Answers to PTP_Final_Syllabus 2012_Dec 2014_Set 1

Paper-13: CORPORATE LAWS AND COMPLIANCE

Full Marks: 100 Time Allowed: 3 Hours

This paper contains 3 questions. All questions are compulsory, subject to instructions provided
against each question. All workings must form part of your answer. Assumptions, if any, must be
clearly indicated.

Question 1: Answer all questions [20 Marks]

(i) A public limited company has only seven shareholders, all the shares being fully paid-up.
All the shares of one such shareholder are sold by the court in an auction and purchased by
another shareholder. The company continues to carry on business thereafter. Discuss the
liabilities of the shareholders of the company under the Companies Act, 1956. [3]

(ii) Describe the following in light of the Companies Act, 2013.

A. Global Depository Receipts
B. Key Managerial Personnel
C. Sweat Equity Shares [3]

(iii) The Registrar of Companies issued a certificate of Incorporation actually on 8th January,
2014. However, by mistake, the certificate was dated '5th January, 2014'. An allotment of shares
was made on 7th January, 2014. Could the allotment be declared void on the ground that it was
made before the company was incorporated, as per Companies Act, 1956? [3]

(iv) The Memorandum of Association of a company was presented to the Registrar of

Companies for registration and the Registrar issued the certificate of incorporation. After
complying with all the legal formalities the company started a business according to the object
clause, which was clearly an illegal business. The company contends that the nature of the
business cannot be gone into as the certificate of incorporation is conclusive. Answer the
question whether company's contention is correct or not, as per Companies Act, 1956. [3]

(v) The Directors of a company registered and incorporated in the name ‘Dharti Textile Ltd;
desire to change the name of the company entitled 'National Textiles and Industries Ltd.'. Advise
as to what procedure is required to be followed under the Companies Act, 1956? [3]

(vi) ‘The institution of business exists only if it fulfills the society’s expectations’. Comment. [3]

(vii) ‘Business ethics helps to promote public reputation’. Comment. [2]

Answer:

(i) Out of the seven shareholders, the remaining six members would be personally liable for the
debts of the company since the number of members has reduced below statutory minimum, viz.
7; provided the company continues to carry on business for more than 6 months.
However, only such of the remaining 6 members shall be liable who were cognisant of the fact
of reduction in number of members; the members shall be liable only for such of the debts as
have been incurred by the company after a period of 6 months [Sec 45 of Companies Act,
1956].

Academics Department, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) Pg 1
 Answers to PTP_Final_Syllabus 2012_Dec 2014_Set 1

(ii)
A. Global Depository Receipt - ‘Gobal Depository Receipt’ means any instrument in the
form of a depository receipt, by whatever name called, created by a foreign depository
outside India and authorized by a company making an issue of such depository receipts.

B. Key managerial personnel - 'Key managerial personnel', in relation to a company,

means:
 The Chief Executive Officer or the managing director or the manager;
 The company secretary;
 The whole –time director;
 The Chief Financial Officer; and
 Such other officer as may be prescribed.

C. Sweat Equity Shares - 'Sweat equity shares' means such equity shares as are issued by a
company to its directors or employees at a discount or for consideration, other than
cash, for providing their know-how or making available rights in the nature of intellectual
property rights or value additions, by whatever name called.

(iii) The date of incorporation of the company is 5th January, 2014, since it is the date specified
in the certificate of incorporation. This date is to be considered even though the certificate of
incorporation was issued at a later date (Jubilee Cotton Mills Vs Lewis).
The date of allotment of the shares by the company is 7 th January, 2014. Hence the allotment of
the shares is valid since it has been made by the company after its incorporation.

(iv) The company’s contention is not correct since, as per Sec. 35 of Companies Act, 1956,
certificate of incorporation is conclusive, but not memorandum, and accordingly any illegal
object contained in the object clause of memorandum does not become a legal object
because of operation of Sec. 35.
Thus, if the business carried on by the company is an illegal one, the company, its directors,
officers shall be liable for penalties as per law, and it shall not be a defense for the company
that such business is contained in the memorandum of association.

(v) The steps that are to be followed by Dharti Textile Ltd. As per section 21 of Companies Act,
1956 for name change are enumerated below:
1. Confirm availability of proposed name by filing Form No. 1A with the Registrar along with
prescribed fees of ` 500.
2. Pass a Special Resolution approving the change of name (if the proposed name is
available).
3. File a copy of Special Resolution with the Registrar within 30 days of passing Special
Resolution
4. Issue of fresh certificate of incorporation by the Registrar (on receipt of approval of
Central Government).
5. Change of name to be effective only when fresh certificate of incorporation is issued by
the Registrar.

