaji Dole v. Shikshan Prasarak Mandali, the school owned a swimming pool and offered swimming facilities to the public on payment of a fee. The complainants had enrolled their son for learning swimming under the guidance of the coach.

The State Commission held the school and the coach deficient in rendering service to the deceased, that the coach was not fully trained, did not exercise even the basic commonsense needed to counter an accident in swimming. Dismissing the appeal the National Commission observed that the State Commission had given cogent reasons for holding the school and the coach responsible for the death of the deceased.

Decision/Conclusion: Thus, Mohan will succeed in claiming compensation from the school and the coach under the Consumer Protection Act, 2019

Question 15.
Mohan was suffering from a serious ailment. He was admitted to a well-known private hospital in Gurgaon. He was subjected to various tests. Even after diagnosis and subsequent treatment, his condition deteriorated. The doctor advised surgery during which Mohan collapsed and died. Sushma, his wife, preferred a claim for compensation of ₹ 50 lakhs under the Consumer Protection Act, 2019 for ‘deficiency in service’. The hospital authorities contended that the medical profession was being unnecessarily hounded. Is the contention tenable? Refer to relevant case law laying down the guidelines for the medical profession. [June 2014 (5 Marks)]
Answer:
In Kusum Sharma & Others v. Balm Hospital & Medical Research Centre & Others, the Supreme Court held that the hospital could be charged as guilty if it is shown that the hospital was negligent in its duties. However, medical professionals are entitled to get protection so long as they perform their duties with reasonable skill and competence and in the interest of the patients. The interest and welfare of the patients have to be paramount for the medical professionals.

In a given case, Mohan was given reasonable and standard treatment by the hospital. Even, after this he was expired, then the hospital and doctors cannot be held liable as there is no deficiency in service.

Question 16.
What amounts to ‘defect in goods’ under the Consumer Protection Act, 2019? [June 2015 (3 Marks)]
Answer:
Defect [Section 2(10)]: Defect means any fault, imperfection, or shortcoming in the quality, quantity, potency, purity, or standard which is required to be maintained by or under any law for the time being in force or under any contract express or implied, or as is claimed by the trader in any manner whatsoever in relation to any goods.

It is clear from the above definition that non-fulfillment of any of the standards or requirements laid down under any law for the time being in force or as claimed by the trader in relation to any goods falls under the ambit of the defect.

Therefore, contravention of any of the provisions of the following enactments will be treated as a defect under the Act:

Drugs & Cosmetics Act, 1950
Prevention of Food Adulteration Act, 1955
Indian Standards Institution (Certification Marks) Act, 1952

Contravention of the conditions or implied warranties under the Sale of Goods Act, 1930 in relation to any goods has also been treated as a defect under the Act.

Fault, imperfection, or shortcoming in quality, quantity, potency, purity, or standard in relation to goods is to be determined with reference to the warranties or guarantees expressly given by a trader.

Eg: A mobile phone company promised that battery life will be 10 hours but mobile phone battery life, in reality, is 5 hours is defective.

Question 17.
Ms. Neelam, daughter of Ashok, was traveling by train. She fell down from the running train while she was passing through the inner-connecting passage between two compartments and died as a result of crush injuries on her head.
Ashok claimed compensation from the Railways for deficiency in service. The Railways contended that the redressal agencies under the Consumer Protection Act, 2019 had no jurisdiction to consider a complaint of this nature. They also contended that all the coaches of the train had been thoroughly checked at the starting point of the train and no defect was reported.
Will Ashok succeed in getting compensation? Give reasons and refer to decided case law, if any. [June 2015 (5 Marks)]
Answer:
Facts of Case: Ms. Neelam, daughter of Ashok, was traveling by train. She fell down from the running train while she was passing through the interconnecting passage between two compartments and died as a result of crush injuries on her head.

Ashok claimed compensation from the Railways for deficiency in service. The Railways contended that the redressal agencies under the Consumer Protection Act, 2019 had no jurisdiction to consider a complaint of this nature. They also contended that all the coaches of the train had been thoroughly checked at the starting point of the train and no defect was reported.

Provision It was held that a railway passenger traveling in a train on payment of consideration was a consumer within the meaning of the Consumer Protection Act, 1986.

In Union of India v. Nathmal Hansaria, the National Commission held that the death of the passenger could not be described as resulting from a railway accident but an accidental death caused by the absence of safety devices in the vestibule passageway.

Decision/Conclusion: Thus, there is a deficiency in service and Railway is liable in a given case.

Question 18.
Pawan hooked an air ticket for New York with Skyhigh Airlines. At New Delhi airport, authorities found the visa in order; but at Amsterdam, when his visa was checked it was found that the visa bears the photocopy of the photograph. Thus, Pawan missed his flight to New York. However, the airlines helped him to reach New York on the same day. After reaching New York, Skyhigh Airlines tendered an apology to Pawan for the inconvenience caused to him and paid as a goodwill gesture, a sum of ₹ 2,500. Pawan filed a complaint with National Commission under the Consumer Protection Act, 2019. Will Pawan succeed? Give reasons with reference to case law, if any. [Dec. 2015 (5 Marks)]
Answer:
Facts of Case: Pawan booked an air ticket for New York with Sky-high Airlines. At New Delhi airport, authorities found the visa in order; but at Amsterdam, when his visa was checked it was found that the visa bears the photocopy of the photograph. Thus, Pawan missed his flight to New York. However, the airlines helped him to reach New York on the same day.

After reaching New York, Skyhigh Airlines tendered an apology to Pawan for the inconvenience caused to him and paid as a goodwill gesture, a sum of ₹ 2,500. Pawan filed a complaint with the National Commission Provision: The facts of the present case are similar to the case of Ravneet Singh Bagga v. KLM Royal Dutch Fintimes, the Supreme Court held that the respondent could not be held to be guilty of deficiency in service. The staff of the airline acts keeping in mind the security and safety of passengers and the Aircraft.

The photograph on visa documents was a photocopy and not the original which was unusual. In the circumstances, the staff took some time to ascertain the truth and helped the appellant to reach New York the same day

Conclusion: Hence, Raman will not succeed in his claim against Skyhigh Airline for deficiency in service under the Consumer Protection Act, 2019.

Question 19.
Samir, on a holiday with his family, hired taxi service. The taxi was in a poor condition and the driver had not adequate rest and drove rashly. Eventually, it went burst in the middle of the way. As a result, Samir and his family could not reach the airport in time to catch their flight. Decide, whether, Samir may be treated as a consumer under Consumer Protection Act, 2019? [June 2017 (3 Marks)]
Answer:
As per facts given in the case, Samir hired a taxi service and hence Samir is a consumer within the meaning of the definition of ‘consumer’ as given in section 2(7) as he takes service for consideration. Thus, there is a contract between Samir and the provider of the taxi services.

The service provider has a duty as per contract to reach the destination as indicated by the consumer safely and in time. It is also the duty of the provider of a taxi service to see that the tax is in good and running condition in ordinary circumstances. If the taxi is in poor condition and also diver drives the car rashly causing inconvenience to the consumer then it is definitely a deficiency in service.

Question 20.
Pankaj booked a flat in the Sagar Housing Board colony. Housing Board registered it and agreed to give possession within two years. After receiving the price of the flat Housing Board failed to give possession to Pankaj within the agreed period. Is it a deficiency in service under Consumer Protection Act, 2019? [Dec. 2017 (3 Marks)]
Answer:
The above case is similar to the case of [Lucknow Development Authority v. Roop Kishore Tandon] where the failure of a Housing Board to give possession of the flat after receiving the price and after registering it in favor of the allottee was held to be ‘deficiency in service’.

As per facts given in the case, Pankaj booked a flat in Sagar Housing Board colony and after receiving the price of the flat, Housing Board has failed to give possession to Pankaj within the agreed period which is clearly a deficiency in service as per case law given above.

Question 21.
The complainant booked a ticket from Delhi to New York by a KLM plane. The airport authorities in New Delhi did not find any fault in his visa and other documents. However, at Amsterdam, the airport authorities instituted proceedings of verification because of which the appellant missed his flight to New York. After reaching New York, the airlines tendered an apology to the appellant for the inconvenience and paid as a goodwill gesture a sum of ₹ 2,500. The appellant made a complaint to the National Commission under the Consumer Protection Act, 2019. Whether the complainant will succeed? Give reasons with the help of decided case law. [Dec. 2018 (4 Marks)]
Answer:
Facts of Case: Pawan booked an air ticket for New York with Sky-high Airlines. At New Delhi airport, authorities found the visa in order; but at Amsterdam, when his visa was checked it was found that the visa bears the photocopy of the photograph. Thus, Pawan missed his flight to New York. However, the airlines helped him to reach New York on the same day.

Conclusion: Hence, Raman will not succeed in his claim against Skyhigh Airline for deficiency in service under the Consumer Protection Act, 2019.

Question 22.
Rajni got herself operated on in the Devashri Hospital for removal of her uterus, as a cyst was found to have developed near one of her ovaries. The surgeon, who performed the operation, left an abdominal pack in the abdomen. This caused a lot of pain, suffering, and uneasiness to her. The abdominal pack was subsequently removed by another surgical operation. It was alleged that due to negligence of the surgeon, the patient suffered all the consequences, therefore it should be treated as negligence in the treatment. But the Hospital authorities contended that the patient’s problem was removed by the second operation, hence it is not deficient. Rajni sought the relief under Consumer Protection Act, 2019 stating that this negligence may be treated as a deficiency and compensation may be paid to her. Decide whether Rajni will succeed or not? Why? [June 2019 (4 Marksj]
Answer:
Provision:
(a) Meaning of Deficiency: According to section 2(11) of the Consumer Protection Act, 2019, “Deficiency” means any fault, imperfection, shortcoming, or inadequacy in the quality, nature, and manner of performance that is required to be maintained by or under any law for the time being in force or has been undertaken to be performed by a person in pursuance of a contract or otherwise in relation to any service.

(b) Kusum Sharma & Others versus Batra Hospital & Medical Research Centre & Others

The facts of the given case are similar to Kusum Sharma & Others versus Batra Hospital & Medical Research Centre & Others

As long as the doctors have performed their duties and exercised an ordinary degree of professional skill and competence, they cannot be held guilty of medical negligence. In the present case, the doctor is liable for medical
negligence as by leaving an abdominal pack in the abdomen, his conduct fell below that of the standards of a reasonably competent practitioner in his field. The doctor has breached all the above-stated principles.

Question 23.
Write a short note on Complainant under the Consumer Protection Act, 2019 [Dec. 2010 (3 Marks)]
Answer:
Complainant [Section 2(5)]: Complainant means:

A consumer
Any voluntary consumer association registered under any law for time being in force
Central or State Government which makes a complaint
Central Authority
One or more consumers, where there are numerous consumers having the same interest
In case of death of a consumer, his legal heir or legal representative
In case of a consumer being minor, his parent or his guardian.

Question 24.
What do you understand by ‘restrictive trade practices? [Dec. 2016 (3 Marks)]
Answer:
Restrictive Trade Practice [Section 2(41)]: Restrictive trade practice means a trade practice that manipulates price or conditions of delivery or flow of supplies relating to goods or services in a manner to impose unjustified costs or restrictions on the consumers and shall include:
(a) A trade practice to raise the price by making delay in supply of goods or rendering of service

(b) Any agreement requiring a purchaser of goods, as a condition of such purchase, to purchase some other goods or services, (ie. tie in sale)

Question 25.
Distinguish between: Pecuniary and territorial jurisdiction of the District Forum [Dec. 2012 (5 Marks)]
Answer:
Jurisdiction of the District Forum [Section 34]: The District Forum shall have jurisdiction to entertain complaints where the value of the goods or services and the compensation claimed does not exceed ₹ 1 Crore. A complaint shall be instituted in a District Forum within the local limits of whose jurisdiction:

The opposite party or each of the opposite parties, where there are more than one, at the time of the institution of the complaint, ordinarily resides or carries on business or has a branch office or personally works for gain; or
Any of the opposite parties, where there are more than one, at the time of the institution of the complaint, actually and voluntarily resides, or carries on business or has a branch office, or personally works for gain, provided that in such case the permission of the District Commission is given; or
The cause of action arises.
The complainant resides or personally works for gain.

Question 26.
Explain the nature and scope of remedies available under the Consumer Protection Act, 2019, [Dec. 2013 (5 Marks)]
Answer:
As per Section 39 of the Consumer Protection Act, 2019, where the goods suffer any defect or there is a deficiency in service, the District Forum, State or National Commission may pass the following orders:

To remove the defects.
To replace the goods.
To return the price or the charges paid by the complainant.
To pay the compensation amount to the consumer for any loss or injury.
To remove the defects in goods or deficiencies in the services.
To discontinue the unfair trade practice or the restrictive trade practice.
Not to offer hazardous goods for sale.
To withdraw the hazardous goods from being offered for sale.
To cease manufacture of hazardous goods and to desist from offering services that are hazardous in nature.
To pay such sum as may be determined by it if it is of the opinion that loss or injury has been suffered by a large number of consumers who are not identifiable conveniently.
To issue corrective advertisement to neutralize the effect of misleading advertisement at the cost of the opposite party.
To provide for adequate costs to parties.

Question 27.
State the composition and jurisdiction of the National Commission under the Consumer Protection Act, 2019. [June 2017 (5 Marks)]
Answer:
National Commission: The Central Government has established the National Consumer Disputes Redressal Commission, by notification in the Official Gazette. [Section 53(1)]

Section 54 provides that the National Commission shall consist of
(a) President
(b) not less than four and not more than a such number of members as may be prescribed.

Maximum age for President and Members: President shall not be more than 70 years of age and members should not be more than 67 years of age.

Term of appointment and reappointment: President and members of the National Commission shall hold office for such term as specified in the rules made by the Central Government but not exceeding five years from the date on which he enters upon his office and shall be eligible for re-appointment

Jurisdiction of National Commission: Section 58 provides that the National Commission shall have jurisdiction:
(a) Complaints where the value of the goods or services paid as consideration exceeds rupees ten crores.
(b) To entertain appeals against the orders of any State Commission.
(c) To entertain appeals against the orders of any Central Authority.
(d) To call for the records and pass appropriate orders in any consumer dispute which is pending before, or has been decided by any State Commission where it appears to the National Commission that such State Commission has exercised a jurisdiction not vested in it by law, or has failed to exercise a jurisdiction so vested, or has acted in the exercise of its jurisdiction illegally or with material irregularity.

Question 28.
Discuss the process of filing an appeal by an aggrieved person under the Consumer Protection Act, 2019 [Dec. 2017 (5 Marks)]
Answer:
Appeal with State Commission-Section 41: If the aggrieved party is j not satisfied by the decision of the district forum, he can file an appeal to State Commission within 45 days by 50% of the penalty amount whichever is less. On sufficient cause

The State Commission may entertain an appeal after the expiry of 30 days. Appeal with National Commission-Section 51: In case the aggrieved party is not satisfied with the order of the State Commission then he can file an appeal in National Commission within 30 days by depositing 50% of the amount whichever is less.

On sufficient cause, the National Commission may entertain an appeal after the expiry of 30 days.

Appeal with Supreme Court (Section 67) If the aggrieved party is not satisfied with the order of the National Commission he can file an appeal in Supreme Court within 30 days.

On sufficient cause, the Supreme Court may entertain an appeal after the j expiry of 30 days.

Limitation Period – Section 69: The District Commission, the State Com- j mission or the National Commission shall not admit a complaint unless it is filed within two years from the date on which the cause of action has arisen \ Thus, an appeal from the order of the District Forum lies to the State Commission, against the order of the State Commission to the National \ Commission and against the order of the National Commission to the j Supreme Court.

Question 29.
Distinguish between: Contract of service and contract for service, [June 2010 (5 Marks)]
Answer:
Following are the main points of distinction between contract of service and contract for service:

Points	Contract of service	Contract for service
Meaning	A contract of service is an agreement wherein a person agrees to cm plot another as an employee and the employee agrees to serve his employer as an employee.	A contract for service is an agreement whereby a person is engaged as an independent contractor for carrying out an assignment or project.
Relationship	There exists a master and servant relationship in the contract of service.	In a contract for service, there is no master and servant relationship.
Example	XL .td. employes Mr. Ram. a Company Secretary This is a contract of service.	X Ltd. appoints Mr. Ram as a Secretarial Auditor. This is a contract for service.
Nature of work	In a contract of service, the employee is bound to work under the supervision and directions given b\ the employer.	In a contract for service, a person executes his work as per his own skill and experience.

Question 30.
Ram Dhenu Ltd. and Diamond Engineers entered into a contract for the supply of electrical equipment. The contract contained an arbitration clause to refer the disputes to an arbitral tribunal. Ram Dhenu Ltd. made a complaint to the Consumer Disputes Redressal Forum for ‘deficiency in service’. The opposite party opposed the complaint in view of the arbitration clause contained in the contract. Will it succeed? Give reasons. [Dec. 2011 (5 Marks)]
Answer:
Facts of Case: Ram Dhenu Ltd. and Diamond Engineers entered into a contract for the supply of electrical equipment. The contract contained an arbitration clause to refer the disputes to an arbitral tribunal. Ram Dhenu Ltd. made a complaint to the Consumer Disputes Redressal Forum for ‘deficiency in service’.

Provision: Act not in derogation of any other Law [Section 100]: The provisions of the Consumer Protection Act, 2019 shall be in addition to and not in derogation of the provisions of any other law for the time being in force.

If an agreement contains an arbitration clause, the dispute must be referred to arbitration, as per Section 8 of the Arbitration & Conciliation Act, 1996.

However, in Skypark Courier Ltd. v. Tata Chemical Ltd., it has been held that if there is an arbitration agreement, a consumer forum can entertain consumer complaints, as remedy provided under the Act is in addition to the provision of any law for the time being in force.

Decision: Thus, Ram Dhenu Ltd. can file a complaint in Consumer Forum and the opposite party will fail in objection even though the agreement contains an arbitration clause.

Question 31.
Distinguish between: Contract of service and contract for service [June 2012 (5 Marks)]
Answer:
Following are the main points of distinction between contract of service and contract for service:

Points	Contract of service	Contract for service
Meaning	A contract of service is an agreement wherein a person agrees to cm plot another as an employee and the employee agrees to serve his employer as an employee.	A contract for service is an agreement whereby a person is engaged as an independent contractor for carrying out an assignment or project.
Relationship	There exists a master and servant relationship in the contract of service.	In a contract for service, there is no master and servant relationship.
Example	XL .td. employes Mr. Ram. a Company Secretary This is a contract of service.	X Ltd. appoints Mr. Ram as a Secretarial Auditor. This is the contract for service.
Nature of work	In a contract of service, the employee is bound to work under the supervision and directions given b\ the employer.	In a contract for service, a person executes his work as per his own skill and experience.

Question 32.
Sohan has a truck that was driven by a driver, Shyam, but Shyam did not have a valid license for driving the truck. The truck was insured by an insurance company. On the way, all of a sudden the truck started burning. Sohan filed a claim with the insurance company. The insurance company repudiated the claim on the ground that the driver of the said truck | did not have a valid driving license. The truck owner pleaded that the claim I am not related to ‘driving’ of the truck but the insurance company did not change its earlier decision. Sohan filed a complaint with the District Consumers’ Disputes Redressal Forum. Will Sohan succeed? Discuss with | reference to the decided case, if any. [Dec. 2016 (5 Marks)]
Answer:
Facts of Case: Sohan has a truck that was driven by a driver, Shy- am, but Shyam did not have a valid license for driving the truck. The truck was insured by an insurance company. On the way, all of a sudden the truck started burning. Sohan filed a claim with the insurance company. The insurance company repudiated the claim on the ground that the driver of the said truck did not have a valid driving license. The truck owner pleaded that the claim is not related to the ‘driving’ of the truck but the insurance company did not change its earlier decision.

Provision/Land Mark Case: The above facts are similar to the case of Jitendra Kumar v. Oriental Insurance Company Ltd. and another, the Supreme Court has held that where the fire has occurred due to mechanical failure and not due to any act or omission of the driver. A driving license has no relevance or connection with the fire. The insurance company cannot repudiate the claim because of a lack of a valid driving license.

Decision: Thus, Sohan will succeed in his claim.

Question 33.
Distinguish between: Contract of service and contract for service. [June 2019 (3 Marks)]
Answer:
Following are the main points of distinction between contract of service and contract for service:

Points	Contract of service	Contract for service
Meaning	A contract of service is an agreement wherein a person agrees to cm plot another as an employee and the employee agrees to serve his employer as an employee.	A contract for service is an agreement whereby a person is engaged as an independent contractor for carrying out an assignment or project.
Relationship	There exists a master and servant relationship in the contract of service.	In a contract for service, there is no master and servant relationship.
Example	XL .td. employes Mr. Ram. a Company Secretary This is a contract of service.	X Ltd. appoints Mr. Ram as a Secretarial Auditor. This is a contract for service.
Nature of work	In a contract of service, the employee is bound to work under the supervision and directions given b\ the employer.	In a contract for service, a person executes his work as per his own skill and experience.

Economic, Business and Commercial Laws Questions and Answers

SEBI (Listing Obligations & Disclosure Requirements) Regulations, 2015 – Securities Laws and Capital Markets Important Questions

Leave a Comment / CS Executive / By Murali / April 2, 2024 April 3, 2024

SEBI (Listing Obligations & Disclosure Requirements) Regulations, 2015 – Securities Laws and Capital Markets Important Questions

Question 1.
Write a short note on Types of Listing [Dec. 2016 (4 Marks)]
Answer:
Listing of securities falls under five groups:

Initial Listing: If the shares or securities are to be listed for the first time by a company on a stock exchange is called initial listing.
Listing for Public Issue: When a company whose shares are listed on a stock exchange comes out with a public issue of securities, it has to list such issues with the stock exchange.
Listing for Rights Issue: When companies whose securities are listed on the stock exchange issue securities to existing shareholders on a rights basis, it has to list such rights issues on the concerned stock exchange.
Listing of Bonus Shares: It is a listing of shares issued as a result of capi¬talisation of profit through a bonus.
Listing for merger or amalgamation: When new shares are issued by an amalgamated company to the shareholders of the amalgamating com¬pany, such shares are also required to be listed on the concerned stock exchange.

Question 2.
“Listing of securities with stock exchanges is a matter of great importance for companies and investors.” Comment on this statement and list out the benefits of listing for the companies and investors. [June 2017 (4 Marks)]
Answer:
Benefits to the Company: The following benefits are available to the company when securities are listed by a company in the stock exchange:

The public image of the company is enhanced.
The liquidity of the security is ensured making it easy to buy and sell the securities in the stock exchange.
Tax concessions are made available both to the investors and the companies.
The listing procedure compels company management to disclose important information to the investors enabling them to make crucial decisions with regard to keeping or disposing of such securities.
Listed companies command better support such as loans and investments from Banks and FIs.

Benefits to the investors:

It affords liquidity to their holdings.
It affords them to obtain the best prices for the securities they want to sell-off.
The Stock Exchange quotation helps the investors to keep themselves abreast of the price changes of the securities owned or held by them.
The investors get maximum protection in regard to their holdings because the Stock Exchange rules and regulations have been formulated with the end in view.
The listing gives an added collateral value to the securities held by investors, for banks in making loans and advances prefer security quoted on the Stock Exchange.
Listing is also advantageous in the matter of income-tax, wealth-tax, estate duty, and other taxes payable by shareholders in their capacity as assessee.

Question 3.
Explain briefly: Multiple listing [June 2013 (3 Marks)]
Answer:
A company with a paid-up capital above ₹ 5 Crore should list its securities or have its securities permitted for trading, on at least one stock exchange having Nationwide Trading Terminals.

The benefit of multiple listing: Multiple listing provides arbitrage opportunities 1 to the investors, whereby they can make a profit based on the difference in the | prices prevailing in the said exchanges.

Question 4.
Explain: Multiple Listing [June 2016 (2 Marks)]
Answer:
A company with a paid-up capital above ₹ 5 Crore should list its securities or have its securities permitted for trading, on at least one stock exchange having Nationwide Trading Terminals.

The benefit of multiple listing: Multiple listing provides arbitrage opportunities to the investors, whereby they can make a profit based on the difference in the prices prevailing in the said exchanges.

Question 5.
Discuss the duties of a ‘Compliance Officer’ in a listed company. [Dec. 2006 (4 Marks)]
Answer:
Compliance Officer and his Obligations [Regulation 6]: A listed entity; shall appoint a qualified Company Secretary as the Compliance Officer.

The Compliance Officer of the listed entity shall be responsible for:

Ensuring conformity with the regulatory provisions applicable to the listed entity in letter and spirit.
Coordination with and reporting to SEBI recognized stock exchanges, and depositories with respect to compliance with rules, regulations, and other directives of these authorities in a manner as specified from time to time.
Ensuring that the correct procedures have been followed would result in the correctness, authenticity, and comprehensiveness of the information, statements, and reports filed by the listed entity under these regulations.
Monitoring email address of grievance redressal division as designated by the listed entity for the purpose of registering complaints by investors. However, requirements of this regulation shall not be applicable in the case of units issued by mutual funds which are listed on the recognized stock exchange but shall be governed by the provisions of the SEBI (Mutual Funds) Regulations, 1996.

Question 6.
State any four regulations of the SEBI (LODR) Regulations, 2015. [Dec. 2008 (5 Marks)]
Answer:
Some of the regulations of the SEBI (LODR) Regulations, 2015 are as follows:

Scheme of Arrangement [Regulation 11]	The listed entity shall ensure that any scheme of arrangement/ amalgamation/merger/reconstruction/reduction of capital etc. to be presented to any Court or Tribunal does not in any way violate, override or limit the provisions of securities laws or requirements of the stock exchanges.
Payment of dividend etc. [Regulation 12]	The listed entity shall use an electronic mode of payment facility approved by the RBI for the payment of dividends, interest, redemption, or repayment principle amounts. However, where it is not possible to use an electronic mode of payment, ‘payable- at par warrants or cheques may be issued.
Fees and other charges [Regulation 14]	The listed entity shall pay all such fees or charges, as applicable, to the recognized stock exchanges, in the manner specified by the SEBI or the recognized stock exchanges.
Annual Information Memorandum [Regulation 35]	The listed entity shall submit to the stock exchanges an Annual Information Memorandum in the manner specified by the SEBI from time to time.
Minimum Public Shareholding [Regulation 38]	The listed entity shall comply with the minimum public shareholding requirements specified in Rule 19(2) and Rule 19A of the Securities Contracts (Regulation) Rules, 1957 in the manner as specified by the SEBI from time to time. However, this provision shall not apply to entities listed on the institutional trading platforms without making a public issue.
Dividends [Regulation 43]	The listed entity shall declare and disclose the dividend on a per-share basis only. The listed entity shall not forfeit unclaimed dividends before the claim becomes barred by law and such forfeiture, if effected, shall be annulled in appropriate cases.
Accounting Standards [Regulation 48]	The listed entity shall comply with all the applicable and notified Accounting Standards from time to time.

Question 7.
You are Company Secretary of All Season Travels Ltd., which is listed on the stock exchange after an IPO is made by the company. Your Board of directors desires to understand the compliance requirements relating to the publication of financial results. Write a Board note on ‘Regulation 33 of the SEBI (LODR) Regulations, 2015’, [Dec. 2011 (7 Marks)]
Answer:
Financial Results [Regulation 33]:
1. While preparing financial results, the listed entity shall comply with the following:
(a) The financial results shall be prepared on the basis of accrual ac¬counting policy and shall be in accordance with uniform accounting practices adopted for all the periods.

(b) The quarterly and year to date results shall be prepared in accor¬dance with the recognition and measurement principles laid down in AS-25 or IAS-3 f (AS 25/Ind AS 34 – Interim Financial Reporting), as applicable, specified in Section 133 of the Companies Act, 2013 read with relevant rules framed thereunder or as specified by the ICAI, whichever is applicable.

(c) The standalone financial results and consolidated financial results shall be prepared as per Generally Accepted Accounting Principles in India. In addition to the above, the listed entity may also submit the financial results, as per the IFRS notified by the IASB.

(d) The listed entity shall ensure that the limited review or audit reports submitted to the stock exchange(s) on a quarterly or annual basis are to be given only by an auditor who has subjected himself to the peer review process of ICAI and holds a valid certificate issued by the Peer Review Board of the ICAI.

(e) The listed entity shall make the disclosures specified in Part A of Schedule IV.

2. The approval and authentication of the financial results shall be done by a listed entity in the following manner:
(a) The quarterly financial results submitted shall be approved by the board of directors. However, while placing the financial results before the board of directors, the CEO and CFO of the listed entity shall certify that the financial results do not contain any false or misleading statements or figures and do not omit any material fact which may make the statements or figures contained therein misleading.

(b) The financial results submitted to the stock exchange shall be signed by the Chairperson or Managing Director, or a Whole Time Direc¬tor or in the absence of all of them; it shall be signed by any other director of the listed entity who is duly authorized by the board of directors to sign the financial results.

(c) The limited review report shall be placed before the board of direc¬tors, at its meeting which approves the financial results, before being submitted to the stock exchange.

(d) The annual audited financial results shall be approved by the board of directors of the listed entity and shall be signed as stated above.

3. The listed entity shall submit the financial results in the following manner:
(a) The listed entity shall submit quarterly and year-to-date standalone financial results to the stock exchange within 45 days of the end of each quarter, other than the last quarter.

(b) In case the listed entity has subsidiaries, the listed entity shall also submit quarterly/year-to-date consolidated financial results.

(c) The quarterly and year-to-date financial results may be either audited or unaudited subject to the following:
1. In case the listed entity opts to submit unaudited financial results, they shall be subject to limited review by the statutory auditors of the listed entity and shall be accompanied by the limited review report. In the case of public sector undertakings, this limited review may be undertaken by any practicing Chartered Accountant.

2. In case the listed entity opts to submit audited financial results, they shall be accompanied by the audit report.

(d) The listed entity shall submit annual audited standalone financial results for the financial year, within 60 days from the end of the financial year along with the audit report and Statement on Impact g of Audit Qualifications for audit report with modified opinion. If the ig listed entity has subsidiaries, it shall, while submitting annual audited standalone financial results also submit annual audited consolidated financial results along with the audit report and Statement on Impact of Audit Qualifications for audit report with modified opinion.

In case of audit reports with unmodified opinion, the listed entity shall furnish a declaration to that effect to the Stock Exchange while f publishing the annual audited financial results,

(e) The listed entity shall also submit the audited or limited reviewed financial results in respect of the last quarter along with the results for the entire financial year, with a note stating that the figures of last quarter are the balancing figures between audited figures in respect f of the full financial year and the published year-to-date figures up
to the third quarter of the current financial year.

(f) The listed entity shall also submit as part of its standalone or consolidated financial results for the half-year, by way of a note, a statement of assets and liabilities as at the end of the half-year.

(g) The listed entity shall also submit as part of its standalone and consolidated financial results for the half-year, by way of a note, statement of cash flows for the half-year.

(h) The listed entity shall ensure that, for the purposes of quarterly consolidated financial results, at least eighty percent of each of the consolidated revenue, assets, and profits, respectively, shall have been subject to audit or in case of unaudited results, subjected to limited review.

