Due Diligence-I – CS Professional Study Material

Chapter 19 Due Diligence-I – Secretarial Audit Compliance Management and Due Diligence ICSI Study Material is designed strictly as per the latest syllabus and exam pattern.

Due Diligence-I – Secretarial Audit, Compliance Management and Due Diligence Study Material

Question 1.
Write a note on the following:
Documents to be checked in due diligence process (June 2012, 4 marks)
Answer:
The following are the few types of information or documents to be checked, during the process of due diligence:

1. Basic Information
2. Important Business Agreements
3. Financial Data
4. Marketing Information
5. Litigation Aspects
6. IPR Details
7. Taxation Aspects
8. Internal Control System
9. Human Resources Aspects
10. Insurance Coverage
11. Cultural Aspects
12. Environmental Impact

Question 2.
Write short note on the following:
Technical due diligence. (Dec 2014, 3 marks)
Answer:
Technical due diligence
Technical due diligence covers:
(a) intellectual property due diligence; and
(b) technology due diligence.

Question 3.
Distinguish between the following:
Technical due diligence’ and ‘financial due diligence’. (Dec 2013, 5 marks)
Answer:
Technical Due Diligence:
Technical due diligence covers:
(i) intellectual property due diligence, and
(ii) technology due diligence.

(i) Intellectual property due diligence:
The recent concept of valuation of intangible assets related to intellectual property like patents, copyrights, design, trademarks, brands etc, also getting greater importance as these intellectual properties of the business are now often sold and purchased in the market by itself, like any other tangible asset.

(ii) Technology due diligence:
Technology due diligence* considers aspects such as current level of technology, company’s existing technology, further investments required etc.

Financial Due Diligence:
Financial due diligence provides peace of mind to both corporate and financial buyers, by analysing and validating all the financial, commercial, operational and strategic assumptions being made.
Financial due diligence includes review of accounting policies, review of internal audit procedures, quality and sustainability cf earnings and cash flow, condition and value of assets, potential liabilities, tax implications of deal structures, examination of information, systems to establish the reliability of financial information, internal control systems etc.

Question 4.
Distinguish between the following:
‘Audit’ and ‘due diligence’. (Dec 2014, 3 marks)
Answer:

Audit	Due diligence
Limited to financial analysis	Includes not only analysis of financial statements, but also business plan, sustainability of business, future aspects, corporate and managements structure, legal issues etc.
Based on historical data	Covers future growth prospects in addition to historical data.
Mandatory	Mandatory based on the transaction
Positive assurance i.e. true and fairness of the financial statements	Negative assurance i.e. identification of risks if any
Post mortem analysis	It is required for future decision
Always uniform	Varies according to the nature of transaction
Recurring event	Occasional event

Question 5.
Distinguish between the following:
(i) ‘Operational due diligence’and‘strategic due diligence’.
(ii) ‘Financial due diligence’ and ‘tax due diligence’. (June 2016, 3 marks each)
Answer:
(i) (a) Operational due diligence : Operational due diligence aims at the assessment of the functional operations of the target company, connectivity between operations, technological upgradation in operational process, financial impact on operational efficiency etc. It also uncovers aspects on operational weakness, inadequacy of control mechanisms etc.

(b) Strategic due diligence : Strategic due diligence tests the strategic rationale behind a proposed transaction and analyses whether the deal is commercially viable, whether the targeted value would be realized, it considers factors such as value creation opportunities, competitive position and critical capabilities.

(ii) Financial Due Diligence:
Financial due diligence provides peace of mind to both corporate and financial buyers, by analysing and validating all the financial, commercial, operational and strategic assumptions being made. Financial Due Diligence includes review of accounting policies, review of internal audit procedures, quality and sustainability of earnings and cash flow, condition and value of assets, potential liabilities, tax
implications of deal structures, examination of information systems to establish the reliability of financial information, internal control systems etc.
The tax due diligence comprises an analysis of:

• tax compliance
• tax contingencies and aggressive positions
• transfer pricing
• identification of risk areas
• tax planning and opportunities.

Question 6.
Critically examine and comment on the following:
A key step in any due diligence exercise is to develop an understanding of the purpose for the transaction. ‘ (June 2012, 4 marks)
Answer:
The Statement is correct. The nature of due diligence varies from the type of transaction, its volume, the motive and objective of parties to a transaction. The nature and the extent of due diligence depends upon the risk perceived by parties to a transaction. The scope of due diligence is transaction based and is depending on the needs of the people who are involved in the potential investments, in addressing key uncovered issues, areas of concern and in identifying other opportunities.

The goal of due diligence is to provide the party proposing the transaction with sufficient information to make a reasoned decision provide a basis for determining the appropriate terms and price for the transaction incorporating consideration of the risks inherent in the proposed transaction. Due diligence is also necessary to ensure that there are no onerous contracts or agreements that affect the acquirer’s return on investment. Space to write important points for revision :

Question 7.
Critically examine and comment of the following:
Due diligence investigations are generally for corporate mergers and acquisitions. (Dec 2012, 4 marks)
Answer:
Due diligence investigations are generally for corporate acquisitions and mergers i.e. investigation of the company being acquired or merged. The buyer or transferee company wants to make sure to know what it is buying. Some other transactions where due diligence is appropriate could be:

• Strategic Alliances and joint-ventures
• Strategic Partnership
• Partnering Agreements
• Business Coalitions
• Outsourcing Arrangements
• Technology and Product Licensing
• Technology sharing and cross Licensing Agreements (viii) Distribution Relationship, etc.

Question 8.
Examine and comment on the following:
The SWOT analysis of target business is carried out as part of due diligence. (Dec 2013, 4 marks)
Answer:
The SWOT analysis of the target business carried out as a part of due diligence has to reveal the strengths and weaknesses of not only the financials but also intangibles.

To do this effectively, the potential buyer needs to be clear about the goals and motives for acquiring the target company, as well as the value the buyer is attempting to create with the purchase. For example, if there is a legal risk, such as an outstanding lawsuit, that will not only jeopardize the financial stability of the company but also the loyalty of existing customers. This will erode the target company’s market of customers by a new and stronger competitor. The target company’s talent is the asset desired, and much of this depends on employee relations and accordingly cultural issues has to be addressed in time.

Question 9.
Critically examine and comment on the following:
During the diligence process, care should be taken to adhere to certain hospitality issues. (Dec 2013, 4 marks)
Answer:
During the diligence process, care should be taken to adhere to certain hospitality issues like:
(a) Be warm and respective to the professionals who are conducting diligence.
(b) Enquire on the Due Diligence team.
(c) Join them for lunch.
(d) Ensure good supply of refreshments.
(e) In case of any corrections – admit and rectify.
As regards the process of diligence, as a professional care should be taken to scrutinize every document that is made available and ask for details and clarifications, though generally the time provided to conduct the diligence may not be too long and though things have to be wrapped up at the eariiest. The company may be provided with an opportunity to clear the various issues that may arise out of the diligence.

Question 10.
Examine and comment on the following.
Due diligence covers compliances, litigations, uncovered risks and future prospects. (June 2014, 4 marks)
Answer:
Due diligence is an investigative process for providing the desired comfort level about the potential investment and to minimize the risks such as hidden uncovered liabilities, poor growth prospects, price claimed for proposed investment being on higher side etc. Due diligence is also necessary to ensure that there are no onerous contracts or other agreements that could affect the acquirer’s return on investment.

Question 11.
“Cultural clashes are likely to be more prominent in cross-national than domestic acquisitions.” Discuss and also briefly enumerate the cultural due diligence process. (June 2014, 5 marks)
Answer:
The Cultural Due Diligence Process Covers

• Leadership, Strategies and Governing Principles: It covers vision, mission, values, business strategy development, leadership effectiveness, ethics, board room practices, role of independent directors etc.,
• Relationships and behaviors: It covers trust, inter/intra group relationships, community and customers.
• Communication: Feedback, information sharing, employee trust in information.
• Infrastructure: Formal procedures, processes, systems, policies, structure and teams.
• involvement and Decision Making: Authority levels, accountability, expectations and the decision making process.
• Change Management: Creativity, innovation, recognition, continuous learning and diversity.
• Communication platforms.
• Finance: Perception of financial health and the role of the employee and the level of financial comprehension and impact on the business.

Question 12.
Examine and comment on the following:
Due diligence is essentially required to make an informed decision about a potential investment. (Dec 2014, 4 marks)
Answer:
Due diligence is an investigative process for providing, the desired comfort level about the potential investment and to minimize the risks suqh as hidden uncovered liabilities, poor growth prospects, price claimed for proposed investment being on higher side etc. Due diligence is also necessary to ensure that there are no onerous contracts or other agreements that could affect the acquirer’s return on investment.

