Thursday, August 19, 2010

CA Final Law - Rules and Interpretation of Statutes

CHAPTER 7
RULES AND INTERPRETATION OF STATUTES,
DEEDS AND DOCUMENTS
Question 1
Explain the rule of ‘beneficial construction’ while interpreting the statutes quoting an example
(May, 2000)
Answer
Where the language used in a statute is capable of more than one interpretation, the most firmly established rule for construction is the principle laid down in the Heydon’s case. This rule enable, consideration of four matters in constituting an act:
(1) what was the law before making of the Act,
(2) what was the mischief or defect for which the law did not provide,
(3) what is the remedy that the Act has provided, and
(4) what is the reason for the remedy.
The rule then directs that the courts must adopt that construction which ‘shall suppress the mischief and advance the remedy’. Therefore even in a case where the usual meaning of the language used falls short of the whole object of the legislature, a more extended meaning may be attributed to the words, provided they are fairly susceptible of it. If the object of any enactment is public safety, then its working must be interpreted widely to give effect to that object. Thus in the case of Workmen’s Compensation Act, 1923 the main object being provision of compensation to workmen, it was held that the Act ought to be so construed, as far as possible, so as to give effect to its primary provisions.
However, it has been emphasized by the Supreme Court that the rule in Heydon’s case is applicable only when the words used are ambiguous and are reasonably capable of more than one meaning [CIT v. Sodra Devi (1957) 32 ITR 615 (SC)].
Question 2
What is meant by ‘disclaimer of onerous property’ and how the same is exercised during winding up”. Explain the circumstances under which such a disclaimer is not allowed.
(May, 2000)
Answer
The provisions relating to disclaimer of onerous property will arise during the winding up of the company. The liquidator, may, with the leave of the court disclaim any onerous property within 12 months of the commencement of the winding up. If the existence of any disclaimable property does not come to the knowledge of the liquidator, within one month after the commencement of the winding up, he can disclaim at any time within 12 months after he has become aware of it. The Court has, however, the power to extend the time.
An onerous property may consist of (a) land of any tenure burdened with onerous covenants (b) shares or stocks in companies (c) any other property which is unsaleable or not readily saleable (d) unprofitable contracts.
The liquidator’s right to disclaim is lost if within 28 days or such extended period as may be allowed by the court, of receiving a demand from any interest person to make his decision, he does not give notice that he intends to apply to the court for leave to disclaim [Section 535(4)].
Question 3
How far are (i) title, (ii) preamble and (iii) marginal notes in an enactment helpful in interpreting any of the parts of an enactment? (May, 2001)
Answer
(i) Title: An enactment would have what is known as ‘Short Title’ and also a ‘Long Title’. The short title merely identifies the enactment and is chosen merely for convenience. The ‘Long title’ describes the enactment and does not merely identify it.
The Long title is a part of the Act and, therefore, can be referred to for ascertaining the object and scope of the Act.
(ii) Preamble: It expresses the scope and object of the Act more comprehensively than the long title. The preamble may recite the ground and the cause for making a statute and or the evil which is sought to the remedied by it. The preamble like the Long title can legitimately be used for construing it. However, the preamble cannot over ride the provisions of the Act. Only if the wording of the Act gives rise to doubts as to its proper construction (e.g., where the words or a phrase has more than the one meaning and doubts arises as to which of the two meanings is intended in the Act) the preamble can and ought to be referred to the arrive at the proper construction.
(iii) Marginal notes: As held in CIT Ahmed Bhai Umar Bhai Company HJR 1950, SC (134, 141) marginal notes applied to the section cannot be used for construing the section.
However, marginal notes appended to the Articles of the Constitution have been held to be part of the constitution and therefore, have been made use of in construing the articles.