(vi) According to Gandhiji, "a businessman has to act only as a trustee of the society for
whatever he has gained from the society. Everything finally belongs to the society." Society
bestows upon businesses the authority to own and use land and natural resources. In return,
society has the right to expect that business organisations will enhance the general interests of
consumers, employees and community.

Academics Department, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) Pg 2
 Answers to PTP_Final_Syllabus 2012_Dec 2014_Set 1

Also, if a business organisation does not use its powers in a socially acceptable manner, that
power will be lost in the long run. This is called as 'Iron Law of Responsibility'. Thus, the statement
"The institution of business exists only if it fulfills the society's expectations" is correct.

(vii) It is in the long term interest of a business organisation to observe business ethics. Observing
business ethics serves as a strategic branding tool in differentiating from competitors. It helps an
entity to build trust with all its stakeholders. It also results in positive press coverage, thus
enhancing its reputation with the public, customers and within the business community. Thus, the
statement "Business ethics helps to promote public reputation" is correct.

Question 2: Answer any four questions [60 Marks]

Question 2(a):

(i) Star bank wants to acquire the financial assets of Moon Ltd. Is the bank or financial institution
bound to give notice of acquisition of financial asset to the obligor? State the provisions in this
regard with reference to SARFAESI Act, 2002.

(ii) The Board of directors of M/s. Intelligent Consultants Limited, registered in Chandigarh,
proposes to hold the next Board meeting in the month of May, 2014. They seek your advice in
respect of the following matters:
A. Can the Board meeting be held in Delhi, when all the directors of the company reside at
Chandigarh?
B. Whether the Board meeting can be called on a public holiday and that too after business
hours as the majority of the directors of the company have gone to Delhi on vacation.
C. Is it necessary that the notice of the Board meeting should specify the nature of business to
be transacted?
Advise with reference to the relevant provisions of the Companies Act,1956.
[6+9 = 15]

Answer:

(i) The provisions relating to giving of notice of acquisition of financial asset by the bank or
financial institution are explained below:

1. Notice of acquisition of financial asset to obligor [(Section 6(1)] :

The bank or financial institution may, if it considers appropriate, give a notice of acquisition of
financial assets by any securitisation company or reconstruction company, to the concerned
obligor and any other concerned person and to the concerned registering authority (including
Registrar of Companies) in whose jurisdiction the mortgage, charge, hypothecation, assignment
or other interest created on the financial assets had been registered.

2. Duty of obligor to make payments to the securitisation or reconstruction company [Section

6(2)]
Where a notice of acquisition of financial asset under sub-section (1) is given by a bank or
financial institution, the obligor, on receipt of such notice, shall make payment to the concerned
securitisation company or reconstruction company, as the case may be, and payment made to
such company in discharge of any of the obligations in relation to the financial asset specified in
the notice shall be a full discharge to the obligor making the payment from all liability in respect
of such payment.

Academics Department, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) Pg 3
 Answers to PTP_Final_Syllabus 2012_Dec 2014_Set 1

3. Money received by lender to be held in trust [Section 6(3)]

Where no notice of acquisition of financial asset under sub-section (1) is given by any bank or
financial institution, any money or other properties subsequently received by the bank or
financial institution, shall constitute monies or properties held in trust for the benefit of and on
behalf of the securitisation company or reconstruction company, as the case may be and such
bank or financial institution shall hold such payment or property which shall forthwith be made
over or delivered to such securitisation company or reconstruction company, as the case may
be, or its agent duly authorised in this behalf.

Hence the above procedures are required to be followed by Star Bank before acquisition of the
assets of Moon Ltd.

(ii) Unlike section 166, there is no provision which requires that a Board meeting shall be held -
(a) only on a day that is not a public holiday;
(b) only at the registered office of the company or at any other place within the city, town
or village in which the registered office of the company is situated;
(c) only during business hours.

The answer to the given problem is as under:

A. Section 301 requires that the register of contracts shall be placed in each Board meeting.
However, the Department of Company Affairs (now Ministry of Corporate Affairs) has allowed
the companies to remove the register of contracts to any place provided adequate notice to
shareholders is given indicating the precise periods during which they can inspect the register of
contracts. Thus, in the instant case the Board meeting can be held in Delhi, even though all the
directors of the company reside in Chandigarh and the registered office is also situated at
Chandigarh provided adequate notice to shareholders is given and the inspection of register of
contracts is allowed to the shareholders.