Question 13.
“The RBI vide its circular No. RBI/2008-2009- 313/DBOD No. B.P. BC 94/08.12.001/2008-2009 dated 8,h December, 2008 advised the banks to strengthen their information back-up about the borrowers enjoying credit facilities from multiple banks.” What are those. advices? (Dec 2014, 5 marks)
Answer:
As per RBI vide its Circular No. RBI/2008-2009-313/DBOD No. B.P. BC 94/08.12.001/2008-2009 dated 8th December, 2008 advised the banks which are given below:
1. The formats for declaration of information by the borrower at the time of applying for a credit facility to a bank (Annex I) and the format for exchange of information among the banks in respect of borrowers enjoying credit facilities from more than one bank (Annex II), enclosed to the aforesaid circular have been revised to reflect information relating to the derivatives transactions entered into by banks with the borrowers and the unhedged foreign currency exposures of the borrowers.
2. Banks are advised to use the revised formats with immediate effect.

Question 14.
Prepare a checklist of the questions to be analysed in cultural due diligence. (Dec 2014, 5 marks)
Answer:
Questions being analysed In Cultural Due Diligence The following questions are being analysed for determining the different corporate culture:

• What are the primary issues driving the business strategy?
• What are the levels of relationship with the board and the senior management?
• What is the nature of the relationship between groups and units in the organization?
• What formal and informal systems are in place and what part do they play in the daily life of doing the work?
• How do people dress and address each other?
• How do the office ambience differ?
• What are the working hours?
• What are the variation in utilization of technology in daily routine?
• How actual work is performed?
• How authority and responsibility is allocated?
• How the performance evaluation is done and reward is granted?
• What are the reporting relationships in the organization?
• What are the supervisory practices in the organization?

The above questions indicate that the corporate culture is basically focused on:

1. Leadership style and management practices.
2. Manner of organizational functioning.
3. Employees.

Question 15.
Under financial due diligence for a manufacturing industry, describe briefly the focus areas for the following aspects:
(i) Cost
(ii) Revenue (Dec 2014, 8 marks)
Answer:
Focus areas under financial due diligence:
(i) Cost

• Rationalise the costs incurred by the company.
• Is there an increase in the level of costs incurred by the company. — Ensure that provisions for liability has been made correctly on the basis of monthly/annual costs incurred by the company.
• Detailing the costs of the company along with percentage break up of the total cost.
• Summary of costs per functional classification (marketing finance etc.), different cost heads (materials salary etc.)
• Understanding of purchase policies and procedures.
• Trend analysis of movement in costs over the review period, for , each cost item.
• Purchase policies and procedures.
• Input/output analysis on a monthly basis.
• Compute raw material consumption with respect to turnover on a monthly basis over the review period etc.

(ii) Revenue

• Review customer wise revenue share and ascertain any excessive dependence on few customers.
• Percentage of the sales to major customers (top ten) with respect to sales over their review period.
• Discussing any revenue – Sharing arrangements. Review the implications of the variables and fixed components and any commitments arising from such an arrangement.
• Trend Analysis: Identify the trend in customer purchases and inquire about the reasons for any significant increase or decrease in customer orders.
• Reviewing whether repeat sales happen regularly or rarely. ‘
• Discussing with the management any long term revenue commitments with the customers.
• Geographical break-up of revenue along with any significant changes to evaluate particular regions/locations where the revenue has increased/decreased Significantly.
• Providing a table on the break-up of sales into domestic sales and exports.
• Analyse the recovery period for credit sales etc.

Question 16.
Your company intends to acquire another company. As a Company Secretary, describe the aspects you will check in the area of legal and regulatory framework for this acquisition. (Dec 2014, 7 marks)
Answer:
Legal framework for acquiring a company

• SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 2011; (in case of listed company)
• Section 186 of the Companies Act, 2013;
• Section 235 of the Companies Act, 2013;
• Income Tax Act, 1961; and
• FEMA provisions (in case of cross border acquisition).

Regulatory aspects .
Checklist under SEBI (Substantial Acquisition of Shares and Takeovers)
Regulations, 2011 for acquiring a company:

1. Whether any acquisition/transfer has triggered open offer?
2. Ensure that a merchant banker of Category I, has been appointed who is not an associate of or group of acquirer or the target Company.
3. Ensure that an escrow account has been opened with the required deposit.
4. If, an open offer is made conditional upon minimum level of acceptance, hundred percent of the consideration payable in respect of minimum level of acceptance or 50% of the consideration payable under the open offer, whichever is higher, has been deposited in cash in the Escrow A/c.
5. A letter duly authorizing target company to realize the value of Escrow account as specified in these regulations.
6. An undertaking from the target company that none of the Acquirer/ Persons Acting in Concert have been prohibited by SEBI from dealing in securities, in terms of direction issued under Section 11B of SEBI Act.
7. An undertaking from the sellers, promoters, directors of the target company that they have not been prohibited by SEBI from dealing in securities, in terms of direction issued under Section 11B of SEBI Act.
8. An undertaking from the target company that it has complied with the provisions of Listing Agreement, and that any non- compliance or delayed compliance has been brought to the notice of Target Company.
9. An undertaking from the target company that it has complied with the provisions of these regulations, and that any non-compliance or delayed compliance has been brought to the notice of Target Company.
10. A public announcement of an open offer to the shareholder of the target company has been given and detailed public statement has been published as per the prescribed timeline in case of Acquirer acquires the shares or voting rights of the target company in excess of the limits prescribed under Regulation 3 and 4 of these regulations.
11. The public announcement has been sent to all the stock exchanges on which the shares Of the target company are listed, to SEB1 and to the target company at its registered office within one working day of the date of the public announcement.
12. A detailed public statement has been published by the acquirer through the Manager to the Open Offer within maximum 5 working days from the date of public announcement as provided in Regulation 13(4).
13. The compliances relating to publication of public announcement and detailed public statement by the acquirer has been complied under Regulation 14.
14. The acquirer through the manager to the offer has filed a draft letter of offer along with the fee as prescribed in Regulation 16, with SEBI for its observations within 5 working days of publication Detailed Public Statement.
15. The minimum of 26% of voting capital of the company is being offered subject to minimum public holding requirements.
16. The acquirer has made complete payment of consideration whether in the form of cash, or as the case may be, by issue, exchange or transfer of securities, to all shareholders who have tendered shares in acceptance of the open offer, within ten working days of the expiry of the tendering period.
17. The unclaimed balances, if any lying to the credit of the special escrow account at the end of seven years from the date of deposit thereof, has been transferred to the Investor Protection and Education Fund established under the SEBI (Investor Protection and Education Fund) Regulations, 2009.

Question 17.
Your client is intending to enter into a major commercial agreement for collaboration. You as a Company Secretary have been asked to conduct due diligence for the prospective company. Which factors you will keep in mind while conducting due diligence ? (June 2015, 7 marks)
Answer:
Factors To Be Kept In Mind While Conducting Due Diligence:

1. Objectives and purpose
2. Planning the schedule
3. Negotiation for time
4. Risk Minimisation
5. Information from external sources
6. Limit the report with only material facts
7. Structure of information

Question 18.
As a Practicing Company Secretary, during the course of carrying out due diligence process of a merger and amalgamation, enumerate the obligations of target company and acquirer. (Dec 2015, 7 marks)
Answer:
Obligation of Target Company:
Once a Public Announcement is made, the Board of Directors of the Target Company is expected to ensure that the business of the target company is conducted in the ordinary course. Alienation of material assets, material borrowings, issue of any authorized securities, announcement of a buyback offer etc. is not permitted, unless authorized by shareholders by way of a special resolution by postal ballot.

• The target company shall furnish to the acquirer within two working days from the identified date, a list of shareholders and a list of’persons whose applications, if any, for registration of transfer of shares, in case of physical shares, are pending with the target company.
• After closure of the open offer, the target company is required to provide assistance to the acquirer in verification of the shares tendered for acceptance under the open offer, in case of physical shares.
• Upon receipt of the detailed public statement, the Board of Directors of the target company shall constitute a committee of Independent Directors to provide reasoned recommendations on such open offer, and the target company shall publish such recommendations and such committee shall be entitled to seek external professional advice at the expense of the target company. The recommendations of the Independent Directors are published in the same newspaper where the Detailed Public Statement is published by the acquirer and are published at least 2 working days before opening of the offer. The recommendation will also be sent to SEBI, Stock Exchanges and the Manager to the offer.

Obligations of the acquirer:
1. Prior to making the public announcement of an open offer for acquiring shares under these regulations, the acquirer shall ensure that firm financial arrangements have been made for fulfilling the payment obligations under the open offer and that the acquirer is able to implement the open offer, subject to any statutory approvals for the open offer that may be necessary.

2. In the event the acquirer has not declared an intention in the detailed public statement and the letter of offer to alienate any material assets of the target company or of any of its subsidiaries whether by way of sale, lease, encumbrance or otherwise outside the ordinary course of business, the acquirer, where he has acquired control over the target company, shall be debarred from causing such alienation for a period of two years after the offer period.
Provided that in the event the target company or any of its subsidiaries is required to so alienate assets despite the intention to alienate not having been expressed by the acquirer, such alienation shall require a special resolution passed by shareholders of the target company, by way of a postal ballot and the notice for such postal ballot shall inter alia contain reasons as to why such alienation is necessary.