Question 4
Explain the principles of grammatical interpretation vis-à-vis logical interpretation especially in the context that the duty of the Court is to administer the law as it stands and not to find out whether the law is just or reasonable. (November, 2001)
Answer
Interpretation may be either grammatical or logical. Grammatical interpretation concerns itself exclusively with the verbal expression of law. It does not go beyond the letter of the law. Logical interpretation on the other hand, seeks more satisfactory evidence of the true intention of the legislature. In all ordinary cases, the grammatical interpretation is the sole form allowable. The court cannot take from or add to modify the letter of the law. However, where the letter of the law is logically defective on account of ambiguity, inconsistency or incompleteness, the court is under a duty to travel beyond the letter of law so as to determine from the other sources, the true intentions of the legislature. Further a statute is enforceable at law, however, unreasonable it may be. The duty of the court is to administer the law as it stands. It is not within its jurisdictions to see whether the law is just or unreasonable. However, if there are two possible constructions of a clause, one a mere mechanical construction based on the rules of grammar and the other which emerges from the setting in which the clause appears and the circumstances in which it came to be enacted and also the words used therein, the courts may prefer the second construction which though may not be literal may be a better one. (Arora vs. State of U.P.)
Question 5
Explain the significance of the definition clause in a Statute. The definition of a word may be either restrictive or extensive. Elaborate this with particular reference to the following definition of ‘Book and Paper’ as contained in the Companies Act, 1956:
“Book and Paper” include accounts, deeds, vouchers, writings, and documents. (May, 2002)
Answer
When a word is defined as having a particular meaning in the enactment, it is that meaning alone which must be given to it in interpreting the said section of Act unless there be anything repugnant in the context. When a word is defined to “mean” such and such, the definition is prima facie restrictive and exhaustive and it restricts the meaning of the word to that given in the definition section. But where the word is defined to “include” such and such the definition is prima facie extensive. Again when the word is defined as “means” and includes such and such, the definition would be exhaustive.
‘Book and paper’
It is an inclusive definition and as such the definition is prima facie extensive i.e. the word defined is not restricted to the meaning assigned to it but has extensive meaning which also includes the meaning assigned to it in the definition section. It includes all registers, book and other papers maintained by the company and as such the directors who are entitled to inspect the books of accounts and other books and papers can have access to all the registers and other documents maintained by the company.
Question 6
Explain the meaning of the word “Statute” and discuss the need for interpretation of any statute citing an example in the case of holding the annual general meeting of a company where more than one prescribed time is given in the Companies Act, 1956. (May, 2002)
Answer
The word ‘Statute’ generally means the laws and regulations of every sort without considering from which source they emanate. It has been defined as the written will of the legislature solemnly expressed according to the forms necessary to constitute it the law of the State. Normally, the term denotes an Act enacted by the legislative authority (e.g. Parliament of India).
Even though the Laws are drafted by legal experts, yet they are expressed in language and no language is so perfect as to leave no ambiguities. Since a statute is an edict of the legislature, many a time the intent of the legislature has to be gathered not only from the language but the surrounding circumstances that prevailed when the law was enacted. Further if any provision is open to two interpretations, the Court has to choose that interpretation which represents the time intention of the legislature.
In the case of holding an annual general meeting of a company three different periods have been given as stated.
(a) The meeting should be held in every calendar year (section 166(i))
(b) The gap between the two meetings should not be more than 15 months (Section 166(i))
(c) The meeting should be held with 6 month from the close of the financial year of the company (section 210(3))
The above said three requirements are cumulative and separate. Failure to comply with any of them constitutes an offence. Therefore to give effect to all the provisions, they are to be interpreted harmoniously.
Question 7
Explain the rules relating to interpretation of the terms 'subject to' and 'notwithstanding' used in the provisions of an Act. State the effect of the term 'notwithstanding anything contained in this Act' used in Section 408 of the Companies Act empowering the Central Government to prevent oppression or mismanagement. (May, 2003)
Answer
Interpretation of the terms ‘notwithstanding’ and ‘subject to’
The word ‘notwithstanding anything contained’ characterise the non obstante clause. It is generally included to give an overriding effect to the clause over the other. If there is any inconsistency or departure between the non obstante clause and another provision, it is the non obstante clause which will prevail (K. Parasuramaiah v. Pakari Lakshman, A/R 1965 AP 220).
But the word ‘subject to’ conveys the idea of a provision yielding place to another provision or provisions to which it is made ‘subject to’. Hence the effect of non obstante clause (i.e. notwithstanding) is the opposite of a provision which states ‘subject to’.