B. As per section 288, if a Board meeting could not be held for want of quorum, then, unless the
articles otherwise provide, the meeting shall automatically stand adjourned to the same day,
time and place in the next week, or if that day is a public holiday, then to next succeeding day,
which is not a public holiday. It means that an adjourned Board meeting can be held only on a
day which is not a public holiday. However, there is nothing in the Act which prohibits the
holding of an original Board meeting on a public holiday. Similarly, the Act does not require that
a Board meeting shall be held only during business hours. However, the articles of the company
may provide otherwise.
In the instant case, the directors intend to hold a Board meeting on a public holiday and after
business hours. Unless the articles of the company provide otherwise, holding a Board meeting
on a public holiday and after business hours is permissible.

C. No form or contents of notice has been specified by the Act. Agenda of a Board meeting is
not required to be sent along with the notice of a Board meeting unless the Act requires a
specific notice to move a resolution at a Board meeting.
Therefore, the notice of Board meeting need not specify the nature of business to be
transacted, unless the articles otherwise require. However, the notice shall state the nature of
business to be transacted in the following cases:
a) Appointment of a person as a managing director if he is already a managing director or
manager in any other company (Section 316).
b) Appointment of a person as a manager if he is already a managing director or manager
in any other company (Section 386).

Academics Department, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) Pg 4
 Answers to PTP_Final_Syllabus 2012_Dec 2014_Set 1

Question 2(b):

(i) The Board of Directors of Xee Ltd. has agreed in principle to grant loan worth ` 38 lakhs to
Mee Ltd. on the basis of the following information. Advise Xee Ltd. about the requirements to be
complied with under the Companies Act, 1956 for the proposed inter-corporate loan to Mee Ltd.

Sl. No. Particulars Amount (`)

(i) Authorised share capital 1,00,00,000
(ii) Issued, subscribed and paid up capital 50,00,000
(iii) Free reserves 10,00,000

(ii) What are the consequences if a company makes inter-corporate loans and investments in
contravention of the provisions of section 372A of Companies Act, 1956?

(iii) Super Limited, a banking company maintained the record of all transactions for a period of
5 years from the date of cessation of the transactions between the clients and the company.
Decide whether the Company has fulfilled its obligation under the provisions of the Prevention of
Money Laundering Act, 2002.

(iv) Examine the validity of appointment of Mr. Bonny, a minor, as a director of Max (Private)
Limited, with reference to Companies Act, 1956.
[6+4+3+2 = 15]

Answer:

(i) Inter-corporate loans, investments etc. are governed by the provisions of section 372A. Firstly
to determine whether a special resolution is required for making fresh investments. This can be
determined as follows:

Particulars Amount (`)

Paid up capital of the company (A) 50,00,000
Free reserves (B) 10,00,000
Aggregate of paid up capital and free reserves (C) 60,00,000
60% of aggregate of paid up capital and free reserves (D) 36,00,000
Higher of (B) or (D), i.e. the ceiling limit for inter-corporate loans, investments 36,00,000
etc. without requiring a special resolution

Proposed Loan to Mee Ltd. 38,00,000

Since the proposed Loan exceeds the ceiling given under section 372A, a special resolution is
required. The company shall adopt the following procedure for making Loan to Mee Ltd.:
(a) Unanimous approval of the Board shall be obtained by passing a resolution at a Board
meeting.
(b) A special resolution shall be passed in the general meeting.
 The notice of special resolution shall state the specific limits, particulars of the company
to which loan is proposed to be given, specific source of funding and other relevant
details.
 The company shall file a copy of special resolution with the registrar within 30 days of
passing the special resolution.
(c) The company shall obtain the prior approval of the Public Financial Institution, if any, from
whom it has taken a term loan.
(d) The company can make such investments only if no default in respect of Public deposits

Academics Department, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) Pg 5
 Answers to PTP_Final_Syllabus 2012_Dec 2014_Set 1

is subsisting.
(e) The rate of interest on loan must not be less than the prevailing bank rate.
The prescribed particulars shall be entered in the register maintained under section 372A(5).

(ii) The provisions relating to contravention of section 372 A can be discussed as under:

1. Contravention of provisions relating to Register of loans etc.

The company and every officer of the company who is in default shall be punishable with
fine of ` 5,000 plus ` 500 for every day till the offence continues.