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

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

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

Question 19.
“Audit is a financial post-mortem analysis whereas due diligence is a future decision and a process to achieve the desired comfort level about the potential investment.” Comment. (Dec 2015, 5 marks)
Answer:

Audit	Due Diligence
Limited to financial analysis	Includes not only analysis of financial statements, but also business plan, sustainability of business, future aspects, corporate and managements structure, legal issues etc.
Based on historical data	Covers future growth prospects in addition to historical data.
Mandatory	Mandatory based on the transaction
Positive assurance i.e. true and fairness of the financial statements	Negative assurance i.e. identification of risks if any.
Post mortem analysis	It is required for future decision.
Always uniform	Varies according to the nature of transaction.
Recurring event	Occasional event.

Misrepresentations and fraudulent dealings are not always obvious or straight. These are to be uncovered, especially in a major business transaction, as it would create a major impact on the business. Proper due diligence services explore and assess the details behind the same and to become fully informed about the financials, business, internal systems, profitability, key operational aspects, management team, promoters and other material factors that will help in making an informed decision about an investment. Due diligence is designed to protect the interests of the Company by providing objective and reliable information on the target company before making any written commitments. Due diligence is an investigative process for providing, the desired comfort level about the potential investment and to minimize the risks such as hidden uncovered liabilities, poor growth prospects, price claimed for proposed investment being on higher side etc. Due diligence is also necessary to ensure that there are no onerous contracts or other agreements that could affect the acquirer’s return on investment.

Question 20.
In the case of a tender floated by a public sector undertaking, there were allegations that some of the parties have indulged in anti-competitive bidding in the tender. As a practising Company Secretary, how would you check that the company you represent has not indulged in any anti-competitive bidding? (June 2016, 7 marks)
Answer:
Being a practicing Company Secretary, the following should be checked for ascertaining that the Company has not indulged in any anti-competitive bidding.
Check that:

• The company has not agreed to submit identical bids.
• The company has not agreed as to who shall submit the lowest bid, agreements for the submission of cover bids (voluntarily inflated bids).
• The company has not agreed not to bid against each other.
• The company has not agreed on common norms to calculate prices or terms of bids.
• The company has not agreed to squeeze out outside bidders.
• The company has not agreed on designating bid winners in advance on a rotational basis, or on a geographical or customer allocation basis.
• The company has not agreed as to the bids which any of the parties may offer at an auction for the sale of goods or any agreement through which any party agrees to abstain from bidding for any auction for the sale of goods or any agreement through which any party agrees to abstain from bidding for any auction for the sale of goods, which eliminates or distorts competition.

Question 21.
As a Practicing Company Secretary, while carrying out due diligence regarding the loans taken by Quick Ltd. from a nationalised bank, how would you ensure that the company has not committed any wilful default in the matter of repayment of loans? Also, state the consequences if a false diligence report is submitted. (Dec 2016, 5 marks)
Answer:
A Practising Company Secretary while carrying out due diligence regarding the loans taken by Quick Ltd. from a nationalized bank, ensure that the company has not committed any willful default in the matter of repayment of loans if any of the following events is not noted:
(a) The company has defaulted in meeting its payment/repayment obligations to the lender even when it has the capacity to honour the said obligations.
(b) The company has defaulted in meeting its payment/repayment obligations to the lender and has not utilised the finance from the lender for the specific purposes for which finance was availed of but has diverted the funds for other purposes.
(c) The company has defaulted in meeting its payment/repayment obligations to the lender and has siphoned off the funds so that the funds have not been utilised for the specific purpose for which finance was availed of, nor are the funds available with the unit in the form of other assets.

Any failure or lapse on the part of a Practising Company Secretary (PCS) in issuing a Diligence Report may not only, attract penalty for false reporting and disciplinary action for professional or other misconduct under the provisions of the Company Secretaries Act, 1980 but also make him liable for any injury caused to any person due to his/her negligence in issuing the Diligence Report.

Question 22.
Super Product Agro Ltd. is proposed to be merged in Geetanjali Ayurved India Ltd. What are the check points to be observed in due diligence with respect to payment of consideration for merger and amalgamation. (Dec 2017, 5 marks)
Answer:
Under the Regulation 21 of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011, following check points should be observed:
1. For the amount of consideration payable in cash, the acquirer shall open a special escrow account with a banker to an issue registered with the Board and deposit therein, such sum as would, together with cash transferred under clause (b) of sub-regulation (10) of Regulation 17, make up the entire sum due and payable to the shareholders as consideration payable under the open offer, and empower the manager to the offer to operate the special escrow account on behalf of the acquirer for the purposes under these regulations.

2. Subject to provisos to sub-regulation (11) of Regulation 18, the acquirer shall complete payment of consideration whether in the form of cash, or as the case may be, by issue, exchange or transfer of securities, to all shareholders who have tendered shares in acceptance of the open offer, within ten working days of the expiry of the tendering period.

3. Unclaimed balances, if any, lying to the credit of the special escrow account referred to in sub-regulation (1) at the end of seven years from the date of deposit thereof, shall be transferred to the Investor Protection and Education Fund established under the Securities and Exchange Board of India (Investor Protection and Education Fund) Regulations, 2009.

As per Section 236 read with Rule 27 of the Companies (Arrangement and Amalgamations) Rules, 2016, In case of purchase of equity shares of the minority shareholders of the company, the following point shall also be considered by registered valuer:
1. In case of a listed company:

1. The offer price shall be determined in the manner as may be specified by the Securities And Exchange Board Of India under the relevant regulations framed by it, as may be applicable; and
2. The registered valuer shall also provide a valuation report on the basis of valuation addressed to the board of directors of the company giving justification for such valuation.

2. In the case of an unlisted company and a private company:
(i) The offer price shall be determined after taking into account the following factors:
(a) The highest price paid by the acquirer, person or group of persons for acquisition during last twelve months;
(b) The fair price of shares of the company to be determined by the registered valuer after taking into account valuation parameters including return on net worth, book value of shares, earning per share, price earning multiple vis-a-vis the industry average, and such other parameters as are customary for valuation of shares of such companies; and
(ii) The registered valuer shall also provide a valuation report on the basis of valuation addressed to the board of directors of the company giving justification for such valuation.

Question 23.
Define the Cultural Due Diligence. How would you address the cultural difference during the merger? (Dec 2017, 4 marks)
Answer:
Cultural Due Diligence (CDD) is the process of identifying, assessing, investigating, evaluating and defining the cultures of two or more distinct corporates through a cultural analysis so that the similarities and differences that impact the merged organization are identified and remedial actions are taken well in advance. It should be carried along with M&A due diligence stage itself. The findings of cultural due diligence would be the base for post integration strategies.
Address Cultural Differences during merger in the following manner:

• Formation of strategies for cultural integration.
• Analyzing the existing cultures.
• Identifying common aspects and differences.
• Decide if you want to go on with one of the existing cultures or if you prefer an integration culture.
• Establish ‘bridges’ between both companies.
• Establish a basis and mechanisms for the new culture.
• Extensive interaction with people.

Question 24.
Compliance under SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 includes event bases/continual disclosures; and opening of an Escrow Account is one of important event. Explain the compliance required to be done for this purpose. (Dec 2017, 5 marks)
Answer:
As Regulation 29 and Regulation 30 of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 included event bases/ continual disclosures. However, Regulation 17 of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 provides for opening of an Escrow Account.
The Major provisions under this regulation are as under:
(i) An escrow account has to be opened and the following sum has to be deposited.
(ii) The escrow amount shall be calculated in the following manner, as specified in regulation 17,
For consideration payable under the public offer.,

• On the first 500 crores 25 percent; of the consideration
• On the balance consideration An additional amount equal to 10% of balance consideration.

If, an open offers is made conditional upon minimum level of acceptance, hundred percent of the consideration payable in respect of minimum level of acceptance or fifty percent of the consideration payable under the open offer, whichever is higher, shall be deposited in cash in the escrow account.

Provided further that in case of indirect acquisitions where public announcement has been made in terms of clause (e) of sub-regulation (2) of regulation 13 of these regulations, an amount equivalent to hundred per cent of the consideration payable in the open offer shall be deposited in the escrow account.
The consideration payable under the open offer shall be computed as provided for in sub-regulation (2) of Regulation 16 and in the event of an upward revision of the offer price or of the offer size, the value of the escrow amount shall be computed on the revised consideration calculated at such revised offer price, and the additional amount shall be brought into the escrow account prior to effecting such revision. The escrow account referred to in sub-regulation (1) may be in the form of,

• cash deposited with any scheduled commercial bank;
• bank guarantee issued in favour of the manager to the open offer by any scheduled commercial bank; or
• deposit of frequently traded and freely transferable equity shares or other freely transferable securities with appropriate margin;

Provided that securities sought to be provided towards escrow account under clause (c) shall be required to conform to the requirements set out in sub-regulation (2) of Regulation 9.