(i) The listed entity shall disclose, in the results for the last quarter in the financial year, by way of a note, the aggregate effect of material adjustments made in the results of that quarter which pertain to earlier periods.

4. The applicable formats of the financial results and Statement on Impact of Audit Qualifications (for audit report with modified opinion) shall be in the manner as specified by the SEBI.

5. For the purpose of this regulation, any reference to “quarterly/quarter” in case of the listed entity which has listed their specified securities on SME Exchange shall be respectively read as “half-yearly/half-year” and the requirement of submitting ‘year-to-date’ financial results shall not be applicable for a listed entity which has listed their specified securities on SME Exchange.

6. The Statement on Impact of Audit Qualifications (for audit report with modified opinion) and the accompanying annual audit report shall be reviewed by the stock exchange.

7. The statutory auditor of a listed entity shall undertake a limited review of the audit of all the entities/companies whose accounts are to be consolidated with the listed entity as per AS-21 in accordance with guidelines issued by the SEBI on this matter.

Annual Report [Regulation 34]:
1. The listed entity shall submit to the stock exchange and publish on its website –
(a) A copy of the annual report sent to the shareholders along with the notice of the annual general meeting not later than the day of commencement of dispatch to its shareholders.

(b) In the event of any changes to the annual report, the revised copy along with the details and explanation for the changes shall be sent not later than 48 hours after the AGM.

2. The annual report shall contain the following:
(a) Audited financial statements i.e. balance sheets, profit and loss accounts, and Statement on Impact of Audit Qualifications, if applicable.

(b) Consolidated financial statements audited by its statutory auditors.

(c) Cash flow statement presented only under the indirect method as prescribed in AS-3 or IAS-7, as applicable, specified in Section 133 of the Companies Act, 2013 read with relevant rules framed thereunder or as specified by the ICAI, whichever is applicable.

(d) Directors report.

(e) Management discussion and analysis report – either as a part of directors report or addition thereto.

(f) For the top 500 listed entities based on market capitalization, business responsibility report describing the initiatives taken by them from an environmental, social, and governance perspective, in the format as specified by the SEBI from time to time.

Listed entities other than top 500 listed companies based on market capitalization and listed entities that have listed their specified securities on SME Exchange, may include these business responsibility reports on a voluntary basis in the format as specified.

3. The annual report shall contain any other disclosures specified in the Companies Act, 2013 along with other requirements as specified in Schedule V.

Question 8.
Write a short note on Whistle Blower Policy [June 2015 (4 Marks)]
Answer:
Regulation 22 of the SEBI (LODR) Regulations, 2015 makes the following provisions on Whistle Blower Policy.
Vigil Mechanism [Regulation 22]: The listed entity shall formulate a vigil mechanism for directors and employees to report genuine concerns:
The vigil mechanism shall provide for adequate safeguards against victimization of directors or employees or any other person who avail the mechanism and also provide for direct access to the chairperson of the audit committee in appropriate or exceptional cases.

‘Whistle-Blower Policy’/‘vigil mechanism’ explained:
The concept of ‘Whistle-Blower Policy’/‘vigil mechanism’ is borrowed from western thinking. The concept is that there are many employees at various levels in the organization who feel that something is going wrong e.g. corruption, violation of law, wastages, unethical practices, etc. The policy/mechanism to report such corruption, violation of law, wastages, and unethical practices is known as the vigil mechanism.

In many cases when lower-level employee reports such incidence and they are victimized – may be demoted or removed from his job. In fear of losing job, he will not report such incidence hence regulation provides that vigil mechanism shall provide adequate safeguards against victimization of directors or employees or any other j person who avail the mechanism.

Question 9.
State any six regulations of the SEBI (LODR) Regulations, 2015. [June 2012 (5 Marks)]
Answer:
Some of the regulations of the SEBI (LODR) Regulations, 2015 are as follows:

Scheme of Arrangement [Regulation 11]	The listed entity shall ensure that any scheme of arrangement/ amalgamation/merger/reconstruction/reduction of capital etc. to be presented to any Court or Tribunal does not in any way violate, override or limit the provisions of securities laws or requirements of the stock exchanges.
Payment of dividend etc. [Regulation 12]	The listed entity shall use an electronic mode of payment facility approved by the RBI for the payment of dividends, interest, redemption, or repayment principle amounts. However, where it is not possible to use an electronic mode of payment, ‘payable- at par warrants or cheques may be issued.
Fees and other charges [Regulation 14]	The listed entity shall pay all such fees or charges, as applicable, to the recognized stock exchanges, in the manner specified by the SEBI or the recognized stock exchanges.
Annual Information Memorandum [Regulation 35]	The listed entity shall submit to the stock exchanges an Annual Information Memorandum in the manner specified by the SEBI from time to time.
Minimum Public Shareholding [Regulation 38]	The listed entity shall comply with the minimum public shareholding requirements specified in Rule 19(2) and Rule 19A of the Securities Contracts (Regulation) Rules, 1957 in the manner as specified by the SEBI from time to time. However, this provision shall not apply to entities listed on the institutional trading platforms without making a public issue.
Dividends [Regulation 43]	The listed entity shall declare and disclose the dividend on a per-share basis only. The listed entity shall not forfeit unclaimed dividends before the claim becomes barred by law and such forfeiture, if effected, shall be annulled in appropriate cases.
Accounting Standards [Regulation 48]	The listed entity shall comply with all the applicable and notified Accounting Standards from time to time.

Question 10.
Nikhil Ltd., a listed company is confused about the composition of the Board of directors, seeks your advice regarding the composition of the Board of directors as per SEBI (LODR) Regulations, 2015. As a Company Secretary of Nikhil j Ltd., offer your suggestions by highlighting provisions of applicable regula¬tion. [Dec. 2015 (6 Marks)]
Answer:
Board of Directors [Regulation 17]: The composition of the board of directors of the listed entity shall be as follows:
(a) Board of directors shall have an optimum combination of executive and non-executive directors with at least 1 woman director and not less than 50% of the board of directors shall comprise of non-executive directors.

However, the Board of directors of the top 500 listed entities shall have at least independent woman director by April 1, 2019, and the Board of directors of the top 1000 listed entities shall have at least 1 independent woman director by April 1, 2020.

Explanation: The top 500 and 1000 entities shall be determined on the basis of market capitalization, as at the end of the immediate previous financial year.

(b) Where the chairperson of the board of directors is a non-executive direc¬tor, at least 1 / 3rd of the board of directors shall comprise independent directors.

Where the listed entity does not have a regular non-executive chairper¬son, at least 50% of the board of directors shall comprise independent directors.

However, where the regular non-executive chairperson is a promoter of the listed entity or is related to any promoter or person occupying man¬agement positions at the level of board of director or at one level below the board of directors, at least half of the board of directors of the listed entity shall consist of independent directors.

(c) The board of directors of the top 1000 listed entities (w.e.f. from April 1, 2019) and the top 2000 listed entities (w.e.f. April 1, 2020) shall comprise not less than 6 directors.

Explanation: The top 1000 and 2000 entities shall be determined on the basis of market capitalization as at the end of the immediate previous financial year.

(d) Where the listed company has outstanding SR equity shares, at least half of the board of directors shall comprise independent directors. Appointment of a non-executive director having age more than 75 years:

No listed entity shall appoint a person or continue the directorship of any person as a non-executive director who has attained the age of 75 years unless a special resolution is passed to that effect, in which case the explanatory statement annexed to the notice for such motion shall indicate the justification for appointing such a person.

Chairperson of the board: With effect from April 1, 2022, the top 500 listed entities shall ensure that the Chairperson of the board of such listed entity shall –
(a) be a non-executive director;
(b) not be related to the Managing Director or the Chief Executive Officer as per the definition of the term “relative” defined under the Companies Act, 2013.

However, this provision shall not be applicable to the listed entities which do not have any identifiable promoters as per the shareholding pattern filed with stock exchanges.

Question 11.
What are the policies required to be framed under SEBI (LODR) Regulations, 2015? [June 2017 (4 Marks)]
Answer:
Following policies are required to be framed under the SEBI (LODR)
Regulations, 2015:

The listed entities other than the top 500 listed entities based on market capitalization may disclose their dividend distribution policies on a voluntary basis in their annual reports and on their websites.
Significant changes in accounting policies during the year and that the same should be disclosed in the notes to the financial statements.
Changes in accounting policies and practices and reasons for the same.
The listed entity shall formulate a policy on the materiality of related party transactions and on dealing with related party transactions.
Vigil mechanism/Whistle Blower policy.
Policy on dealing with related party transactions.
Policy for determining ‘material subsidiaries’.
The nomination and remuneration committee shall devise a policy on the diversity of the board of directors.
Risk policy.
Policy for the preservation of documents.

Question 12.
A listed entity shall not be allowed to change its name more than once. [Dec. 2017 (5 Marks)]
Answer:
Change in name of the listed entity [Regulation 45 of the SEBI (LODR) Regulations, 2015]: The listed entity shall be allowed to change its name subject to compliance with the following conditions:
(a) A time period of at least one year has elapsed from the last name change.
(b) At least 50% of the total revenue in the preceding one-year period has been accounted for by the new activity suggested by the new name.
(c) The amount invested in the new activity/project is at least 50% of the assets of the listed entity. However, if any listed entity has changed its activities that are not reflected in its name, it shall change its name in line with its activities within a period of 6 months from the change of activities in compliance with provisions as applicable to change of name prescribed under the Companies Act, 2013.

On satisfaction of the above conditions, the listed entity shall file an application for name availability with ROC.

On receipt of confirmation regarding name availability from ROC, before filing the request for change of name with the ROC, the listed entity shall seek approval from Stock Exchange by submitting a certificate from CA stating compliance with required conditions.

Question 13.
For ensuring independence in the spirit of Independent Directors and their active participation in the functioning of the company, SEBI has accepted many recommendations of the Committee set up under the Chairmanship of Shri Uday Kotak and made amendments in the SEBI (Listing Obligations and Disclo¬sure Requirements) Regulations, 2015. Explain any four amended provisions related to Independent Directors. [Dec. 2018 (4 Marks)]
Answer:
Four important amendments relating to ‘independent directors’ as per SEBI (LODR) Regulations, 2015 are given below:
1. The Board of directors of the top 500 listed entities shall have at least one independent woman director by April 1, 2019, and the Board of directors of the top 1,000 listed entities shall have at least 1 independent woman director by April 1, 2020.

Explanation: The top 500 and 1000 entities shall be determined on the basis of market capitalization, as at the end of the immediate previous financial year. [w.e.f. 1.4.2019]

2. The quorum for every meeting of the board of directors of the top 1000 listed entities with effect from April 1, 2019, and of the top 2000 listed entities with effect from April 1, 2020, shall be 1 /3rd of its total strength or 3 directors, whichever is higher, including at least 1 independent director.
[Inserted by the SEBI (Listing Obligations and Disclosure Requirements) (Amendment) Regulations, 2018]

3. The evaluation of independent directors shall be done by the entire board of directors which shall include –
(a) performance of the directors; and
(b) fulfillment of the independence criteria as specified in these regula¬tions and their independence from the management. However, in the above evaluation, the directors who are subject to evaluation shall not participate, [w.e.f. 1.4.2019]

4. A person shall not serve as an independent director in more than seven listed entities, [w.e.f. 1.4.2019]

Question 14.
MCS Ltd. is a listed company with Bombay Stock Exchange Ltd. The company enters into related party transactions frequently with MAP Ltd. in which one of the directors of MCS Ltd. holds 3% paid-up capital of MAP Ltd. MCS
Ltd. feels that getting the approval of the Audit Committee for each transaction is time-consuming and delaying the operational plan. You, being a Company Secretary of MCS Ltd., advise the management with reference to SEBI (Listing Obligations & Disclosure Requirements) Regulations, 2015 for approval of the related party transactions from the Audit Committee for the next year. Will your answer be different if MAP Ltd. is a wholly-owned subsidiary of MCS Ltd.? [Dec. 2018 (4 Marks)]
Answer:
As per Regulation 23(3) & (4) of the SEBI (LODR) Regulations, 2015, all related party transactions shall require prior approval of the audit committee.

The audit committee may grant omnibus approval for related party transactions proposed to be entered into by the listed entity subject to the following conditions:
(a) The audit committee shall lay down the criteria for granting the omnibus approval in line with the policy on related party transactions of the listed entity and such approval shall be applicable in respect of transactions that are repetitive in nature.

(b) The audit committee shall satisfy itself regarding the need for such omni¬bus approval and that such approval is in the interest of the listed entity.

the names of the related party, nature of the transaction, period of transaction, the maximum amount of transactions that shall be entered into,
the indicative base price/current contracted price and the formula for variation in the price if any; and
such other conditions as the audit committee may deem fit. However, where the need for related party transactions cannot be foreseen and aforesaid details are not available, the audit committee may grant omni¬bus approval for such transactions subject to their value not exceeding t 1 Crore per transaction.

(d) The audit committee shall review, at least on a quarterly basis, the details of related party transactions entered into by the listed entity pursuant to each of the omnibus approvals given.

(e) Such omnibus approvals shall be valid for a period not exceeding 1 year and shall require fresh approvals after the expiry of 1 year.

Above provisions shall not be applicable in the following cases:
(a) transactions entered into between two government companies;
(b) transactions entered into between a holding company and its wholly-owned subsidiary whose accounts are consolidated with such holding company and placed before the shareholders at the general meeting for approval.

Considering the above provisions, the answer to the given problem is as follows:

The audit committee of MCS Ltd. can grant omnibus approval for related party transactions subject to fulfillment of the above-stated conditions of the SEBI (LODR) Regulations, 2015.
The provisions of clauses (3), (4) & (5) stated above shall not be applicable for transactions entered into between a holding company and its wholly-owned subsidiary if the accounts are consolidated and placed before the shareholders at the general meeting for approval. Hence, in this case, transactions with related parties can be entered without prior approval.

Omnibus approval explained:
Black’s Law Dictionary defines ‘omnibus’ as ‘relating to or dealing with numerous objects or items at once; including many things or having various purposes ’. In the context of the related party transaction, ‘omnibus’ refers to the collective approval of the transaction instead of the piecemeal/individual approval

Question 15.
A listed company can apply to the stock exchange for re-classification of the Promoter’s holdings as public shareholders under SEBI regulations. Whether following promoters can apply for re-classification with reference to SEBI regulations?
(a) Promoter is declared as a wilful defaulter as per RBI Guidelines.
(b) Promoter is holding 12% of total voting rights in the listed entity.
(c) Promoter is acting as CEO of the listed entity.
(d) The promoter company has outstanding listing fees only for one year. [June 2019 (4 Marks)]
Answer:
As per Regulation 31 A(3)(h) of the SEBI (Listing Obligations & Disclosure Requirements) Regulations, 2015, the promoters seeking re-classification and persons related to the promoters seeking re-classification shall not:

together, hold more than 10% of the total voting rights in the listed entity;
exercise control over the affairs of the listed entity directly or indirectly;
have any special rights with respect to the listed entity through formal or informal arrangements including through any shareholder agreements;
be represented on the board of directors (including not having a nominee ‘ director) of the listed entity;
act as a KMP in the listed entity;
be a ‘wilful defaulter’ as per the RBI Guidelines;
be a fugitive economic offender.

As per Regulation 31A(3)(c) of the SEBI (Listing Obligations & Disclosure Requirements) Regulations, 2015, the listed entity shall:

be compliant with the requirement for minimum public shareholding as required under regulation 38 of these regulations;
not have traded in its shares suspended by the stock exchanges;
not have any outstanding dues to the Board, the stock exchanges, or the depositories.

Keeping in view the above provisions, the answer to the given case is as follows:

The promoter who is declared as a wilful defaulter as per RBI Guideline cannot apply for re-classification.
Promoter holding 12% of the total voting rights in the listed entity cannot apply for re-classification.
Promoter acting CEO cannot apply for re-classification being a key managerial person of the company.
Promoter companies having outstanding listing fees cannot apply for reclassification.

Question 16.
Corporate governance is the application of best management practices. Comment. [June 2009 (4 Marks)]
Answer:
Corporate Governance is a system of rules, practices, and processes by which a company is directed and controlled. Corporate governance essentially involves balancing the interests of the many stakeholders in a company – these include its shareholders, management, customers, suppliers, financiers, government, and the community.

Corporate Governance stipulates parameters of accountability, control, and reporting functions of the board of directors. It is a set of systems and procedures to ensure that the company is managed to suit the best interest of all stakeholders.

In India, requirements of corporate governance have been specified by SEBI through Clause 49 of the Listing Agreement.

Question 17.
Explain the term: Corporate Governance [Dec. 2009 3 Marks)]
Answer:
Corporate Governance is a system of rules, practices, and processes by which a company is directed and controlled. Corporate governance essentially involves balancing the interests of the many stakeholders in a company – these include its shareholders, management, customers, suppliers, financiers, government, and the community.

In India, requirements of corporate governance have been specified by SEBI through Clause 49 of the Listing Agreement.

Question 18.
Discuss briefly the composition, role, and responsibilities of an audit committee under the listing regulations. [Dec. 2010 (7 Marks)]
Answer:
Regulation 18 o[ the SEBI (LODR) Regulations, 2015 makes the following provisions on the audit committee.

Audit Committee [Regulation 18]:
1. Every listed entity shall constitute a qualified and independent audit committee in accordance with the terms of reference, subject to the following:
(a) The audit committee shall have a minimum of 3 directors as members.
(b) 2/3rd of the members of the audit committee shall be independent directors and in case of a listed entity having outstanding SR equity shares the audit committee shall only comprise of independent directors.
(c) All members of the audit committee shall be financially literate and at least one member shall have accounting or related financial management expertise.

The explanation I: ‘Financially literate’ shall mean the ability to read and understand basic financial statements ¿e. balance sheet, profit and loss account, and statement of cash flows.

Explanation 2:A member shall be considered to have accounting or related financial management expertise if he or she possesses experience in finance or accounting, or requisite professional certification in accounting, or any other comparable experience or background which results in the individual’s financial sophistication, including being or having been a chief executive officer, chief financial officer or other senior officers with financial oversight responsibilities.

(d) The chairperson of the audit committee shall be an independent di¬rector and he shall be present at the Annual general meeting to answer shareholder queries.

(e) The Company Secretary shall act as the secretary to the audit com¬mittee.

(f) The audit committee at its discretion shall invite the finance director or head of the finance function, head of the internal audit, and a repre¬sentative of the statutory auditor and any other such executives to be present at the meetings of the committee. However, occasionally the audit committee may meet without the presence of any executives of the listed entity.

2. The listed entity shall conduct the meetings of the audit committee in the following manner:
(a) The audit committee shall meet at least 4 times in a year and not more than 120 days shall elapse between two meetings.
(b) The quorum for an audit committee meeting shall either be 2 members or 1 /3rd members, whichever is greater, with at least 2 independent directors.
(c) The audit committee shall have powers to investigate any activity within its terms of reference, seek information from any employee, obtain outside legal or other professional advice, and secure attendance of outsiders with relevant expertise if considers necessary.

3. The role of the audit committee and the information to be reviewed by the audit committee shall be as specified in Part C of Schedule II.

Question 19.
Discuss briefly the composition of the ‘audit committee’ in terms of listing agreement and enumerate its role and responsibilities. [June 2013 (9 Marks)]
Answer:
Regulation 18 o[ the SEBI (LODR) Regulations, 2015 makes the following provisions on the audit committee.

The explanation I: ‘Financially literate’ shall mean the ability to read and understand basic financial statements ¿e. balance sheet, profit and loss account, and statement of cash flows.

(d) The chairperson of the audit committee shall be an independent di¬rector and he shall be present at the Annual general meeting to answer shareholder queries.

(e) The Company Secretary shall act as the secretary to the audit com¬mittee.

2. The listed entity shall conduct the meetings of the audit committee in the following manner:
(a) The audit committee shall meet at least 4 times in a year and not more than 120 days shall elapse between two meetings.
(b) The quorum for an audit committee meeting shall either be 2 members or 1 /3rd members, whichever is greater, with at least 2 independent directors.
(c) The audit committee shall have powers to investigate any activity within its terms of reference, seek information from any employee, obtain outside legal or other professional advice, and secure atten¬dance of outsiders with relevant expertise if considers necessary.

(3) The role of the audit committee and the information to be reviewed by the audit committee shall be as specified in Part C of Schedule II.

Question 20.
Good governance in the capital market has always been high on the agenda of SEBI. Comment. [Dec. 2014 (4 Marks)]
Answer:
Good Governance in the capital market has always been high on the agenda of SEBI. Corporate Governance is looked upon as a distinctive brand and benchmark in the profile of Corporate Excellence. This is evident from the continuous updating of guidelines, rules, and regulations by SEBI for ensuring transparency and accountability.

In the process, SERT had constituted a Committee on Corporate Governance under the Chairmanship of Shri Kumar Mangalam Bina. The Committee in its report observed that Hythe strong Corporate Governance is indispensable to resilient and vibrant capital markets and is an important instrument of investor protection. Ills the blood that fills the veins of transparent corporate disclosure and high-quality accounting practices. It is the muscle that moves a viable and accessible financial reporting structure.”

Based on the recommendations of the Committee, the SEBI had specified principles of Corporate Governance and introduced a new clause 49 in the Listing Agreement of the Stock Exchanges in the year 2000.

Currently, in India, requirements of corporate governance have been specified by SEBI through SEBI (LODR) Regulations, 2015.

Question 21.
Write a short note on the Corporate Governance Compliance Certificate [June 2015 (4 Marks)]
Answer:
As per SEBI (LODR) Regulations, 2015, the company shall obtain a cer¬tificate from either the Statutory Auditors or Practicing Company Secretary regarding the compliance of conditions of corporate governance.

Compliance Certificate is required to be annexed with the Directors’ Report, j which is sent annually to all the shareholders of the company.

The Compliance Certificate shall also be sent to the Stock Exchanges along | with the Annual Report filed by the company.

Question 22.
You are the Company Secretary of Sunglow Ltd., which is listed on the Stock Exchange after an IPO is made by the company. The Managing Director desires to know about quarterly compliance requirements under the listing agreement. Prepare a list of quarterly compliances as per the listing regulations. [Dec. 2018 (4 Marks)] j
Answer:
Following quarterly compliances are required to be made under the SEBI (LODR) Regulations, 2015:

Particulars	Compliance to be made	Time limit
Statement of investor complaints [Regulation 13]	The listed entity shall file with the recognized stock exchange, a statement giving the number of investor complaints: (a) pending at the beginning of the quarter, (b) those received during the quarter, (c) disposed of during the quarter and (d) those remaining unresolved at the end of the quarter.	Within 21 days from the end of the quarter.
Corporate Governance Report [Regulation 27]	The listed entity shall submit a quarterly compliance report on corporate governance in the format as specified by SEBI from time to time to the recognized stock exchange(s).	Within 15 days from the end of the quarter.
Shareholding Pattern [Regulation 31]	The listed entity shall submit to the stock exchange(s) a statement showing holding of securities and shareholding pattern separately for each class of securities, in the format specified by SEBI from time to time.	Within 21 days from the end of the quarter.
Statement of deviation [Regulation 32]	The listed entity shall submit to the stock exchange a statement of deviation or variation
Financial Results [Regulation 33]	The listed entity shall submit quarterly and year-to-date financial results to the stock exchange	Within 45 days from the end of the quarter other than last quarter.

Question 23.
Bombay Stock Exchange Ltd. had suspended trading in shares of XYZ Ltd. for violating conditions of the listing agreement. The company has now com¬plied with the listing regulations requirements. By referring to SEBI circular/ “z regulations, discuss the criteria for suspension of the trading in the shares of § the listed entities. [Dec. 2018 (4 Marks)]
Answer:
As per Circular No. CIR/CFD/CMD/12/2015 dated November 30, 2015 T issued by SEBI, criteria for suspension of the trading in the shares of the listed j entities is as follows:

Failure to comply with Regulation 27(2) with respect to submission of corporate governance compliance report for 2 consecutive quarters.
Failure to comply with Regulation 31 with respect to submission of share¬holding pattern for 2 consecutive quarters.
Failure to comply with Regulation 33 with respect to submission of finan¬cial results for 2 consecutive quarters.
Failure to comply with Regulation 34 with respect to submission of Annual Report for 2 consecutive financial years.
Failure to submit information on the reconciliation of shares and capital audit report, for 2 consecutive quarters.
Receipt of the notice of suspension of trading of that entity by any other recognized stock exchange on any or all of the above grounds.

Securities Laws and Capital Markets Questions and Answers

Indian Penal Code, 1860 – Jurisprudence, Interpretation & General Laws Important Questions

Leave a Comment / CS Executive / By Murali / April 1, 2024 April 3, 2024

Indian Penal Code, 1860 – Jurisprudence, Interpretation & General Laws Important Questions

Question 1.
Distinguish between: Crime & Civil Wrong
Answer:
Following are the main points of distinction between Crime & Civil Wrong:

Points	Crime	Civil Wrong
Meaning	Crime means any act or omission made punishable under any law.	Wrongs that affect the interests of a particular individual arc called civil wrong.
Wrong	Crime is wrong against society.	Civil wrong is against a private individual or individuals.
Seriousness	More serious wrongs have been considered to be public wrongs and are known as crimes.	Less serious wrongs are considered as private wrongs and have been labelled as a civil wrong.
Intention	In crime, intention is an essential element.	In civil wrong intention is not relevant.
Action	In case of crime, action is taken by the State Le. Government.	In case of civil wrong, the suit is filed by the aggrieved person himself.
Compromise	In the case of crime, compromise is not possible except in certain cases.	In the case of a civil suit, compromise is always possible.
Penalty	The wrongdoer is punished.	The wrongdoer pays compensation or damages to the injured party.

Question 2.
Mr David, a citizen of America had been charged in India for an offence under the Indian Penal Code, 1860. However, he contends that acts for which he is charged do amount to the offence as per the law of his country. Examining the provisions of the Indian Penal Code, 1860 state whether the contention of Mr David is acceptable.
Answer:
As per Section 2 of the Indian Penal Code, 1860, every person shall be liable to punishment under the Code and not otherwise for every act or omission contrary to the provisions thereof, of which, he shall be guilty within India.

A foreigner, who enters Indian territories and thus accepts the protections of Indian Laws virtually gives assurance of his fidelity and obedience to them and submit himself to their operation. It is no defence on behalf of a foreigner that he did not know he was doing wrong, the act not being an offence in his country.

Thus, the contention of Mr David is not acceptable and he will be punished for the crime as provided in the Indian Penal Code, 1860.

Question 3.
State the fundamental elements of a crime.
Answer:
There are four elements that constitute a crime, these are as follows:
1. Human Being: The first element requires that the wrongful act must be committed by a human being. In ancient times, when criminal law was largely dominated by the idea of retribution, punishments were inflicted on animals also for the injury caused by them, for example, a pig was burnt in Paris for having devoured a child, a horse was killed for having kicked a man. But now, if an animal causes an injury we hold not the animal liable but its owner liable for such injury. So the first element of the crime is a human being who must be under the legal obligation to act in a particular manner and should be a fit subject for awarding appropriate punishment.

2. Mens Rea: There can be no crime of any nature without men’s rea or an evil mind. Every crime requires a mental element and that is considered as the fundamental principle of criminal liability. The basic requirement of the principal men’s rea is that the accused must have been aware of those elements in his act which make the crime with which he is charged. There is a well-known maxim in this regard, ie. “actus non facit reum nisi mens sit rea ’’which means that the guilty intention and guilty act together constitute a crime.

3. Actus Reus: The third essential element of a crime is actus reus. In other words, some overt act or illegal omission must take place in pursuance of the guilty intention. Actus reus is the manifestation of men’s rea in the external world.

4. Injury: The fourth requirement of a crime is an injury to another person or to society at large. The injury should be illegally caused to any person in body, mind, reputation or property. According to Section 44, the injury denotes any harm illegally caused to any person in body, mind, reputation or property.

Question 4.
Distinguish between: Mens Rea & Actus Reus
Answer:
Following are the main points of distinction between men’s retail actus reus:

Points	Mens Rea	Actus Reus
Meaning	Men’s rea means the bad intention of the person committing a crime.	Actus reus is some overt act or illegal omission that must take place in pursuance of the guilty intention.
What it is?	Men’s rea is the intent a person has behind committing a crime.	Actus reus is the action the person takes to perform the criminal act.
Element of crime	Men’s rea is the second important essential element of a crime.	Actus reus is the third important essential element of a crime.
Aspect	Mens Rea refers to the mental aspect of crime.	Actus Reus refers to the physical aspect of a crime.

Question 5.
State the exceptional cases where men’s rea is not required in criminal law.
Answer:
There are many exceptional cases where men’s rea is not required in criminal law. Some of them are as follows:
(a) Statute excludes men’s rea: Where a statute imposes liability, the presence or absence of a guilty mind is irrelevant. The classical view of that ‘no men’s rea, no crime has long been eroded and several laws in India and abroad, especially regarding economic crimes and departmental penalties, have j created severe punishment even where the offences have been defined to exclude men’s rea. Many laws passed in the interest of public safety and social welfare imposes absolute liability.

This is so in matters concerning public health, food, drugs, etc. There is an absolute liability (men’s rea is not essential) in the licensing of shops, hotels, restaurants and chemists establishments. The same is true of cases under the Motor Vehicles Act and the Arms Act, offences against the State like waging of war, sedition etc.

(b) Speedy disposal of the case: Where it is difficult to prove men’s rea and penalties are petty fines. In such petty cases, speedy disposal of cases is necessary and the proving of men’s rea is not easy. An accused may be fined even without any proof of men’s rea.

(c) Strict liability: In the interest of public safety, strict liability is imposed and whether a person causes public nuisance with a guilty mind or without a guilty mind, he is punished.

(d) Ignorance of the law: If a person violates a law even without the knowledge of the existence of the law, it can still be said that he has committed an act that is prohibited by law. In such cases, the fact that he was not aware of the law and hence did not intend to violate it is no defence and he would be liable as if he was aware of the law. This follows from the maxim ‘ignorance of the law is no excuse’.

Question 6.
Discuss in detail various stages of crime.
Answer:
In every crime, there is first intention to commit it, secondly, preparation to commit it, thirdly, attempt to commit it and fourthly the accomplishment.

The stages can be explained as under
1. Intention: This is the first stage in the commission of a crime. The law does not take notice of an intention, mere intention to commit an offence not followed by any act, cannot constitute an offence. The obvious reason for not prosecuting the accused at this stage is that it is very difficult for the prosecution to prove the guilty mind of a person. This stage is significant progress from mere deliberation towards the actual commission of the crime. At this stage, the person has made up his mind to actually implement or execute his devious plans.

There is an intention to cause harm but yet no action taken that manifests intention. Further, there is no way to prove an intention because even the devil can’t read a human mind. Thus, this is not considered a crime. For example, the intention to kill anyone is not a crime in itself. However, it is an essential ingredient of crime because, without intention to cause harm, there can be no crime.

2. Preparation: Preparation is the second stage in the commission of a crime. It means to arrange the necessary measures for the commission of the intended criminal act. Intention alone or the intention followed by preparation is not enough to constitute the crime. Preparation has not been made punishable because in most of the cases the prosecution has failed to prove that the preparations in the question were made for the commission of the particular crime.