2. Contravention of other provisions

The company and every officer of the company who is in default shall be punishable with
imprisonment upto 2 years or with fine upto ` 50,000. However, if the loan is repaid in full, no
imprisonment shall be imposed, and where the loan is repaid in part, the imprisonment shall
be proportionately reduced. Further, any person who is knowingly a party to any
contravention shall be liable to indemnify the company for the repayment of the loan, or
the money which has become payable by the company.

(iii) As per section 12, the records of prescribed transactions shall be maintained for a period of
10 years from the date of such transaction (viz. the transaction between the clients and the
banking company).

In the given case, Super Limited has maintained the records of transactions only for a period of
5 years from the date of cessation of the transactions. Thus, Super Limited has failed to maintain
the records for the period of 10 years as prescribed under section 12. Therefore, Super Limited
has defaulted in compliance of section 12.

(iv) Section 274 disqualifies certain persons to act as a director. However, a minor is not covered
by this section. Also, there is no other provision in the Companies Act which disqualifies a minor
from acting as a director.
However, a person can be appointed as a director only if he has been allotted DIN. A minor is
not eligible to obtain DIN. Therefore, a minor cannot become a director in any company,
whether public or private.

Question 2(c):

(i) Mr. Devesh was appointed as the managing director of Casual Industries Ltd. for a period of
five years with effect from 1.4.2008 on a salary of ` 12 lakhs per annum with other perquisites. The
Board of Directors of the company, on coming to know of certain questionable transactions,
terminated the services of the managing director from 1.3.2011. Mr. Devesh termed his removal
as illegal and claimed compensation from the company. Meanwhile the company paid a sum
of ` 5 lakhs on ad hoc basis to Mr. Devesh pending settlement of his dues. Discuss with reference
to Companies Act, 2013, whether:
A. The company is bound to pay compensation to Mr. Devesh, and, if so, how much.
B. The company can recover the amount of ` 5 lakhs paid on the ground that Mr. Devesh is not
entitled to any compensation, because he is guilty of corrupt practices.

(ii) The Board of directors of a beverage company producing several kinds of soft drinks,
namely Priya Limited having a paid up capital of ` 25 lakhs appointed Nishi Limited as sole
selling agent for all its products in India without prior approval of the company in general
meeting without any condition that the appointment is subject to the approval of the company
in general meeting. Nishi Limited, its directors and their relatives are not holding any shares in

Academics Department, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) Pg 6
 Answers to PTP_Final_Syllabus 2012_Dec 2014_Set 1

Priya Limited. Discuss whether the appointment of Nishi Limited as sole selling agent is valid.
State with reasons and reference to Companies Act, 1956, whether your answer will be different
if:
A. Nishi Limited are appointed as sole selling agents only for the State of Maharashtra, or for
whole of India; and
B. For only some of the products manufactured by Priya Limited or for the entire range of
products.

(iii) Explain as per provisions of Companies Act, 1956, whether companies being amalgamated
must be Companies registered under Companies Act, 1956.
[6+6+3 = 15]

Answer:

(i) As per section 202 of the Companies Act, 2013 -

 Compensation can be paid only to a managing director or whole time director or manager.
 The compensation payable shall not exceed the remuneration which he would have earned
if he had been in office for the unexpired residue of his term or for 3 years, whichever is
shorter.
 Where the director has been guilty of fraud or breach of trust or gross negligence in the
conduct of the affairs of the company, he shall not be paid any compensation.

The answers to the given problem are as under:

A. The company is not bound to pay compensation to Mr. Devesh if he has been found guilty
of any fraud or breach of trust. However, it is not proper for the company to withhold the
payment of compensation on the basis of allegations, unless there is a proper finding on the
involvement of Mr. Devesh in corrupt practices.
The compensation payable shall not exceed ` 25 lakhs, i.e. at the rate of ` 12 lakhs per annum
for unexpired period of 25 months.

B. As per the decision in BeIl v Lever Bros [1932] AC 161 House of Lords, the compensation of `
5 lakh already paid by the company to Mr. Devesh cannot be recovered back if the company
later comes to know that Mr. Devesh was guilty of serious breaches of duty and corrupt
practices which would have entitled the company to end the employment of Mr. Devesh
without any compensation. It was also held that the managing director was under no obligation
to disclose to the company the breach of duty so as to give an opportunity to the company to
remove him without paying any compensation.