Question 25.
The scope of Due Diligence Process is wider than a Financial Audit Process. Elucidate. (June 2018, 5 marks)
Answer:
An audit is concerned with historical financial statements only and provides an opinion as to whether the financial statements represent a “true and fair” view of the company’s operations. Whereas the Due diligence, on the other hand, review not only look the historical financial performance of a business but also consider the forecast financial performance for the company under the current business plan. The following table describes the difference

Particulars	Audit	Due Diligence
Scope	Limited to financial analysis	Includes not only analysis of financial statements, but also business plan, sustainability of business, future aspects, corporate and management struct, i.e, legal issues etc.
Data	Based on historical data	Cov: future growth prospects in addi; an to historical data.
Mandatory	Mandatory	Mandatory based on the transaction.
Assurance	Positive assurance i.e. true and fairness of the financial statements	Negative assurance i.e. identification of risks, if any
Type	Post mortem analysis	It is required for future decision
Nature	Always uniform	Varies according to the nature of transaction
Repetitiveness	Recurring event	Occasional event

Question 26.
The Report of the Official Liquidator in a Scheme of Amalgamation. is the route map in any Amalgamation process, which requires ample information from the parties involved in a Corporate Amalgamation. Provide the list of information to be furnished by them respectively to Auditor appointment by the Official Liquidator. (June 2018, 7 marks)
Answer:
The Following Information is required to be furnished to the Auditors Appointed by the Official Liquidator.
From the transferor company

1. Certified true copy of the scheme of amalgamation along with the petition.
2. Certified true copy of the Memorandum and Articles of Association of the company.
3. List of shareholders of the company with their shareholding. Any changes during the last five years to be indicated.
4. Accounts of the company made upto the appointed day of amalgamation.
5. Address of the registered office of the company.
6. Present authorised and paid-up share capital of the company.
7. Changes in the Board of Directors during the last five years alongwith list of present Board of Directors.
8. List of associated concern in which directors are interested.
9. List of various appeals pending under Income-tax, Sale Tax, Excise Duty, Cu55tom Duty, pEMA, etc.
10. Details of loans and advances given to the associated concern/companies under the same management during the last five years,
11. Details of revaluation of assets.
12. Details of any allegations and/or complaints against the company.
13. Details of amount paid to the managing director, directors or any relative of the directors during the last five years.
14. Comparative statement of profit and loss account and balance sheet for the last five years.
15. Details of bad debts written off during the last five years.
16. List of all charges registered with the Registrar of Companies and the amount secured against the same.
17. Copy of the latest annual return filed with the Registrar of Companies alongwith AnnexUres.
18. Details of all the subsidiary companies as under:
    (a) Authorised and paid-up share capital of the company.
    (b) List of present shareholders alongwith details of changes in the shareholding patterns during the last five years.

The following information of the transferee company is required by the auditor:

• Names of the existing directors of the company.
• List of common shareholders of the companies involved in the amalgamation with individual shareholding.
• Authorised and paid up capital of the company.
• Copy of latest audited balance sheet.

The auditors may also require the following records of the transferor company for examination:

• Books of accounts and relevant records for the last five years.
• Minutes book of Board and General Meetings.

Question 27.
You are engaged by a Bank for conducting the due diligence on behalf of the bank and submission of Diligence Report. What are the check points to be observed which may be concluded as Suggested alerts. (June 2018, 4 marks)
Answer:
Suggested alerts

• Disproportionately large cash payments in relation to normal requirements in a company of its size
• Frequent circular transactions between various bank accounts
• Inordinate delay in submission of stock statements/book debts/quarterly filings to the Bank(s)
• Large differences between MSOD/QIS2/FFR etc. with stock statements and inventory regularly and particularly as on date of balance sheet.
• Delay/default in meeting statutory payments.
• Any apparent unrelated payment(s) that come to notice.
• Disproportionate holding of Work-in-progress (WIP).
• Regular on account payments to creditors.

Scanner CS Prof. Prog. M-il Paper 4 (2017 Syllabus)

• Regular on account payments from debtors.
• Any differential pricing system to associates.
• Any attachment of bank accounts from statutory authorities (input from bank).
• Borrowings from unconventional sources.
• Dishonour of cheques.
• Unduly large sales returns/return of bills.
• Lack of tie ups in project finance resulting in diversion of short term funds.
• Winding-up cases if any filed against the company.
• Insolvency proceedings against any of the promoter(s)/director(s).

Question 28.
Merger and Amalgamation aims at stability, development and expansion of business prospects, the decision being based on a prudent Due Diligence process. Draft a Due Diligence Process in a tabular form involving buyer and seller. (June 2018, 5 marks)
Answer:
Due Diligence Process in the M & A

Stages	For Buyer	For Seller
Preparation stage	M & A Strategy formulation Preparation of List of potential targets Appoint external advisor for evaluation of targets Short list targets Create Due diligence tea	Structure a Business plan Preparation of list of potential buyers  Appoint external Advisor Shortlist buyers
Pre-diligence	Approach targets Negotiation of initial terms Execute non disclosure agreement compilation of list of data required	Approach buyers Negotiate initial terms Execution of non disclosure agreement Creation of data room
Due-diligence	Inspection of data room Analysis of private documents Evaluation of risk and return Structure the terms and conditions	Assistance in data room Setting deadlines for offer
Negotiations	Make final offer Negotiate and agree on terms	Compile final offers Select best offer Negotiations
Post-diligence	Post merger integration and cultural adjustments	Termination of data room and ownership exchange

Question 29.
A firm of Company Secretaries is to be engaged as professional experts in due diligence process. What are the preconditions of accepting the professional engagement by the firm to maintain the quality? (June 2019, 3 marks)
Answer:
Pre-conditions of accepting professional engagement by a firm of Company Secretaries
Prior to acceptance of any engagement, the firm, in order to establish whether the preconditions for a professional assignment are present, shall:
(a) Determine whether the reporting framework to be applied in the preparation, audit, review of the secretarial/ non-financial statements is acceptable; and
(b) Obtain the agreement of management that it acknowledges and understands its responsibility:
(i) For the preparation of the secretarial/ non-financial statements in accordance with the applicable reporting framework, including where relevant their fair presentation
(ii) For such internal control/systems/procedure as management determines is necessary to enable the preparation of secretarial/ non- financial statements that are free from material misstatement, whether due to fraud or error; and
(iii) To provide the firm with:
(a) Access to all information of which management is aware that is relevant to the preparation/audit/review etc. of the secretarial/ non- financial statements such as records, documentation and other matters.
(b) Additional information that the firm may request from management for the relevant purpose; and
(c) Unrestricted access to persons within the entity from whom the auditor determines it necessary to obtain audit evidence.

Question 30.
ABC Ltd. has got the licence for setting up of a Rubber enterprise in State of Tamil Nadu. While providing the environmental clearance, Ministry of Environment, Forest and Climate Change imposes the condition for audit to check the compliances of norms issued with respect to environment. The company engages C & Co. Practicing Company Secretary (PCS) for this specific purpose. Prepare a note on Environmental Due Diligence as the PCS. (June 2019, 5 marks)
Answer:
From:
C& Co.
Company Secretary in Practice

To:
ABC Ltd.
Subject: Environment Due Diligence for setting up of a Rubber enterprises in the State of Tamil Nadu.
Dear Sir,
We need your kind attention that audit of the compliance of environment norms and the environmental due diligence is scheduled on ____________. In this regard, we request you to please avail the following documents and records for audit on the schedule dates:

• List of environmental permits and licenses and Validities of the same
• All correspondence and notices with Environment Protection Agencies, state, or local regulatory agencies.
• Whether the company’s disposal methods of various by products are in sync with the regulatory guidelines.
• Whether there are any contingent environmental liabilities or continuing indemnification obligations.
  We further inform you that as a part of the Environmental due diligence process, we will also review and prepare the detailed assessment report based on to historic, current and potential future environmental risks associated with the proposed locations at Tamil Nadu and for its operations. The process involves the risk identification and assessment with respect to:
• Environmental setting and history of the site
• Assessment of the site conditions
• Operations and management of sites
• Confirmation of legal compliance and pollution checks form regulatory authorities etc.
  Accordingly, We request you to please provide the records and available for the Audit on the scheduled dates.

Regards,
CS ___________
C & Co.
Company Secretary in Practice

Question 31.
There are various heads under which due diligence of Competition Law can be carried out. Explain. (June 2019, 5 marks)
Answer:
Due diligence of competition law may be made under the following heads:
1. Due diligence of various agreements (both existing and proposed)
2. Due diligence on dominance and its likely abuse, if any (existing)
3. Due diligence on combinations (i.e. effect of proposed mergers and Acquisition)
1. Due Diligence of various agreements includes:

• Agreements relating to production, supply and distribution of goods or services.
• Agreement if any with competitor relating to production, marketing or bidding, price etc.
• Agreements with customers and distributors.
• Purchase agreements.
• Non-compete covenants.
• Technology transfer/technical know-how agreements.
• Concession agreements.

2. Due diligence on abuse of dominance if any includes:

• Examination as to the existence of dominance.
• Examination of relevant market, whether product or geographical Areas.
• Cases of abuse if any.

3. Due diligence on regulation of combinations: The following aspects are to be analysed during due diligence process:

• Nature of combination.
• acquisition of share, voting rights, assets or control or merger/ amalgamation etc.
• Examination of total value of Assets or Turnover and the valuation methodology.
• Status of merger notification to be filed with Competition Commission of India.
• Status of dominance after merger.