Section 408 of the Companies Act, 1956 opens with the words ‘notwithstanding anything contained in this Act. This is a non obstante clause which vests overriding powers in the Government to nominate directors to prevent mismanagement or oppression (Oriental Industrial Investment Corporation Ltd vs. Union of India (1981) 52 Com cases 487, 493 (Del)). This expression indicates that the appointment of directors under this section is not to be controlled by the maximum number or other proportion, if any, fixed by any provisions of the Act. Further, they cannot be removed by the company at general meeting under section 284 of the Companies Act.
Question 8
Explain the usefulness of 'Heading and Title of a chapter in an Act and marginal notes of a Section' as internal aids in interpreting the provisions of a Statute. (November, 2003)
Answer
Heading and Marginal Notes: A number of sections in an Act applicable to any particular object are grouped together, sometimes in the form of chapters, pre-fixed by Heading and/or Titles. Marginal notes means titles to the section.
In Uttam Das Chela Sunder Das v. SGPC AIR 1996 SC 2133, it was observed that 'Marginal notes or captions undoubtedly, part and parcel of legislative exercise and the language employed therein provides the key to the legislative intent. The words employed are not mere surplusage'. Marginal note is legislative and not editorial exercise C Bhagirath v. Delhi Admn. AIR, 1985 SC 1050. It gives an indication as to what was exactly the mischief that was intended to be remembered and throws light on the intention of legislature. It is relevant factor to be taken into consideration in construing the ambit of the section. Shree Sajjan Mills Ltd. (v) CIT (1985) 156 ITR 585(SC). Heading, title and marginal notes can be referred to if the words are ambiguous. If there is any doubt in the interpretation of words in a section, the headings help to resolve the doubt. But they cannot control the plain words of a statute.
To sum up, heading, title and marginal notes can be used to understand the legislative intent, but cannot limit or restrict the clear word used in a section.
Question 9
Explain the effects of a proviso to a section in a statute. (May, 2004)
Answer
Proviso: Some times a section in a statute contains a proviso. The normal function of a proviso is to except something out of the enactment to qualify something stated in the enactment which would be within its purview of the proviso were not there. The effect of the proviso is to qualify the preceeding enactment which is expressed in terms which are too general. As a general rule, a proviso is added to an enactment to qualify or create an exception to what is in the enactment. Ordinarily a proviso is not interpreted as stating a general rule.
It is a cardinal rule of interpretation that a proviso to a particular provision of a statute embraces only the field which is covered by the main provision. It carries out an exception to the main provision to which it has been enacted as a proviso and to no other (Ram Narain Sons Ltd v. Asst. Commissioner of Sales Tax AIR 1955 Sc. 765).
Question 10
Explain briefly the distinction between “Mandatory” and “Directory” provisions in a statute. How the Court deals with them differently? (November, 2004)
Answer
The distinction between a provision which is mandatory and one which is 'directory' is that when it 'mandatory', it must be strictly complied with, when it is 'directory', it would be sufficient that it substantially complied with. Non-observance of mandatory provisions involves the consequences invalidating. But non-observance of directory provision does not entail the consequence of invalidating, whatever other consequences may occur.
No general rule can be laid down for deciding whether any particular provision on a statue is mandatory or directory. In each case the court has to consider not only the actual word used, but has to decide the legislatures intent. For ascertaining the real intention of the legislature, the court may consider, amongst other things, the following
1. The nature and design of the statute.
2. The consequence, which would flow from construing one-way or the other.
3. The impact of other provisions by resorting to which the necessity of complying with the provision in question can be avoided.
4. Whether or not the statute provides any penalty if the provision in question is not complied with
5. If the provision in question is not complied with, whether the consequences would be trivial or serious.
6. Most important of all, whether the object of the legislation will be defeated or furthered.
Where a specific penalty is provided in a statute itself for non-compliance with the particular provision of the Act no discretion is left to the court to determine whether such provision is directory or mandatory - it has to be taken as mandatory.