Example: If Arun purchases a pistol and keeps the same in his pocket duly loaded in order to kill his bitter enemy Ballu, but does nothing more. Arun has not committed any offence as still he is at the stage of preparation and it will be impossible for the prosecution to prove that Arun was carrying the loaded pistol only for the purpose of killing Ballu.

3. Attempt: Attempt, which is the third stage in the commission of a crime, is punishable. An attempt is the direct movement towards the commission of a crime after the preparation is made. A person may be guilty of an attempt to commit an offence if he does any act which is more than merely preparatory to the commission of the offence and a person will be guilty of attempting to commit an offence even though the facts are such that the commission of the offence is impossible.

4. Accomplishment/Completion: Last stage in the commission of an offence ) is its accomplishment or completion. If the accused succeeds in his attempt to commit the crime, he will be guilty of the complete offence and if his attempt is unsuccessful he will be guilty of an attempt only. For example,

A fire at B with the intention to kill him, if B dies, A will be guilty of committing the offence of murder and if B is only injured, it will be a case of attempt to murder.

Question 7.
Distinguish between: Motive & Intention
Answer:
Following are the main points of distinction between motive & intention:

Points	Motive	Intention
Meaning	Motive refers to the reason a crime was committed. It is often the background of the suspect in committing the alleged crime.	Intention means doing an act with one’s will or desire for some purpose.
Criminal liability	Motive is insubstantial to determine criminal liability.	The intention is substantial to determine criminal liability.
Purpose	Motive is hidden or implied purpose.	The intention is the expressly defined purpose of the crime
What is it?	Motive is the driving force of crime.	The intention is the first stage of crime.
Example	Assume that Y is accused of murdering his wife and it turns out that his wife has a policy of ₹ 1 Chore that will come to Y after the death of his wife. The law will assume that the ₹ 1 Crore is a profit that Y will gain by his wife’s death and so the prosecution will try to establish that since Y’s wife death is a profit to him of ₹ 1 Crore, Y have a motive. Thus, Y has a reason to commit the crime.	Assume that X is caught with 2 kilos of heroin in his house. A rational man will assume that X cannot be keeping the heroin at home for private consumption, so the normal assumption will be that X means to sell this heroin (i.e. distribute). So X will be charged with possession with intent to distribute. This means the law can assume what your intentions are with respect to a criminal offence.

Question 8.
Briefly discern various Type of punishments provided under the Indian Penal Code, 1860.
Answer:
The punishments to which offenders are liable under the provisions of IPC are as follows
1. Death/Capital punishment: A death sentence is the harshest of punishments provided in the IPC, which involves taking the life of the accused as a form of punishment. The Supreme Court has ruled that a death sentence ought to be imposed only in die ‘rarest of rare cases.

The IPC provides for capital punishment for the following offences:

Murder
Dacoity with murder
Waging War against the Government of India
Abetting mutiny actually committed. (mutiny means forcible or passive resistance to lawful authority)
Giving or fabricating false evidence upon which an innocent person suffers death
Abetment of suicide by a minor or insane person
Attempted murder by a life convict.

Death punishment is also called ‘capital punishment. The word ‘capital’ means the head or top of the column. Thus, capital punishment means ‘removal of the head’, ’death penalty or ‘beheading’. Capital punishment is awarded only in two categories of offences, namely treason and murder.

2. Inifeimprisonment: Imprisonment for life meant rigorous imprisonment. that is, 1411 the last breath of the convict.

3. Imprisonment: Imprisonment is of two descriptions namely:

rigorous imprisonment, that is hard labour;
simple imprisonment.

4. Forfeiture of property: Forfeiture is the divestiture of specific property without compensation in consequence of some default or acts forbidden by law. The Courts may offer forfeiture of the property of the accused on certain occasions. The Courts are empowered to forfeit the property of the guilty person u/ss 126 & 127.

5. Fine: Fine is forfeiture of money by way of penalty. It should be imposed individually and not collectively.

6. Default sentence: Wheij, court sentences an accused of a punishment, which includes a fine amount, it can specify that in the event the convict does not pay the fine amount, he would have to suffer imprisonment for a further period as indicated by the court, which is generally referred to as default sentence.

Question 9.
In exceptional cases, mere ‘preparation’ to commit an offence is punishable under the Indian Penal Code, 1860. Discuss. [Dec 2018 (4 Marks)!
Answer:
Preparation is the second stage in the commission of a crime. It means to j arrange the necessary measures for the commission of the intended criminal act. Intention alone or the intention followed by preparation is not enough to constitute the crime. Preparation has not been made punishable because in most of the cases the prosecution has failed to prove that the preparations in the question were made for the commission of the particular crime.

Generally, preparation to commit any offence is not punishable but in some exceptional cases preparation is punishable, following are some examples of such exceptional circumstances which are punishable under the IPC –

Preparation to wage war against the Government.
Preparation to commit depredation on territories of Power at peace with Government of India.
Preparation to commit dacoity.
Preparation for counterfeiting of coins or Government stamps.
Possessing counterfeit coins, false weights or measurements and forged documents.

Question 10.
The ‘men’s rea’ is an essential element to constitute an offence under the Indian Penal Code, 1860. Discuss briefly. [Dec 2018 (4 Marks)]
Answer:
It is a general principle that to constitute a crime there must be a \ guilty mind. If there is no guilty mind, there is no crime. Men’s rea is the mental intention or the defendant’s state of mind at the time of the offence, sometimes; called the guilty mind.

It stems from the ancient maxim of obscure origin, “actus reus non facit reum nisi mens sit reas” that is “the act is not guilty unless the mind is guilty”. The guilty mind refers to the intention, knowledge or recklessness of the accused.

In Srinivasamall v. Emperor, the accused Srinivasamall was a salt distributor.

His servant infringed a rule without his master’s knowledge. The accused was: acquitted on the ground that he had no guilty intention since the act was committed without his knowledge.

Intention. Negligence and recklessness are the important forms of men’s rea.

Question 11.
Describe the kinds of offences under which capital punishment may be awarded by the Court under the Indian Penal Code. [Dec. 2019 (4 Marks)]
Answer:
A death sentence is the harshest of punishments provided in the IPC, which involves taking the life of the accused as a form of punishment. The Supreme Court has ruled that a death sentence ought to be imposed only in the ‘rarest of rare cases.

The IPC provides for capital punishment for the following offences:

Murder
Dacoity with murder
Waging War against the Government of India
Abetting mutiny actually committed. (mutiny means forcible or passive resistance to lawful authority)
Giving or fabricating false evidence upon which an innocent person suffers death
Abetment of suicide by a minor or insane person
Attempted murder by a life convict.

Death punishment is also called ‘capital punishment. The word ‘capital’ means the head or top of the column. Thus, capital punishment means ‘removal of the head’, ‘death penalty or ‘beheading’. Capital punishment is awarded only in two categories of offences, namely treason and murder.

Question 12.
Define ‘criminal conspiracy’ as per the Indian Penal Code, 1860.
Answer:
Definition of criminal conspiracy [Section 120A]: When two or more persons agree to do or cause to be done:

An illegal act or
An act that is not illegal by illegal means, such an agreement is designated a criminal conspiracy.

However, no agreement except an agreement to commit an offence shall amount to a criminal conspiracy unless some act besides the agreement is done by one or more parties to such agreement in pursuance thereof.

Question 13.
Neeraj & Ramesh decides to murder Sudhir when he gets down at the railway station from the evening train. They both go to the railway station for this purpose but Sudhir does not arrive by the evening train. Neeraj & Ramesh came back home. Whether any offence is committed by Neeraj & Ramesh under the Indian Penal Code, 1860?
Answer:
As per Section 120A of the Indian Penal Code, 1860, when two or more persons agree to do or cause to be done:

An illegal act or
An act that is not illegal by illegal means, such an agreement is designated a criminal conspiracy.

Murder is an offence/illegal act under the IPC. As per facts given in the case, Neeraj & Ramesh decides to murder Sudhir when he gets down at the railway station from the evening train. They both go to the railway station for this purpose which shows that they have agreed to commit an illegal act and hence they both have committed the offence of criminal conspiracy u/s 120A of the Indian Penal Code, 1860. They are liable to punishment as provided in Section 120B of the Indian Penal Code, 1860.

Question 14.
X and Y an illiterate woman were on the railway platform of Kanpur. X had a ticket for n K input ticket Lucknow id if had a ticket, from Kanpur. Jhansi. Y handed over her ticket to X in order to ascertain that whether she had a genuine ticket. X under the pretence of returning Y’s ticket substituted, therefore, his own ticket and kept Y ticket. What offence is committed by X under the Indian Penal Code, 1860?
Answer:
As per Section 403 of the Indian Penal Code, 1860, whoever dishonestly misappropriates or converts to his own use any movable property, shall be punished with imprisonment of either description for a term which may extend to 2 years or with fine or with both.

Section 403 has the following ingredients:

Dishonest misappropriation or conversion of property by a person to his use
Movable property.

The facts of the case are similar to the facts of the case Raza Hussain v. Emperor, in which the accused was held guilty of the offence of criminal misappropriation of property u/s 403 of the Indian Penal Code, 1860.

Question 15.
An accused was found in possession of some property that a murdered person was carrying at the time of the murder. There was neither eye-witness of the murder nor did the prosecution succeeds in establishing any other incriminating circumstances against the accused. Of what offence, if any, can the accused be convicted under the Indian Penal Code, 1860? Give reasons.
Answer:
Since the accused was found in possession of some property which a murdered person was carrying at the time of the murder and there was neither eye-witness of the murder nor did the prosecution succeed in establishing any other incriminating circumstances against the accused, the accused cannot be convicted of the offence of murder. However, the accused can be convicted for the offence of dishonest misappropriation of property possessed by the deceased person at the time of his death under Section 404 of the Indian Penal Code, 1860.

If the offence is proved then such offender shall be liable to punishment of imprisonment of either description for a term which may extend to 3 years, and shall also be liable to fine. Such punishment may extend to 7 years if the offender was an employee of the deceased person.

Question 16.
Naveen takes properly belonging to Gauesh out of Ganesh possession In good h Ith belonging at the time w lien he takes It that the property belongs to himself. Later on, Naveen discovers his mistake, dishonestly misappropriates the property for his own use. Explain what offence he has done? [June 2019 (5 Marks)]
Answer:
Dishonest misappropriation of property [Section 403]: Whoever dishonestly misappropriates or converts to his own use any movable property, shall be punished:

With imprisonment of either description for a term which may extend to 2 years or
With fine or
With both.

Thus, if A takes property belonging to Z out of Zs possession, in good faith, believing, at any time when he takes it, that the property belongs to himself. A is not guilty of theft; but if A, after discovering his mistake, dishonestly appropriates the property to his own use, he is guilty of an offence under this section.

Facts given in case are similar to the illustration appended to Section 403 of the Indian Penal Code, 1860 and thus if Naveen dishonestly appropriates the property to his own use he commits the offence of ‘dishonest misappropriation of property and will be liable to punishment as stated above.

Question 17.
Harish instructs Somnath to invest a certain amount of money in Government securities. Somnath buys shares of XYZ Ltd. instead, believing in good faith that it would be Harish advantage. The investment results in a loss. What offence, if any, is committed by Somnath under the Indian Penal Code, 1860?
Answer:
The problem is based on a Criminal breach of trust as defined in Section 405 of the Indian Penal Code, 1860.

Section 405 has the following ingredients:

A person should be entrusted with property or should have control over the property.
Such person to whom the property is entrusted should dishonestly misappropriate or converts to his own use that property or dishonestly uses or disposes of that property in violation of any direction of law.

As per facts given in the case, Harish instructs Somnath to invest a certain amount of money in Government securities but Somnath invests in shares of XYZ Ltd. instead, believing in good faith that it would be Harish advantage. Somnath not having acted dishonestly has not committed a criminal breach of trust although he may be liable to civil action.

Question 18.
State the punishments for the following offences as provided in the Indian Penal Code, 1860:
(i) Criminal breach of trust by carrier
(ii) Criminal breach of trust by clerk or servant.
Answer:
Criminal breach of trust by carrier etc. [Section 407]: Whoever, being entrusted with property as a carrier, wharfinger or warehouse keeper, commits criminal breach of trust in respect of such property, shall be punished with imprisonment of either description for a term which may extend to 7 years and shall also be liable to fine.

Criminal breach of trust by clerk or servant [Section 408]: Whoever, being a clerk or servant or employed as a clerk or servant, and being in any manner entrusted in such capacity with property, or with any dominion over property, commits criminal breach of trust in respect of that property, shall be punished with imprisonment of either description for a term which may extend to 7 years and shall also be liable to fine.

Question 19.
Distinguish between: Criminal misappropriation of property & Criminal breach of trust
Answer:
Following are the main points of distinctions between criminal misappropriation of property & criminal breach of trust:

Points	Criminal misappropriation of property	Criminal breach of trust
Meaning	Dishonestly misappropriating or converting property of others for own use or benefit is known as criminal misappropriation of property.	If a person entrusted with property dishonestly misappropriates or converts it to his own use that property, or dishonestly uses or disposes of property in violation of any direction of law prescribing the mode in which such trust is to be discharged it is known as criminal breach of trust.
Section of IPC	Criminal misappropriation of property is explained in dealt by sections 403 to 404 of the Indian Penal Code, 1860.	Cheating is explained in dealt by sections 405 to 409 of the Indian Penal Code, 1860.
Property	Criminal misappropriation is always regarding the movable property.	A criminal breach of trust may be regarding the movable and immovable property.
Person	Generally, criminal misappropriation is done by near relatives, friends, joint owners etc.	Generally, the criminal breach of trust is committed by bailee, carrier, executor, agent, employee etc.
Essential element	Dishonest is the essential element of criminal misappropriation.	In this case, the property is entrusted by the owner to the offender with good faith and trust. Thereafter, the wrongdoer misappropriates it causing a breach of trust.
Example	A finds a letter on the road, containing a banknote. From the direction and contents of the letter he learns to whom the note belongs. He appropriates the note. He is guilty of an offence of criminal misappropriation.	A is a warehouse-keeper. Z going on a journey, entrusts his furniture to A, under a contract that it shall be returned on payment of a stipulated sum for warehouse room. A dishonestly sells the goods. A has committed a criminal breach of trust.
Punishment	As per Section 403, for the offence of criminal misappropriation pun¬ishment is imprisonment of up to 2 years, or with fine, or with both. As per Section 404, for the offence of criminal misappropriation pun¬ishment is imprisonment of up to 7 years.	As per Section 406, for the offence of criminal breach of trust punishment is imprisonment of up to 3 years, or with fine, or with both. As per Sections 407 & 408, for the offence of criminal breach of trust punishment is imprisonment of up to 7 years and also liable to fine. As per Section 409, for the offence of criminal breach of trust punishment is imprisonment of up to 10 years and also liable to fine.

Question 20.
Balwant is working as a taxation clerk in the Municipal Committee. He collects arrears of tax from tax-payer but the sum was not deposited in the funds of the committee which was deposited after 5 months. He pleads that he had given money to the cashier but fails to prove the same. Whether any offence is committed by Balwant under the Indian Penal Code, 1860?
Answer:
The facts of the given case are similar to Bagga Singh v. the State of Punjab. In this case, the appellant was a taxation clerk in the Municipal Committee, Sangrur. He had collected arrears of tax from tax-payers but the sum was not deposited in the funds of the committee after collection but was deposited after about 5 months. He pleaded that money was deposited with the cashier Madan Lai, a co-accused, who had defaulted on the same but the cashier proved that he had not received any such sum and was acquitted by the lower Court.

The mere fact that the co-accused cashier was acquitted was not sufficient to acquit the accused in the absence of any proof that he had discharged the trust expected of him. As such the accused was liable under Section 409 of the Indian Penal Code, 1860.

Considering the decision in the above case, Balwant has committed the offence of Criminal breach of trust and will be accordingly punished as provided in Section 409 of the IPC.

Question 21.
Discuss briefly the main ingredients of cheating.
Answer:
Cheating: Main Ingredients: The main ingredients of cheating are as under:

Deception of any person.
(a) Fraudulently or dishonestly inducing that person:
(1) to deliver any property to any person or
(2) to consent that any person shall retain any property
(b) Intentionally inducing that person to do or omit to do anything which he would not do or omit if he were not so deceived, and which act or omission causes or is likely to cause damage or harm to that person in body, mind, reputation or property.

Question 22.
A prostitute communicated venereal disease to X who had sexual intercourse with her, on the strength of her representation that she is free from any disease. Whether the prostitute is guilty of any offence under the Indian Penal Code, 1860?
Answer:
As per facts given in the case, X has sexual intercourse with a prostitute on the strength of her representation that she is free from any venereal disease but the prostitute communicated venereal disease to X. The prostitute is guilty of the offence of cheating under Section 415 as an act of prostitute caused damage to the body and mind of X.

X would not have done sexual intercourse with the prostitute if she had not fraudulently induced him to do sexual intercourse by representing her free from venereal disease. Thus, the prostitute will be held guilty of the offence of cheating u/s 415 and will be punished as per Section 417 of the Indian Penal Code, 1860.

Question 23.
Write a short note on Cheating by personation
Answer:
Cheating by personation [Section 416]: A person is said to “cheat by personation” if he cheats by pretending to be some other person, or by knowingly substituting one person for another, or representing that he or any other person is a person other than he or such other person really is.

Punishment for cheating by personation [Section 419]: Whoever cheats by personation shall be punished with imprisonment of either description for a term which may extend to 3 years, or with fine, or with both.

Example: Remika receives a FaceBook message and friend request that appears to have been sent from a young and smart boy – Rahul The information sent by Rahul shows that he is Government Officer working in Satara and draws an attractive salary and also that he is a bachelor and seeking a beautiful girl for marriage. Attracted by the message of Rahul, Renuka meets with Rahul and they fall in love.

Gradually it led to sexual relations. Later Rahul began to ask for money from Renuka for one or another reason. In enquiry, it is discovered that Rahul is not a Government employee and he has taken education only up to 10th Standard. Rahul has committed the offence of cheating by personation u/s 416 and will be punished u/s 419 of the Indian Penal Code, 1860.

Question 24.
Write a short note on Frauds connected with insolvency
Answer:
Dishonest or fraudulent removal or concealment of property to prevent distribution among creditors [Section 421]: Whoever dishonestly or fraudulently removes, conceals or delivers to any person, or transfers or causes to be transferred to any person, without adequate consideration, any property, intending thereby to prevent, or knowing it to be likely that he will thereby prevent, the distribution of that property according to law among his creditors or the creditors of any other person, shall be punished with imprisonment of either description for a term which may extend to 2 years, or with fine, or with both.

Guwahati High Court in Ramautar Chaukhany v. Hari Ram Todi held that an offence under this section has the following essential ingredients:

That the accused removed, concealed or delivered the property or that he transferred, it caused it to be transferred to someone.
That such a transfer was without adequate consideration.
That the accused thereby intended to prevent or knew that he was thereby likely to prevent the distribution of that property according to law among his creditors or creditors of another person.
That he acted dishonestly and fraudulently.

This section specifically refers to frauds connected with insolvency. The offence under it consists in a dishonest disposition of property with intent to cause wrongful loss to the creditors. It applies to movable as well as immovable properties. In view of this section, the property of a debtor cannot be distributed according to law except after the provisions of the relevant enactments have been complied with.

Question 25.
Write a short note on Fraudulent concealment of property
Answer:
Dishonest or fraudulent removal or concealment of property [Section 424]: Whoever dishonestly or fraudulently conceals or removes any property of himself or any other person, or dishonestly or fraudulently assists in the concealment or removal thereof, or dishonestly releases any demand or claim to which he is entitled, shall be punished with imprisonment of either description for a term which may extend to 2 years, or with fine, or with both.

The essential ingredients to bring an offence u/s 424 are as follows:

There is a property.
That the accused concealed or removed the said property or assisted in concealing or removing the said property.
That the said concealment or removal or assisting in removal or concealment was done dishonestly or fraudulently.

Question 26.
What do you understand by the term ‘forgery’? Also state the punishment for the offence of forgery as provided under the Indian Penal Code, 1860?
Answer:
Forgery means fraudulently making or alteration of any record, deed, writing, instrument, register, stamp etc. to the prejudice of another person’s right. It is a false making of a written instrument for the purpose of fraud or deceit; including every alteration of or addition to a true instrument.

Forgery [Section 463]: Whoever makes any false documents or false electronic record or part of a document with intent to cause damage or injury, to the public or to any person, or to support any claim or title, or to cause any person to part with property, or to enter into any express or implied contract, or with intent to commit fraud or that fraud may be committed, commits forgery.

Punishment for forgery [Section 465]: Whoever commits forgery shall be punished with imprisonment of either description for a term which may extend to 2 years, or with fine, or with both.

Essential elements of forgery u/s 463 are as under:

The document or electronic record or the part of it must be false in fact.
It must have been made dishonestly or fraudulently.
The making of a false document or electronic record should be with intent to
(a) cause danger or injury to the public or any person or
(b) support any claim or title or
(c) cause any person to part with property or
(d) enter into any express or implied contract or
(e) commit fraud or that fraud may be committed.

Question 27.
Rani, the accused has been charged for the offence of forgery on the ground that she submitted a false certificate declaring that she had the experience of working as a teacher in school. However, on enquiry, it was found that the school is not a recognized school. State with reason, whether Rani has committed any offence under the Indian Penal Code, 1860?
Answer:
In Balbir Kaur v. the State of Punjab, the allegation against the accused was that she furnished a certificate to get employment as an ETT teacher which was found to be bogus and forged in as much as school was not recognized for the period given in the certificate. However, the certificate did not anywhere say that the school was recognized. It was held that merely indicating the teaching experience of the accused, per se, cannot be said to indicate wrong facts. So the direction which was issued for prosecution is liable to be quashed.

Question 28.
The allegation against the accused was that he furnished a certificate to get employment as ETT Teacher which was found to be bogus and forged in as much as school was not recognized for the period given in the certificate. However, the certificate did not anywhere say that the school was recognized. Whether the accused is guilty of any offence? Explain with the help of decided judicial precedent. [Dec. 2019 (4 Marks)]
Answer:
In Balbir Kaur. In the state of Punjab, the allegation against the accused was that she furnished a certificate to get employment as an ETT teacher which was found to be bogus and forged inasmuch as school was not recognized for the period given in the certificate. However, the certificate did not anywhere say that the school was recognized. It was held that merely indicating the teaching experience of the accused, per se, cannot be said to indicate wrong facts. So the direction which was issued for prosecution is liable to be quashed.

Question 29.
Explain the term ‘Defamation’.
Answer:

Whoever by words either spoken or intended to be read, or by signs or by visible representations, makes or publishes any imputation concerning any person intending to harm, or knowing or having reason to believe that such imputation will harm, the reputation of such person, is said to defame that person.
Example: A is asked who stole B’s watch. A point to Z, intending to cause it to be believed that Z stole B’s watch. This is defamation unless it falls within one of the exceptions.
The wrong of defamation is of two kinds- libel and slander.
In libel, the defamatory statement is made in some permanent and visible form, such as writing, printing or pictures.
In slander, it is made in spoken words or in some other transitory form. whether visible or audible.

Question 30.
A, a shopkeeper, says to B, who manages his business – “Sell nothing to Z unless he pays you ready money, for I have no opinion of his honesty.” Z prosecutes A for defamation. Decide.
Answer:
The facts of the given case are based on Section 499 of the Indian Penal Code, 1860 and illustration appended 9th Exception.

It is not defamation to make an imputation on the character of another provided that the imputation is made in good faith for the protection of the interests of the person making it. A is within the exception, as he has made this imputation on Z in good faith for the protection of his own interests. Thus, Z will not succeed in his case.

Question 31.
A was raped. B, the accused and owner of the newspaper, published the story of A. A filed a complaint against B. B filed a writ petition to quash the proceedings before the trial court seeking the defence of the first exception of Section 499 of the Indian Penal Code, 1860. State with reason whether B can be prosecuted and punished for the offence of defamation under the Indian Penal Code, 1860?
Answer:
The facts of the given case are similar to A.B.K. Prasad and others v. Union of India and others. The A.P. High Court dismissed the write petition and held that “right to privacy and right to freedom of the press has to be balanced”. Therefore, Laxman Rekha has to be drawn somewhere in the public interest. If publication of truth is in the public interest it would not be defamation, but if it has nothing to do with the public interest and relates to the privacy of an individual then it would certainly de defamatory.

Keeping in view of the above decision, A will succeed in his case against B.

Question 32.
The Indian Penal Code, 1860 provides for general exceptions for a person accused of committing any offence under the code to plead in his defence. Explain any eight exceptions; [Dec. 2019 (4 Marks)]
Answer:
The Indian Penal Code, 1860 also provides for general exceptions for a person accused of committing any offence under the Code to plead in his defence. General defences or exceptions are contained in sections 76 to 106 of the IPC. In general exceptions to criminal liability, there will be the absence of men’s rea (guilty mind) on the part of the wrong-doer. If there is any general defence of the accused in a criminal case, the burden of proving lies on him under section 105 of the Indian Evidence Act, 1872.

Some of these general exceptions are given below:
Mistake of fact: believing bound by law [Section 76]: Nothing is an offence, which is done by a person who is, or who by reason of a mistake of fact and not by reason of a mistake of law in good faith believes himself to be, bound by law to do it.

Act of Judge when acting judicially [Section 77]: Nothing is an offence which is done by a Judge when acting judicially in the exercise of any power which is, or which in good faith he believes to be, given to him by law.

The act did pursuant to the judgment or order of Court [Section 78]: Nothing which is done in pursuance of, or which is warranted by the judgment or order of, a Court of Justice; if done whilst such judgment or order remains in force, is an offence, notwithstanding the Court may have had no jurisdiction to pass such judgment or order, provided the person doing the act in good faith believes that the Court had such jurisdiction.

Mistake of fact – justified by law [Section 79]: Nothing is an offence which is done by any person who is justified by law, or who by reason of a mistake of fact and not by reason of a mistake of law in good faith, believes himself to be justified by law, in doing it.

Accident in doing a lawful act [Section 80]: Nothing is an offence, which is done by accident or misfortune, and without any criminal intention or knowledge in the doing of a lawful act in a lawful manner by lawful means and with proper care and caution.

The protection under this section will apply only if the act is a result of an accident or a misfortune.

Act likely to cause harm, but done without criminal intent, and to prevent other harm [Section 81]: Any act done by anyone without any criminal intent for saving or preventing harm to a third person or property in good faith is no offence.
Act of a child under 7 years of age [Section 82]: Nothing is an offence which is done by a child under 7 years of age.
Act of a child above seven and under twelve of immature understanding [Section 83]: Nothing is an offence which is done by a child above 7 years of age and under 12, who has not attained sufficient maturity of understanding to judge of the nature and consequences of his conduct on that occasion.
Act of a person of unsound mind [Section 84]: Nothing is an offence which is done by a person who, at the time of doing it, by reason of unsoundness of mind, is incapable of knowing the nature of the act, or that he is doing what is either wrong or contrary to law.
Communication made in good faith [Section 93]: No communication made in good faith is an offence by reason of any harm to the person to whom it is made if it is made for the benefit of that person.
Act causing slight harm [Section 95]: Nothing is an offence by reason that it causes, or that it is intended to cause, or that it is known to be likely to cause, any harm if that harm is so slight that no person of ordinary sense and temper would complain of such harm.

Question 33.
Anurag has a licensed gun. He goes into the jungle for shooting birds. He shoots at an owl sitting on a bush with intent to kill it but kills Rohan who was behind the bush. Whether Anurag is punishable for his act of killing Rohan under the Indian Penal Code, 1860?
Answer:
As per Section 80 of the Indian Penal Code, 1860, nothing is an offence, which is done by accident or misfortune, and without any criminal intention or knowledge in the doing of a lawful act in a lawful manner by lawful means and with proper care and caution.

Thus, in the act of Anurag, there is no want of proper caution, his act is excusable. From the facts of the case, it can be observed that Anurag accidentally killed Rohan without any criminal intention and hence he is not liable for any punishment under the Indian Penal Code, 1860.

Question 34.
Dr Shreeram Nene is a well-known surgeon in his locality. The band comes to his hospital for a check-up. Dr Shreeram Nene in good faith communicates to Bandu his opinion that he cannot live more than 6 months. Band dies in consequence of the shock. Whether any offence is committed by Dr Shreeram Nene under the Indian Penal Code, 1860?
Answer:
As per Section 93 of the Indian Penal Code, 1860, no communication made in good faith is an offence by reason of any harm to the person to whom it is made if it is made for the benefit of that person.

Dr Shreeram Nene, in good faith, communicates to a patient his opinion that he cannot live. The patient dies as a consequence of the shock. Dr Shreeram Nene has committed no offence, though he knew it to be likely that the communication might cause the patient’s death.

Jurisprudence, Interpretation & General Laws Questions and Answers

Compliances Relating to Environmental Laws – Setting Up of Business Entities and Closure Important Questions

Leave a Comment / CS Executive / By Murali / April 1, 2024 April 3, 2024

Compliances Relating to Environmental Laws – Setting Up of Business Entities and Closure Important Questions

Question 1.
Write a short note on the Regulatory framework for environmental protection in India. [June 2009 (5 Marks)], [June 2011 (5 Marks)]
Answer:
With the endowed protection to the environment under the Constitution and Specific Statutes, all persons, be it natural or legal including a Company owes a duty to conduct themselves in such a manner that their act or omission should not pollute the environment. Therefore, a company is necessitated to abide by various laws in order to protect the environment.

For pollution control and protections following laws are enacted by the Central Government:

Environment (Protection) Act, 1986
Air (Prevention & Control of Pollution) Act, 1981
Water (Prevention & Control of Pollution) Act, 1974
Water (Prevention & Control of Pollution) Cess Act, 1977
Public Liability Insurance Act, 1991
National Green Tribunal Act, 2010
Biological Diversity Act, 2002
Hazardous Wastes (Management, Handling & Transboundary Movement) Rules, 2008

Question 2.
Satvik is running a dyeing factory seeks your guidance in knowing various responsibilities imposed upon his business and to have complied under the Water (Prevention and Control of Pollution) Act, 1974. [June 2019 (5 Marks)]
Answer:
Section 25 in specific along with other relevant sections of Water (Prevention and Control of Pollution) Act, 1974 provides certain responsibilities for the person establishing or taking any steps to establish any industry, operation or process, or any treatment and disposal system or any extension or addition thereto, which is likely to discharge sewage or trade effluent into a stream or well or sewer or on land. In short, it provides a certain process ) for carrying certain types of industrial activities or running an Industrial j unit, which involves discharging the trade effluent into a stream or well or sewer or on land.

Responsibilities of the owner/occupier under the Act:

Obtain ‘Consent to Establish industry’. Consent to be deemed as granted automatically and unconditionally after 4 months from the date of an application already given or refused before this period. Refusal of consent to be recorded in writing.
Obtain ‘Consent to Operate industry’.
Apply for renewal of the ‘Consent to Operate’ before the expiry of the validity period.
Pay Water Cess as indicated in the assessment order.
Consent to be deemed as granted automatically and unconditionally after four months from the date of an application already given or refused before this period.
Refusal of “Consent” to be recorded in writing
Pay Water Cess as indicated in the assessment order.
Affix water meters of the prescribed standards.
Provide access to the officers of the SPCB.
Pay interest in case of delay in paying the Water Cess.
Pay penalty for non-payment of Cess.
The industry is entitled to a 25% rebate if it meets certain conditions.