Question 32.
Explain the due diligence for issue of securities by a Company. (Dec 2019, 5 marks)
Answer:
A public company may issue securities to public through prospectus Public offer by complying with the provisions of Part I of chapter III Prospectus and Allotment of Securities; or through private placement by complying with the provisions of Part II of.chapter III – Prospectus and Allotment of Securities; or through a rights issue or a bonus issue in accordance with the provisions of the Companies Act, 2013 (‘the Act’) and in case of a listed company or a company which intends to get its securities listed also with the provisions of the Securities and Exchange Board of India Act, 1992 and the rules and regulations made thereunder, the key regulation governing the issue of securities and preparation of financial information are

• SEBI (Issue of Capital and Disclosure Requirement) Regulations, 2018
• SEBI (Listing Obligation and Disclosure Requirement) Regulations, 2015.

SEBI ICDR Regulations provide the guidelines relating to conditions for various kind of issue including public and right issue, the ICDR regulations provide detailed provisions:

1. relating to public issue such as conditions an Initial Public offer (IPO) and Further Public Offer (FPO) conditions
2. relating to pricing-in public offering. Conditions governing promoters contribution, restriction on transferability of promoters contributions, minimum offer to public, reservations, manner of disclosures in offer documents etc.

SEBI (LODR) Regulations, 2015 lay down the broad principles for periodic disclosure to be given by the listed entities operating in different segments of capital markets.
A private company may issue securities by way of rights issue or bonus issue in accordance with the provisions of the Act; or through private placement by complying with the provisions of Part II of Chapter III Prospectus and Allotment of Securities & Chapter IV -Share Capital & Debentures of Companies Act, 2013.

The scope and comprehensiveness of the Issue of Securities due diligence is important not only from a legal standpoint to avoid liability but also from a reputational perspective as the reputation of the company and its promoters and other participants may be significantly vanished, if on a later date it appears that the company and other participants are failed to uncover and disclose to prospective investors critical issues relating to the issuer or the Securities.
While the specific requirem ents in connection with issue of securities are different under the Companies Act, 2013 and SEBI Laws & Regulations made thereunder, any non-compliance in these regulations are generally impose liability if the offering memorandum or prospectus contains a materially incorrect or misleading statement or omits a material fact. However in certain conditions the complete issue of securities stand cancelled. The violation of any applicable liability provisions may result in liability for offering participants, in particular the issuer and the underwriters. These liability provisions emphasize the need for careful preparation of all materials to be used in issue of securities offerings, in particular the offering memorandum or prospectus.

Question 33.
Draft the ‘confidentiality undertaking’ and ‘arbitration’ clauses of a non-disclosure agreement. (Dec 2019, 5 marks)
Answer:
Confidentiality Undertaking Clause The Receiving Party agrees:

• to keep confidential and not disclose to any third party, copy, reproduce, adapt, divulge, publish or circulate any part of or the whole of any Confidential Information without the prior written consent of the Disclosing Party; and
• to restrict access to the Confidential Information disclosed to it under this Agreement to those of its employees and officers who need to know the same strictly for the purpose; and
• not to use Confidential Information disclosed to it under this Agreement for any purpose other than the purpose; and
• not to combine any part of or the whole of the Confidential Information with any other information; and
• not to disclose the whole or any part of the Confidential Information to any third party without (a) the prior written consent of the Disclosing Party and (b) prior to disclosure to such third party procuring that the third party is bound by obligations which are no less onerous than those contained in this Agreement; and
• to procure that each employee and officer to whom Confidential Information is disclosed under this Agreement is prior to such disclosure informed of the terms of this Agreement and agrees to be bound by them; and
• to procure that the Confidential Information in its possession is stored securely and that physical access to it is controlled.

Arbitration Clause

1. This agreement shall be construed in accordance with and governed by the laws of India.
2. Any dispute arising in connection with or out of the performance or the interpretation of this agreement, which the parties cannot settle, shall be finally settled by arbitration. The place of arbitration shall be at ………………………. The arbitration shall be governed by the provisions of the Arbitration and Conciliation Act, 1996 and the rules made there under.

Question 34.
As a company Secretary, prepare an information chart, to be contained in, for preparing a scheme of amalgamation. (Dec 2019, 5 marks)
Answer:
1. Drafting of Scheme:
The Scheme of amalgamation would comprise of various parts containing details about Transferor Company, Transferee Company. The Scheme in particular would comprise of the following in detail:

Introductory Part:

• Basic Details of the Transferor & Transferee company like date of incorporation, CIN and registered office and address for service of notice
• Main objects in Memorandum of Association of Transferor and Transferee Company
• Jurisdiction of the Bench
• Limitation
• Facts of the case – reason in brief for going into merger or amalgamation
• Nature of business
• Share Capital of the companies involved and shareholding, relationship between the companies involved
• Definition Clause Operating Part – The scheme
• Appointed Date – The scheme shall clearly indicate an appointed date from which it shall be effective and the scheme shall be deemed to be effective from such date and not at a date subsequent to the appointed date.
• Transfer of the undertaking of the Transferor Company or transfer of the Transferor Company perse
• Transfer of assets
• Transfer of debts and liabilities
• Transfer of licenses, approvals / permissions
• Transfer of Company’s staff, workmen and employees
• The transfer of undertaking or the Transferor Company not to affect the transaction/contracts of transferor Company
• Enforcement of contracts, deeds, bonds and other instruments
• Enforcement of Legal Proceedings
• Issue and Allotment of Shares under the Scheme
• Increase in Authorized Share Capital
• Accounting Treatment
• Conduct of business by the transferor Company till effective date
• Dissolution of Transferor Company
• Effect of Scheme
• Expenses relating to the Scheme
• Scheme conditional upon approval / sanctions
• Effect of non-receipt of approvals
• General terms and conditions applicable for the scheme Prayer/Relief Part
• Approval of scheme
• Particulars of Bank draft evidencing payment of fee for the Application In addition to the above, a clean and clear drafting of the Petition is required to be submitted to the NCLT, which would make process easier.

Following are the standard guidelines for presenting an application or petition before NCLT, prescribed in National Company Law Tribunal Rules, 2016 and Companies (Compromises, Arrangements and Amalgamations) Rules, 2016:-.

1. The petition / application being filed shall fall under the proper territorial jurisdiction of NCLT Bench.
2. The petition / application and all enclosures shall be legibly typewritten in English language.
3. The petition / application / appeal / reply shall be printed in double line spacing on one side of the standard petition paper with an inner margin of about 4 cms width on top and with a right margin of 2.5 cm left margin of 5 cm and duly paginated, indexed and stitched together in paper book form.
4. The petition/ application shall be filed in prescribed form with stipulated fee in triplicate by duly authorised representative of the companies or by an advocate duly appointed in this behalf
5. The petition shall also be accompanied by an index and memo of the parties.
6. The cause title of the petition/application shall be “Before the National Company Law Tribunal” and it shall also specify the Bench to which it is presented.
7. All the relevant provisions of the Companies Act, 2013 / NCLT Rules, 2016 shall be clearly mentioned in the petition / application.
8. The petition/application shall be divided into paragraphs and shall be numbered consecutively and each paragraph shall contain a separate fact or point.
9. The foot of petition / application shall have name and signature of the authorized representative.
10. The name of the petitioner / applicant along with complete address, viz, the name of the road street lane and municipal division or ward, municipal door and other number of the house, the name of the town or village; the post office; postal district and pin code shall be mentioned in the petition /application.
11. The fax number, mobile number, valid email addresses of the petitioner / applicant shall also be mentioned.
12. Every interlineations, eraser or correction or deletion in petition / application shall be initialed by the party or his authorized representative.
13. The affidavit verifying the petition in Form NCLT-6 shall be drawn on non-judicial /stamp paper of requisite value duly attested by Notary public / Oath Commissioner.
14. Full name, parentage, age, description of each party, date, address and in case a party sues or being sued in a representative character, has been set out in accordance to Rule 20(5) of the NCLT Rules, 2016.
15. Petition / application / appeal reply has been drawn in the prescribed form i.e. Form No. NCLT.1 withstipulated fee given in the Schedule of these rules. The fee is to be paid by way of demand draft / PO drawn in favour of the “The Pay & Accounts Officer, Ministry ,of Corporate Affairs, New Delhi” or can be paid through online dt nclt.gov.in.
16. The documents attached with petition / application shall be duly certified by the authorized representative or advocate filing the petition or application.
17. The annexure to the petition /application shall be serially numbered.
18. The Vakalatnama shall bear court fee stamp.
19. The documents with regard to shareholding/paid-up capital/latest balance sheet of the petitioner/ applicant shall be attached.
20. Document other than in English language shall be duly translated and accordingly a translated copy duly certified shall be attached with petition/application.

2. Submission of Application / Petition:
Petition to the Tribunal for merger & amalgamation shall be submitted in Form No. NCLT-1 along with following documents:

• A notice of admission in Form No. NCLT-2
• An affidavit in Form No. NCLT-6
• A copy of Scheme of compromise and arrangement (Merger & Amalgamation)
• The applicant shall also disclose to the Tribunal in the application, the basis on which each class of members or creditors has been identified for the purposes of approval of the scheme.