(ii) The legal position of Priya and Nishi Ltd.:

A. Appointment of a sole selling agent must be made subject to the condition that his
appointment shall be approved by the company in the first general meeting held after his
appointment. The provisions regarding incorporation of this condition are mandatory. If there
is no such condition, the agreement will be void ab initio even if the appointment is
approved by the general meeting [Arantee Manufacturing Corporation v Bright Bolts Pvt.
Ltd. AIR (1967) 37 Comp Cos 758; Department Circular No. 12(11)-CL.- VI/68, dated
6.11.1968].
B. The provisions of section 294 shall apply irrespective of the fact that -
 Appointment of sole selling agent is restricted to a particular area or extends to the
whole of India;

Academics Department, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) Pg 7
 Answers to PTP_Final_Syllabus 2012_Dec 2014_Set 1

 Sole selling agent is appointed in respect of some of the products or the entire range of
products of the company.

In the given case, Nishi Ltd. has been appointed by the Board without any condition regarding
approval of their appointment in the general meeting. Therefore, the appointment is invalid. It is
immaterial as to whether the appointment of sole selling agent is for the State of Maharashtra or
extends to the whole of India. Similarly, whether Nishi Ltd. is appointed for some of the products
or entire range of the products of the company is immaterial.

(iii) For effecting amalgamation of two or more companies, an application shall be made to
the Court under section 391 (Section 394). The benefit of section 394 is available only if the
transferee company (i.e. new company) is a company within the meaning of Companies Act,
1956. However, the transferor company may be any body corporate, whether a company
within the meaning of the Companies Act, 1956 or not. As such, a foreign company can be a
‘transferor company’ but not a ‘transferee company’. Therefore, a scheme of amalgamation
may provide for transfer of foreign companies to Indian Companies. Thus, it is not necessary that
the companies being amalgamated must be companies registered under Companies Act,
1956; it is sufficient if the amalgamated company is a company registered under Companies
Act, 1956.

Question 2(d):

(i) A Public Company secures residential accommodation for the use of its managing director
by entering into a license arrangement under which the company has to deposit a certain
amount with the landlord to secure compliance with the terms of the license agreement. Can it
be considered as a loan to a director? Discuss with reference to Companies Act, 2013.

(ii) What are Special Courts? What are the powers of Special Courts with respect to offence of
money laundering? Discuss with reference to prevention of Money Laundering Act, 2002.

(iii) Referring to the provisions of section 397, of Companies Act, 1956, examine whether the
following acts of the company would amount to oppression:
A. Allotment of shares by directors of the company by which existing majority is reduced to
minority.
B. Allotment of shares by directors of the company by which existing minority are made to
majority
C. A share sale agreement was executed by Vansh, an NRI. The shares and transfer deed was
handed over to an escrow agent. The sale was subject to RBI permission. The shares were not
transferred for 6 years, since RBI permission was not received. Vansh, after waiting for a long
period of time raises the issue and complains of oppression in the capacity of a member. As per
the agreement the sale was unconditional. During the above period Vansh did not exercise any
right as shareholder, nor did the company treat him as a member.
[5+4+6 = 15]

Answer:

(i) As per section 185 of the Companies Act, 2013, no company shall, directly or indirectly,
make any loan to a director.
In the present case, the company has provided the managing director with a housing
accommodation. It does not amount to a loan because of the following reasons:
 The company has not given any deposit or advance to the managing director. The amount
deposited with the landlord cannot be said to be an 'indirect loan' to the managing

Academics Department, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) Pg 8
 Answers to PTP_Final_Syllabus 2012_Dec 2014_Set 1

director.
 It is a usual practice to give a security deposit to the landlord with whom a rent or lease
agreement is entered into. Thus, the company has made the security deposit on account of
bonafide business considerations.
 It is of no concern of the managing director as to the terms on which the company secures
residential accommodation for him.
It is the company and not the director who has entered into the lease agreement. Therefore,
the company can at anytime use the accommodation for any other purpose and the
managing director will have to vacate it, as and when desired by the company.

(ii) The provisions relating to Special Courts are contained in section 43 of the Act, as explained
below:

A. Power of CG to designate Special Court(s) [Section 43(1)]:

The Central Government, in consultation with the Chief Justice of the High Court, shall, for
trial of offence punishable under section 4 by notification designate one or more Courts of
Session as Special Court or Special Courts for such area or areas or for such case or class or
group of cases as may be specified in the notification.
In this sub-section, 'High Court' means the High Court of the State in which a Sessions Court
designated as Special Court was functioning immediately before such designation.

B. Power of Special Court to try any other offence [Section 43(2)]:

While trying an offence under this Act, a Special Court shall also try an offence, other than
an offence referred to in sub-section (1), with which the accused may, under the Code of
Criminal Procedure, 1973, be charged at the same trial.