Question 3.
State the purpose for which the Air (Prevention & Control of Pollution) Act, 1981 has been enacted.
Answer:
Objectives of the Air (Prevention & Control of Pollution) Act, 1981 is

To provide for the prevention, control, and abatement of air pollution,
Establishment of Boards at Central and State Level To achieve the above objective following are various functions under this Act
To counter the problems associated with air pollution, ambient air quality standards were established under the Act.
Prohibiting the use of polluting fuels and substances, as well as by regulating appliances that give rise to air pollution.
The Air Act empowers the State Government, after consultation with the SPCBs, to declare any area or areas within the State as air pollution control areas or areas.
Establishing or operating any industrial plant in the pollution control area requires consent from SPCBs.
SPCBs are also expected to test the air in air pollution control areas, inspect pollution control equipment, and manufacturing processes.

Question 4.
‘Consent to Operate’ given under the Air (Prevention & Control of Pollution) Act, 1981 by the State Board is subject to certain conditions. You are required to enumerate those conditions.
Answer:
As per Section 21 of the Air (Prevention & Control of Pollution) Act, 1981, every person to whom consent has been granted by the State Board shall comply with the following conditions:

Control equipment shall be installed and operated in the premises as per approved specifications by the State Board.
Existing control equipment shall be altered or replaced as per directions of the State Board.
Control equipment shall be kept at all times in good running condition.
The chimney shall be erected as per approved specifications.
Other conditions may be specified by the State Board.
State Board can vary above condition if there is a technological change or otherwise the State board forms opinion to change the condition.

Question 5.
Discuss the object, scope, and scheme of the Environment (Protection) Act, 1986. [June 1999 (10 Marks)], [June 2001 (10 Marks)]
Answer:
The Environment Protection Act, 1986 to provides for the protection and improvement of the environment and the prevention of hazards to human beings, other living creatures, plants, and property.

Objects of the Act are as follows:

To protect the quality of the environment.
To lay down standards for emission or discharge of environmental pollutants.
To provide safeguards for the prevention of accidents.
To provide safeguards in respect of handling hazardous substances.
To require persons to furnish information, issue directions.
To plan nationwide pollution control programs.
To co-ordination of the actions of various agencies and authorities etc.

Question 6.
What is the penalty for the offense by a company under the Environment (Protection) Act, 1986? [June 2007 (5 Marks)], [Dec. 2008 (5 Marks)]
Answer:
Offenses by Companies [Section 16]: Where an offense under the Act has been committed by a company and it is proved that the offense has been committed with the consent or connivance of, or is attributable to any neglect on the part of any director, manager, secretary or other officers of the company, then all person or officers shall be deemed to be guilty of that offense and shall be liable to be proceeded against and published accordingly.

Penalty for Contravention [Section 15]: Contravention of any provisions or any rules are punishable:

With imprisonment up to 5 years or
With fine up to ₹ 1 lakh or
With both.

An additional fine of ₹ 5,000 would also be leviable for every day of continuing default.

Where such contravention continues beyond a period of 1 year then it shall be punishable with imprisonment up to 7 years.

Question 7.
Write a short note on Environmental Audit [Dec. 2005 (3 Marks)], [Dec. 2009 (4 Marks)]
Answer:
Following are some of the important points relating to Environmental Audit:
1. Rule 14 of the Environment (Protection) Rules, 1986 provides for the submission of the environmental audit report.

2. Every person carrying on an industry, operation or process requiring consent under following Acts or Rules arc required to submit an environmental audit report.

Section 25 of the Water Act or
Section 23 of the Air Act or
Hazardous Wastes (Management & Handling) Rules, 1989.

3. Environmental audit report has to be submitted in Form V.

4. Environmental audit report has to be submitted for the financial year ending on 31st March every year on or before the 15th May to the concerned State Board.

Question 8.
Briefly explain the major provisions of the Public Liability Insurance Act, 1991. [Dec. 2002 (5 Marks)], [Dec. 2006 (5 Marks)]
Answer:
Following are the important provisions of the Public Liability Insurance Act, 1991:
1. Liability to give relief in certain cases on the principle of no-fault [Section 3]: Owner shall be liable to give relief as specified in the Schedule to | the Act for death, injury, or damage caused due to an accident. For I this purpose, injury includes permanent total or permanent partial disability or sickness resulting out of an accident. As per Schedule to j the Act a person can get the following relief:

2. Duty of owner to take insurance policies [Section 4]: Every owner J shall take insurance policies, before starting the handling of hazardous I substance. Such insurance policy can be used to discharge the liability under Section 3. The amount of insurance policy should not be less than the paid-up capital of the undertaking and more than ₹ 50 Crore.

Such insurance policy should be renewed from time to time before the expiry of the period of validity throughout the period during which such handling of hazardous substances is continued.

3. Verification & publication of accident [Section 5]: Whenever it comes to the notice of the Collector that an accident has occurred at any place within his jurisdiction, he shall verify the occurrence of such accident.

4. Application for a claim for relief [Section 6]: An application for a claim for relief may be made by-

The person who has sustained injury.
Owner of the property to which damage has been caused.
In the case of death resulting from an accident, by all or any of the legal representatives of the deceased.
Duly authorized agent.

Every application is required to be submitted to a collector in Form I along with prescribed documents within 5 years of the occurrence of the accident.

5. Award of relief [Section 7]: The collector, on receipt of an application for a claim for relief, to hold an inquiry into the claim or each of the claims, after giving notice of the application to the owner and after giving the parties an opportunity of being heard and make an award determining the amount of relief payable to person or persons.

The insurers have to deposit the amount within 30 days from the date of announcement of the award as specified by the collector. The collector then arranges to pay from the relief fund to the persons such amount in the prescribed manner as may be specified in the scheme.

6. Establishment of Environment Relief Fund [Section 7A]: The Central Government is empowered to establish Environment Relief Fund, by notification in the Official Gazette, to be utilized for paying relief under the Act. This provision is applicable for the industries established by Central or State governments that are not required to take insurance policies as per Section 4. In such a case, the amount of relief shall be paid out of the Environmental Relief Fund.

7. Provisions as to other rights to claim compensation for death, etc. [Section 8]: If a person also claims compensation for death, injury, or damage to property under any other law then compensation payable under that Act will be reduced by the relief claimed under this Act.

Question 9.
Write a short note on Public Liability Insurance [June 2019 (3 Marksj]
Answer:
The Public Liability Insurance Act, 1991 has been passed in the background of Bhopal Gas Tragedy in the factory of Union Carbide on the night of 2.12.1984 and a caustic chlorine plant accident in Delhi. The growth of hazardous industries and processes accompany the risk of accidents not only to workmen but also to innocent members of the public. Mandatory public liability insurance is felt necessary to provide for liability of such hazards to victims of the accident.

The liability is on a ‘no fault’ basis. Industries storing hazardous substances beyond the specified limits are liable to pay victims in case of accidents. Public sector units are also made liable but they can payout special funds set up by the government of India instead of taking an insurance cover.

Application for relief is to be made by the applicant to the Collector within 5 years of the accident, who, after giving notice to the owner and the insurer and giving the parties an opportunity of being heard, shall make the award determining the amount of relief payable. The victim will however be free to approach the Court for higher compensation.

Question 10.
Public Liability Insurance intends to provide protection to the general ( public against any unforeseen industrial accident. Elucidate [Dec. 2019 (3 Marks)]
Answer:
The Public Liability Insurance Act, 1991 has been passed in the background of Bhopal Gas Tragedy in the factory of Union Carbide on the night of 2.12.1984 and a caustic chlorine plant accident in Delhi. The growth of hazardous industries and processes accompany the risk of accidents not only to workmen but also to innocent members of the public. Mandatory public liability insurance is felt necessary to provide for liability of such hazards to victims of the accident.

The owner shall buy one or more insurance policies before he/she starts handling any hazardous substance. When an accident comes to the knowledge of the Collector, then he/she shall verify the occurrence of the accident and order for relief as he/she deems fit.

Question 11.
Write a short note on Objects of National Green Tribunal Act, 2010
Answer:
The National Green Tribunal Act, 2010 intend to provide for the establishment of a National Green Tribunal for the effective and expeditious disposal of cases relating to:

Effective and speedy disposal of the cases relating to environmental protection
All previous cases will be heard by the Tribunal
Environmental protection
Conservation of forests and other natural resources
Enforcement of any legal right relating to the environment
Giving relief and compensation for damages to persons and property
For matters connected therewith or incidental thereto.

Question 12.
Write a short note on the Power of the National Green Tribunal to settle disputes
Answer:
Tribunal to settle disputes [Section 14]: The Tribunal shall have the jurisdiction over all civil cases where a substantial question relating to the environment including enforcement of any legal right relating to the environment is involved and such question arises out of the implementation of the enactments specified in Schedule I.

The Tribunal shall hear the disputes and settle such disputes and pass order thereon.

Application for adjudication of a dispute under this section shall be made within a period of 6 months from the date on which the cause of action for such dispute first arose.

However, the Tribunal may, if it is satisfied that the applicant was prevented by sufficient cause from filing the application within 6 months, allow it to be filed within a further period not exceeding 60 days.

The NGT has been given the power to regulate the procedure by itself. The Tribunal shall not be bound by the procedure laid down by the Code of Civil Procedure, 1908 but shall be guided by the principles of natural justice.

National Green Tribunal shall have the same powers as of civil court which is as follows:

Issuing summons and enforcing the attendance of any person and examining him on oath;
Requiring the discovery and production of documents;
Receiving evidence on affidavits;
subject to the provisions of sections 123 and 124 of the Indian Evidence Act, 1872, requisitioning any public record or document or copy of such record or document from any office;
issuing commissions for the examination of witnesses or documents;
reviewing its decision;
dismissing an application for default or deciding it ex parte;
setting aside any order of dismissal of any application for default or any order passed by it ex parte;
pass an interim order (including granting an injunction or stay) after providing the parties concerned an opportunity to be heard, on any application made or appeal filed under this Act;
pass an order requiring any person to cease and desist from committing or causing any violation of any enactment specified in Schedule
any other matter which may be prescribed.

Question 13.
Harpreet is doing Masters’s Degree and he is studying environmental legislation. He is inquiring about the ‘Green Tribunal’. Brief him ] about Green Tribunal and its objectives. [Dec. 2019 (3 Marks)]
Answer:
The National Green Tribunal (NGT), 2010 was established keeping in mind The Rio Conference of 1992 and based on the international environment principles of ‘polluter pays principle’ and ‘sustainable development. This legislation was established to deal with environment-related disputes, a speedy disposal of these cases, and giving relief and compensation for damages to persons and property and for matters connected or incidental thereto.

NGT was established for the effective and expeditious disposal of cases relating to environmental protection and conservation of forests and other natural resources including enforcement of any legal right relating to the environment and giving relief and compensation for damages to persons and property and for matters connected therewith or incidental thereto.

Objects of National Green Tribunal:
The National Green Tribunal Act, 2010 intend to provide for the establishment of a National Green Tribunal for the effective and expeditious disposal of cases relating to:

Environmental protection
Conservation of forests
Other natural resources
Enforcement of any legal right relating to the environment
Giving relief and compensation for damages to persons and property
For matters connected .therewith or incidental thereto.

Setting Up of Business Entities and Closure Questions and Answers

Depositories Act, 1996 – Securities Laws and Capital Markets Important Questions

Leave a Comment / CS Executive / By Murali / April 1, 2024 April 3, 2024

Depositories Act, 1996 – Securities Laws and Capital Markets Important Questions

Question 1.
Distinguish between: Depository & Custodian [Dec. 2006 (2 Marks)]
Answer:
Following are the main points of distinction between Depository & Custodian:

Points	Depository	Custodian
Meaning	The depository is an organization, which holds securities of investors in electronic form and provides services related to transactions in securities.	A Custodian is a person who carries on the business of providing custodial services to the client.
Transfer of ownership	A depository can legally transfer beneficial ownership.	Custodians cannot transfer legal ownership.
Regulation	Depositories are governed by the SEBI (Depositories & Participants) Regulations, 1996.	Custodian are governed by the SEBI (Custodian of Securities) Regulations, 1996
Net wroth	The depository must have a net worth of a minimum of ₹ 100 Crores.	Custodian must have a net worth of a minimum of ₹ 50 Crores.
Numbers	There are only two depositories registered with SEBI.	There are many custodians are registered with the SEBI.

Question 2.
Distinguish between: Shares in physical form and Shares in the dematerialized form [June 2008 (4 Marks)]
Answer:
Following are the main points of distinction between ‘Shares in physical | form’ and ‘Shares in dematerialized form’:

Points	Shares in physical form	Shares in dematerialized form
Nature	Share certificates are issued in physical form.	No physical scrips are in existence. An only electronic record is maintained by the depository.
Account	No necessity of opening accounts.	It is necessary to open a Demat account.
Time in transfer	Transfer of shares takes a longer time due to the physical movement of documents.	Since there is electronic transfer, it takes effect immediately.
Stamp duty	To transfer shares held in physical form, stamp duty has to be paid.	No stamp duty is payable for transferring the share in dematerialized form.
Theft & forgery	There are chances of theft and forgery.	The chances of theft and forgery are remote.
Bad delivery	There are chances of bad delivery.	There are no chances of bad delivery.

Question 3.
Explain the term ‘Demat’. State the benefits of Demat securities. [June 2009 (3 Marks)]
Answer:
‘Demat’ refers to dematerialization which is the process by which physical certificates of an investor are converted to an equivalent number of securities in electronic form.

The main aim of depositories is to introduce paperless trading and smooth J functioning of settlement of security transactions. Following are the advantages of the depository scheme/Demat:
1. No stamp duty: In the case of transfer of physical shares, stamp duty is payable on the market value of shares being transferred. However, for the transfer of securities in the electronic form no stamp duty is payable.

2. Immediate transfer and registration of securities: Physical transfer of shares was a lengthy process as the process usually takes around three to four months. Since the depository is a system that works in an electronic environment, there is an immediate transfer of securities.

3. Elimination of bad deliveries: In the case of transfer of physical shares, transfers could be withheld for bad deliveries e.g. signature of transfer is not tallying. In the depository environment, the question of bad delivery does not arise Le. they cannot be held “under objection”.

4. Elimination of all risks associated with physical certificates: All risks associated with physical certificates such as delays, loss-in-transit, theft, mutilation, etc. eliminated. This problem does not arise in the depository environment.

5. No “odd lot”: In the traditional system, shares are required to be transferred in lots say 50 or 100. Now, with the introduction of the depository scheme, the concept of an “odd lot” in respect of dematerialized shares stands abolished, i.e. in the Demat mode, a market lot becomes one share.

6. Faster disbursement of non-cash corporate benefits: Depository system provides for direct credit of non-cash corporate benefits like bonus, right issue, and dividend to an investor’s account, thereby ensuring faster disbursement and avoiding the risk of loss in transit.

7. Reduction in transaction cost: In the physical transfer of shares transaction costs like brokerage and handling charges were high. Further courier/postal charges for sending share certificates/transfer deeds are also required to be incurred. But in depository scheme brokerage charges are getting reduced and other charges like courier/postal charges are required at all.

8. Elimination of problems related to change of address of investor, transmission, etc.: In case of change of address or transmission of Demat shares, investors are saved from undergoing the entire change procedure j with each company or registrar. Investors have to only inform their DP with all relevant documents and the required changes are effected in the database of all the companies, where the investor is a registered holder of securities.

9. Elimination of problems related to selling securities on behalf of a minor: A natural guardian is not required to take court approval for selling demands securities on behalf of a minor.

Question 4.
What do you understand by the dematerialization of securities? [Dec. 2009 (5 Marks)]
Answer:
Dematerialization is the process by which physical certificates of an investor are converted to an equivalent number of securities in electronic form.

An investor will have to first open an account with a Depository Participant g and then request for the dematerialization of his share certificates through the Depository Participant so that the dematerialized holdings can be credited into that account. This is very similar to opening a Bank Account.

Dematerialization of shares is optional and an investor can still hold shares in physical form. However, he/she has to Demat the shares if he/she wishes to sell the same through the Stock Exchanges. Similarly, if an investor purchases shares from the Stock Exchange, he/she will get delivery of the shares in Demat form.

Question 5.
Explain the term: Depository Participants [June 2010 (2 Marks)]
Answer:
A Depository Participant is an agent of the depository through which it; interfaces with the investor and provides depository services.

According to SEBI guidelines, Financial Institutions like banks, custodians, stockbrokers, etc. can become participants in the depository.

DP is one with whom a client needs to open an account to deal in electronic j form. While the Depository can be compared to a Bank, DP is like a branch of a bank with which one can have an account. Therefore, DPS is authorized to maintain accounts of dematerialized shares. They help in the instantaneous electronic transfer of shares held in Demat form through the electronic book-entry system.

Characteristics of a depository participant:

Acts as an agent of Depository
The customer interface of Depository
Functions like Securities Bank
Account opening
Facilitates dematerialization
Instant transfer on pay-out
Credits to an investor in IPO, rights, bonus
Settles trades in the electronic segment.

Question 6.
The depository system functions very much like the banking system. Comment. [Dec. 2010 (3 Marks)]
Answer:
The Depository system functions very much like the banking system. The following points are given in support of this statement.

A bank holds funds in accounts whereas a depository holds securities in accounts for its clients.
A bank transfers funds between accounts whereas a depository transfers securities between accounts.
Both the bank and the depository are accountable for the safekeeping of funds and securities respectively.

A depository is a system that holds shares in the form of an electronic account. A Depository performs the functions of holding safe-keeping, transferring, and allowing withdrawal of securities like a bank performs functions of holding, safe-keeping, transferring, and withdrawal of money. When you deposit money your money, your account is credited. When you withdraw cash, your account is debited.

The currency notes paid to you will be different from the ones you deposited. Thus, a serial number of currency notes deposited and withdrawn will never be the same – the same will be the situation in the depository scheme. The depository participant with whom you have opened a Demat account gives you a periodic statement of your account just like the bank gives you a statement/passbook regarding your deposit and withdrawal of funds from the accounts.

Question 7.
Dematerialization and immobilization are distinct terms. [Dec. 2011 (3 Marks)]
Answer:
Following are the main points of distinction between dematerialization and immobilization:

Points	Dematerialization	Immobilization
Meaning	Dematerialization is the process by which physical certificates of an investor are converted to an equivalent number of securities in electronic form.	Immobilization is the process where physical share certificates are kept in vaults with the depository for safe custody.
Withdraw of original share certificate	Physical share certiíicate surrendered at the time of dematerialization cannot be withdrawn but investors can ask for a fresh certificate by adopting the rematerialization process.	The actual owner has the right to withdraw his original share certificate is kept in vaults with the depository.
Cost	This model is simple and cost-effective.	This model is not popular as it is complex and expensive.

Question 8.
Write a short note on Depository Agreement [June 2011 (4 Marks)]
Answer:
Every depository is required to enter into an agreement with the issuer in respect of securities disclosed as eligible to be held in Demat form. No agreement is required to be entered into where the depository itself is an issuer of securities.

Depository Agreement also sets forth the rights and duties of the depository in respect of the deposited shares and all other securities.

The depository is also required to enter into a tripartite agreement with the issuer, its transfer agent, and itself where the company has appointed a transfer agent.

Question 9.
Write a short note on Depository Participant (DP) [June 2012 (5 Marks)]
Answer:
A Depository Participant is an agent of the depository through which it; interfaces with the investor and provides depository services.

According to SEBI guidelines, Financial Institutions like banks, custodians, stockbrokers, etc. can become participants in the depository.

DP is one with whom a client needs to open an account to deal in electronic form. While the Depository can be compared to a Bank, DP is like a branch of a bank with which one can have an account. Therefore, DPS is authorized to maintain accounts of dematerialized shares. They help in the instantaneous electronic transfer of shares held in Demat form through the electronic book-entry system.

Characteristics of a depository participant:

Acts as an agent of Depository
The customer interface of Depository
Functions like Securities Bank
Account opening
Facilitates dematerialization
Instant transfer on pay-out
Credits to an investor in IPO, rights, bonus
Settles trades in the electronic segment.

Question 10.
Explain the term: Dematerialization [June 2012 (2 Marks)]
Answer:
Dematerialization is the process by which physical certificates of an investor are converted to an equivalent number of securities in electronic form.

Question 11.
Discuss the procedure followed by depository participants regarding issuance and verification of delivery instruction slip (DIS). [June 2013 (4 Marks)]
Answer:
Issuance of DIS: The procedure followed by the Participants with respect to:

Issuance of DIS booklets including loose slips.
Existence of controls on DIS issued to Clients including pre-stamping of Client ID and unique pre-printed serial numbers.
Record maintenance for issuance of DIS booklets (including loose slips) in the back office.

Verification of DIS: The procedure followed by the Participants with respect to:

Date and time stamping (including late stamping) on instruction slips.
Blocking of used/reported lost/stolen instruction slips in back office system/manual record.
Blocking of slips in the back office system/manual record which are executed in DPM directly.
Two-step verification for a transaction for more than ₹ 5 lakhs, especially in the case of off-market transactions.
Instructions received from dormant accounts.

Question 12.
Write a short note on Concurrent Audit of Depository Participants (DPs) [Dec. 2013 (3 Marks)]
Answer:

NSDL vide its Circular has provided for concurrent audit of the Depository Participants.
The Circular provides that, the process of Demat account opening, control, and verification of Delivery Instruction Slips (DIS) is subject to Concurrent Audit.
DPS has been advised to appoint a firm practicing CS/CA for conducting the concurrent audit. However, the participants may entrust the concurrent audit to their Internal Auditors.
In respect of account opening, the Concurrent Auditor should verify all the documents including KYC documents furnished by the Clients and verified by the officials of the Participants.
The Concurrent Auditor should conduct the audit in respect of all accounts opened, DIS issued, and controls on DIS during the day, by the 5 next working day.
In case the audit could not be completed within the next working day due to the large volume, the auditor should ensure that the audit is completed within a week’s time.
Any deviation or non-compliance observed should be mentioned in the audit report.
The Management of the DPs should comment on the observations made by the Concurrent Auditor.
The Concurrent Audit Report should be submitted on a quarterly basis in a hard copy to NSDL.
If the Auditor for Internal and Concurrent Audit is the same, a consolidated report may be submitted.

Question 13.
The depository is a boon to the capital market and investor both. Elucidate the statement and bring out the advantage of the depository scheme. [June 2014 (5 Marks)]
Answer:
‘Demat’ refers to dematerialization which is the process by which physical certificates of an investor are converted to an equivalent number of securities in electronic form.

The main aim of depositories is to introduce paperless trading and smooth functioning of settlement of security transactions. Following are the advantages of the depository scheme/Demat:
1. No stamp duty: In the case of transfer of physical shares, stamp duty is payable on the market value of shares being transferred. However, for the transfer of securities in the electronic form no stamp duty is payable.

3. Elimination of bad deliveries: In case of transfer of physical shares, transfers could be withheld for bad deliveries e.g. signature of transfer is not tallying. In the case depository environment, the question of bad delivery does not arise Le. they cannot be held “under objection”.

5. No “odd lot”: In the traditional system, shares are required to be transferred in lots say 50 or 100. Now, with the introduction of a depository scheme, the concept of an “odd lot” in respect of dematerialized shares stands abolished, i.e. in the Demat mode, a market lot becomes one share.

8. Elimination of problems related to change of address of investor, transmission, etc.: In case of change of address or transmission of Demat shares, investors are saved from undergoing the entire change procedure j with each company or registrar. Investors have to only inform their DP with all relevant documents and the required changes are effected in the | database of all the companies, where the investor is a registered holder | of securities.

9. Elimination of problems related to selling securities on behalf of a minor: A natural guardian is not required to take court approval for selling demands securities on behalf of a minor.

Question 14.
Write a short note on In-Person Verification (IPV) [Dec. 2014 (4 Marks)]
Answer:
SEBI has made it mandatory for all the intermediaries including Depository Participant (DP) to carry out IPV of their clients.

The intermediary shall ensure that the details like the name of the person doing IPV, his designation, organization with his signatures, and date are recorded on the KYC form at the time of IPV.

The IPV carried out by one SEBI registered intermediary can be relied upon by another intermediary.

Question 15.
The depository system functions very much like the banking system. Comment. [Dec. 2014 (3 Marks)]
Answer:
The Depository system functions very much like the banking system. The following points are given in support of this statement.

A bank holds funds in accounts whereas a depository holds securities in accounts for its clients.
A bank transfers funds between accounts whereas a depository transfers securities between accounts.
Both the bank and the depository are accountable for the safekeeping of funds and securities respectively.

Question 16.
Dematerialization and immobilization are distinct activities. [June 2015 (3 Marks)]
Answer:
Following are the main points of distinction between dematerialization and immobilization:

Points	Dematerialization	Immobilization
Meaning	Dematerialization is the process by which physical certificates of an investor are converted to an equivalent number of securities in electronic form.	Immobilization is the process where physical share certificates are kept in vaults with the depository for safe custody.
Withdraw of original share certificate	Physical share certiíicate surrendered at the time of dematerialization cannot be withdrawn but investors can ask for a fresh certificate by adopting the rematerialization process.	The actual owner has the right to withdraw his original share certificate is kept in vaults with the depository.
Cost	This model is simple and cost-effective.	This model is not popular as it is complex and expensive.

Question 17.
Write a short note on Reconciliation of shares under regulation 75 of the SEBI (Depositories & Participants) Regulations, 2018 [June 2015 (4 Marks)]
Answer:
Every issuer shall submit an audit report on a quarterly basis to the concerned stock exchanges audited by a practicing CS or CA.

Purpose of Audit: The audit is conducted for the following purposes:

To reconcile total issued capital, listed capital, and capital held by depositories in dematerialized form.
To give the details of changes in share capital during the quarter.
To give the details of in-principle approval obtained by the issuer from all the stock exchanges where it is listed in respect of further issued capital.
To give the updated status of the Register of Members of the issuer.
To confirm that securities have been dematerialized as per requests within 21 days from the date of receipt of requests by the issuer.
If the dematerialization has not been effected within 21 days, the reasons I for such delay.

The issuer is under an obligation to immediately bring to the notice of the depositories and the stock exchanges, any difference observed in its issued, listed, and the capital held by depositories in dematerialized form.

Reconciliation [Regulation 75]: The issuer or its agent shall reconcile the records of Dematerialized securities with all the securities issued by the issuer, on a daily basis.

However, where the State or the Central Government is the issuer of Government securities, the depository shall, on a daily basis, reconcile the records of j the dematerialized securities.

Question 18.
All securities in the same class are identical and interchangeable. [June 2015 (3 Marks)]
Answer:
The Depository system functions very much like the banking system. The following points are given in support of this statement.

A bank holds funds in accounts whereas a depository holds securities in accounts for its clients.
A bank transfers funds between accounts whereas a depository transfers securities between accounts.
Both the bank and the depository are accountable for the safekeeping of funds and securities respectively.

Question 19.
Briefly explain the role of a Practicing Company Secretary in the concurrent audit of depository participants. [June 2015 (5 Marks)]
Answer:

NSDL vide its Circular has provided for concurrent audit of the Depository Participants.
The Circular provides that, the process of Demat account opening, control, and verification of Delivery Instruction Slips (DIS) is subject to Concurrent Audit.
DPS has been advised to appoint a firm of practicing CS/CA for conducting the concurrent audit. However, the participants may entrust the concurrent audit to their Internal Auditors.
In respect of account opening, the Concurrent Auditor should verify all the documents including KYC documents furnished by the Clients and verified by the officials of the Participants.
The Concurrent Auditor should conduct the audit in respect of all accounts opened, DIS issued, and controls on DIS during the day, by the 5 next working day.
In case the audit could not be completed within the next working day due to the large volume, the auditor should ensure that the audit is completed within a week’s time.
Any deviation or non-compliance observed should be mentioned in the audit report.
The Management of the DPs should comment on the observations made by the Concurrent Auditor.
The Concurrent Audit Report should be submitted on a quarterly basis in a hard copy to NSDL.
If the Auditor for Internal and Concurrent Audit is the same, a consolidated report may be submitted.

Question 20.
Write a short note on Dematerialization and immobilization [Dec. 2015 (4 Marks)]
Answer:
Following are the main points of distinction between dematerialization and immobilization:

Points	Dematerialization	Immobilization
Meaning	Dematerialization is the process by which physical certificates of an investor are converted to an equivalent number of securities in electronic form.	Immobilization is the process where physical share certificates are kept in vaults with the depository for safe custody.
Withdraw of original share certificate	Physical share certiíicate surrendered at the time of dematerialization cannot be withdrawn but investors can ask for a fresh certificate by adopting the rematerialization process.	The actual owner has the right to withdraw his original share certificate is kept in vaults with the depository.
Cost	This model is simple and cost-effective.	This model is not popular as it is complex and expensive.

Question 21.
Depository participant provides a link between the company and investors. Comment. [June 2016 (4 Marks)] Answer:
A Depository Participant is an agent of the depository through which it; interfaces with the investor and provides depository services.

According to SEBI guidelines, Financial Institutions like banks, custodians, stockbrokers, etc. can become participants in the depository.

Characteristics of a depository participant:

Acts as an agent of Depository
The customer interface of Depository
Functions like Securities Bank
Account opening
Facilitates dematerialization
Instant transfer on pay-out
Credits to an investor in IPO, rights, bonus
Settles trades in the electronic segment.

Question 22.
“Depositary system provides numerous direct and indirect benefits.” [June 2016 (4 Marks)]
Answer:
‘Demat’ refers to dematerialization which is the process by which physical certificates of an investor are converted to an equivalent number of securities in electronic form.

3. Elimination of bad deliveries: In case of transfer of physical shares, transfers could be withheld for bad deliveries e.g. signature of transfer is not tallying. In the depository environment, the question of bad delivery does not arise Le. they cannot be held “under objection”.

6. Faster disbursement of noncash corporate benefits: Depository system provides for direct credit of non-cash corporate benefits like bonus, right issue, and dividend to an investor’s account, thereby ensuring faster disbursement and avoiding the risk of loss in transit.

7. Reduction in transaction cost: In the physical transfer of shares transaction costs like brokerage and handling charges was high. Further courier/postal charges for sending share certificates/transfer deeds are also required to be incurred. But in depository scheme brokerage charges are getting reduced and other charges like courier/postal charges are required at all.

8. Elimination of problems related to change of address of investor, transmission, etc.: In case of change of address or transmission of Demat shares, investors are saved from undergoing the entire change procedure j with each company or registrar. Investors have to only inform their DP with all relevant documents and the required changes are effected in the | database of all the companies, where the investor is a registered holder of securities.

9. Elimination of problems related to selling securities on behalf of a minor: A natural guardian is not required to take court approval for selling demands securities on behalf of a minor.

Question 23.
Write a short note on Rematerialization [June 2017 (4 Marks)]
Answer:
Rematerialization is the process of converting securities held in electronic form in a Demat account back in physical certificate form. For the purpose of rematerialization, the client has to submit the rematerialization request to the DP with whom he has an account. A client can rematerialize his dematerialized holdings at any point in time. The securities sent for rematerialization cannot be traded.