3. Calling of Meeting by Tribunal:
The Tribunal upon hearing the application may either give relevant directions / order for conducting the meeting of the creditors or class of creditors, or of the members or class of members or may dismiss the application for any appropriate reason.

Question 35.
Mega Ltd. has identified Helping Hands, a reputed NGO for executing its CSR activities as an implementation agency. However, one of the directors suggested it would be better if the company considers to go for a FCRA due diligence before finalizing and appointing th&tJGO. Explain in brief about the FCRA due diligence. (Aug 2021, 5 marks)
Answer:
The Foreign Currency (Regulations) Act, 2010 (FCRA 2010), read with the Foreign Contribution (Regulation) Rules 2011(FCRR, 2011), as amended from time to time were enacted to regulate the inflow of foreign funds received by NGOs.
The FCRA, 2010 replaces the erstwhile Foreign Contribution (Regulation) Act of 1976.
The FCRA legislation state that an organization cannot receive funding from a foreign source, unless it is registered under the Foreign Currency (Regulations) Act, 2010 or has obtained specific permission for receiving such foreign contribution for a specific project. Also, the registered NGOs need to comply with various post-registration/ permission requirements, as detailed in the provisions of the FCRA 2010 and FCRR 2011.
It is necessary of the entities who receive foreign funding should review the updated FCRA norms and meet their compliance obligations meticulously to avoid any regulatory actions. The FCRA Due Diligence through a proper verification of the compliance status of the NGO gives a comfort to the company that if the NGO is chosen as the implementing agency for the CSR Activities of the Company, the activities done by the NGO for the company shall be within full compliance of FCRA legislations.
The key aspects of the FCRA Due Diligence could be summarised as follows:
Scope of the Act on NGO’s Activities: FCRA Legislation is applicable only if the NGO received foreign contributions.
Registration & Prior Approval: If the NGO has received foreign contributions, then it needs to be verified if the NGO has obtained Registration or has it obtained specific prior permission for the foreign contributions received by it and whether the underlying conditions, prescribed for such registration/ prior permission are being complied with or not.
Reporting Requirements: All NGOs receiving foreign contributions are required to file periodical returns with the FCRA Division of the Ministry of Home Affairs. All NGOs are required to submit their annual return. This return has to include all the details of the contributions received, namely.

• Source and manner in which it is received;
• Purpose for which it was received; and,
• Manner of usage of the contributions.

It is necessary for the entities who receive foreign funding should review the updated FCRA norms and meet their compliance obligations meticulously to avoid any regulatory actions. As once an entity appears under the government scanner for non-compliance, such organizations may face all manner of restrictions and regulatory obstacles.
Due diligence of the NGO can be done by reviewing these annual returns and other compliances under the FCRA.

Question 36.
Write a brief note on guidance criteria for verification of compliances under Foreign Exchange Management Act, 1999 and the rules and regulations made thereunder. (Aug 2021, 5 marks)
Answer:
Verification of compliances under Foreign Exchange Management Act, 1999 and the rules and regulations made thereunder
Under Foreign Exchange Management Act, 1999, the Central Government issued Foreign Exchange Management (Non-debt Instruments) Rules, 2019. Further, the Reserve Bank of India issued Foreign Exchange Management (Transfer or Issue of any foreign Security) Regulations, 2004 and Foreign Exchange Management (Mode of Payment and Reporting of Non-Debt Instruments) Regulations, 2019 as well as Foreign Direct Investment (FDI) Policy issued by DPI IT which are required to be complied with.
The Verification of Compliances includes:

• Permission for making investment by a person resident outside India, including foreign portfolio Investor, NRI or OCI on Repatriation basis/ Non-Repatriation basis etc.
• Purchase and sale of securities other than capital instruments by a person resident outside India
• Investment in a Limited Liability Partnership (LLP)
• Investment by a Foreign Venture Capital Investor (FVCI)
• Investment by a person resident outside India in an Investment Vehicle
• Investment in Depository receipts by a person resident outside India – Issue of Indian Depository Receipts (IDRs)
• Acquisition through a rights issue or a bonus issue
• Issue of shares under Employees Stock Options Scheme to persons resident outside India
• Issue of Convertible Notes by an Indian startup company
• Merger or demerger or amalgamation of Indian companies
• Transfer of capital instruments of an Indian company by or to a person resident outside India
• Pricing Guidelines
• Reporting requirements Advance Remittance Form, Form Foreign Currency- Gross Provisional Return, Annual Return on Foreign Liabilities and Assets, Form Foreign Currency-Transfer of Shares, Form Employees’ Stock Option. Form Depository Receipt Return, Form LLP, Form Convertible Notes etc. *
• Prohibited activities for investment by a person resident outside India
• Permitted sectors, entry routes and sectorial caps for total foreign investment.

Question 37.
Prepare a brief note on Right to Access Records and Methodology for Diligence Reporting. (Dec 2021, 5 marks)
Answer:
Right to Access Records and Methodology for Diligence Reporting
To enable the practicing company secretary (PCS) to issue the Diligence Report, the Company (borrower) should provide the PCS access at all times to the books, papers, minutes books, forms and returns filed under various statutes, documents and records of the company, whether kept in pursuance of the applicable laws or otherwise and whether kept at the registered office of the company or elsewhere which he considers essential for the purposes of Diligence Reporting.

The PCS shall be entitled to require from the officers or agents of the company such information and explanations as he or she may think necessary for the purpose of such reporting. However, depending on the facts and circumstances, he/she may obtain a letter of representation from the company in respect of matters where verification by PCS may not be practicable, for example matters like

• disqualification of directors;
• show cause notices received;
• persons and concerns in which directors are interested, etc.

Question 38.
What do you understand by reporting with qualification? (Dec 2021, 5 marks)
Answer:
Reporting with Qualification
1. A qualification, reservation or adverse remarks, if any, should be stated by the auditor at the relevant places in his report in bold type or in italics.

2. If the auditor is unable to express an opinion on any matter, he should mention that he is unable to express an opinion on that matter and the reasons therefor.

3. If the scope of work required to be performed is restricted on account of restrictions imposed by the company or on account of circumstantial limitations (like certain books or papers being in the custody of another person who is not available or a government authority), the report should indicate such limitations.

4. If such limitations are so material that the Auditor is unable to express any opinion, the Auditor should state that in the absence of necessary information and records, he is unable to report on compliance(s) relating to such areas by the Company.
Further, the board of directors, in its report prepared under section 134(3) of the Companies Act, 2013, shall provide and explanation in full on any qualification or observation or other remarks made by the company secretary in practice in the secretarial audit report.

Question 39.
Whether Intellectual Property Due Diligence can be considered as Technical Due Diligence ? Prepare a brief note. (Dec 2021, 5 marks)
Answer:
Technical due diligence can be classified in to (i) intellectual property due diligence; and (ii) technology due diligence.

Intellectual Property Due Diligence:
The company which owns Intellectual Property (IPs) use that IPs to monetize their business. These IPs are something that differentiates their product and service from their competitors. However the concept of valuation of intangible assets related to Intellectual Property like Patents, Copyrights, Design, Trademarks, Brands etc., also getting greater importance as these Intellectual Properties of the business are now often sold and purchased in the market by itself, like any other tangible asset. Many Indian companies and corporate entities do not give much importance to the portfolio management of their Intellectual Property Rights (IPR). The main objective of intellectual property due diligence is to ascertain the nature and scope of target company’s right over the intellectual property, to evaluafe the validity of the same and to ensure whether there is no infringement claims.

Few of the items that need to be seen while conducting due diligence is:

• Schedule of patents and its application.
• Schedule of copyrights, trademarks and brand names.
• Pending patents clearance documents.
• Any pending claims case by or against the company in violation of intellectual property

Question 40.
TQP Ltd. wants to amalgamate with the company RZP Ltd. As a Practising Company Secretary, explain about preparing the scheme of amalgamation and its contents. (June 2022, 5 marks)

Question 41.
Star Ltd. and its group company Earth Ltd. acquired shares of Mars Ltd. (the target company) over a period of time. On 17th December, 2014, Star Ltd. and Earth Ltd. were holding 13.86% and 4.74% shares respectively of the target company. Both these companies want to further acquire shares in the target company. You are asked to advise the companies whether these companies can freely acquire further shares in the target company as per the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011. (June 2015, 5 marks)
Answer:
The holdings by Star Ltd., and Earth Ltd. on 17th December 2014 were 18.60% (i.e. 13.86% + 4.74%). Accordingly, if Earth Ltd., and Star Ltd. along with any other person acting in concert, want to acquire additional share that would result in 25% or more shares or voting rights in Mars Ltd. (including the current holding of 18.60%), then, it will have to make open offer before acquiring such additional shares that would entitle them to exercise 25% or more of voting rights of Mars Ltd. because as per Regulation 3 of SEBI (Substantial Acquisition of Shares and Takeovers) Regulation 2011, an acquirer, who along with persons acting in concerts (PAC), if any] holds less than 25% of shares or voting rights in target company and agrees to acquire or acquires shares /voting rights alongwith PAC’s that would entitle him to exercise 25% or more of voting rights in a target company, needs to make an open offer before acquiring such additional shares.