(iii) Issue of further shares amounts to oppression if it is proved that the idea of issuing further
shares was to benefit one group to the detriment of the other [Piercy v Mill(s) & Co. (1920) 1 Ch
77]. Further issue of shares must be made for the benefit of the company. If the directors use
their fiduciary power of issuing shares for an extraneous purpose like maintenance and
acquisition of control over affairs of the company, it would amount to oppression [Needle
Industries Case]. It is not open to directors to issue and allot shares in a manner by which an
existing majority of shareholders is reduced to minority. If the issue of shares disturbs the existing
majority of the shareholders and if it is not bonafide, it will amount to oppression [Re Gluco series
(P) Ltd.]

A. Thus allotment of shares by directors of the company by which the existing majority is
reduced to minority shall amount to oppression, if the directors acted malafide.

B. Allotment of shares by directors by which the existing minority shareholders are made
majority shall amount to oppression, if the directors acted malafide.

C. When a share sale agreement was executed by an NRI and the scrips and transfer deed
were handed over to an escrow agent as such sale was subject to RBI permission and full
consideration money was received, then such a person after lapse of about 5 years, cannot
raise an issue of oppression in the capacity of a member, as the transfer remained in abeyance
awaiting RBI permission. On fact, the sale of shares was unconditional and unrestricted, and
there was no clause to render the sale agreement infructuous after lapse of any stipulated time.
Also, during the long intervening period neither the NRI exercised any right as a share holder nor
the company treated him as a member [Rajiv Mehta v Group 4 Securities Hindustan (P) Ltd
(1998), 18 SCL 89 CLB]. The facts are similar to the stated case and therefore, it can be said that
there is no oppression.

Academics Department, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) Pg 9
 Answers to PTP_Final_Syllabus 2012_Dec 2014_Set 1

Question 2(e):

(i) Solomon Ltd., a reputed Public Company, had advanced a certain sum of money to one of
its Directors, Mr. Gold on certain terms and conditions and fixing the time limit for repayment
thereof. Now, Mr. Gold has approached the company with a request to extend the time limit for
repayment of the balance loan amounting to ` 12,00,000 by another 6 months. Who, as per
Companies Act, 2013 is authorized to grant the extension as requested by Mr. Gold?

(ii) Briefly explain the meaning of the term 'investigation' and the kinds of investigations that
can be ordered under the Companies Act, 1956?

(iii) The managing director of a company is convicted of an offence involving moral turpitude.
He prefers an appeal against conviction. Can he continue as managing director pending
disposal of the appeal? Can the appellate Court remove the disqualification or stay the same
pending the disposal of the appeal? Discuss in light of Companies Act, 1956.

(iv) Explain briefly the powers of the Central Government to issue directors to the IRDA, as per
IRDA Act 1999.
[2+4+5+4 = 15]

Answer:

(i) As per section 180(1) (d) of the Companies Act, 2013, approval of the members by passing
a special resolution is required in case a company intends to extend the time for repayment of a
debt payable by a director. In the given case, the unpaid amount of the loan of `12,00,000
amounts to debt payable by the director, Mr. Gold. And hence extension of time for repayment
of debt of `12,00,000 requires approval of the members in general meeting by passing a special
resolution.

(ii) Investigation of affairs of a company means investigation of all its business affairs, profit and
loss account, and assets including goodwill, contracts and transactions, investments and other
property interests and control of subsidiary companies too.
The object of an investigation is to discover something which is not apparently visible to the
naked eye. If the allegations are apparent from the balance sheet of the company, no
investigation need be ordered. Prima facie evidence should lead to the conclusion that an
investigation is necessary.

Kinds of investigations:
An investigation can be ordered by the Central Government under sections 235, 237 and 247 of
the Companies Act, 1956. These investigations can be classified as follows:
A. Investigations into affairs of the company (Sections 235 and 237).
B. Investigation of ownership of the company (Section 247).

(iii) The grounds of vacation of office of a director are contained in section 283. However, a
managing or whole time director is subject to additional grounds of vacation of office as
contained in section 267.

If a whole time director or a managing director is convicted by a Court of an offence involving

moral turpitude, he shall vacate his office (Section 267). Even a day's imprisonment or a mere
fine of one rupee will attract this section if the offence involves moral turpitude.
Under section 283, when a director is convicted of any offence involving moral turpitude
(resulting in imprisonment of 6 months or more), the order does not become effectual if an

Academics Department, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) Pg 10
 Answers to PTP_Final_Syllabus 2012_Dec 2014_Set 1

appeal is filed by the director against the order of the Court. The order becomes effectual only
when the appeal, as well as the second appeal, if any, is finally disposed off. However, no such
privilege has been given under section 267. As such, the order of conviction under section 267
becomes effective as soon as order is pronounced. Thus, filing of an appeal against the
conviction order would not save a whole time director or managing director from vacating the
office.