Normally the following procedure is adopted for the dematerialization of shares:

Client submits Rematerialization Request Form (RRF) to DP.
DP enters the request in its system which blocks the client’s holdings.
DP intimates to Depository and simultaneously, DP sends the RRF to the Registrar/Issuer.
Registrar/Issuer prints certificates and dispatches them to the client.
Registrar/Issuer electronically confirms REMAT to Depository.
Client’s account with DP debited.

Question 24.
Write a short note on Designated Depository Participant (DDP) [Dec 2017 (4 Marks)]
Answer:
Designated Depository Participant (DDP) means a person who has been approved by SEBI under Chapter III of the SEBI (Foreign Portfolio Investors) Regulations, 2014. A person shall not act as DDP unless he has obtained the approval of SEBI. As of now, 18 DDP were registered with SEBI which includes is Axis Bank Ltd., HSBC Ltd., India Infoline Ltd., etc.

Eligibility criteria for DDP: SEBI shall grant approval to a person to act as DDP subject to the following conditions:

The applicant is a Participant and Custodian registered with the SEBI.
The applicant is an Authorized Dealer Category-1 bank authorized by the RBI.
The applicant has a multinational presence either through its branches or through agency relationships with intermediaries regulated in their respective home jurisdictions.
The applicant has systems and procedures to comply with the requirements of FATF Standards, Prevention of Money-laundering Act, 2002, and the rules and circulars prescribed thereunder.
A Certificate of Registration granted to a DDP shall be permanent unless suspended or canceled by SEBI or surrendered by the DDP.

The SEBI had also issued operating guidelines for DDP who would grant registration to Foreign Portfolio Investors (FPI).

DDPs are authorized to grant registration to FPIs on behalf of the SEBI. The application for grant of registration is to be made to the DDP in a prescribed form along with the specified fees.

Question 25.
Write a short note on Concurrent Audit [June 2018 (4 Marks)]
Answer:

NSDL vide its Circular has provided for concurrent audit of the Depository Participants.
The Circular provides that, the process of Demat account opening, control, and verification of Delivery Instruction Slips (DIS) is subject to Concurrent Audit.
DPS has been advised to appoint a firm practicing CS/CA for conducting the concurrent audit. However, the participants may entrust the concurrent audit to their Internal Auditors.
In respect of account opening, the Concurrent Auditor should verify all the documents including KYC documents furnished by the Clients and verified by the officials of the Participants.
The Concurrent Auditor should conduct the audit in respect of all accounts opened, DIS issued, and controls on DIS during the day, by the 5 next working day.
In case the audit could not be completed within the next working day due to the large volume, the auditor should ensure that the audit is completed within a week’s time.
Any deviation or non-compliance observed should be mentioned in the audit report.
The Management of the DPs should comment on the observations made by the Concurrent Auditor.
The Concurrent Audit Report should be submitted on a quarterly basis in a hard copy to NSDL.
If the Auditor for Internal and Concurrent Audit is the same, a consolidated report may be submitted.

Question 26.
Write a short note on Models of depository [June 2018 (4 Marks)]
Answer:
Models of Depository:
Immobilization: Where physical share certificates are kept in vaults with the depository for safe custody. All subsequent transactions in these securities take place in book-entry form. The actual owner has the right to withdraw his physical securities as and when desired. The immobilization of fresh issues may be achieved by issuing a jumbo certificate representing the entire issue in the name of the depository, as the nominee of the beneficial owners.

Dematerialization: No Physical scrip in existence, only electronic records maintained by the depository. This type of system is cost-effective and simple and has been adopted in India.

Question 27.
Explain the following:
(i) Dematerialization
(ii) Fungibility [Dec. 2018 (4 Marks)]
Answer:
Dematerialization: Dematerialization is the process by which physical certificates of an investor are converted to an equivalent number of securities in electronic form.

An investor will have to first open an account with a Depository Participant and then request for the dematerialization of his share certificates through the Depository Participant so that the dematerialized holdings can be credited into that account. This is very similar to opening a Bank Account.

Securities in depositories to be in the fungible form [Section 9 of the Depositories Act, 1996]: All securities held by a depository shall be dematerialized and shall be in a fungible form ie. all certificates of the same security shall become interchangeable in the sense that investor loses the right to obtain the exact certificate he surrenders at the time of entry into the depository. It is like withdrawing money from the bank without bothering about the distinctive numbers of the currencies.

Question 28.
What are the objectives of the Depositories Act, 1996?
Answer:
Objectives of the Depositories Act, 1996 are as follows:

To provides for the establishment of depositories like NSDL and CDSL.
To curb the irregularities in the capital market.
To protect the interests of the investors.
To pave a way for the orderly conduct of the financial markets.
To enable market-free transferability of securities with speed, accuracy, and transparency.
To exempt all transfers of shares within a depository from stamp duty.
To provide dematerialization of securities in the depositories mode.

Question 29.
An investor holding shares in electronic form can opt-out of in respect of any security and thus can hold shares in physical form. Comment.
Answer:
It is not necessary that an investor should hold shares in dematerialized form. He can opt out of the depository scheme at any time subject to compliance to provisions of section 14 of the Depositories Act, 1996.

Option to opt-out in respect of any security [Section 14]:

If a beneficial owner seeks to opt-out of a depository in respect of any security he shall inform the depositor accordingly.
The depository shall on receipt of intimation make appropriate entries in its records and shall inform the issuer.
Every issuer shall, within 30 days of the receipt of intimation from the depository and on fulfillment of conditions and on payment of fees, issue the certificate of securities to the beneficial owner or the transferee.

Question 30.
Write a short note on Pledging of securities in the dematerialized form [June 2006 (4 Marks)]
Answer:
Pledge or hypothecation of securities held in a depository [Section 12]:
A beneficial owner may with the previous approval of the depository create a pledge or hypothecation in respect of a security owned by him through a depository.

Every beneficial owner shall give intimation of pledge or hypothecation to the depository and depository shall make entries in its records accordingly.

Procedure for pledging securities: Any entry in the records of a depository shall be evidence of a pledge or hypothecation. Securities held in Demat mode can be pledged. A Beneficial Owner (BO) not only pledges his Demat securities but, may also be able to obtain higher loan amounts, with a lower rate of interest. Moreover, the procedure for pledging securities in Demat form is very convenient, both, for the pledgor and the pledge.

The procedure for pledging securities is as follows:

The pledgor and the pledgee must have BO accounts with CDSL. These accounts can be with the same DP or with different DPS.
The pledgor has to fill up the Pledge Request Form (PRF) in duplicate available with his DP.
On receipt of the PRF, the pledgor’s DP shall verify that the securities can be pledged.
The DP then sets up a pledge request in the depository system and a unique Pledge Sequence No. (PSN) will be generated. The PSN number should be recorded on the PRF.
An authorized official of the DP should sign the PRF and stamp it. A copy of the PRF is then given to the pledgor.
One copy of PRF (with the PSN) should be sent to the pledgee by the Pledgor. The Pledgee will then countersign the PRF for acceptance/ rejection of the pledge request and submit the PRF to his DP.
The pledgee’s DP has the facility to access the request. Based on a copy of PRF the pledgee’s DP either accepts or rejects the pledge request.

When dematerialized securities are pledged, they remain in the pledgor BOs Demat account but they are blocked so that they cannot be used for any other transaction.

Question 31.
Write a short note on Fungibility [Dec. 2008 (3 Marks)]
Answer:
Securities in depositories to be ¡n fungible form [Section 9 of the Depositories Act, 1996]: AIl securities held b a depository shall be dematerialized and shall be in a fungible form Le. all certificates of the same security shall become interchangeable in the sense that investor loses the right to obtain the exact certificate he surrenders at the time of entry into the depository. It is like withdrawing money from the bank without bothering about the distinctive numbers of the currencies.

Question 32.
Explain the power of the Central Government to grant immunity under the Depositories Act, 1996. [June 2014 (6 Marks)]
Answer:
Power to grant immunity [Section 24B]: The Central Government may grant immunity to a person who has violated the provisions of the SEBI Act, 1992.

Conditions for granting immunity:

SEBI makes a recommendation to the Central Government.
The concerned person has made full and true disclosure in respect of the alleged violation.
Proceedings for the prosecution for any such offense not have been instituted before granting immunity.
The Central Government may impose conditions subject to which immunity shall be granted.

Withdrawal of immunity: An immunity granted to a person may be withdrawn by the Central Government if it is satisfied that:

Such person had not complied with the condition on which the immunity was granted, or
Such a person had given false evidence.

A consequence of withdrawal of immunity: After the withdrawal of immunity, the concerned person may be tried for the offense of which he appears to have been guilty and shall also become liable to the imposition of any penalty.

Question 33.
All securities in depositories shall be in fungible form. Comment. [June 2016 (4 Marks)]
Answer:
Securities in depositories to be ¡n fungible form [Section 9 of the Depositories Act, 1996]: AIl securities held b a depository shall be dematerialized and shall be in a fungible form Le. all certificates of the same security shall become interchangeable in the sense that investor loses the right to obtain the exact certificate he surrenders at the time of entry into the depository. It is like withdrawing money from the bank without bothering about the distinctive numbers of the currencies.

Securities Laws and Capital Markets Questions and Answers

Adoption, Convergence & Interpretation of IFRS & Accounting Standards in India – Corporate and Management Accounting MCQ

Leave a Comment / CS Executive / By Murali / April 1, 2024 April 3, 2024

Students should practice Adoption, Convergence & Interpretation of IFRS & Accounting Standards in India – Corporate and Management Accounting CS Executive MCQ Questions with Answers based on the latest syllabus.

Adoption, Convergence & Interpretation of IFRS & Accounting Standards in India – Corporate and Management Accounting MCQ

Question 1.
Under Ind AS-1, presentation of any items of income or expense as extraordinary is
(A) Separately disclosed
(B) Shown as a part of the statement of profit and loss
(C) Prohibited
(D) None of the above
Answer:
(C) Prohibited

Question 2.
Ind AS-11 requires contract revenue to be measured at –
(A) Net realizable value
(B) Fair value of consideration received/ receivable
(C) Consideration received/receivable
(D) None of the above
Answer:
(B) Fair value of consideration re-ceived/ receivable

Question 3.
Ind AS-20 requires government grants of the nature of promoters contribution to be –
(A) Credited directly to capital reserve and treated as a part of shareholders funds
(B) Recognize as income over the periods
(C) Do not recognize any such grants
(D) None of the above
Answer:
(C) Do not recognize any such grants

Question 4.
Ind AS-34 requires the following in the contents of an interim financial report in addition to what was required under previous standard AS-25 condensed balance sheet, a condensed statement of profit and loss, a condensed cash flow statement –
(A) A condensed balance sheet
(B) A condensed statement of profit and loss
(C) A condensed cash flow statement
(D) A condensed statement of changes in equity
Answer:
(D) A condensed statement of changes in equity

Question 5.
Ind AS-7 deals with:
(A) Inventories
(B) Statement of Cash Flows
(C) Accounting Policies, Changes in Accounting Estimates and Errors
(D) Events after the Reporting Period
Answer:
(B) Statement of Cash Flows

Question 6.
The main objective of the Ind AS- 10 is:
(A) When an entity should adjust its financial statements for events after reporting period
(B) To prescribe the accounting treatment for income taxes
(C) To prescribe the criteria for selecting and changing accounting policies
(D) To prescribe, for lessee and lessor, the appropriate accounting policies
Answer:
(A) When an entity should adjust its financial statements for events after reporting period

Question 7.
Match the following:

List-A	List-B
(i) IndAS-21	1. Effects of Changes in Foreign Exchange Rates
(ii) Ind AS-24	2. Related Party Disclosures
(iii) IndAS-33	3. Earnings per Share
(iv) Ind AS-40	4. Investment Property

Select the correct answer from the options given below:
Adoption, Convergence & Interpretation of IFRS & Accounting Standards in India – Corporate and Management Accounting MCQ 1
Answer:
(C)

Question 8.
Ind AS-1 requires disclosure of critical assumptions about the future and other sources of measurement uncertainty
(A) That can affect earning capacity of the business
(B) That can affect carrying amounts of assets and liabilities within the next financial year.
(C) That can affect carrying amounts of intangibles in a current financial year.
(D) All of the above
Answer:
(B) That can affect carrying amounts of assets and liabilities within the next financial year.

Question 9.
Ind AS-1 requires that classification of expenses be presented on the basis of –
(A) Nature of enterprises
(B) Ability of accountant
(C) Nature of expenses
(D) Reference to last year expenses
Answer:
(C) Nature of expenses

Question 10.
IAS-1 requires:
(A) Separate statement of changes in equity
(B) Changes in equity to be shown as a part of the balance sheet.
(C) Separate statement of changes in minority
(D) Changes in equity to be shown as a part of the income statement.
Answer:
(A) Separate statement of changes in equity

Question 11.
IAS-1 allows the classification of expenses based on within the equity.
(A) their nature
(B) their function
(C) either their nature or their function
(D) none of the above
Answer:
(C) either their nature or their function

Question 12.
Ind AS-2 provides for reversed of the write-down of inventories to:
(A) Cost
(B) Replacement cost
(C) Net realizable value
(D) Net realizable value limited to the amount of original write-down
Answer:
(D) Net realizable value limited to the amount of original write-down

Question 13.
Ind AS-2
(A) Defines the fair value
(B) Provides an explanation in respect of the distinction between net realizable value and fair value
(C) Provides explanation with regard to inventories of service providers
(D) All of the above
Answer:
(D) All of the above

Question 14.
Ind AS-7:
(A) Prohibits presentation of extraor¬dinary items
(B) Uses the term ‘reporting currency
(C) Do not provide the option to classify interest and dividend paid/inter-est and dividend received as part of operating cash flows
(D) All of the above
Answer:
(A) Prohibits presentation of extraordinary items

Question 15.
Ind AS-11 deals with:
(A) Accounting for service concession arrangements and agreements for the construction of the real estate
(B) Measurement of contract revenue at consideration received/ receivable.
(C) Both (A) and (B)
(D) None of the above
Answer:
(A) Accounting for service concession arrangements and agreements for the construction of the real estate

SEBI (Issue of Sweat Equity) Regulations, 2002 – Securities Laws and Capital Markets Important Questions

Leave a Comment / CS Executive / By Murali / April 1, 2024 April 3, 2024

SEBI (Issue of Sweat Equity) Regulations, 2002 – Securities Laws and Capital Markets Important Questions

Question 1.
To whom sweat equity shares may be issued the SEBI (Issue of Sweat Equity) Regulations, 2002?
Answer:
Sweat equity shares may be issued to employees & promoter [Regulation 4]: A company whose equity shares are listed on a recognized stock exchange may issue sweat equity shares in accordance with Section 54 of Companies Act, 2013 and these Regulations to its:
(a) Employees
(b) Directors.

Question 2.
State the provisions relating to the issue of sweat equity shares to promoters under the SEBI (Issue of Sweat Equity) Regulations, 2002.
Answer:
Sweat equity shares can be issued to directors or employees and not to others. Thus, sweat equity shares cannot be issued to promoters unless he is a director or an employee. The director may be whole-time or part-time i.e. executive or non-executive.

Issue of Sweat Equity Shares to Promoters [Regulation 6]:

In case of an Issue of sweat equity shares to promoters, the same shall also be approved by a simple majority of the shareholders in the General Meeting. However, for passing such a resolution, voting through postal ballot as specified under Rule 22 of the Companies (Management & Administration) Rules, 2014 can also be adopted. The promoters to whom such sweat equity shares are proposed to be issued shall not participate in such resolution.
Each transaction of issue of sweat equity shall be voted by a separate resolution.
The resolution for the issue of sweat equity shall be valid for a period of not more than 12 months from the date of passing of the resolution.
For the purposes of passing the resolution, the explanatory statement shall contain the disclosures as specified in the Schedule.

Authors Note: Section 54 of the Companies Act, 2013 provides that sweat equity shares can be issued by passing a special resolution in the general meeting of the company. Whereas Regulation 6 of the SEBI(Issue of Sweat Equity) Regulations, 2002 provides that sweat equity shares can be issued to promoters by passing a resolution of a simple majority of the shareholders in General Meeting; which is doubtful. Even otherwise, special resolution u/s 62 of the Companies Act, 2013 will also be required as a right issue is not being made. Hence, in the opinion of the author issue of sweat equity shares to promoters requires special resolution.

Question 3.
Write a short note on Pricing of Sweat Equity Shares
Answer:
Pricing of Sweat Equity Shares [Regulation 7]:
1. The price of sweat equity shares shall not be less than the higher of the following two:
(a) The average of the weekly high and low of the closing prices of the related equity shares during the last 6 months preceding the relevant date.

(b) The average of the weekly high and low of the closing prices of the related equity shares during the 2 weeks preceding the relevant date. . Explanation: “Relevant date” for this purpose means the date which is 30 days prior to the date on which the meeting of the General Body of the shareholders is convened, in terms of Section 54(1 )(a) of the Companies Act, 2013.

2. If the shares are listed on more than one stock exchange, but quoted only on one stock exchange on a given date, then the price on the stock exchange shall be considered.

3. If the share price is quoted on more than one stock exchange, then the stock exchange where there is the highest trading volume during that date shall be considered.

4. If the shares are not quoted on the given date, then the share price on the next trading day shall be considered.

Question 4.
Write a short note on the Accounting treatment of sweat equity shares
Answer:
Accounting Treatment [Regulation 9]: Where the sweat equity shares are issued for a non-cash consideration, such noncash consideration shall be treated in the following manner in the books of account of the company:
(a) Where the non-cash consideration takes the form of a depreciable or amortizable asset, it shall be carried to the balance sheet of the company in accordance with the relevant accounting standards.

(b) Where clause (a) is not applicable, it shall be expensed as provided in the relevant accounting standards.
In simple words, consideration against which sweat equity shares are issued is either treated as an asset or will be debited to profit & loss account as expenses.

Question 5.
Under what circumstances the amount of sweat equity shares issued shall be treated as part of managerial remuneration for the purpose of Sections 197 of the Companies Act, 2013?
Answer:
Ceiling on Managerial Remuneration [Regulation 11]: The amount of sweat equity shares issued shall be treated as part of managerial remuneration for the purpose of Section 197 of the Companies Act, 2013 if the following conditions are fulfilled:

Sweat equity shares are issued to any director or manager.
Sweat equity shares are issued for non-cash consideration, which does not take the form of an asset that can be carried to the balance sheet of the company in accordance with the relevant accounting standards.

Question 6.
Write a short note on Lock-in of sweat equity shares
Answer:
Lock-in of sweat equity shares [Regulation 12]: The sweat equity shares shall be locked in for a period of 3 years from the date of allotment.

The SEBI (ICDR) Regulations, 2009 on the public issue in terms of lock-in and computation of promoters’ contribution shall apply if a company makes a public issue after it has issued sweat equity.

Question 7.
Elucidate the obligations of the Company under the SEBI (Issue of Sweat Equity) Regulations, 2002.
Answer:
Obligations of the Company [Regulation 15]: The Company shall ensure that –
(a) The explanatory statement to the notice for a general meeting shall contain disclosures as are specified u/s 54(1 )(b) and Regulation 5(1).

(b) The Auditor’s certificate as required under Regulation 10 shall be placed in the general meeting of shareholders.

A number of sweat equity shares.
Price at which the sweat equity shares are issued.
Total amount invested in sweat equity shares.
Details of the persons to whom sweat equity shares are issued.
The consequent changes in the capital structure and the shareholding pattern after and before the issues of sweat equity.

Question 8.
Distinguish between: Sweat equity & Issue of capital on the preferential basis [Dec. 2009 (4 Marks)]
Answer:
Following are the main points of distinction between sweat equity & the issue of capital on a preferential basis:

Points	Sweat Equity Shares	Issue of capital on preferential basis
Meaning	Sweat equity shares mean equity shares issued by a company to its employees or directors at a discount or for consideration, other than cash for providing know-how or making available right in the nature of intellectual property rights or value additions, by whatever name called.	A preferential issue is an issue of shares or of convertible securities by listed companies to a select group of persons under Section 81 which is neither a rights issue nor a public issue.
To whom issued	Sweat equity shares are issued to employees or directors.	A preferential issue is an issue to a select group of persons.
How issued	Sweat equity shares are issued at a discount or for consideration, other than cash.	A preferential issue is at par or at a premium.

Question 9.
Distinguish between: Sweat Equity Shares & ESOS j [Dec. 2010 (4 Marks), June 2015 (4 Marks)]
Answer:
Following are the main points of distinction between sweat equity shares & ESOS:

Points	Sweat Equity Shares	ESOS
Meaning	Sweat equity shares mean equity shares issued by a company to its directors or employees at a discount or for consideration, other than cash for providing know-how or making available rights in the nature of intellectual property rights or value additions, by whatever name called.	Employee stock option means the option given to the whole-time directors, officers, or employees of a company, which gives such directors, officers, or employees the benefit or right to purchase or subscribe at a future date, the securities offered by the company at a pre-determined price.
How regulated	Issue of sweat equity shares is regulated by Section 53 of the Companies Act, 2013 and the SEBI (Issue of Sweat Equity) Regulations, 2002 and the Companies (Share Capital & Debentures) Rules, 2014.	Issue of shares under employee stock option plan is regulated by Section 2(37) of the Companies Act, 2013 and the SEBI (Share Based Employee Benefits) Regulations, 2014.
Issue	Sweat equity shares can be issued at a discounted price or free for know-how and services to the company.	Employee stock options can be issued with the conversion right at a pre-determined price. The issue price can be less than the intrinsic value of the shares.
Consideration	The consideration can be partly cash and partly IPRs/value addition or fully non-cash consideration.	The consideration has to be paid in cash.
Purpose	Sweat equity shares are mainly intended to be issued to build up equity for directors or employees with technical capability but with meager financial resources.	Employee stock options can be used for multiple purposes – as a talent retention tool, as an incentive, as a remuneration mechanism.

Question 10.
Write a short note on Sweat equity shares [June 2014 (5 Marks)]
Answer:
Sweat Equity Shares [Section 2(88)]: Sweat equity shares mean equity shares issued by a company to its directors or employees at a discount or for consideration, other than cash for providing know-how or making available rights in the nature of intellectual property rights or value additions, by whatever name called.

Issue of sweat equity shares [Section 54]: A company can issue sweat equity- shares, of a class of shares already issued, if the following conditions are satisfied:
1. The issue has been authorized by a special resolution passed by the company in the general meeting.

2. Such special resolution should clearly specify:

Number of shares
Current market price
Consideration and
Classes of directors or employees to whom such equity shares are to be issued.

3. At least1 a year should have elapsed from the date on which the company was entitled to commence business. [Deleted by the Companies (Amendment) Act, 2017]

4. A company whose shares are listed on a recognized stock exchange is-suing sweat equity shares should comply with the SEBI (Issue of Sweat Equity) Regulations, 2002.

5. A company whose shares are not so listed should comply with the Companies (Share Capital & Debentures) Rules, 2014.

The rights, limitations, restrictions, and provisions as are for the time being applicable to equity shares shall be applicable to the sweat equity shares issued and the holders of sweat equity shares shall rank pari passu {on an equal footing) with other equity shareholders. [Section 54 (2)]

Register of Sweat Equity Shares [Rule 8(14) of the Companies (Share Capital & Debentures) Rules, 2014]: The company shall maintain a Register of Sweat Equity Shares in Form No. SH. 3 and shall forthwith enter therein the particulars of issue of sweat equity shares.

The Register of Sweat Equity Shares shall be maintained at the registered office of the company or such other place as the Board may decide.

The entries in the register shall be authenticated by the Company Secretary of the company or by any other person authorized by the Board for the purpose.

Question 11.
An Indian company is planning to issue sweat equity shares of a class of | shares already issued. Explain the meaning of sweat equity shares and advise the company regarding the conditions to be fulfilled to issue sweat equity? [Dec. 2014 (6 Marks)]
Answer:
Sweat Equity Shares [Section 2(88)]: Sweat equity shares mean equity shares issued by a company to its directors or employees at a discount or for consideration, other than cash for providing know-how or making available rights in the nature of intellectual property rights or value additions, by whatever name called.

2. Such special resolution should clearly specify:

Number of shares
Current market price
Consideration and
Classes of directors or employees to whom such equity shares are to be issued.

3. At least1 a year should have elapsed from the date on which the company was entitled to commence business. [Deleted by the Companies (Amendment) Act, 2017]

4. A company whose shares are listed on a recognized stock exchange is-suing sweat equity shares should comply with the SEBI (Issue of Sweat Equity) Regulations, 2002.

5. A company whose shares are not so listed should comply with the Companies (Share Capital & Debentures) Rules, 2014.

The Register of Sweat Equity Shares shall be maintained at the registered office of the company or such other place as the Board may decide.

The entries in the register shall be authenticated by the Company Secretary of the company or by any other person authorized by the Board for the purpose.

Question 12.
Z Ltd. has issued Sweat Equity Shares for a non-cash consideration. What are the possible accounting treatments in the books of Z Ltd.? [June 2019(4 Marks)]
Answer:
Accounting Treatment [Regulation 9]: Where the sweat equity shares are issued for a non-cash consideration, such non-cash consideration shall be treated in the following manner in the books of account of the company –
(a) Where the non-cash consideration takes the form of a depreciable or amortizable asset, it shall be carried to the balance sheet of the company in accordance with the relevant accounting standards.

Question 13.
A listed NBFC has been granted a license to run as a small finance bank by the Reserve Bank of India under a recently announced policy to improve the financial inclusion of the country. During the last three years, the attrition rate for top-level management employees was not too high. As RBI has granted licenses to many small banks, therefore, the promoters of the Bank feel that the attrition rate will be high in the coming period. The Board of directors wishes to allot Sweat Equity shares to employees. You, being compliance officer of the g Bank, advise the Board about the pricing of the Sweat Equity shares. [June 2019 (4 Marks)]
Answer:
Pricing of Sweat Equity Shares [Regulation 7]:
1. The price of sweat equity shares shall not be less than the higher of the following two:
(a) The average of the weekly high and low of the closing prices of the related equity shares during the last 6 months preceding the relevant date.
(b) The average of the weekly high and low of the closing prices of the related equity shares during the 2 weeks preceding the relevant date. . Explanation: “Relevant date” for this purpose means the date which is 30 days prior to the date on which the meeting of the General Body of the shareholders is convened, in terms of Section 54(1 )(a) of the Companies Act, 2013.

2. If the shares are listed on more than one stock exchange, but quoted only on one stock exchange on a given date, then the price on the stock exchange shall be considered.

3. If the share price is quoted on more than one stock exchange, then the stock exchange where there is the highest trading volume during that date shall be considered.

4. If the shares are not quoted on the given date, then the share price on the next trading day shall be considered.

Securities Laws and Capital Markets Questions and Answers

Foreign Contribution (Regulation) Act, 2010 – Economic, Business and Commercial Laws Important Questions

Leave a Comment / CS Executive / By Murali / April 1, 2024 April 3, 2024

Foreign Contribution (Regulation) Act, 2010 – Economic, Business and Commercial Laws Important Questions

Question 1.
Define ‘foreign contribution’ under the Foreign Contribution (Regulation) Act, 2010. [June 2015 (5 Marks)]
Answer:
Definition [Section 2(l)(h)]: Foreign Contribution means the donation, delivery or transfer made by any foreign source, of any:

Article not being an article given as a gift for his personal use, if the market value of such article is not more than specified sum;
Currency, whether Indian or foreign; g
Security and includes any foreign security.

Explanation 1: Deemed to be Foreign
Contribution- Donation, delivery or & transfer of any article, currency or foreign security either directly or through one or more persons, shall also be deemed to be a foreign contribution.

Explanation 2: Deemed to be Foreign
Contribution: Interest earned on foreign contribution deposited in any bank or any other income derived from foreign contribution or interest thereon shall be deemed to be a foreign contribution.

Explanation 3:Not Foreign
Contribution: Any amount received, from any foreign source towards the cost of goods sold or serviced rendered in the ordinary course of his business, trade or commerce, whether within India or outside India, shall be excluded from the definition of Foreign Contribution.

Example: Mr Rahul Gandhi received the gift of 10,000 shares of Microsoft from Mr Bill Gates as a foreign contribution.
Mrs Soniya Gandhi received a BMW car as a gift from Mr Jackson (Italy resident) as a foreign contribution.

Question 2.
The object of the Foreign Contribution (Regulation) Act, 2010 is to legalise foreign donations and hospitality to office-bearers of political parties. Comment. [Dec. 2018 (5 Marks)]
Answer:
1. Object of the Act: The objects of the Foreign Contribution (Regulation) Act, 2010
(a) To regulate the acceptance and utilisation of foreign contribution or foreign hospitality by certain individuals or associations or companies and
(b) To prohibit acceptance and utilisation of foreign contribution or foreign hospitality for any activities detrimental to the national interest and for matters connected therewith or incidental thereto.

2. Provision: Section 3(1) of the Act, imposes a restriction on acceptance of foreign contribution by

candidate for election;
correspondent, columnist, cartoonist, editor, owner, printer or publisher of a registered newspaper;
Judge;
Government servant or employee of any corporation or any other body controlled or owned by the Government;
member of any Legislature;
a political party or office-bearer thereof;
the organisation of a political nature;
association or company engaged in the production or broadcast of audio news or audiovisual news or current affairs programmes through any electronic mode, or any other electronic form.

3. Conclusion: Thus, it is incorrect to say that object of the Act is to legalize foreign donations and hospitality to office-bearers of political parties.

Question 3.
State the person who is prohibited from accepting foreign contributions under the Foreign Contribution (Regulation) Act, 2010? [Dec. 2010 (3 Marks)]
Answer:
As per Section 3 of the Foreign Contribution (Regulation) Act, 2010, the following person or organization cannot accept foreign contribution:
(a) Candidate for election
(b) Correspondent, columnist, cartoonist, editor, owner, printer or publisher of a registered newspaper
(c) Judge, Government servant or employee of any corporation or government company or any other body controlled or owned by the Government
(d) Member of any Legislature (i.e. MP & MLA)
(e) Political party or its office-bearer
(f) Organization of a political nature
(g) Association or company engaged in the production or broadcast of audio news or audiovisual news or current affairs programmes through any electronic mode or any other electronic form
(h) Correspondent or columnist, cartoonist, editor, owner of the association or company covered in clause (g).

Question 4.
What are the exemptions to the prohibition of acceptance of foreign contributions under the Foreign Contribution (Regulation) Act, 2010? [Dec 2010 (5 Marks)]
Answer:
As per Section 4 of the Foreign Contribution (Regulation) Act, 2010, the following transactions do not come within the purview of Section 3 if the foreign contribution is accepted subject to the provisions of Section 10:

Salary, wages or other remuneration received from any foreign source by way of payment in the ordinary course of business.
Payment in the course of international trade or commerce, or in the ordinary course of business transacted outside India.
Transaction made as an agent of foreign source in relation to any transaction made by such foreign source with the Central or State Government.
Gift or presentation made to a member of any Indian delegation, (however such gift or present was accepted in accordance with the rules made by the Central Government)
Foreign contribution received from relative.
Remittance received, in the ordinary course of business through any official channel, post office, or any authorized person in foreign exchange under the FEMA.
Scholarship, stipend or any payment of like nature.