Question 42.
Sun Chemicals Ltd., a chemical speciality company proposes to get itself merged with Star Industries Ltd., a pioneer in chemicals, fertilizers and plastic moulds having a market share of more than 40%. List out the basic information that the company may require under the scheme of amalgamation. (Dec 2015, 5 marks)
Answer:
The Scheme of amalgamation to be prepared by the company should contain inter-alia the following information:

• Definitions of the transferor and transferee as well as the definition of the undertaking of the transferor company.
• Authorised, issued and subscribed capital of transferor and transferee ccmpanies.
• Basis of scheme should be explained briefly on the recommendation of valuation report, covering transfer of assets/liabilities, specified date, reduction or consolidation of capital, application to financial institutions as lead institution for permission, etc.
• Change of name, objective and accounting year.
• Protection of employment.
• Dividend position and prospects.
• Management structure, indicating the number of directors of the transferee company and the transferor company.
• Applications under sections 230 to 232 of the Companies Act, 2013 to obtain approval from the Tribunal.
• Expenses of amalgamation.
• Conditions of the scheme to become effective and operative and the effective date of amalgamation.
  The basis of the scheme should be framed on the reports of valuers, auditors and chartered accountants of assets of both the merger partner companies.

Question 43.
M/s S. Core Advisory Services Pvt. Ltd. has submitted its bid invited through International Bidding Process by RE Textiles & Yarns Ltd. Being a lowest bid, the letter of award was issued in favour of M/s S. Core Advisory Services Pvt. Ltd. for providing consultancy services to set up a knitting Fabric Plant at Maharashtra. M/s S. Core Advisory Services Pvt. Ltd. is already providing consultancy services to various organizations in India and outside India. RE Textiles & Yarns Ltd. asks M/s S. Core Advisory Services Pvt. Ltd. to enter into a Non Disclosure Agreement. The Agreement is proposed to be signed at Mumbai. The Management of RE Textiles & Yarns Ltd. wants to include the following clauses in the Agreement:
(1) No Title to Use
(2) No Obligation to Disclose, No Representations
Prepare a brief note on above two clauses required to be included in the Non-Disclosure Agreement. (June 2018, 5 marks)
Answer:
The Model contents of the clauses to be included in the Non-Disclosure Agreement are as under:
1. No title of Use
Nothing contained in this Agreement shall be construed as conferring upon the Receiving Party any right of use in or title to Confidential Information received by it from the Disclosing Party, other than as expressly provided herein:

2. No Obligation to Disclose, No Representations
Nothing in this Agreement shall be construed as-

• creating an obligation on any of the Parties to disclose particular information; or
• creating an obligation on the parties to negotiate; or
• as a representation as to the accuracy, completeness, quality or reliability of the information.

Question 44.
Snehal Santhan a non-profit organization registered under Section 8 of the Companies Act, 2013 is enlisted under the Foreign Contribution (Regulation) Act, 2010 (FCRA) to procure foreign money. The organization is actively engaged in development of children of slum areas of Mumbai. For this purpose the organization is getting donation of $ 100K from Helping Hands, a social organization of California. As a Company Secretary in Practice, guide the organization about procurement and utilisation of this donation. Also state the due diligence and reporting requirements. (Dec 2020, 5 marks)
Answer:
The guidelines for Foreign Funding are as under:

• As per Section 17 of Foreign (Contribution) Regulation Act, 2010, NGOs have to open and maintain bank accounts, which will exclusively deal with the receipt and utilization of foreign contributions.
• A separate set of accounts and records must be maintained, exclusively for these transactions.
• The FCRA also mandates that foreign contributions must be utilized only for the purpose for which they were received.
• Under Section 7 of Foreign (Contribution) Regulation Act, 2010, the transfer of contributions is not allowed. A person or entity is prohibited from transferring contributions to any other person, unless such transferee is authorized by the government to receive foreign contributions.
  Or
  Under Section 7 of the Foreign Contribution (Regulation) Act, 2010 (as amended by the Foreign Contribution (Regulation) Amendment Act, 2020) No person who is registered and granted a certificate or has obtained prior permission under this Act and receives any foreign contribution, shall transfer such foreign contribution to any other person.

The Due Diligence & Reporting Requirements are as under:
The most important reporting requirement under FCRA is the submission of annual returns. All NGOs are required to submit their annual-returns online with scanned copies of income and expenditure statement, receipt and payment account and balance sheet within nine months from the closure of the previous financial year. This return has to include all the details of the contributions received, namely:

• Source and manner in which it is received;
• Purpose for which it was received; and,
• Manner of usage of the contributions.

It is necessary for the entities who receive foreign funding to review the updated FCRA norms and meet their compliance obligations meticulously to avoid any regulatory actions. As once an entity appears under the government scanner for non-compliance, such organizations may face all manner of restrictions and regulatory obstacles.

Question 45.
Explain the necessity of the due diligence.
Answer:
The necessity of the due diligence can be summarized as under:

• To investigate in to the affairs of business as a prudent business person
• To confirm all material facts related to the business
• To access the Risks and opportunities of a proposed transaction
• To reduce the Risk of Post Transaction
• To confirm that the business is what as it appears
• To create a trust between two unrelated parties
• To identify potential deal killers defected in the target and avoid a bad business transaction
• To gain information that will be useful for valuing assets
• Representations warranties for indemnification
• Negotiation price concessions
• To verify that the transaction complies with investment or acquisition criteria
• To investigate Sevaluate a business opportunity
• To determine compliance with relevant laws and disclose any regulatory restrictions on the proposed transaction
• To evaluate the condition of the physical plant and equipment; as well as other tangible and intangible assets
• To ascertain the appropriate purchase price and the method of payment.
• To determine details that may be relevant to the drafting of the acquisition agreement,
• To discover liabilities or risks that may be deal-breakers
• To analyze any potential antitrust issues that may prohibit the proposed M&A.
• To evaluate the legal and financial risks of the transaction

Question 46.
Explain the scope of Due Diligence
Answer:
Scope of due diligence is transaction based and is depending on the needs of the people who are involved in the potential investments, in addressing key uncovered issues, areas of concern/threat and in identifying additional opportunities.
Due diligence is generally understood by the legal, financial and business communities/potential investors to mean the disclosure and assimilation of public and proprietary information related to the assets and liabilities of the business being acquired. This, information includes financial, human resources, tax, environmental, legal matters, intellectual property matters etc. The investigation or inspection would cover:

• Compliance with applicable laws
• Regulatory violations or disciplinary actions
• Litigation and assessment of feasibility of pursuing litigation
• Financial statements
• Assets – real and intellectual property, brand value etc.
• Unpaid tax liens and/or judgments
• Past business failures and consequential debt
• Exaggerated Credentials/Fraudulent claims
• Misrepresentations or character issues
• Cross-border issues – double taxation, foreign exchange fluctuation, sovereign risk, investment climate, cultural aspects.
• Reputation, goodwill and other intangible assets.

Question 47.
What items needs to be seen while conducting Intellectual Property Due Diligence?
Answer:
Few of the items that need to be seen while conducting due diligence is:

• Schedule of patents and its application
• Schedule of copyrights, trademarks and brand names
• Pending patents clearance documents
• Any pending claims case by or against the company in violation of intellectual property.

Question 48.
What are the areas that should be examined and reviewed during payroll and labour due diligence?
Answer:
During the payroll and labour due diligence the auditor should examine and review the following areas:

• Labour law regulations and agreements;
• Employment contracts, amendments to employment contracts;
• Information, job descriptions;
• Legal declarations/agreements regarding termination of employment;
• Maintenance of Records
• Verification of compliance by Contractor engaged by the company
• Observing Liability as Principal Employer.

Question 49.
Explain the primary components of the Competition Law Due Diligence.
Answer:
Primary components of Competition Law due diligence are:

• An examination of selected company documents.
• Interviews with selected company personnel.
• identify specific business activities that potentially could create antitrust exposure for the company.
• The results of the due diligence may suggest an enterprise to have an effective competition law compliance programme.
• The results of the due diligence may result in variation of deal value, withdrawal of deal and also make suggestions to structure a compliance program.
• How to go about the process of due diligence of competition law.