Question 11
(i) Explain the rule of ‘ejusdem generis’ with regard to interpretation of statutes. (4 Marks)
(ii) Sunrise Industries Ltd. has paid Rs.1,00,000 to a political party as its contribution to fight elections. Can it do so under the provisions of the Companies Act, 1956? (4 Marks)
Will it make any difference if the company has advertised its products in the monthly magazine published by the political party? (May 2005)

Answer
(i) the term ‘ejusdem generis’ means ‘of the same kind or species’. This rule can be explained as follows:
(a) Where any Act enumerates different subjects, general words following specific words are to be construed with reference to the words that precede them. Those genera words are to be taken as applying to things of the same kind as the specific words previously mentioned, unless there is something to show that a wider sense was intended. Thus, this rule means that where specific words are used and after them some general words are used the general words would take their colour from the specific words used earlier.
Where there was prohibition on importation of arms, ammunition or gun -powder or any other goods’, the words’ any other goods’ will be construed as referring to goods similar to ‘arms, ammunition or gun powder – A.G. Brown (1920)/KB. 773.
(b) If the particular words used exhaust the whole genus (category), then the general words are to be construed as covering a larger genus.
(c) This rule applies only where the specific words are of the same nature. When they are of different categories than the meaning of the general words following these specific words remains unaffected. The general words then would not take colour from the earlier specific words.
Courts have discretion whether to apply this rule in a particular case or not. For example, the ‘just and equitable’ clause under Section 433 of the Companies Act is held to be not restricted by the first five situations in which the court may wind up a company.
(ii) Under section 293A of the Companies Act, 1956, a company may contribute any amount not exceeding 5% of its average net profits during 3 immediately preceding financial years, to any political party or for any political purpose. For the purpose, Board may pass a resolution in this behalf and the amount contributed and the name of the party be disclosed in the Profit and Loss Account of the company. However, a Government company is prohibited to make any such political contribution.
Sunrise Industries Ltd. may contribute the amount of Rs.1 lakh subject to the above restrictions provided it has been in existence for more than three years.
As per section 293A(3)(b) of the Act, the amount of expenditure incurred on advertisement in any publication (being a publication in the nature of a souvenir, brochure, tract, pamphlet or the like) by a political party shall also be deemed to be a contribution to a political party. Publication of advertisement of the products of the company in the monthly magazine of the political party will be covered by the general words ‘or the like and will also be deemed to be a contribution to the political party for the purposes of section 293A of the Act.
Question 12
(i) Explain the rules relating to interpretation of Statutes, when the terms “notwithstanding” and “Subject to” are used in any provision of an Act.
(ii) State the effect of the words “notwithstanding anything contained in this Act” used in Section 408 of the Companies Act, 1956, which vests certain powers in the Central Government to prevent oppression or mismanagement (November 2005)
Answer
(i) The term “notwithstanding” used along with the words “anything contained” in an Act characterises the non obstante clause. It is used in a provision of an Act when the intention of the legislature is to give an over-riding effect to that provision over other provisions of that Act and/or over provisions of other Acts as may be specified later in such provision. If there is any inconsistency or departure between the non obstante clause and other provisions, then the provisions as contained in the non obstante clause shall prevail. [K. Parasuramaiah Vs. Pakari Lakshman AIR (1965) AP 220].
As against the above non obstante clause, the term “subject to” is used in a provision of an Act to convey the intention of the legislature that the particular provision is yielding place to another provision or provisions to which is made “subject to”. Thus, it can be concluded that the effect of non obstante clause (i.e., not withstanding”) is the opposite to a provision or provisions which includes the term “subject to”.
(ii) Section 408 of the Companies Act, 1956 starts with the words “notwithstanding anything contained in this Act”. This is a non obstante clause which vests over-riding powers in the Central Government to nominate directors to prevent mismanagement or oppression. [Oriental Industrial Investment Corporation Ltd. Vs. Union of India (1981) 52 Comp. Cas. 487, 493]. This expression indicates that the appointment of the directors under this section is not to be controlled by other provisions of the Companies Act, 1956 such as maximum number or other proportion, if any fixed by the said Act. Further, the directors so appointed are also not liable to be removed by the company at general meeting under the provisions of section 284 of the Companies Act, 1956.
Question 13
What are the Internal and External aids to interpretation of statutes ? Give five examples each of Internal and External aids. (May 2006)
Answer
Internal aids to interpretation / construction are those which are found within the text of the statutes. On the other hand external aids of interpretation are those factors which are external to the text of the statute but are of great help.