Question 5.
Discuss the powers of the Central Government to prohibit receipt of foreign contribution under the Foreign Contribution (Regulation) Act, 2010. [Dec. 2012 (5 Marks)]
Answer:
As per Section 9 of the Foreign Contribution (Regulation) Act, 2010, the Central Government may –

Prohibit: Prohibit any person or organization from accepting any foreign contribution.
Prior Permission for Foreign Hospitality: Require any person to obtain the prior permission of the Central Government before accepting any foreign hospitality.
Furnish Information for Foreign Contribution: Require any person to furnish intimation within prescribed time and in the prescribed manner of the source, purpose and manner of utilization of any foreign contribution received.
Prior Permission for Foreign Contribution: Require a specified person to obtain the prior permission of the Central Government before accepting any foreign contribution.
Furnish information for foreign hospitality: Require any person to furnish intimation, within the prescribed time and in the prescribed manner as to the source and manner of receipt of any foreign hospitality.

However above prohibition shall be made by the Central Government only if it is satisfied that the acceptance of foreign contribution or foreign hospitality by such person, is likely to affect prejudicially:

Sovereignty and integrity of India or
Public interest or
Freedom or fairness of election to any Legislature or
Friendly relations with any foreign State or
Harmony between religious, racial, social, linguistic or regional groups, castes or communities.

Question 6.
Enumerate the powers of the Central Government to prohibit receipt of foreign contribution under the Foreign Contribution (Regulation) Act, 2010 [Dec. 2019 (5 Marks)]
Answer:
As per Section 4 of the Foreign Contribution (Regulation) Act, 2010, the following transactions do not come within the purview of Section 3 if the foreign contribution is accepted subject to the provisions of Section 10:

Salary, wages or other remuneration received from any foreign source by way of payment in the ordinary course of business.
Payment in the course of international trade or commerce, or in the ordinary course of business transacted outside India.
Transaction made as an agent of foreign source in relation to any transaction made by such foreign source with the Central or State Government.
Gift or presentation made to a member of any Indian delegation, (however such gift or present was accepted in accordance with the rules made by the Central Government)
Foreign contribution received from relative.
Remittance received, in the ordinary course of business through any official channel, post office, or any authorized person in foreign exchange under the FEMA.
Scholarship, stipend or any payment of like nature.

Question 7.
Ashok, a director of a public limited company, was on a business trip to the USA. Suddenly, he developed chest pain there and was provided medical treatment in a hospital, the funds for which were provided by one John, a US national, who happened to be his friend. Did Ashok violate the provisions of the Foreign Contribution (Regulation) Act, 2010? Give reasons. [June 2013 (5 Marks)]
Answer:
(a) Facts of Case: Ashok, a director of a public limited company, was on a business trip to the USA. Suddenly, he developed chest pain there and was provided medical treatment in a hospital, the funds for which were provided by one John, a US national, who happened to be his friend.

(b) Provision
As per Section 6 of the Foreign Contribution (Regulation) Act, 2010, the following person cannot receive foreign hospitality visiting any country without prior permission of the Central Government:

Member of a Legislature or office-bearer of a political party or
Judge or
Government servant or
An employee of any corporation or any other body owned or controlled by the Government

(c) Conclusion: By referring to the above facts and provision we can conclude that since directors of a public company are not covered u/s 6, Ashok can accept foreign hospitality and as such he or the company has not contravened the provisions of the Foreign Contribution (Regulation) Act, 2010.

Question 8.
Discuss the powers of the Central Government to prohibit receipt of foreign contribution under the Foreign Contribution (Regulation) Act, 2010. [Dec. 2014 (3 Marks)]
Answer:
As per Section 9 of the Foreign Contribution (Regulation) Act, 2010, the Central Government may –

Prohibit: Prohibit any person or organization from accepting any foreign contribution.
Prior Permission for Foreign Hospitality: Require any person to obtain the prior permission of the Central Government before accepting any foreign hospitality.
Furnish Information for Foreign Contribution: Require any person to furnish intimation within prescribed time and in the prescribed manner of the source, purpose and manner of utilization of any foreign contribution received.
Prior Permission for Foreign Contribution: Require a specified person to obtain the prior permission of the Central Government before accepting any foreign contribution.
Furnish information for foreign hospitality: Require any person to furnish intimation, within the prescribed time and in the prescribed manner as to the source and manner of receipt of any foreign hospitality.

Sovereignty and integrity of India or
Public interest or
Freedom or fairness of election to any Legislature or
Friendly relations with any foreign State or
Harmony between religious, racial, social, linguistic or regional groups, castes or communities.

Question 9.
Which organizations/individuals are specifically prohibited from receiving foreign contributions under the Foreign Contribution (Regulation) Act, 2010? [Dec. 2015 (3 Marks)]
Answer:
As per Section 3 of the Foreign Contribution (Regulation) Act, 2010, the following person or organization cannot accept foreign contribution:
(a) Candidate for election
(b) Correspondent, columnist, cartoonist, editor, owner, printer or publisher of a registered newspaper
(c) Judge, Government servant or employee of any corporation or government company or any other body controlled or owned by the Government
(d) Member of any Legislature (i.e. MP & MLA)
(e) Political party or its office-bearer
(f) Organization of a political nature
(g) Association or company engaged in the production or broadcast of audio news or audiovisual news or current affairs programmes through any electronic mode or any other electronic form
(h) Correspondent or columnist, cartoonist, editor, owner of the association or company covered in clause (g).

Question 10.
Which organizations/individuals are specifically prohibited from receiving foreign contribution under the Foreign Contribution (Regulation) Act, 2010? [June 2016 (5 Marks)]
Answer:
As per Section 3 of the Foreign Contribution (Regulation) Act, 2010, the following person or organization cannot accept foreign contribution:
(a) Candidate for election
(b) Correspondent, columnist, cartoonist, editor, owner, printer or publisher of a registered newspaper
(c) Judge, Government servant or employee of any corporation or government company or any other body controlled or owned by the Government
(d) Member of any Legislature (i.e. MP & MLA)
(e) Political party or its office-bearer
(f) Organization of a political nature
(g) Association or company engaged in the production or broadcast of audio news or audiovisual news or current affairs programmes through any electronic mode or any other electronic form
(h) Correspondent or columnist, cartoonist, editor, owner of the association or company covered in clause (g).

Question 11.
Which are the organizations and persons who are specifically debarred from receiving foreign contributions under Foreign Exchange Regulation Act, 2010? [Dec. 2018 (3 Marks)]
Answer:
As per Section 3 of the Foreign Contribution (Regulation) Act, 2010, the following person or organization cannot accept foreign contribution:
(a) Candidate for election
(b) Correspondent, columnist, cartoonist, editor, owner, printer or publisher of a registered newspaper
(c) Judge, Government servant or employee of any corporation or government company or any other body controlled or owned by the Government
(d) Member of any Legislature (i.e. MP & MLA)
(e) Political party or its office-bearer
(f) Organization of a political nature
(g) Association or company engaged in the production or broadcast of audio news or audiovisual news or current affairs programmes through any electronic mode or any other electronic form
(h) Correspondent or columnist, cartoonist, editor, owner of the association or company covered in clause (g).

Question 12.
Write a short note on the Cancellation of a certificate under the Foreign Contribution (Regulation) Act, 2010 [Dec. 2013 (5 Marks)]
Answer:
(a) As per Section 14 of the Foreign Contribution (Regulation) Act, 2010, the Central Government by order may cancel the certificate, if it is satisfied after making such inquiry that:

The holder of the certificate has made an incorrect or false statement for the grant of registration or renewal.
Holder of the certificate has violated any of the terms and conditions of the certificate or renewal.
In the opinion of the Central Government, it is necessary for the public interest to cancel the certificate.
Holder of the certificate has violated any of the provisions of the Act or rules or order.
Holder of the certificate has not been engaged in any reasonable activity in its chosen field for the benefit of the society for 2 consecutive years or has become defunct.

(b) The person concerned has to be been given a reasonable opportunity of being heard before cancellation of the certificate.

(c) Any person whose certificate has been cancelled shall not be eligible for registration or grant of prior permission for a period of 3 years from the date of cancellation of such certificate.

Question 13.
State the procedure for making an application for renewal of a certificate under the Foreign Contribution (Regulation) Act, 2010 [Dec. 2015 (3 Marks)]
Answer:
Renewal of certificate [Section 16]:

The time limit for renewal: Every person who has been granted a certificate shall have such certificate renewed within 6 months before the expiry of the period of the certificate.
Application to CG: The application for renewal of the certificate shall be made to the Central Government in the prescribed form and along with the prescribed fee.
Renewal time and Term: The Central Government shall renew the certificate within 90 days from the date of receipt of an application for renewal and grant a certificate of renewal for a period of 5 years.
Reason for Not renewing: In case the Central Government does not renew the certificate within 90 days, it shall communicate the reasons to the applicant.
Refusal for renewal: The Central Government may refuse to renew the certificate in case where a person has violated any provisions of the Act or rules made thereunder.

Question 14.
Discuss briefly provisions relating to the confiscation of article/currency/security obtained in contravention of the Foreign Contribution (Regulation) Act, 2010.
Answer:
Confiscation of article or currency or security obtained in contravention of the Act [Section 28]: Any article or currency or security which is seized u/s 25 shall be liable to confiscation if such article or currency or security has been adjudged u/s 29 to have been received or obtained in contravention of the Act.

Adjudication of confiscation [Section 29]: Any confiscation may be adjudged without limit by the Court of Session within the local limits of whose jurisdiction the seizure was made.

Cases of adjudication of confiscation can also be dealt with by an officer, not below \ the rank of an Assistant Sessions Judge as the Central Government may by notification in the Official Gazette specify on this behalf.

The Sessions Judge or Assistant Sessions Judge may make such order as he thinks fit.
Procedure for confiscation [Section 30]: No order of adjudication of confiscation shall be made unless a reasonable opportunity of making a representation against such confiscation has been given to the person from whom any article or currency or security has been seized.

Question 15.
Joseph, a resident in India has failed to comply with some provisions of the Foreign Contribution (Regulation) Act, 2010 in relation to the receipt of foreign contribution and in this regard a complaint has been filed in a Court by somebody inimical to Joseph. Explain briefly whether Court can take cognizance of violation of the provisions of the Foreign Contribution (Regulation) Act, 2010?
Answer:
(a) Facts of the case: Joseph, a resident in India has failed to comply with some provisions of the Foreign Contribution (Regulation) Act, 2010 in relation to the receipt of foreign contribution and in this regard a complaint has been filed in a Court by somebody inimical to Joseph.

(b) Provision: As per Section 40 of the Foreign Contribution (Regulation) Act, 2010, no Court shall take cognizance of any offence under the Act, except with the previous sanction of the Central Government or any officer authorized by that Government in this behalf.

(c) Conclusion: In the present case, the complaint against Joseph has been made by a person who is inimical to Joseph and not by taking the previous sanction of the Central Government or any officer authorized by that Government on this behalf. Therefore, Court cannot take cognizance of an offence under the Foreign Contribution (Regulation) Act, 2010.

Question 16.
Stale the provisions regarding the penalties and punishment provided under the Foreign Contribution (Regulation) Act, 2010. [Dec. 2019 (4 marksJ]
Answer:
(a) Penalty for article or currency or security obtained in contravention of section 10 [Section 34]

Any person, on whom any prohibitory order has been served under Section 10 of the Act, pays, delivers, transfers or otherwise deals with, in any manner whatsoever, any article or currency or security, whether Indian or foreign, in contravention of such prohibitory order, he shall be punished.
Imprisonment up to 3 years or fine or both.

(b) Punishment for contravention of any provision of the Act [Section 35]

Whoever accepts, or assists any person, political party or organisation in accepting, any foreign contribution or any currency or security from a foreign source, in contravention of any provision of this Act or any rule or order made thereunder
Imprisonment up to 5 years or fine or both

(d) Composition of certain offence is dealt with in Section 41

Economic, Business and Commercial Laws Questions and Answers

Capital Market Instruments – Securities Laws and Capital Markets Important Questions

Leave a Comment / CS Executive / By Murali / April 1, 2024 April 3, 2024

Capital Market Instruments – Securities Laws and Capital Markets Important Questions

Question 1.
Distinguish between: Pure Instruments & Hybrid Instruments [Dec. 2013 (3 Marks)]
Answer:
Following are the main difference between pure & hybrid instruments:

Points	Pure Instruments	Hybrid Instruments
Meaning	Equity shares, preference shares, debenture, and bonds which are issued with the basic characteris¬tics without mixing the features of other instruments are called pure instruments.	Instruments that are created by combining the features of equity, preference, bond are called hybrid instruments.
Examples	Following are pure instruments: Equity shares Preference shares Debentures	Following are hybrid instruments: Convertible preference shares Convertible debentures Secured premium notes
Beneficial	These are beneficial but not like hybrid instruments.	These are more beneficial than a pure instrument.

Question 2.
Distinguish between: ‘Hybrid Funds’ and ‘Hybrid Instruments’. [Dec. 2015 (2 Marks)]
Answer:
Hybrid funds: Such funds cover both needs of an investor i.e. provide regular income as well as provides 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”.

Hybrid Instruments: Instruments that are created by combining the features of equity, preference, bond are called hybrid instruments.

Example: Hybrid instruments are:

Convertible preference shares
Non-convertible debentures with equity warrant
Partly convertible debentures
Secured premium notes

Question 3.
Distinguish between: Naked Debentures & Secured Debentures [Dec. 2009 (3 Marks)]
Answer:
Naked or Unsecured Debentures: Debentures of this kind do not carry any charge on the assets of the company. The holders of such debentures do not, therefore, have the right to attach particular property by way of security as to repayment of principal or interest and thus called as naked or unsecured debentures.

Secured Debentures: Debentures that are secured by a charge of the whole or part of the assets of the company are called mortgage debentures or secured debentures. After creating a charge on debentures, a charge is required to be registered with ROC within 30 days of creation.

Question 4.
Distinguish between: Perpetual Debentures & Bearer Debentures [June 2011 (2 Marks)]
Answer:
Perpetual Debentures: If the debentures are issued subject to redemption on the happening of specified events that may not happen for an indefinite period, e.g. winding-up, they are called perpetual debentures.

Bearer Debentures: Such debentures are payable to the bearer and are transferable by mere delivery. The name of the debenture holder is not registered in the books of the company, but the holder is entitled to claim interest and principal as and when due. A bona fide transferee for value is not affected by the defect in the title of the transferor.

Question 5.
Write a short note on Debt Securities [June 2011 (4 Marks)]
Answer:
Debt security represents borrowed funds that must be repaid. In other words, debt securities are interest-paying Bonds, Notes, Bills, or Money Market Instruments that are issued by governments or corporations.

Some debt securities pay a fixed rate of interest over a fixed time period in exchange for the use of the principal. In that case, that principal, or par value, is repaid at maturity.

Some are pass-through securities, with principal and interest repaid over the term of the loan. Still, other issues are sold at discount, with interest included in the amount paid at maturity.

Example of debt securities includes:

Debentures
Bonds
Notes
Certificates of deposit (CD)
Commercial paper (CP)
Treasury bills
Mortgage-backed bonds

Question 6.
Write a short note on Fixed Income Products [June 2011 (4 Marks)]
Answer:
Following are the fixed income products:
Deposit: Deposit includes any receipt of money by way of deposit. Deposits serve as a medium of saving and as a means of payment and are a very important variable in the national economy.

A bank basically has three types of deposits:

Time Deposit
Savings Deposit
Current Account

Fixed Deposit: A fixed deposit (FD) is a financial instrument provided by NBFCs and banks that provides investors with a higher rate of interest than a regular savings account, until the given maturity date.

The amount of deposits that may be raised by NBFCs is linked to their net worth and rating. However, the interest rate that may be offered by an NBFC is regulated. The deposits offered by NBFCs are not insured whereas the deposits accepted by most banks are insured up to a maximum of ₹ 1,00,000.

Question 7.
Write a short note on Fixed Income Products [Dec. 2011 (4 Marks)]
Answer:
Following are the fixed income products:
Deposit: Deposit includes any receipt of money by way of deposit. Deposits serve as a medium of saving and as a means of payment and are a very important variable in the national economy.

A bank basically has three types of deposits:

Time Deposit
Savings Deposit
Current Account

Question 8.
Distinguish between: Fixed Coupon Rate & Floating Coupon Rate [June 2012 (3 Marks)]
Answer:
Following are the main points of distinction between fixed coupon & floating coupon rate:

Points	Fixed Coupon Rate	Floating Coupon Rate
Meaning	When a rate is fixed for interest payment of debenture or bond it is known as a fixed coupon rate.	When the rate of interest on debenture or bond is linked with index or benchmark rate it is known as the floating coupon rate.
Security is known as	A bond that has a fixed coupon rate is known as a fixed-rate bond.	A bond that has a floating coupon rate is known as a floating rate bond or variable rate bond or floater.
Benefit	The benefit of owning a fixed-rate bond is that investors know with certainty how much interest they will earn and for how long.	Though such bonds offer protection against future increases in interest rates the investor is not sure about the return they will get on their investments.
Investor	An investor who is willing to take less risk and desire to have constant fixed income on his investment generally invest in fixed-rate bonds.	An investor who is willing to take more risk and desire to have his income similar to the market generally invest in floating-rate bonds.

Question 9.
Explain the financial instrument: Naked debenture[June 2012 (2 Marks)]
Answer:
Naked or Unsecured Debentures: Debentures of this kind do not carry any charge on the assets of the company. The holders of such debentures do not, therefore, have the right to attach particular property by way of security as to repayment of principal or interest and thus called as naked or unsecured debentures.

Question 10.
Write a short note on Fixed Income Products [Dec. 2012 (4 Marks)]
Answer:
Following are the fixed income products:
Deposit: Deposit includes any receipt of money by way of deposit. Deposits serve as the medium of saving and as a means of payment and are a very important variable in the national economy.

A bank basically has three types of deposits:

Time Deposit
Savings Deposit
Current Account

Question 11.
Distinguish between: Debt Market & Equity Market [June 2015 (3 Marks)]
Answer:
Following are the main difference between the debt & equity market:

Points	Debt Market	Equity Market
Meaning	The debt market is the market where debt instruments are traded.	The equity market is the market where equity shares are traded.
Instruments	Debt instruments include debentures, bonds, Notes & Mortgages.	Inequity market equity and preference shares are traded.
Status of holder	Debt instrument holders are creditors of the issuing companies.	Equity holders are the owners of the issuing companies.
Risk	Investments in debt securities typically involve less risk than equity investments.	Investments in equity typically involve more risk than debt investments.
Volatility	The debt market is less volatile.	The equity market is more volatile.
Returns	In the debt market, there is less risk and hence returns are also low.	The equity market is riskier and may offer attractive and higher returns as compared to the debt market.
Income	Income of debt is the market is fixed.	Income in the equity market is variable.

Question 12.
Distinguish between: Fully Convertible Debentures & Partly Convertible Debentures [June 2015 (3 Marks)]
Answer:
Following are the main points of distinctions between fully and partly convertible debentures:

Points	Partly Convertible Debentures	Fully Convertible Debentures
Meaning	When only part of debenture is converted into equity shares they are known as partly convertible debentures.	When the full value of debenture is converted into equity shares they are known as fully convertible debentures.
Suitability	Better suited for companies with an established track record.	Better suited for companies without an established track record
Capital base	Relatively lower equity capital on the conversion of debentures.	Higher equity capital on the conversion of debentures.
Flexibility in financing	Favorable debt-equity ratio.	Highly favorable debt-equity ratio.
Classification for debt-equity ratio	Convertible portion classified as ‘equity’ and non-convertible portion as ‘debt’.	Classified as equity for debt-equity computation.
Popularity	Not so popular with investors.	Highly popular with investors.
Servicing of equity	The relatively lesser burden of equity servicing.	Higher burden of servicing of equity.

Question 13.
What is meant by differential voting rights (DVR)? Discuss the conditions subject to which a company may issue shares with DVR? [Dec. 2012 (4 Marks)]
Answer:
‘Shares with differential voting rights’ means a share issued with the differential right as to dividend, voting, or otherwise in accordance with Section 43(a)(ii).

Conditions for issuing shares with differential rights [Rule 4(1) of the Companies (Share Capital & Debentures) Rules, 2014]: Company limited by shares shall not issue equity shares with differential rights as to dividend, voting, or otherwise, unless it complies with the following conditions, namely:

The AOA authorizes the issue of shares with differential rights.
The issue of shares is authorized by an ordinary resolution passed at a general meeting.

In the case of a listed company, the issue shall be approved by the shareholders through a postal ballot.

The shares with differential rights shall not exceed 26% of the total post-issue paid-up equity share capital including equity shares with differential rights issued at any point in time.
The company should have a consistent track record of distributable profits for the last 3 years.
The company has not defaulted in filing financial statements and annual returns for the last 3 financial years.
The company has no subsisting default in the payment of a declared dividend to its shareholders or repayment of its matured deposits or redemption of its preference shares or debentures that have become due for redemption or payment of interest on such deposits or debentures or payment of dividend.

Company has not defaulted in:

payment of the dividend on preference shares;
repayment of principal or interest on any term loan from a PFI or State Level Financial Institution or Scheduled Bank;
dues with respect to statutory payments relating to its employees to any authority;
crediting the amount in Investor Education & Protection Fund to the Central Government.

However, a company may issue equity shares with differential rights upon expiry of 5 years from the end of the financial year in which such default was made good.

The company has not been penalized by Court or Tribunal during the last 3 years of any offense under the RBI Act, 1934, the SEBI Act, 1992, the Securities Contracts (Regulation) Act, 1956, the FEMA Act, 1999, or any other special Act.

Question 14.
Discuss the conditions subject to which a company may issue shares with differential voting rights. [June 2013 (6 Marks)]
Answer:
‘Shares with differential voting rights’ means a share issued with the differential right as to dividend, voting, or otherwise in accordance with Section 43(a)(ii).

Conditions for issuing shares with differential rights [Rule 4(1) of the Companies (Share Capital & Debentures) Rules, 2014]: Company limited by shares shall not issue equity shares with differential rights as to dividend, voting, or otherwise unless it complies with the following conditions, namely:

The AOA authorizes the issue of shares with differential rights.
The issue of shares is authorized by an ordinary resolution passed at a general meeting.

In the case of a listed company, the issue shall be approved by the shareholders through a postal ballot.

The shares with differential rights shall not exceed 26% of the total post-issue paid-up equity share capital including equity shares with differential rights issued at any point in time.
The company should have a consistent track record of distributable profits for the last 3 years.
The company has not defaulted in filing financial statements and annual returns for the last 3 financial years.
The company has no subsisting default in the payment of a declared dividend to its shareholders or repayment of its matured deposits or redemption of its preference shares or debentures that have become due for redemption or payment of interest on such deposits or debentures or payment of dividend.

The company has not defaulted in

payment of the dividend on preference shares;
repayment of principal or interest on any term loan from a PFI or State Level Financial Institution or Scheduled Bank;
dues with respect to statutory payments relating to its employees to any authority;
crediting the amount in Investor Education & Protection Fund to the Central Government.

However, a company may issue equity shares with differential rights upon expiry of 5 years from the end of the financial year in which such default was made good.

Question 15.
Explain the conditions for the issue of shares with differential voting rights? [June 2015 (4 Marks)]
Answer:
‘Shares with differential voting rights’ means a share issued with the differential right as to dividend, voting, or otherwise in accordance with Section 43(a)(ii).

The AOA authorizes the issue of shares with differential rights.
The issue of shares is authorized by an ordinary resolution passed at a general meeting.

In the case of a listed company, the issue shall be approved by the shareholders through a postal ballot.

The shares with differential rights shall not exceed 26% of the total post-issue paid-up equity share capital including equity shares with differential rights issued at any point in time.
The company should have a consistent track record of distributable profits for the last 3 years.
The company has not defaulted in filing financial statements and annual returns for the last 3 financial years.
The company has no subsisting default in the payment of a declared dividend to its shareholders or repayment of its matured deposits or redemption of its preference shares or debentures that have become due for redemption or payment of interest on such deposits or debentures or payment of dividend.

Company has not defaulted in

payment of the dividend on preference shares;
repayment of principal or interest on any term loan from a PFI or State Level Financial Institution or Scheduled Bank;
dues with respect to statutory payments relating to its employees to any authority;
crediting the amount in Investor Education & Protection Fund to the Central Government.

However, a company may issue equity shares with differential rights upon expiry of 5 years from the end of the financial year in which such default was made good.

Company has not been penalized by Court or Tribunal during the last 3 years of any offense under the RBI Act, 1934, the SEBI Act, 1992, the Securities Contracts (Regulation) Act, 1956, the FEMA Act, 1999, or any other special Act.

Question 16.
Write a short note on Dual Option Warrants [June 2009 (5 Marks)]
Answer:
Equity shares or debentures may be issued with two warrants –
1.one warrant giving the right to the purchaser to be allotted one equity share at the end of a certain period and

2. another warrant gives the right to purchase debt or preference share option. Dual option warrants provide the buyer with good capital appreciation.

Dual option warrants have limited downside risk.
Dual option warrants may be used to sell equity shares in different markets.
Dual option warrants may be used to sell equitY shares in different markets.

Capital Market Instruments – Securities Laws and Capital Markets Important Questions 1

Question 17.
Write a short note on Hybrid Instruments [June 2009 (2 Marks)]
Answer:
Hybrid Instruments: Instruments that are created by combining the features of equity, preference, bond are called hybrid instruments.

Example: Hybrid instruments are:

Convertible preference shares
Non-convertible debentures with equity warrant
Partly convertible debentures
Secured premium notes

Question 18.
Write a short note on Hybrid Instruments [Dec. 2011 (3 Marks)]
Answer:
Hybrid Instruments: Instruments that are created by combining the features of equity, preference, bond are called hybrid instruments.

Example: Hybrid instruments are:

Convertible preference shares
Non-convertible debentures with equity warrant
Partly convertible debentures
Secured premium notes

Question 19.
Explain briefly with reference to capital market: Dual option warrant. [Dec. 2012 (3 Marks)] f
Answer:
Equity shares or debentures may be issued with two warrants
1. one warrant giving the right to the purchaser to be allotted one equity share at the end of a certain period and

2. another warrant gives the right to purchase debt or preference share option. Dual option warrants provide the buyer with good capital appreciation.

Dual option warrants have limited downside risk.
Dual option warrants may be used to sell equity shares in different markets.
Dual option warrants may be used to sell equitY shares in different markets.

Capital Market Instruments – Securities Laws and Capital Markets Important Questions 1

Question 20.
Explain briefly: Share warrants [Dec. 2015 (3 Marks)]
Answer:
A share warrant is a bearer document of title to shares and can be issued only by public limited companies and that against fully paid up shares only.

A share warrant is transferable by mere delivery of the warrants without execution of any written instrument of transfer being registered by the company. The bearer of a share warrant is not a member of the company unless otherwise so provided in the articles of the company.

Question 21.
Write a short note on Foreign Currency Convertible Bond [Dec. 2008 (3Marks)]
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).

Question 22.
Explain the meaning of the following in the context of the international capital market: Global Depository Receipts [Dec. 2009 (3 Marks)]
Answer:
It is a form of a depository receipt created by the Overseas Depository Bank outside India denominated in the dollar and issued to non-resident investors against the issue of ordinary shares or foreign currency convertible bonds of issuing company.

In simple words, GDR is a negotiable instrument denominated in US dollars.
It is traded in Europe or the US or both.

After getting approval from the Ministry of Finance and completing other X formalities, a company issues rupee-denominated shares in the name of de- if position which delivers these shares to its local custodian bank, the holder on records, thus depository.

GDR as defined in Section 2(44) of the Companies Act, 2013: Global Depository Receipt means any instrument in the form of a depository receipt, by whatever name called, created by a foreign depository outside India and authorized by a company making an issue of such depository receipts

As per Section 41 of the Companies Act, 2013, a company may, after passing j a special resolution in its general meeting, issue depository receipts in any foreign country in the prescribed manner, and subject to prescribed conditions.

Listing of GDR: Listing of GDR may take place in international stock exchanges such as London Stock Exchange, New York Stock Exchange, American Stock Exchange, NASDAQ, Luxembourg Stock Exchange, etc.

Question 23.
FCCB and ECB are different modes for raising foreign capital. [Dec. 2011 (3 Marks)]
Answer:
Following are the main points of difference between ECB and FCCB:

Points	External Commercial Borrowings (ECBs)	Foreign Currency Convertible Bonds (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.
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.
How to obtain	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 can be listed at all in the stock exchange.	FCCBs can be listed in the stock exchange after their conversion into shares.

Question 24.
IDR and GDR have distinct features. Comment. [Dec. 2011 (3 Marks)]
Answer:
Following are the main points of difference between GDR & IDR:

Points	GDR	IDR
Meaning	Global Depository Receipt (GDR) means any instrument in the form of a depository receipt, created by a foreign depository outside India and authorized by a company making an issue of such depository receipts.	Indian Depository Receipt (IDR) means any instrument in the form of a depository receipt created by a Domestic Depository in India against the underlying equity shares of a company incorporated outside India.
Denomination	GDR is denominated in foreign currency.	IDR is denominated Indian currency.
Underlying shares	In the case of GDR underlying shares are held by Domestic Custodian Bank (DCB).	In the case of IDR, underlying shares are held by Overseas Custodian Bank (OCB).
Issue of DRS	GDR is issued by Overseas Custodian Bank to foreign investors.	IDR is issued by Domestic Depository to Indian investors.
Rules	GDR is regulated by the Companies (Issue of Global Depository Receipts) Rules, 2014.	IDR is regulated by the Companies (Issue of Indian Depository Receipts) Rules, 2004.
Listing	GDR are listed in foreign countries.	IDR is listed in Indian Stock Exchanges.

Question 25.
Write a short note on Indian Depository Receipts (IDRs) [June 2012 (4 Marks)]
Answer:
Indian Depository Receipt (IDR) means any instrument in the form of a depository receipt created by a Domestic Depository in India against the underlying equity shares of a company incorporated outside India.

Peculiarities of IDR:

IDR is an instrument denominated in Indian Rupees.
IDR is a depository receipt created by a Domestic Depository.
IDR is issued against the underlying equity of foreign companies.
IDR helps foreign companies to raise funds from the Indian securities markets.

Global banking giant Standard Chartered PLC was coming out with the first issue of IDR and listed on the Indian stock exchanges in the year 2010.

Question 26.
Write a short note on Listing of Indian Depository Receipts (IDRs) [Dec. 2012 (4 Marks)]
Answer:
Listing of IDRs [Rule 9 of the Companies (Issue of IDRs) Rules, 2004]: The IDRs shall be listed on the recognized Stock Exchange in India, and g such IDRs may be purchased, possessed, and freely transferred by a person resident in India as defined in Section 2(v) of FEMA, subject to the provisions of the said Act.

Question 27.
“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 Indi a company expressed in foreign currency, and the principal and interest in j 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 I 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 I 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.

Foreign Currency Exchangeable Bonds (FCEB) vs. Foreign Currency Convertible Bonds (FCCB):
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, FCCBs are issued by the investment or holding company of an I 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 are of the operating company which must be a listed company.