Question 50.
Describe the Due Diligence Process in the M&A Strategy
Answer:

Stages	For Buyer	For Seller
Preparation Stage	M&A Strategy formulation Preparation of List of potential Targets Appoint external advisor for evaluation of targets Short list targets Create Due diligence team	Structure a Business Plan Preparation of list of potential buyers Appoint external advisor Shortlist buyers
Pre diligence	Approach targets Negotiation of initial terms Execute Non Disclosure Agreement Compilation of list of data required	Approach buyers Negotiate initial terms Execution of Non Disclosure agreement Creation of Data room
Due diligence	Inspection of Data room Analysis of private documents Evaluation of risk and return Structure the terms and conditions	Assistance in data room Setting deadlines for offer
Negotiations	Make final offer Negotiate and agree on terms	Compile final offers Select best offer Negotiations
Post diligence	Post merger integration and cultural adjustments	Termination of data room and ownership exchange

Question 51.
How the scheme of amalgamation to be prepared by the company?
Answer:
The scheme of amalgamation to be prepared by the company should contain interalia the following information:

1. Definitions of transferor and transferee as well as the definition of the undertaking of the transferor company.
2. Authorised, issued and subscribed capital of transferor and transferee companies.
3. Basis of scheme should be explained briefly on the recommendation of valuation report, covering transfer of assets/liabilities, specified date, reduction or consolidation of capital, application to financial institutions as lead institution for permission, etc.
4. Change of name, object and accounting year.
5. Protection of employment.
6. Dividend position and prospects.
7. Management structure, indicating the number of directors of the transferee company and the transferor company.
8. Applications under Sections 230 and 230 of the Companies Act, 2013 to obtain approval from the Tribunal.
9. Expenses of amalgamation.
10. Conditions of the scheme to become effective and operative and the effective date of amalgamation.
    The basis of the scheme should be framed on the reports of valuers, auditors and chartered accountants of assets of both the merger partner companies.

Question 52.
What are the Information/Documents that can be required by the Regional Director, Ministry of Corporate Affairs, in Connection With Amalgamation?
Answer:
Information/Documents that may be required by the Regional Director, Ministry of Corporate Affairs, in Connection With Amalgamation.

• Balance sheets for last five years of the transferee company.
• Balance sheets for last five years of the transferor company.
• Two copies of the valuation report of the chartered accountants.
• List of top shareholders of the transferee company.
• List of top shareholders of the transferor company.
• List of directors of the transferor company and their other directorships.
• List of directors of the transferee company and their other directorships.
• Number and percentage of NRI and foreign holding in the transferee and transferor companies.
• Rights/Bonus/Debentures Issues made by the transferee and the transferor companies in the last five years.

Due Diligence-I Notes

Due Diligence:
“Due diligence” is an analysis and risk assessment of an impending business transaction. It is the careful and methodological investigation of a business or persons, or the performance of an act with a certain standard of care to ensure that information is accurate, and to uncover information that may affect the outcome of the transaction.

Objectives of Due Diligence:

• Collection of material of information
• Identification of strength and threats and weaknesses.
• To improving the bargaining position.
• Identification of areas where representations and warranties are required.

Scope of Due diligence:
Scope of Due diligence is transaction based and is depending on the needs of the people who are involved in the potential investments, in addressing key uncovered issues, areas of concern/threat and in identifying additional opportunities.

Factors to be kept in mind while conducting due diligence:

• Objectives and purpose
• Planning the schedule
• Negotiation for time
• Risk Minimisation
• Information from external sources
• Limit the report with only material facts
• Structure of information

Deal Breakers:
In this report the findings can be very glaring and may expose various non-compliance that may arise – any criminal proceedings or known liabilities.

Deal Diluters:
The findings arising out a diligence may contain violations which may have an impact in the form of quantifiable penalties and in turn may result in diminishing the value of company.

Deal Cautioners:
It covers those findings in a diligence which may not impact the financials, but there exist certain non-compliances which though rectifiable, require the investor to tread a cautious path.

Deal Makers:
Which are very hard to come by and may not be a reality in the strict sense, are those reports wherein the diligence team have not been able to come across any violations, leading them to submit what is called a ‘clean report’.

Post Diligence:
Post diligence sometimes result in rectification of non-compliances found during the course of due diligence. There can be interesting assignments arising out of the diligence made by the team of professionals. It can range from making applications/filing of petition for compounding of various offences or negotiating the shareholders’ agreement, since the investors will be on a strong wicket and may negotiate the price very hard.

Operational Due diligence:
Operational Due diligence aims at the assessment of the functional operations of the target company, connectivity between operations, technological up gradation in operational process, financial impact on operational efficiency etc. It also uncovers aspects on operational weakness, inadequacy of control mechanisms etc.

Financial Due diligence:
One of the most important types of Due diligence as it seeks to check whether the financials showcased in the Information Memorandum is correct or not.
The Financial Due diligence also review the company’s projection and basis of such projections, capital expenditure plan, schedule of inventory, debtors and creditors, etc.
The Financial Due Diligence can further extended to tax Due diligence which covers the Diligence on various taxes the company is required to pay and which ensure that the proper calculation with no intention of under reporting of taxes. Status of any tax related case running with the tax authorities. The tax due diligence comprises an analysis of:

• tax compliance
• tax contingencies and aggressive positions
• transfer pricing
• identification of risk areas
• tax planning and opportunities

Technical Due diligence:
Technical Due diligence can be classified in to (i) intellectual property due diligence; and (ii) technology Due diligence.
The company which owns Intellectual Property (IPs) use that IPs to monetize their business. These IPs are something that differentiates their product and service from their competitors. However the concept of valuation of intangible assets related to Intellectual Property like Patents, Copyrights, Design, Trademarks, Brands etc., also getting greater importance as these Intellectual Properties of the business are now often sold and purchased in the market by itself, like any other tangible asset. Many Indian companies and corporate entities however do not give much importance to the portfolio management of their Intellectual Property Rights (IPR). The main objective of intellectual property due diligence is to ascertain the nature and scope of target company’s right over the intellectual property, to evaluate the validity of the same and to ensure whether there is no infringement claims.

Technology Due Diligence:
Technology Due diligence help organizations in the decision-making process when acquiring new technologies or lines of business, or when they need a simple evaluation of how their current technology is functioning. Technology due diligence considers aspects such as current level of technology, company’s existing technology, further investments required etc. Technology is a key component of merger and acquisition activities; it’s imperative to look at IT considerations.

Environmental Due diligence:
Environmental Due diligence analyses environmental risks and liabilities associated with an organisation. This investigation is usually undertaken before a merger, acquisition, management buy-out, corporate restructure etc.
Environmental Due diligence provides the acquirer with a detailed assessment of the historic, current and potential future environmental risks associated with the target organisation’s sites and operations.

Human Resource Due Diligence:
Human Resource Due. Diligence aims at people or related issues. Key managers and scarce talent leave unexpectedly. Valuable operating synergies get disturbed, when cultural differences between companies aren’t understood or are simply ignored. It’s crucial to consider cultural and employees issues upfront, for success of any venture.

Labour Law Due Diligence:
The purpose of a labour due diligence is to conduct a comprehensive review. The compliance from a labour law perspective in order to identify gaps before an authority audit any non-compliances relating to the inappropriate application of labour law regulations and to allow company to correct errors and deficiencies. The labour law due diligence is identify gaps and minimize labour law and payroll deficiencies before any regulatory action.

Information Security Due Diligence:
Information security due diligence is often undertaken during the information technology procurement process to ensure that risks are uncovered. However the regular review internal information security system helps to identifying security gaps, as well as ensure that the company is acting with an acceptable standard of care elevate existing information security management system. The information security due diligence covers the following:

• Information Security Measure
• Data Protection/ Sharing policy
• Network and System design
• Wireless and Remote Access facility
• Incident Management and Data recovery

Legal Due Diligence:
A legal due diligence covers the legal aspects of a business transaction, liabilities of the target company, potential legal pitfalls and other related issues. Legal due diligence covers intra-corporate and intercorporate transactions.

Due Diligence on Competition Law:
Due diligence on competition law aspects is an examination of the actual operations and practices of an enterprise to determine the extent of its compliance with the competition law and to identify potential risks and liabilities, and assess the adherence to and effectiveness of the company’s competition law compliance policy and training program.

Ethical Due Diligence:
Ethical Due Diligence measures ethical character of the company and identify, the possibilities of ethical risks, which is a non-financial risk. It may relate to reputation, governance, ethical values etc. It helps an organization to decide whether the partner is ethically viable. This is an effective reputation management tool for any type of business decisions.
Ethical due diligence of management of a company involves assessing in terms of their fit with the ethical culture and values of the organization. Ethical performance assessment is also used as one of the parameter of the career development and promotion within the organization.

FEMA Due Diligence:
The FEMA Due diligence helps to avoid damaging circumstances and is helpful in ensuring compliance of Foreign Exchange laws. The FEMA Due diligence covers all types of cross border transactions – import, export, debt funding, equity capital infusion, transfer of shares etc. The following are covered under the FEMA Due diligence:

• Capital Accounts Transactions
• Current Account Transaction
• Currency Transactions
• Regulations, Master Directions and Circulars issued by RBI
• FDI Policy, approvals
• Setting up of Business through Liaison office, Branch office, project office, wholly owned subsidiaries, joint ventures, foreign institutional investors, and foreign venture capital investor, Non-Resident of India /person of Indian origin.

Non Disclosure Agreement (NDA):
NDAs are common in business, as it provide a safe guard to protect trade secrets and other confidential information which are meant to be kept under wraps. Information commonly protected by NDAs might include research and development activities, innovations for a new product, client information, sales and marketing plans, or a unique manufacturing process. The non disclosure agreement ensure that the business secrets will stay underground, and in case of any failure, the company is eligible to have legal recourse and to sue for damages.

Content of the Non-Disclosure Agreements:

• Definitions and exclusions of confidential information
• Obligations from all involved people or parties; and time periods