The operation of section 267 takes effect as soon as conviction for an offence involving moral
turpitude is recorded by a Court. The order of conviction does not on the mere filing of an
appeal disappear and it cannot be held that section 267 applies only to a final order of
conviction. As such, the managing director cannot continue pending the appeal. Further, he
shall be eligible to be again appointed as a managing director only if the appellate Court
suspends the order of conviction. As such, where the appellate Court suspends merely the
execution of the sentence, the managing director shall remain disqualified for appointment
[Rama Narang v Ramesh Narang (1995) 83 Comp Cos 194].

The facts of the present case are similar to the facts of the case discussed above. In the light of
the decision given in the above case, it appears that the managing director cannot continue
pending the disposal of appeal. However, if specific order is sought for removal of
disqualification, the appellate Court may suspend the order of conviction, in which case he
shall be eligible to be again appointed as a managing director.

(iv) The provisions of section 18of IRDA Act, 1999 may be explained as follows:

1. Nature of directions and their binding effect [Section 18(1)]

Without prejudice to the foregoing provisions of this Act, the Authority shall, in exercise of its
powers or the performance of its functions under this Act, be bound by such directions on
questions of policy, other than those relating to technical and administrative matters, as the
Central Government may give in writing to it from time to time:
Opportunity to Authority before giving directions [Proviso to Section 18(1)]. The Authority shall, as
far as practicable, be given an opportunity to express its views before any direction is given
under this sub-section.

2. 'Question of policy or not' to be decided by the Central Government [Section 18(2)]

The decision of the Central Government, whether a question is one of policy or not, shall be
final.

Question 3: Answer any two questions [20 Marks]

Question 3(a):

(i) ‘Corporate Governance is about promoting fairness’. Is it truly beneficial?

(ii) Write a short note on SA 8000. [6+4 = 10]

Answer:

(i) Corporate Governance deals with promoting corporate fairness, transparency and
accountability. It is concerned with structures and processes for decision-making,
accountability, control and behavior at the top level of the organizations. It influences how the

Academics Department, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) Pg 11
 Answers to PTP_Final_Syllabus 2012_Dec 2014_Set 1

objectives of an organization are set and achieved, how risk is monitored and assessed and
how performance is optimized. It is truly beneficial and it has the following benefits:

1. Improved Financial Performance: Socially responsible business practices are linked to positive
financial performance.

2. Operating Cost Reduction: CSR initiatives can help to reduce operating costs.

3. Brand Image and Reputation: CSR helps a company to increase its brand image and
reputation among the public, which in turn increase its ability to attract investors and trading
partners. Proactive CSR Practices would lead to a favourable public image resulting in various
positive outcomes like consumer and retailer loyalty, easier acceptance of new products and
services, market access and preferential allocation of investment funds.

4. Increased Sales & Customer Loyalty: Businesses must first satisfy customer's key buying criteria,
i.e., price, quality, safety and convenience.

5. Productivity and Quality: Improved working conditions, reduced environmental impacts or

increased employee involvement in decision-making, leads to (a) increased productivity, and
(b) reduced errors.

6. Ability to attract and retain employees: Companies perceived to have strong CSR
commitments find it easier to recruit and retain employees, resulting in reduction in turnover
and associated recruitment and training costs.

(ii) Social Accountability 8000:

 SA 8000 is a comprehensive, global, verifiable performance standard for auditing and

certifying compliance with corporate responsibility.
 The heart of the standard is the belief that all workplaces should be managed in such a
manner that basic human rights are supported and that management is prepared to accept
accountability for this.
 SA 8000 is an international standard for improving working conditions. This standard is based
on the principles of international human rights norms as described in International Labour
Organisation Conventions, the UN Convention on the Rights of the Child and the Universal
Declaration of Human Rights.
 The requirements of this standard apply regardless of geographic location, industry sector, or
company size.

Question 3(b):

(i) Explain the importance of ‘Ethics’ for a finance and accounting professional.