Question 28.
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, FCCBs are issued by the investment or holding company of a group to non-residents who are exchangeable for the shares of the specified group company at a predetermined price.

Question 29.
Briefly explain Indian Depository Receipt (IDR) [Dec. 2015 (3 Marks)]
Answer:
Indian Depository Receipt (IDR) means any instrument in the form of an I depository receipt created by Domestic Depository in India against the underlying equity shares of a company incorporated outside India.

Peculiarities of IDR:

IDR is an instrument denominated in Indian Rupees.
IDR is a depository receipt created by a Domestic Depository.
IDR is issued against the underlying equity of foreign companies.
IDR helps foreign companies to raise funds from the Indian securities markets.

Global banking giant Standard Chartered PLC was coming out with the first issue of IDR and listed on the Indian stock exchanges in the year 2010.

Question 30.
Investment in Indian depository receipts (IDRs) is an opportunity for Indian investors to invest funds in foreign equity. [June 2016 (4 Marks)]
Answer:
Indian Depository Receipt (IDR) means any instrument in the form of a depository receipt created by a Domestic Depository in India against the underlying equity shares of a company incorporated outside India.

Peculiarities of IDR:

IDR is an instrument denominated in Indian Rupees.
IDR is a depository receipt created by a Domestic Depository.
IDR is issued against the underlying equity of foreign companies.
IDR helps foreign companies to raise funds from the Indian securities markets.

Global banking giant Standard Chartered PLC was coming out with the first issue of IDR and listed on the Indian stock exchanges in the year 2010.

Benefits of IDRs to the Issuing Company:

It provides access to a large pool of capital to the issuing capita.
It gives brand recognition in India to the issuing company.
It facilitates acquisitions in India.
Provides an exit route for existing shareholders.

Benefits of IDRs to Investors:

It provides portfolio diversification to the investor.
It gives the facility of ease of investment.
There is no need to know your customer norms.
No resident Indian individual can hold more than $ 2,00,000 worth of foreign securities purchased per year as per Indian foreign exchange regulations. However, this will not be applicable for IDRs which gives Indian residents the chance to invest in an Indian listed foreign entity.

Question 31.
“Not only Indian companies are going abroad to raise funds, but foreign companies are also coming to India to raise funds.” Name the instrument(s) through which a foreign company can raise funds in India by issuing its own equity shares. Also, state the eligibility and conditions for the issue of such instrument(s) in India. [Dec. 2016 (8 Marks)]
Answer:
A foreign company can access the Indian securities market for raising funds through the issue of Indian Depository Receipts (IDRs).
[ Indian Depository Receipt (IDR) means any instrument in the form of a depository receipt created by Domestic Depository in India against the underlying | equity shares of a company incorporated outside India.

Eligibility conditions to make an issue of IDRs [Regulation 183 of the SEBI | (ICDR) Regulations, 2018]:
1. An issuer shall be eligible to make an issue of IDRs only if:
(a) The issuing company is listed in its home country for at least 3 immediately preceding years.
(b) The issuer is not prohibited to issue securities by any regulatory body.
(c) The issuer has a track record of compliance with the securities market regulations in its home country.
(d) Any of its promoters or directors is not a fugitive economic offender.

2. The issue shall be subject to the following conditions:
(a) Issue size shall not be less than ₹ 50 Crore.
(b) At any given time, there shall be only one denomination of IDRs of the issuer.
(c) Issuer shall ensure that the underlying equity shares against which IDRs are issued have been or will be listed in its home country before listing of IDRs in the stock exchange(s).
(d) Issuer shall ensure that the underlying shares of IDRs shall rank pari passu with the existing shares of the same class.

3. The issuer shall ensure that:
(a) It has made an application to one or more stock exchanges to seek an in-principle approval for listing of the IDRs on such stock exchanges and has chosen one of them as the designated stock exchange, in terms of Schedule XIX.
(b) It has entered into an agreement with a depository for dematerialization of the IDRs proposed to be issued.
(c) It has made firm arrangements of finance through verifiable means towards 75% of the stated means of finance for the project proposed to be funded from issue proceeds, excluding the amount to be raised through the proposed issue of IDRs or through existing identifiable internal accruals, have been made.

4. The amount for general corporate purposes, as mentioned in objects of the issue in the draft offer document and the offer document, shall not exceed 25% of the amount being raised by the issuer.

Issuance conditions [Regulation 191]: The procedure to be followed by each class of applicant shall be mentioned in the offer document. The minimum application amount shall be ₹ 20,000.

Question 32.
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 33.
Explain: Foreign Currency Convertible Bond (FCCB) [Dec. 2017 (3 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 34.
Explain: Global Depository Receipts [June 2018 (3 Marks)]
Answer:
It is a form of a depository receipt created by the Overseas Depository Bank outside India denominated in the dollar and issued to non-resident investors against the issue of ordinary shares or foreign currency convertible bonds of issuing company.

In simple words, GDR is a negotiable instrument denominated in US dollars.
It is traded in Europe or the US or both.

Listing of GDR: Listing of GDR may take place in international stock exchanges such as London Stock Exchange, New York Stock Exchange, American Stock Exchange, NASDAQ, Luxembourg Stock Exchange, etc.

Question 35.
Indian Companies are allowed to raise equity capital in the international market through the issue of ADR/GDR/FCCB/FCEB. Briefly discuss the regulatory framework of ADR & GDR in India. [June 2018 (5 Marks)]
Answer:
Issue of ADR/GDR/FCCBs/FCEBs is regulated by the following regulations in India:

The Foreign Currency Convertible Bonds & Ordinary Shares (Through Depository Receipt Mechanism) Scheme, 1993
Foreign Currency Exchangeable Bonds Scheme, 2008
Notifications issued by the Ministry of Finance
Circulars issued by the Ministry of Finance
Consolidated FDI Policy
RBI Regulations
RBI Circulars
The Companies Act, 2013
Rules made under the Companies Act, 2013
Listing Agreement

Question 36.
‘Derivative contracts are of various types”. Comment. [Dec. 2011 (3 Marks)]
Answer:
A derivative is a financial contract that derives its value from the l performance of another entity such as an asset, index, or interest rate, called the “underlying”.

Derivatives include a variety of financial contracts, including futures, forwards, swaps, options.

As per Section 2(ac) of the Securities Contracts (Regulation) Act, 1956, ‘derivative’ includes:
(a) A security derived from a debt instrument, share, loan, whether secured | or unsecured, risk instrument or contract for differences or any other: a form of security;

(b) A contract that derives its value from the prices, or index of underlying securities.
In derivatives contracts, the gain of one person results in the loss of another person, so it is also called a zero-sum game.

Question 37.
Write a short note on: ‘Future’ and ‘Options’ [June 2012 (3 Marks)]
Answer:
A futures contract is a contract between two parties to buy or sell an asset at a specified future time at a price agreed upon today. Thus, an instrument that is similar to a forwarding contract but traded and under which no risk of default is called a futures contract.

A futures contract is a standardized contract between two parties where one of the parties commits to sell, a specified quantity of a specified asset at an agreed price on a given date in the future.

An option is a contract that gives the holder the right to purchase or sell the underlying security at a specified price within a specified period of time. Option may be Put Option or Call Option.

Question 38.
Explain: Option Contract [June 2018 (3 Marks)]
Answer:
An option is a contract between two parties under which the buyer of the I option buys the right, and no obligation, to buy or sell a standardized quantity of a financial instrument (underlying asset) at or before a pre-determined date (expiry date) at a price decided in advance (exercise price or strike price). ; Option may be Put Option or Call Option.

1. Call Option: When the option gives the buyer the right to buy is called the call option.
Standardization: The contract is standardized as to quantity, date and month of delivery, and minimum amount by which price would move. Each deal has a market lot.

Thus, if you want to enter into Future Contract in Tata Ltd. stock, you have to buy 100 Tata stock or in multiples thereof.

The date and month of delivery are determined by the exchange. As of now, the exchange has fixed the last Thursday of the month for settlement and delivery.

Deal with clearing house: The clearinghouse plays important role in the trading of futures contracts. It does all back-office operations. More importantly, it guarantees performance. Thus, there is no risk of default.

Mark to market margin: The clearinghouse requires the parties to maintain a deposit (margin) with it. The margin amount changes with the change in daily prices. If the price goes up, the buyer’s margin is reduced and the seller’s margin is increased by an equal amount. If the price goes down, the buyer’s margin is increased and the seller’s margin is reduced by an equal amount.

This is because an increase in price is good for the buyer and bad for the seller while a decrease in price is bad for the buyer and good for the seller. This process is called marking to market. In effect marking to market ensures that the profits and losses are settled on day to day basis.

Question 40.
Jai Ltd. announced the issue of bonus shares in the ratio of 1:3 (i.e. one share for every three shares held). At present the face value share is ₹ 10, the current market price is ₹ 621. In addition, it announced a split of shares by reducing the face value from ₹ 10 to 2. Calculate the share price if all other things remain constant. What would have been the situation if the split would have been done before the issue of bonus shares? [Dec. 2015 (5 Marks)]
Answer:
Calculation of share price after issue of bonus shares (without split):
$\frac{\text { Existing shares } \times \text { Market value }}{\text { Existing shares }+\text { Bonus Shares }}=\frac{3 \times 621}{3+1}$ = 465.75

The company desires to split the shares from 110 to 12 per share i.e. one share will be converted into 5 shares.
Calculation of share price after issue of bonus & split:
No. of shares after split = (Existing shares + bonus shares) × Split ratio
= (3 + 1) × 5
= 20

If split would have been done before tite issue of bonus sitares:
No. of shares after split = Existing shares × Split ratio
= 3 × 5
= 15

Market price after split = $\frac{621 \times 3}{15}$ = 124.2

calculation of share price after- split & issue of bonus shares:
$\frac{\text { Existing shares } \times \text { Market value }}{\text { Existing shares }+\text { Bonus Shares }}=\frac{15 \times 124.2}{15+5}$ = 93.15

Question 41.
Prime Ltd. issued some warrants which allowed the holders to purchase, with one warrant, one equity share at ₹ 18.275 per share. The equity share was quoted at ₹ 25 per share and the warrant was selling at ₹ 9.50. In this case, you are required to compute:
(i) The minimum price of warrant and
(ii) The warrant premium [June 2016 (4 Marks)]
Answer:
The value of the warrant is calculated as follows:

Condition	The minimum value of the warrant
P_s > P_c	(P_s – P_c) × N
P_s ≤ P_c	0

P_s = Current market price for the equity shares
P_c = exercise price of the warrant

N = No. of equity shares per warrant (Generally N = 1)
Thus,
Value of warrant = 25 – 18.275 = 6.725
Warrant premium = 9.50 – 6.725 – 2.775

Question 42.
Does Manish own 250 preference shares of Amaze Ltd. which currently sells for ₹ 77 per share and pays an annual dividend of ₹ 13 per share:
(i) What is Manish’s expected return?
(ii) If Manish requires a 13% return, should he sell or buy more preference shares at the current price? [June 2016 (4 Marks)]
Answer:
Dividend 13
Expected return on preference shares = $\frac{\text { Dividend }}{\text { Market price }}$ × 100 = $\frac{13}{77}$ × 100 = 16.88
The required return of Manish is 13%.
Analysis: Since the expected return is more than the required return, Manish should buy more shares.

Question 43.
Earnings per share of Alexa Piston Ltd. expected at the end of the year 2017-2018 is ₹ 18. The earnings per share in the year 2016-2017 is ₹ 16. The required rate of return is 25% p.a. and the dividend payout ratio is 30% which is expected to remain constant. If the earnings are expected to grow at the historical rate, compute the value of the share of the company at the beginning of 2017-2018. [June 2018 (4 Marks)]
Answer:
Growth Rate = $\frac{18-16}{16}$ × 100 = 12.5%

Dividend at the end of year 1 = D1 = 18 × 30% = 5.4 per share
Market price = $\frac{\mathrm{D}_{1}}{\mathrm{~K}_{\mathrm{e}}-\mathrm{g}}$
= $\frac{5.4}{0.25-0.125}$
= 43.2

Question 44.
Narender purchased a bond with a face value of ₹ 1,000 for ₹ 950. The coupon rate on the bond is 12%. If he sells the bond one year later for ₹ 960. Compute the holding period return for the Narender. [June 2018 (4 Marks)]
Answer:
Return = $\frac{\left(P_{1}-P_{0}\right)+I}{P_{0}}$ × 100
Where,
R = Return
P₁ = Market price at the end of the period
P₀ = Market price at the beginning of the period
I = Interest

Return = $\frac{(960-950)+120}{950}$ × 100 = 13.68%

Question 45.
Blue Line Shoe Company is contemplating a debenture issue on the following terms:
Face value : ₹ 1,000
Terms to maturity: 7 years Coupon rate of interest Year 1 – 2: 10%p.a.
Year 3-4 : 12% p.a.
Year 5-7 : 15% p.a.
The current market rate of interest on similar debentures is 15% p.a. The company proposes to price the issue so as to yield a (compounded) return of 16% p.a. to the investors. The debentures would be redeemed at a premium of 12% at the end of 7 years. Compute the maturity price of the debentures. [June 2018 (4 Marks)] |
Answer:
Capital Market Instruments – Securities Laws and Capital Markets Important Questions 2

Question 46.
Naman had executed the following trades on Gama Ltd. stock:
(I) Purchased one 3-month call option with a premium of 25 at an exercise price of 530.
(ii) Purchased one 3-month put option with a premium of 5 at an exercise price of 430.
The lot size is loo shares per lot and the current price of Gama Ltd. stock is 500. Determine Naman’s profit or loss, if the price of Gama Ltd. stock after 3 months is:
(a) 500
(b) 350. [Dec. 2018 (5 Marks)]
Answer:
Capital Market Instruments – Securities Laws and Capital Markets Important Questions 3

The explanation for solving the above problem:
Call option buys: Buying a call option is right to buy the underlying asset at the exercise price on a future date. The call option will be exercised by the buyer of the option when the spot price is more than the exercise price.

Example: If you buy a call option at an exercise price of 1200 by paying a premium of ₹ 10, it means you have the right to buy at ₹ 200 irrespective prices of the underlying share. Suppose the price of a share in the spot market goes up to ₹ 250, you will exercise your option to buy the underlying share at ₹ 200 and thus get the benefit of ₹ 50 and after deducting premium of ₹ 10 your net benefit will be ₹ 40.

On the other hand, if the price of a share in the spot market falls to ₹ 150, then it is beneficial to buy a share in the spot market and you will lap your option. The only loss to you is the premium you have paid ie. ₹ 10.

Thus, a person will normally buy a call option when he anticipates that prices of shares will increase in the future.

Put option buys: Buying a put option is ‘right to sell the underlying asset at the exercise price on a future date.

In ‘put option bought’ we buy the right to sale at exercise price underlying asset on a future date. Thus, the person who sale the put option is a buyer of the option. He buys the ‘right to sale’ by paying a premium.

A put option will be exercised by the buyer of the option when the spot price (market price) is less than the exercise price. Thus, a person will normally buy a put option w7hen he anticipates that prices of shares will fall in the future.

Question 47.
From the following information, calculate the Enterprise Value of E Ltd.: Balance Sheet of E Ltd. as of 31st March 2018
Capital Market Instruments – Securities Laws and Capital Markets Important Questions 5
Answer:
The enterprise value of a company can be ideally defined as an amount that represents the entire cost of the company in case some investor intends to acquire 100% of it. The formula for enterprise value is computed by adding the company’s market capitalization, preferred stock, outstanding debt, and minority interest together, and then deducting the cash and cash equivalents j obtained from the balance sheet. The cash and cash equivalents are deducted from the enterprise value since post-acquisition of the complete ownership of j the company, the cash balance basically belongs to the new owner.

Mathematically, it is represented as,
Enterprise Value Formula = Market Capitalization + Preferred stock + Outstanding Debt + Minority Interest – Cash & Cash Equivalents
Market Capitalization = 952/2 × 96 = 45,696
Outstanding Debt = 2,860
Minority Interest =115
Cash & Cash Equivalents = 102
Enterprise Value = 45,696 + 2,860 + 115 – 102 = 48,569 lakh.

Question 48.
What are the Option contracts? You are required to compute the profit/ loss for each investor in the below option contracts:
(i) Mr. X writes a call option to purchase a share at an exercise price of ₹ 60 for a premium of 112 per share. The share price rises to ₹ 62 by the time the option expires.
(ii) Mr. Y buys a put option at an exercise price of ₹ 80 for a premium of ₹ 8.50 per share. The share price falls to ₹ 60 by the time the option expires.
(iii) Mr. Z writes a put option at an exercise price of ₹ 80 for a premium of ₹ 11 per share. The price of the share rises to ₹ 96 by the time the option expires.
(iv) Mr. XY writes a put option with an exercise price of ₹ 70 for a premium of ₹ 8 per share. The price falls to ₹ 48 by the time the option expires.
Answer:
An option is a contract between two parties under which the buyer of the option buys the right, and no obligation, to buy or sell a standardized quantity of a financial instrument (underlying asset) at or before a pre-determined date (expiry date) at a price decided in advance (exercise price or strike price). Option may be Put Option or Call Option.

Call Option: When the option gives the buyer the right to buy is called the call option.
Put Option: When the option gives the buyer the right to sell is called the put option.

	Buyer of option	Seller of option
Call option	Right to buy	Obligation to sell
Put option	Right to sell	Obligation to buy

(i) Mr. X sales/writes call option:
Capital Market Instruments – Securities Laws and Capital Markets Important Questions 6
(ii) Mr. Y buys put option:

(iii) Mr. Z sales/writes put option:

(iv) Mr. XY sales/writes put option:

The explanation for solving the above problem:
Buying call option: Buying a call option is the right to buy the underlying asset at the exercise price on a future date. The call option will be exercised by the buyer of the option when the spot price is more than the exercise price.

Example: If you buy a call option at an exercise price of ₹ 200 by paying a premium of ₹ 10, it means you have the right to buy at ₹ 200 irrespective prices of the underlying share. Suppose the price of a share in the spot market goes up to ₹ 250, you will exercise your option to buy the underlying share at ₹ 200 and thus get the benefit of ₹ 50 and after deducting premium of ₹ 10 your net benefit will be ₹ 40.

Thus, a person will normally buy a call option when he anticipates that prices of shares will increase in the future.

Selling call option: Selling/writing a call option is an ‘obligation to sell’ at the exercise price on a future date. As we have obligation to sell at the exercise price, the buyer of the option will exercise the option when the price is more than the exercise price. (Remember it is a buyer who will always exercise the option, as a seller of the option you can not exercise the option as you have obligation to sell and not right to sell)

Example: If you sell a call option at an exercise price of ₹ 200 by receiving a premium of ₹ 10, it means you take the obligation to sell at ₹ 200 irrespective prices of the underlying share. So whether the price moves upward or downward you made fix income of ₹ 10.

Suppose the price of a share in the spot market goes up to ₹ 250, the buyer of the option will exercise the option to buy the underlying share at ₹ 200 and as you have obligation to sell at ₹ 200 you will have to sell it at ₹ 200. Thus, you lose ₹ 50 and after setting off the premium that you have received of ₹ 10 your net loss will be ₹ 40.

On the other hand, if the price of a share in the spot market falls to ₹ 150, then the buyer of the option will not exercise his option as it will be beneficial for him to purchase the share from the spot instead of purchasing from you at ₹ 200. Thus, he will lapse his option and you will not incur any loss on this transaction. But you make a profit of ₹ 10, the premium you already received.

Thus, as the seller of a call option, we will incur a loss if the price rises above the exercise price. But for selling an option we will receive a premium and that is our gain. If the price falls the buyer will not exercise the option and the premium received by you will be gain in the contract.

Buying a put option: Buying a put option is the ‘right to sell’ underlying asset at the exercise price on a future date.
In ‘put option bought’ we buy the right to sale at exercise price underlying asset on a future date. Thus, a person who sale the put option is the buyer of the option. He buys the ‘right I to sale’ by paying a premium.

A put option will be exercised by the buyer of the option when the spot price is less than the exercise price. Thus, a person will normally buy a put option when he anticipates that prices of shares will fall in the future. But as the future is uncertain price may increase also.

Selling a put option: Selling/writing a put option is an obligation to buy the underlying asset at the exercise price on a future date.

In ‘put option sold’ we sell the obligation to ‘buy at exercise price’ underlying asset on a future date. Thus, the person who sale the put option is the seller of the option. He sells the ‘obligation to buy’ by receiving a premium.

As we have obligation to buy at the exercise price, the buyer of the option will exercise the option when the price is less than the exercise price. (Remember it is a buyer who will always exercise the option, as a seller of option we cannot exercise the option as we have obligation to buy and not the right to buy)

Thus, as a seller of the option, we will incur a loss as the price falls below the exercise price. But for selling an option we will receive a premium and that is our gain. If the price increase the buyer will not exercise the option and the premium received by you will be gain in the contract.

The above discussion is given for the understanding of the students as to how ‘option contracts’ are traded. It is not part of the answer.

Securities Laws and Capital Markets Questions and Answers

Prevention of Money Laundering Act, 2002 – Economic, Business and Commercial Laws Important Questions

Leave a Comment / CS Executive / By Murali / March 31, 2024 April 3, 2024

Prevention of Money Laundering Act, 2002 – Economic, Business and Commercial Laws Important Questions

Question 1.
Write a short note on the Process of money laundering [Dec 2010 (5 Marks)]
Answer:
Money laundering is commonly defined as happening in three steps: the first step involves introducing cash into the financial system by some means (placement); The second involves carrying out complex financial transactions to camouflage the illegal source (layering), and the final step entails acquiring wealth generated from the transactions of the illicit funds (integration).

1. Placement Stage: The placement stage represents the initial entry of the “dirty” cash or proceeds of crime into the financial system. Generally, this stage serves two purposes:

It relieves the criminal of holding and guarding large amounts of bulky cash; and
It places the money into the legitimate financial system.
It is during the placement stage that money launderers are the most vulnerable to being caught.

2. Layering Stage: The layering stage is the most complex and often entails the international movement of funds. The primary purpose of this stage is to separate illicit money from its source. This is done by the sophisticated layering of financial transactions that obscure the audit trail and sever the link with the original crime.

During this stage, for example, the money launderers may begin by moving funds electronically from one country to another, then divide them into investments placed in advanced financial options or overseas markets; constantly moving them to elude detection; each time, exploiting loopholes or discrepancies in legislation and taking advantage of delays in judicial or police co-operation.

3. Integration Stage: In the final stage, the money is returned to the criminal from what seem to be legitimate sources. Having been placed initially as cash and layered through a number of financial transactions, the criminal proceeds are now fully integrated into the financial system and can be used for any purpose.

There are many different ways in which the laundered money can be integrated back with the criminal; however, the major objective at this stage is to reunite the money in a manner that does not draw attention and appears to result from a legitimate source. For example, the purchases of property, artwork, jewellery, or high-end automobiles are common ways for the launderer to enjoy their illegal profits.

Question 2.
Write a short note on the Process of money laundering. [Dec. 2013 (5 Marks)]
Answer:
Money laundering is commonly defined as happening in three steps: the first step involves introducing cash into the financial system by some means (placement); The second involves carrying out complex financial transactions to camouflage the illegal source (layering), and the final step entails acquiring wealth generated from the transactions of the illicit funds (integration).

1. Placement Stage: The placement stage represents the initial entry of the “dirty” cash or proceeds of crime into the financial system. Generally, this stage serves two purposes:

It relieves the criminal of holding and guarding large amounts of bulky cash; and
It places the money into the legitimate financial system.
It is during the placement stage that money launderers are the most vulnerable to being caught.

Question 3.
“Despite the deleterious impact of money laundering on development, it has, of late, assumed alarming proportions and its growth has been 4, cancerous.” Discuss. [June 2011 (5 Marks)]
Answer:
Economies with growing or developing financial centres, but inadequate controls are particularly vulnerable to money laundering, as against ¥ the established financial centre countries, which implement comprehensive anti-money laundering regimes. The gaps in a national anti-money laundering system are exploited by launderers, who tend to move their networks to countries and financial systems with weak or ineffective countermeasures. As with the damaged integrity of an individual financial institution, there is a damping effect on foreign direct investment when a country’s commercial and financial sectors are perceived to be subject to the control and influence of organized crime.

In times of decelerating growth, an infusion of hard currency can bolster a country’s foreign reserves; ease the hardship associated with budget tightening policies and moderate foreign indebtedness. While these are short-term benefits associated with an inflow of criminal monies, the long-term effects are mostly negative. One difference between official borrowing and laundered funds is that the former can be controlled by Government, whereas the funds owned by criminals escape the Government’s ability to control and regulate the economy.

The possible social, economic and political effects of money laundering, if left unchecked or dealt with ineffectively, are serious. Through the process of money laundering, organized crime can infiltrate financial institutions, acquire control of large sectors of the economy through investment, or offer bribes to public officials and indeed governments. Thus, the economic and political influence of criminal organizations can weaken the social fabric, ethical standards and ultimately the democratic institutions of society.

Question 4.
Discuss in brief the objectives and scope of the Money Laundering Act, 2002. [June 2014 (5 Marks)]
Answer:
The Money Laundering Act, 2002 seeks to combat money laundering in India and following main objectives:

To prevent and control money laundering.
To confiscate and seize the property derived from, or involved in, money laundering.
To provide punishment for the offence of money laundering.
To appoint the Adjudicating Authority and Appellate Tribunal to deal with the matter connected with money laundering.
To put obligations on banking companies, financial institutions and intermediaries to maintain records.
To deal with any other issue connected with money laundering in India.

Scope: The Money Laundering Act, 2002 extends to the whole of India.

Question 5.
“The problem of money laundering is no longer restricted to the geopolitical boundaries of any country. It is a menace that cannot be contained by any nation alone.” Discuss this statement in the context of the impact of money laundering on development, various global initiatives on the prevention of money laundering and the enactment of the Prevention of Money Laundering Act, 2002. [June 2015 (8 Marks)]
Answer:
Since money laundering is an international phenomenon, transnational cooperation is of critical importance in the fight against this menace.

A number of initiatives have been taken to deal with the problem at the international level which is given below:

The UN or the Bank for International Settlements took some initiatives in the 1980s to address the problem of money laundering.
With the creation of the Financial Action Task Force (FATF) in 1989, regional groupings, such as the European Union, Council of Europe, and organization of American States also established anti-money laundering standards for their member countries.
The major international agreements addressing money laundering include the UN Convention against Illicit Trafficking in Drugs and Psychotropic Substances (the Vienna Convention) and the Council of Europe Convention on Laundering, Search, Seizure and Confiscation of the Proceeds of Crime.
The role of financial institutions in preventing and detecting money laundering has also been the subject of pronouncements by the Basel Committee on Banking Regulation Supervisory Practices, the European Union and the International Organization of Securities Commissions.

UN global programme against money laundering: Office of the Drug Control and Crime Prevention implement this programme against Money Laundering with a view to increasing the effectiveness of international action against money laundering through comprehensive technical co-operation services offered to Governments.

The programme encompasses the following three areas of activities, providing various means to states and institutions in their efforts to effectively combat money laundering:

Technical co-operation is the main task of the programme. It encompasses activities of creating awareness, institution building and training.
The research and analysis aimed at offering States Key Information to better understand the phenomenon of money laundering and to enable the international community to devise more efficient and effective countermeasure strategies.
The commitment to support the establishment of financial investigation services for raising the overall effectiveness of law enforcement measures.

The implementation of the global programme against money laundering is carried out in the spirit of cooperation with other international, regional and national organizations and institutions.

Question 6.
Define the term ‘money laundering. How does it impact the development of a growing economy? [Dec 2015 (7 Marks)]
Answer:
Meaning of Money Laundering:
(a) Money and crime are related to each other. Crimes are done because a lot of money involved in it. Money created by crimes when converted into white money is known as money laundering.

(b) In simple words, money laundering allows criminals to transform illegally obtained gain into seemingly legitimate funds.

(c) Section 3 of the Act states that whosoever directly or indirectly attempts to indulge or knowingly assists or knowingly is a party or actually involved in any process or activity connected with the proceeds of crime including its concealment, possession, acquisition or use and projecting or claiming it is an untainted property shall be guilty of the offence of money laundering.

(d) Criminals want their illegal funds laundered because they can then move their money through society freely, without fear that the funds will be traced to their criminal deeds. In addition, laundering prevents the funds from being confiscated by the police.

The impact of money laundering on development is given below:

Increased Crime & Corruption:
Damaged reputation and international consequences:
Weakened Financial Institutions:
Compromised economy and private sector:
Damaged privatization efforts:
Infiltrate financial institution
Acquire control over large sectors of the economy through investment
Weaken the social fabric, ethic standards and ultimately democratic institution of society.

Question 7.
Write a short note on the Process of money laundering. [Dec 2016 (5 Marks)]
Answer:
Money laundering is commonly defined as happening in three steps: the first step involves introducing cash into the financial system by some means (placement); The second involves carrying out complex financial transactions to camouflage the illegal source (layering), and the final step entails acquiring wealth generated from the transactions of the illicit funds (integration).

1. Placement Stage: The placement stage represents the initial entry of the “dirty” cash or proceeds of crime into the financial system. Generally, this stage serves two purposes:

It relieves the criminal of holding and guarding large amounts of bulky cash; and
It places the money into the legitimate financial system.
It is during the placement stage that money launderers are the most vulnerable to being caught.

Question 8.
Discuss the objectives and functions of the Financial Action Task v Force (FATF). [Dec 2016 (5 Marks)] f
Answer:
(a) The Financial Action Task Force is an inter-governmental organization founded in 1989 on the initiative of the G7 countries to develop policies to combat money laundering.

(b) Objective: The objectives of the FATF are to set standards and promote effective implementation of legal, regulatory and operational measures for combating money laundering, terrorist financing and other related threats to the integrity of the international financial system

(d) Functions: The main tasks of the FATF are:

Monitoring members progress in applying measures to counter money laundering.
Reviewing money laundering techniques and countermeasures.
Promoting the adoption and implementation of appropriate measures by non-member countries.

(e) Recommendations: The FATF’s primary policies issued are the 40 recommendations on money laundering from 1990 and the 9 Special Recommendations on Terrorism Financing. Both sets of FATF Recommendations are intended to be implemented at the national level through legislation and other legally binding measures

(f) International Standard: It also set the international standard for anti-money laundering measures and combating the financing of terrorism and terrorist acts.

(g) They set out the principles for action and allow countries a measure of flexibility in implementing these principles according to their particular circumstances and constitutional frameworks.

Question 9.
What do you understand by the term “Money laundering” under the Prevention of Money Laundering Act, 2002? [Dec. 2018 (3 Marks)]
Answer:
Money laundering is commonly defined as happening in three steps: the first step involves introducing cash into the financial system by some means (placement); The second involves carrying out complex financial transactions to camouflage the illegal source (layering), and the final step entails acquiring wealth generated from the transactions of the illicit funds (integration).

1. Placement Stage: The placement stage represents the initial entry of the “dirty” cash or proceeds of crime into the financial system. Generally, this stage serves two purposes:

It relieves the criminal of holding and guarding large amounts of bulky cash; and
It places the money into the legitimate financial system.
It is during the placement stage that money launderers are the most vulnerable to being caught.

Question 10.
What are the effects of Money laundering on the economic development of a country? [June 2019 (3 Marks)]
Answer:
Meaning of Money Laundering:
(a) Money and crime are related to each other. Crimes are done because a lot of money involved in it. Money created by crimes when converted into white money is known as money laundering.

(b) In simple words, money laundering allows criminals to transform illegally obtained gain into seemingly legitimate funds.

The impact of money laundering on development is given below:

Increased Crime & Corruption:
Damaged reputation and international consequences:
Weakened Financial Institutions:
Compromised economy and private sector:
Damaged privatization efforts:
Infiltrate financial institution
Acquire control over large sectors of the economy through investment
Weaken the social fabric, ethic standards and ultimately democratic institution of society.

Question 11.
What do you understand by ‘offence of money laundering under the Prevention of Money Laundering Act, 2002? Also, state the punishment for the money-laundering offence.
Answer:
The offence of money laundering [Section 3]: Whosoever directly or indirectly attempts to indulge or knowingly assists or knowingly is a party or is actually involved in any process or activity connected proceeds of crime including its concealment, possession, acquisition or use and projecting or claiming it as untainted property shall be guilty of the offence of money-laundering.

Punishment for money laundering [Section 4]: Whoever commits the offence of money-laundering shall be punishable with rigorous imprisonment for 3 years which may extend to 7 years and shall also be liable to fine.

Where the proceeds of crime involved in money laundering related to the offence specified under Paragraph 2 of Part A of the Schedule, imprisonment may extend to 10 years instead of 7 years.

Question 12.
How the property involved in money laundering is dealt with under the Prevention of Money Laundering Act, 2002? [Dec. 2010 (5 Marks)]
Answer:
(a) Attachment of property involved in money-laundering [Section 5]: Director, Joint Director or Deputy Director can provisionally attach property up to 180 days, if he has reasons to believe that such person is in possession of proceeds of crime, he is charged with that crime and proceeds of money are likely to be concealed or transferred.

(b) Execution of attached Such attachment is executed in the manner provided in the Second Schedule of the Income-tax Act, 1961.

(d) Sealed Cover: The reason should be sent in a sealed cover to adjudicating authority along with a copy of the attachment order.

(e) Complaint with adjudicating authority: After attachment, a complaint will be filed with adjudicating authority within 30 days.

Question 13.
How the attachment of property is executed under the Prevention of Money Laundering Act, 2002? [June 2017 (5 Marks)]
Answer:
Money laundering is commonly defined as happening in three steps: the first step involves introducing cash into the financial system by some means (placement); The second involves carrying out complex financial transactions to camouflage the illegal source (layering), and the final step entails acquiring wealth generated from the transactions of the illicit funds (integration).

1. Placement Stage: The placement stage represents the initial entry of the “dirty” cash or proceeds of crime into the financial system. Generally, this stage serves two purposes:

It relieves the criminal of holding and guarding large amounts of bulky cash; and
It places the money into the legitimate financial system.
It is during the placement stage that money launderers are the most vulnerable to being caught.

Question 14.
Mention the obligation of banking companies, financial institutions and intermediaries under the Prevention of Money Laundering Act, i 2002? [Dec 2011 (5 Marks)]
Answer:
The following are the obligation under the Prevention of Money-laundering Act, 2002:
(a) Reporting entity to maintain records [Section 12]: The bank, financial institutions and intermediary has obligations

To maintain records of all transactions and value as prescribed, whether such transactions comprise of a single transaction or a series of transactions internally connected to each other when such series take place within a month.
To inform the director within the prescribed time.
To verify the identity of its clients in the prescribed manner.
To maintain a record of documents evidencing the identity of its clients and beneficial owners as well as account files and business correspondence relating to its clients.

(b) Confidentiality: All information maintained, furnished or verified as above shall be kept confidential.
(c) Preserve Record: The records mentioned above shall be maintained for 5 years from the date of transaction.
The Central Government has the power to exempt any reporting entity from the provisions of this section.

(d) To furnish information whenever called upon by Director to [Section 13]: Director can call the records from the bank, financial institutions and intermediary. If the Director finds that the bank, financial institutions and intermediary have not complied with the provisions of Section 12, he can impose a fine of ₹ 10,000 to ₹ 1,00,000.

If the bank, financial institutions and intermediary supplies the information, no civil proceedings can be taken against them for furnishing information to Authority. [Section 14]

Procedure and manner of furnishing information by reporting entities [Section 15]: The Central Government in consultation with the RBI may prescribe the procedure and the manner of maintaining and furnishing information by a reporting entity for the purpose of implementing the provisions of the Act.

Question 15.
What is meant by ‘money laundering’? Mention the provisions of the Prevention of Money Laundering Act, 2002 regarding the obligations of banking companies, financial institutions and intermediaries. [June 2016 (5 Marks)]
Answer:
Money laundering is commonly defined as happening in three steps: the first step involves introducing cash into the financial system by some means (placement); The second involves carrying out complex financial transactions to camouflage the illegal source (layering), and the final step entails acquiring wealth generated from the transactions of the illicit funds (integration).

1. Placement Stage: The placement stage represents the initial entry of the “dirty” cash or proceeds of crime into the financial system. Generally, this stage serves two purposes:

It relieves the criminal of holding and guarding large amounts of bulky cash; and
It places the money into the legitimate financial system.
It is during the placement stage that money launderers are the most vulnerable to being caught.

2. Layering Stage: The layering stage is the most complex and often entails the international movement of the funds. The primary purpose of this stage is to separate illicit money from its source. This is done by the sophisticated layering of financial transactions that obscure the audit trail and sever the link with the original crime.

The following are the obligation under the Prevention of Money-laundering Act, 2002:
(a) Reporting entity to maintain records [Section 12]: The bank, financial institutions and intermediary has obligations

To maintain records of all transactions and value as prescribed, whether such transactions comprise of a single transaction or a series of transactions internally connected to each other when such series take place within a month.
To inform the director within the prescribed time.
To verify the identity of its clients in the prescribed manner.
To maintain a record of documents evidencing the identity of its clients and beneficial owners as well as account files and business correspondence relating to its clients.

(b) Confidentiality: All information maintained, furnished or verified as above shall be kept confidential.

(c) Preserve Record: The records mentioned above shall be maintained for 5 years from the date of transaction.
The Central Government has the power to exempt any reporting entity from the provisions of this section.

If the bank, financial institutions and intermediary supplies the information, no civil proceedings can be taken against them for furnishing information to Authority. [Section 14]

Question 16.
What information is required to be preserved by Banks under the Prevention of Money Laundering Act, 2002? Discuss also the process of maintenance and preservation of records by Banks. [Dec 2017 (5 Marks)]
Answer:
The following are the obligation under the Prevention of Money-laundering Act, 2002:
(a) Reporting entity to maintain records [Section 12]: The bank, financial institutions and intermediary has obligations

To maintain records of all transactions and value as prescribed, whether such transactions comprise of a single transaction or a series of transactions internally connected to each other when such series take place within a month.
To inform the director within the prescribed time.
To verify the identity of its clients in a prescribed manner.
To maintain a record of documents evidencing the identity of its clients and beneficial owners as well as account files and business correspondence relating to its clients.

(b) Confidentiality: All information maintained, furnished or verified as above shall be kept confidential.

If the bank, financial institutions and intermediary supplies the information, no civil proceedings can be taken against them for furnishing information to Authority. [Section 14]

Question 17.
Is the offence committed under the Prevention of Money Laundering Act, 2002 is cognizable and bailable? State the law and procedure relating to it. [Dec 2017 (5 Marks)]
Answer:
Offences to be cognizable and non-bailable [Section 45]:
(a) Cognizable: Every offence punishable under the Act to be cognizable.

(b) No Bail: A person accused of an offence shall not be released on bail or on bond

(c) Public Prosecutor: The Public Prosecutor has been given an opportunity to oppose the application for such release.
If the Public Prosecutor opposes the application then bail can be granted only when Court is satisfied that there are reasonable grounds for believing that he is not guilty of an offence and that he is not likely to commit any offence while on bail.

(d) Exception: A person, who, is under the age of 16 years, or is a woman or is sick or infirm, or is accused either on his own or along with other co-accused of money-laundering a sum of less than ₹ 1 Crore may be released on bail if the Special Court so directs.

(e) Compliant is made in writing: The Special Court shall not take cognizance of any offence punishable u/s 4, except upon a complaint in I writing made by the Director or any officer of the Central or State | Government authorized by a general or special order.

(f) No authority to police officer: No police officer shall investigate an offence under the Act, unless specifically authorized, by the Central Government by a general or special order.

Question 18.
What is the objective of ‘know your customer (KYC) guidelines? When do the KYC guidelines apply? [Dec 2009 (5 Marks)]
Answer:
(a) The objective of KYC guidelines is to prevent banks from being used, intentionally or unintentionally, by criminal elements for money laundering activities. KYC procedures also enable banks to know/understand their customers and their financial dealings better which in turn help them manage their risks prudently.

(b) Every bank whether a co-operative, private or nationalized bank, NBFC’s, housing financial institution, chit fund company etc need to comply with KYC. Intermediaries also need to maintain KYC like stockbrokers, sub-broker, share transfer agent, banker to an issue, trustee to trust deed, merchant banker, underwriter, portfolio manager, investment advisor etc.

Customer Acceptance Policy
Customer Identification Procedures
Monitoring of Transactions and
Risk management.

Question 19.
What are the essential elements of KYC guidelines? [Dec 2014 (3 Marks)]
Answer:
(a) The objective of KYC guidelines is to prevent banks from being used, intentionally or unintentionally, by criminal elements for money laundering activities. KYC procedures also enable banks to know/understand their customers and their financial dealings better which in turn help them manage their risks prudently.

Customer Acceptance Policy
Customer Identification Procedures
Monitoring of Transactions and
Risk management.

Question 20.
State the obligation of banks on KYG policy as per guidelines issued by the Reserve Bank of India. [June 2017 (5 Marks)]
Answer:
The objective of Know Your Customer (KYC) Norms /Anti-Money Laundering (AML) Measures/Combating of Financing of Terrorism (CFT) guidelines is to prevent banks from being used, intentionally or unintentionally, by criminal elements for money laundering or terrorist financing activities. KYC procedures also enable banks to know/understand their customers and their financial dealings better which in turn help them manage their risks prudently.

The obligation of Banks:
Banks should keep in mind that the information collected from the customer for the purpose of opening of account is to be treated as confidential and details thereof are not to be divulged for cross-selling or any other purposes. Banks should, therefore, ensure that information sought from the customer is relevant to the perceived risk, is not intrusive, and is in conformity with the guidelines issued in this regard. Any other information from the customer should be sought separately with his/her consent and after opening the account.

Banks should ensure that any remittance of funds by way of demand draft, mail/telegraphic transfer or any other mode and issue of traveller’s cheques for the value of ₹ 50,000 and above is effected by debit to the customer’s account or against cheques and not against cash payment. Banks should ensure that the provisions of the Foreign Contribution (Regulation) Act, 1976 as amended from time to time, wherever applicable are strictly adhered to

The bank should maintain and preserve records and information
(a) Records relating to the identification of customer and address
(b) Nature of Transaction
(c) Amount of transaction
(d) Date of Transaction
(e) Parties to a transaction

Question 21.
What do you mean by the KYC guidelines as given under the Prevention of Money-laundering Act, 2002? [Dec. 2019 (3 Marks each)]
Answer:
(a) The objective of KYC guidelines is to prevent banks from being used, intentionally or unintentionally, by criminal elements for money laundering activities. KYC procedures also enable banks to know/understand their customers and their financial dealings better which in turn help them manage their risks prudently.

Customer Acceptance Policy
Customer Identification Procedures
Monitoring of Transactions and
Risk management.

Question 22.
What are the provisions (or freezing of assets under Section 51A of the Unlawful Activities (Prevention) Act, 1967? Briefly discuss. [June 2018 (5 Marks)]
Answer:
Central Government has issued an Order detailing the procedure for implementation of Section 51A of the Unlawful Activities (Prevention) Act, 1967 relating to the purposes of prevention of, and for coping with terrorist activities.

Certain powers of the Central Government [Section 51A of the Unlawful Activities (Prevention) Act, 1967]: For the prevention of, and for coping with terrorist activities, the Central Government shall have power to:

Freeze, seize or attach funds and other financial assets or economic resources held by, on behalf of or at the direction of the individuals or entities listed in the Schedule to the Order, or any other person engaged in or suspected to be engaged in terrorism.
Prohibit any individual or entity from making any funds, financial assets or economic resources or related services available for the benefit of the individuals or entities listed in the Schedule to the Order or any other person engaged in or suspected to be engaged in terrorism.
Prevent the entry into or the transit through India of individuals listed in the Schedule to the Order or any other person engaged in or suspected to be engaged in terrorism.

Economic, Business and Commercial Laws Questions and Answers

SEBI (Buy-Back of Securities) Regulations, 2018 – Securities Laws and Capital Markets Important Questions

Leave a Comment / CS Executive / By Murali / March 31, 2024 April 3, 2024

SEBI (Buy-Back of Securities) Regulations, 2018 – Securities Laws and Capital Markets Important Questions

Question 1.
State the conditions which are required to be satisfied by a company for the purpose of buy-back of shares under the Companies Act, 2013. [Dec 2009 (10 Marks)], [Dec 2010 (8 Marks)]
Answer:
Conditions for buy-back of shares: No company shall purchase its own shares or other specified securities, unless

The buy-back is authorized by its articles.
A special resolution has been passed at a general meeting of the company authorizing the buy-back where buy-back is above 10% but up to 25% of the aggregate of paid-up capital and free reserves of the company.

However, for buy-back up to 10% of paid-up capital and free reserves of the company Board resolution is sufficient.

In respect of the buy-back of equity shares in any financial year, the reference to 25% shall be construed with respect to its total paid-up equity capital that financial year.

The ratio of the aggregate of secured and unsecured debts owed by the company after buy-back is not more than twice the paid-up capital and its free reserves ie. to say –
$\frac{\text { Secured + Unsecured Debts }}{\text { Paid-up Capital + Free Reserves }}$ < 2

The Central Government may, by order, notify a higher ratio of the debt to capital and free reserves for a class or classes of companies.

All the shares or other specified securities for buy-back are fully paid up.
The buy-back of the shares or other specified securities listed on any recognized stock exchange is in accordance with the SEBI (Buy-Back of Securities) Regulations, 2018.
The buy-back in respect of shares or other specified securities for unlisted public companies and private companies is in accordance with the Companies (Share Capital & Debentures) Rules, 2014.
No offer of buy-back shall be made within a period of 1 year reckoned from the date of the closure of the preceding offer of buy-back if any. (in simple words, there should be a gap of 1 year between two buybacks)

Question 2.
It is a well-known fact that to maximize the shareholder’s value, a company having surplus funds often induced to buy back its own shares. What are common reasons which usually induce a company to resort to buy-back? [June 2011 (5 Marks)]
Answer:
Good corporate governance calls for maximizing shareholder value. When a company has surplus funds for which it does not have good avenues for deployment assuring an average return on capital employed and earnings per share, the company’s financial structure requires balancing.

The reasons/objectives for buy-back may be one or more of the following:

To improve earnings per share (EPS).
To improve return on capital, return on net worth, and to enhance the long-term shareholder value.
To provide an additional exit route to shareholders when shares are undervalued or are thinly traded.
To enhance consolidation of stake in the company.
To prevent unwelcome takeover bids.
To return surplus cash to shareholders.
To achieve optimum capital structure.
To support share price during periods of sluggish market conditions.
To service the equity more efficiently.

The decision to buy back is also influenced by various other factors relating to the company, such as growth opportunities, capital structure, sourcing of funds, cost of capital, and optimum allocation of funds generated.

Question 3.
ABC Ltd. has completed the buy-back of equity shares on 30th April 2019. The company desires to make a further issue of equity shares on 31st August 2019. Can the company proceed and allot further equity shares on 31st August 2019 assuming that all other requirements are complied with or will be complied with?
Will your answer be different, if the company desires to issue and allot on the very same day (i.e., 31st August 2019), preference shares instead of equity shares assuming that all other requirements are complied with or will be complied with? [Dec 2014 (5 Marks)]
Answer:
As per Section 68(8) of the Companies Act, 2013, where a company completes a buy-back of its shares or other specified securities, it shall not make a further issue of the same kind of shares or other securities including allotment of new shares u/s 62( 1 )(a) [i.e. right issue]or other specified securities within a period of 6 months. However, bonus issues, conversion of warrants, stock option schemes, sweats equity, or conversion of preference shares or debentures into equity shares will be allowed.

As per the facts given in the case, ABC Ltd. has completed the buy-back of equity shares on 30th April 2019. As per Section 68(8) of the Companies Act, 2013, it cannot issue further equity shares for the next 6 months ie. up to 30th September 2019. Thus, ABC Ltd. cannot proceed and allot further equity shares on 31st August 2019.

However, if ABC Ltd. desires to issue and allot on the very same day i.e., 31st August 2019, preference shares instead of equity shares, it can do so as a restriction in Section 68(8) extends to ‘same kind of shares’. Preference shares being separate class, it will not be covered by the restriction covered u/s 68(8) and the company can issue such shares in the next 6 months after completion of buy-back of equity shares.

Question 4.
Brown Ltd. (listed company) committed certain defaults in repayment of deposits. Subsequently, the said defaults were remedied and a period of 30 months has elapsed after such defaults ceased to subsist. Brown Ltd. desires to purchase its own shares. Do you think Brown Ltd. is entitled to proceed with the proposed buy-back of shares? Give reasons for your answer quoting the relevant provisions applicable to the issue under consideration. [June 2015 (5 Marks)]
Answer:
According to Section 70(l)(c) of the Companies Act, 2013 read with Regulation 4(10) of the SEBI (Buy-Back of Securities) Regulations, 2018, no company shall directly or indirectly purchase its own shares or other specified securities if a default, is made by the company, in the repayment of deposits, interest payment thereon, the redemption of debentures or preference shares or payment of dividend to any shareholder, or repayment of any term loan or interest payable thereon to any financial institution or banking company.

However, the buy-back is not prohibited, if the default is remedied and a period of 3 years has elapsed after such default ceased to subsist.

Since a period of 3 years has not lapsed such default ceased to subsist Brown Ltd. is not entitled to proceed with the proposed buy-back of shares. Thus, the company will have to wait another 6 months, and then it will be entitled to proceed with the proposed buy-back of shares

Question 5.
No offer of buy-back shall be made by the listed entity within a period of 180 days from the date of the Board meeting or meeting of shareholders, as the case may be, in respect of the preceding offer of buy-back. [June 2016 (3 Marks)]
Answer:
As per Section 68(2) of the Companies Act, 2013, read with Regulation 4(7) of the SEBI (Buy-Back of Securities) Regulations, 2018, no offer of buyback shall be made within a period of 1 year reckoned from the date of the closure of the preceding offer of buy-back, if any.

Thus, the next offer of buy-back can be made after 1 year from the closure of the earlier back-back of shares.

Hence, the given statement “no offer of buy-back shall be made by the listed entity within a period of 180 days from the date of a Board meeting or meeting j of shareholders as the case may be, in respect of the preceding offer of buyback” is incorrect.

Question 6.
Circumstances that prohibit buy-back of shares or other specified securities under the Companies Act, 2013. Comment. [Dec 2016 (3 Marks)]
Answer:
Prohibition for buy-back in certain circumstances [Section 70]: No company shall directly or indirectly purchase its own shares or other specified securities:
(a) Through any subsidiary company including its own subsidiary companies;
(b) Through any investment company or group of investment companies; or
(c) If a default, is made by the company, in the repayment of deposits, interest payment thereon, the redemption of debentures or preference shares or payment of dividend to any shareholder, or repayment of any term loan or interest payable thereon to any financial institution or banking J company.

However, the buy-back is not prohibited, if the default is remedied and a period 5 of 3 years has elapsed after such default ceased to subsist.

No company shall, directly or indirectly, purchase its own shares or other specified securities in case such company has not complied with the provisions of the following sections:

Section 92 [Annual Return]
Section 123 [Declaration of dividend]
Section 127 [Punishment for failure to distribute dividend]
Section 129 [Financial Statements]

Question 7.
“Measuring the shareholders’ value” is the objective of Good Corporate Governance. Comment on the statement, how buyback of shares achieves [June 2017 (5 Marks)]
Answer:
Good corporate governance calls for maximizing shareholder value. When a company has surplus funds for which it does not have good avenues for deployment assuring an average return on capital employed and earnings per share, the company’s financial structure requires balancing.

The reasons/objectives for buy-back may be one or more of the following:

To improve earnings per share (EPS).
To improve return on capital, return on net worth, and to enhance the long-term shareholder value.
To provide an additional exit route to shareholders when shares are undervalued or are thinly traded.
To enhance consolidation of stake in the company.
To prevent unwelcome takeover bids.
To return surplus cash to shareholders.
To achieve optimum capital structure.
To support share price during periods of sluggish market conditions.
To service the equity more efficiently.

Question 8.
Discuss briefly conditions and requirements for buy-back of shares and specified securities under the SEBI (Buy-Back of Securities) Regulations, 2018.
You are the Company Secretary & Compliance Officer of XYZ Ltd. (listed company). In a meeting of directors, they are discussing the forthcoming plan of buy-back of equity shares.

Following questions are raised by some of the directors in the meeting:
(i) Which methods of buy-back are applicable to the listed company?
(ii) One director suggested that the company should buy back 20% of the paid-up capital and free reserves from the open market? Is it possible?
(iii) Can a company buy back its shares through negotiated deals?
(iv) What should be the gap between two buy-back?
Answer the above questions explaining directors of your company relevant provisions of the SEBI (Buy-Back of Securities) Regulations, 2018.
Answer:
Conditions and requirements for buy-back of shares and specified securities [Regulation 4]:
1. Maximum limit for buy-back: The maximum limit of any buy-back shall be 25% or less of the aggregate of paid-up capital and free reserves of the company.

Explanation. In respect of the buy-back of equity shares in any financial 1 year, the reference to 25% shall be construed with respect to its total paid-up equity capital in that financial year.

2. Post-buy-back debt-equity ratio: The ratio of the aggregate of secured and unsecured debts owed by the company after buy-back shall not be more than twice the paid-up capital and free reserves. However, if a higher ratio of the debt to capital and free reserves for the company has been notified under the Companies Act, 2013, the same shall prevail.

3. Only a fully paid-up share can be brought back: All shares or other specified securities for buy-back shall be fully paid up.

4. Methods for buy-back: A company may buy back its shares or other specified securities by any one of the following methods:
(a) From the existing shareholders or other specified securities-holders on a proportionate basis through the tender offer.

(b) From the open market through:

Book-building process
Stock exchange.

(c) From odd-lot holders.
No offer of buy-back for 15% or more of the paid-up capital and free | reserves of the company shall be made from the open market.

5. Buyback is not allowed for delisting purposes: A company shall not buy back its shares or other specified securities so as to delist its shares or j other specified securities from the stock exchange.

6. Buy-back through negotiated deals not allowed: A company shall not J buy-back its shares or other specified securities from any person through negotiated deals, whether on or off the stock exchange or through spot transactions, or through any private arrangement.

7. Gap of 1 year between two buy-back: A company shall not make any offer of buy-back within a period of one year reckoned from the date of expiry of buyback period of the preceding offer of buy-back if any.

Reduction of share capital: A company shall not allow buy-back of its shares unless the consequent reduction of its share capital is effected. Sources for buyback: A company may undertake a buy-back of its own shares or other specified securities –
(a) out of its free reserves or
(b) out of the securities premium account or
(c) out of the proceeds of the issue of any shares or other specified securities.

However, no such buy-back shall be made out of the proceeds of an earlier issue of the same kind of shares or same kind of other specified securities.

Prohibition on buyback: No company shall directly or indirectly purchase its own shares or other specified securities:
(a) Through any subsidiary company including its own subsidiary companies.
(b) Through any investment company or group of investment companies.
(c) If a default is made by the company in the repayment of deposits interest payment thereon, the redemption of debentures or preference shares or payment of dividend to any shareholder, or repayment of any term loan or interest payable thereon to any financial institution or banking company.

However, the buy-back is not prohibited, if the default is remedied and a period of 3 years has elapsed after such default ceased to subsist.

Question 9.
In what ratio the listed company can buy-back its shares from the shareholders? Also, state whether it is necessary to make reservations for small shareholders?
Answer:
Buy-back from existing security-holders [Regulation 6]: A company may buy back its shares or other specified securities from its existing security-holders on a proportionate basis.

Reservation for small shareholders: 15% of the number of securities which the company proposes to buy back or a number of securities entitled as per their shareholding, whichever is higher, shall be reserved for small shareholders.

Small shareholder means a shareholder of a listed company, who holds shares or other specified securities whose market value, on the basis of the closing price of shares or other specified securities, on the recognized stock exchange in which highest j trading volume in respect of such security, as on record date is not more than ₹ 2 lakh. [Regulation 2(1a)]

Question 10.
Explain Buy-back of shares through book-building route. [June 2014 (5 Marks)]
Answer:
Buy-back through book building [Regulation 22]: A company may buy back its shares or other specified securities through the book-building process as stated below:
1. The Special resolution or board resolution shall be passed as per Regulation 5.

2. Disclosures, filing requirements, and timelines for the public announcement:
(a) The company shall appoint Merchant Banker and make a public announcement as per Regulation 7.
(b) The disclosures in the public announcement shall also be in accordance with Schedule II.
(c) The public announcement shall be made at least 7 days prior to the commencement of buy-back.

3. The provision of Regulation 9 relating to the Escrow Account also applies for buy-back under this method. Additional provisions relating to Escrow Account are as follows:
(a) The deposit in the escrow account shall be made before the date of the public announcement.
(b) The amount to be deposited in the escrow account shall be determined with reference to the maximum price as specified in the public announcement.

4. A copy of the public announcement shall be filed with the SEBI within 2 days of such announcement along with the fees as specified in Schedule V.

5. The public announcement shall also contain the detailed methodology of the book-building process, the manner of acceptance, the format of acceptance to be sent by the securities holders pursuant to the public announcement, and the details of bidding centers.

6. The book-building process shall be made through an electronically linked transparent facility.

7. The number of bidding centers shall not be less than 30 and there shall be at least one electronically linked computer terminal at all the bidding centers.

8. The offer for buy-back shall remain open to the securities holders for a period not less than 15 days and not exceeding 30 days.

9. The Merchant Banker and the company shall determine the buy-back price based on the acceptances received.

10. The final buy-back price, which shall be the highest price accepted shall be paid to all holders whose shares or other specified securities have been accepted for buy-back.

11. The provisions of Regulation 10 pertaining to verification of acceptances and opening of special account and payment of consideration shall be applicable mutatis mutandis.

Extinguishment of certificates [Regulation 23]: The provisions pertaining to the extinguishment of certificates for tender offer shall be applicable mutatis mutandis to the buy-back through book building.

Question 11.
Elucidate the obligations of Merchant Banker under the SEBI (Buy-Back of Securities) Regulations, 2018. [Dec 2016 (5 Marks)]
Answer:
Obligations of the Merchant Banker [Regulation 25]: The Merchant Banker shall ensure that –

The company is able to implement the offer.
The provision relating to the escrow account has been complied with.
Firm arrangements for monies for payment to fulfill the obligations under the offer are in place.
The public announcement of buy-back is made in terms of these regulations.
The letter of offer has been hied in terms of the regulations.
A due diligence certificate along with the draft letter of offer has been furnished to the SEBI.
The contents of the public announcement of the offer as well as the letter of offer are true, fair, and adequate, and quoting the source wherever necessary.
Due to compliance with Sections 68, 69 & 70 of the Companies Act, 2013 and no other laws or rules have been made.
The bank with whom the escrow or special amount has been deposited releases the balance amount to the company only upon fulfillment of all obligations by the company under the regulations.
A final report is submitted to the SEBI in the form specified within 15 days from the date of expiry of the buy-back period.

Question 12.
Can a company buy back its own shares or any specified securities through negotiated deals or through any private arrangements? Comment with methods allowed for buy-back. [June 2019 (5 Marks)]
Answer:
Methods for buy-back: A company may buy back its shares or other specified securities by any one of the following methods:
(a) From the existing shareholders or other specified securities-holders on a proportionate basis through the tender offer.

(b) From the open market through:

Book-building process
Stock exchange.

(c) From odd-lot holders.
No offer of buy-back for 15% or more of the paid-up capital and free reserves of the company shall be made from the open market.

Buy-back through negotiated deals not allowed: A company shall not buy-back | its shares or other specified securities from any person through negotiated | deals, whether on or off the stock exchange or through spot transactions or I through any private arrangement.

Question 13.
Financial data of a listed company as of 31st March 2018 are as follows:
Authorized equity share capital (1 Crore shares of ₹ 10 each) – ₹ 10 Crore
Paid-up equity share capital – ₹ 5 Crore
General reserve – ₹ 3
Crore Debenture redemption reserve – ₹ 2 Crore
The Board of directors of your company passed a resolution by circulation for buy-back of shares to the extent of 9% of the company’s paid-up share capital and free reserves. You are required to examine the validity of the proposal with reference to the provisions of the SEBI Regulations. [June 2019 (4 Marks)]
Answer:
As per Section 68(2) of the Companies Act, 2013 read with SEBI Regulations, the board of directors is authorized to buy back up to 10% of the total paid-up equity capital and free reserves of the company by passing a resolution at its meeting.

Under Section 179(3)(b), the Board of Directors of a company has given the power to buy back securities as per Section 68 by passing resolutions at meetings of the Board.

Therefore, in the present case, the Board of Directors is authorized to buy back the shares of the company up to 10% of the paid-up capital and free reserves, provided the resolution authorizing the buy-back is passed at the Board meeting and not by circular resolution.

As per the facts given in the case, the board of directors of Pious Ltd. desires to buy back 9% of paid-up capital and free reserve. This can be done by passing Board Resolution at the board meetings.

Total shares that can be brought back by passing Board Resolution are calculated as follows:
[₹ 5 Crore (Paid-up Capital) + ₹ 3 Crore (General Reserve)] × 9% = ₹ 0.72 Crore

The company should also comply with the other conditions specified in Section 68 and SEBI Regulations.

Question 14.
A listed entity facing some problems while complying with some provisions of the SEBI (Buy-Back of Securities) Regulations, 2018, can it apply to SEBI from exemptions from applicability of the provisions?
Answer:
Exemption from enforcement of the regulations in special cases [Regulation 25A]:
The SEBI may, exempt any person or class of persons from the operation of all or any of the provisions of these regulations for a period as may be specified but not exceeding 12 months, for furthering innovation in technological aspects relating to testing new products, processes, services, business models, etc. in the live environment of a regulatory sandbox in the securities markets.

Any exemption granted shall be subject to the applicant satisfying such conditions as may be specified by the SEBI including conditions to be complied with on a continuous basis.

Explanation: or the purposes of these regulations, “regulatory sandbox” means a live testing environment where new products, processes, services, business models, etc. may be deployed on a limited set of eligible customers for a specified period of time, for furthering innovation in the securities market, subject to such conditions as may be specified by the SEBI.

Securities Laws and Capital Markets Questions and Answers