(ii) If you are an accounting professional in a large multinational corporation, what steps would
you undertake to create an ethical accounting environment? [5+5 = 10]

Answer:

(i) The importance of ‘Ethics’ for a finance and accounting professional may be discussed as
two-fold:

1. Public Responsibility:

Academics Department, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) Pg 12
 Answers to PTP_Final_Syllabus 2012_Dec 2014_Set 1

Finance and Accounts is perhaps the only business function which accepts responsibility to
act in public interest. Finance and accounting professional's responsibility is not restricted to
satisfy the needs of any particular individual or organization. While acting in public interest, it
becomes imperative that the finance and accounting professional adheres to certain basic
ethics in order to achieve his objectives.

2. To restore Public Confidence:

Various accounting scandals witnessed during the past few years have put a serious
question mark on the role of the finance and accounting professional in providing the right
information for decision making both within and outside their respective organizations.
As these finance and accounting professionals are in public practice, they should take
reasonable steps to identify circumstances that could pose the conflict of interest and thus
leading to follow unethical behavior.

(ii) The factors that are to be considered for creating an ethical accounting environment are:

1. Employee Awareness:
 Make the employees aware of their legal and ethical responsibilities.
 Train and motivate employees towards ethical behaviour.
 Encourage employees to report cases of violations, frauds, manipulations,
misappropriations, etc.

2. Reporting of Frauds: For reporting violations, manipulations, misappropriations, etc., -

 without any fear of being reprimanded or fired,
 provide facilities to employees.

3. Whistle Blowers:
 A whistle blower is an employee /person who reports frauds, mismanagement or
creating good accounting environment in a business enterprise. Fair treatment and
appreciation of Whistle Blowers is necessary to check fraud.

Question 3(c):

(i) Write a short note on Memorandum of Understanding and Public Sector Enterprises.

(ii) Discuss the difficulties faced in Governance by state owned businesses. [5+5 = 10]

Answer:

(i) Memorandum of Understanding and Public Sector Enterprises:

After Independence, Public Sector Enterprises (PSEs) were set up in India with an objective to
promote rapid economic development through the creation and expansion of infrastructure by
the government. With different phases of development, the role of PSEs has changed and their
operations have extended to a wide range of activities in manufacturing, engineering, steel,
heavy machinery, machine tools, fertilizers, drugs, textiles, pharmaceuticals, petro-chemicals,
extraction and refining of crude oil and services such as telecommunication, trading, tourism,
warehousing, etc. as well as a range of consultancy services. While there have been many PSEs
that have performed very well in competition with private sector enterprises, there are also
many PSEs that have performed very poorly. In an economic environment that has changed
considerably in the last two decades, the role of PSEs has changed and they have been
increasingly guided to reduce their dependence on the Government. They have been listed on

Academics Department, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) Pg 13
 Answers to PTP_Final_Syllabus 2012_Dec 2014_Set 1

the stock exchange and few of them have been privatized. The Government has provided PSEs
the necessary flexibility and autonomy to operate effectively in a competitive environment.
However, there are a few issues with the operation and management of PSEs which still persist
and need to be attended to. There is a need to develop a mechanism on how government
can get an efficient Indian presence in the sectors where the private sector investments are not
forthcoming especially in strategic areas where developing capabilities is essential if India has to
play its rightful role among the among the nations of the world.

(ii) Difficulties Encountered in Governance in state owned businesses

Routine governance regulations become applicable for public sector companies formed under
the Companies Act, 1956 and come under the purview of SEBI regulations the moment they
mobilize funds from the public. The typical organizational structure of PSUs makes it difficult for the
implementation of corporate governance practices as applicable to other publicly-listed
private enterprises. The typical difficulties faced are:
 The board of directors will comprise essentially bureaucrats drawn from various ministries
which are interested in the PSU In addition, there may be nominee directors from banks or
financial institutions who have loan or equity exposures to the unit. The effect will be to have
a board much beyond the required size, rendering decision-making a difficult process.
 The chief executive or managing director (or chairman and managing director) and other
functional directors are likely to be bureaucrats and not necessarily professionals with the
required expertise. This can affect the efficient running of the enterprise.
 Difficult to attract expert professionals as independent directors. The laws and regulations
may necessitate a percentage of independent components on the board; but many
professionals may not be enthused as there are serious limitations on the impact they can
make.
 Due to their very nature, there are difficulties in implementing better governance practices.
Many public sector corporations are managed and governed according to the whims and
fancies of politicians and bureaucrats. Many of them view PSUs as a means to their ends. A
lot of them have turned sick due to overdoses of political interference, even when their
areas of operations offered enormous opportunities for advancement and growth. And
when the economy was opened up, many of them lacked the competitiveness to fight it out
with their counterparts from the private sector.

Academics Department, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) Pg 14