Examples of internal aids to interpretation:
1. Definitional sections and clauses
2. Illustrations
3. Provisos
4. Long title and short title
5. Preambles
6. Heading and title of chapter
7. Marginal notes
8. Explanations
9. Schedules
10. Reading the statute as a whole
Examples of external aids to interpretation:
1. Historical setting (Background)
2. Consolidating statute & Previous law
3. Usage
4. Earlier & later analogous acts
5. Earlier acts explained by the later act
6. Reference to repealed acts
7. Dictionary definition
8. Use of foreign decisions
Question 14
There is an apparent difference between section 292 of the Companies Act, 1956, which permits the board to delegate its power to make loans and section 372A of the Companies Act, which requires approval of loan by a resolution passed at a board meeting with the consent of all the directors present at the meeting. How would you interpret these two provisions applying the rule of harmonious construction ? (November 2006)
Answer
Rule of Harmonious Construction
Where there are in an enactment two or more provisions which cannot be reconciled with each other, they should be so interpreted, wherever possible, as to give effect to all of them. This is what is known as the Rule of Harmonious Construction. Importance should not be attached to a single clause in one section overlooking the provisions of another section. If it is impossible to avoid inconsistency, the provision which was evaluated or amended later in point of time must prevail. The rule of Harmonious Construction is applicable only where there is real and not merely apparent conflict between the provisions of an Act, and one of them has not been made subject to the other.
Every loan falling within the purview of Section 372 A of the Companies Act, 1956 must be sanctioned by a resolution of the Board of Directors passed at its meeting (Section 372 A(2). Every such resolution must be passed with the consent of all the directors present at the Board meeting, that is no one dissenting or unanimously.
Every loan covered by Section 372 A falls within the purview of Section 292 (i)(e). That section permits delegation by the Board of its power of making loans vide proviso to Section 292 (i), subject to the conditions stipulated in Section 292(3). The condition that the resolution delegating the power must specify the total amount upto which loans may be made by the delegate, the purposes for which the loans may be made and the maximum amount of loans which may be made for each purpose in individual cases.
However, by harmonious interpretation of both the provisions of Section 292 and 372A and in absence of specific prohibition in Section 372A against delegations, the Boards power under Section 372A may be delegated in accordance with the provisions of Section 292 by passing unanimous resolution of the Board. Any other interpretation will make provisions of Section 292 redundant.
Question 15
(i) What is the effect of proviso ? Does it qualify the main provisions of an Enactment?
(ii) Does an explanation added to a section widen the ambit of a section ? Support your answer with an example from the Companies Act, 1956.
(iii) What do you understand by the term ‘Preamble” and how does it help in interpretation of a statute ? (May 2007)
Answer
(i) Normally a Proviso is added to a section of an Act to except something or qualify something stated in that particular section to which it is added. A proviso should not be, ordinarily, interpreted as a general rule. A proviso to a particular section carves out an exception to the main provision to which it has been enacted as a Proviso and to no other provision. [Ram Narian Sons Ltd. Vs. Commissioner of Sales Tax AIR (1955) S.C. 765]
(ii) Sometimes an explanation is added to a section of an Act for the purpose of explaining the main provisions contained in that section. If there is some ambiguity in the provisions of the main section, the explanation is inserted to harmonise and clear up and ambiguity in the main section. Something may added to or something may be excluded from the main provision by insertion of an explanation. But the explanation should not be construed to widen the ambit of the section.
For example, Section 294AA of the Companies Act, 1956 gives power to the Central Government to prohibit the appointment of Sole Selling Agents of a company in certain cases. An explanation has been added to that section which states that an “appointment” includes “re-appointment”. By inclusion of this explanation, the legislature has only clarified the main provisions of that section and has not widened the ambit of the powers of the Central Government.
(iii) The “Preamble” expresses the scope, object and purpose of the Act. It may recite the ground and the cause making a statue and the evil, which is sought to be remedied by it. It is a part of the statute and can legitimately be used for construing it. However, it does not over-ride the plain provisions of the Act, but if the wording of the statute gives rise to the doubts as to its proper construction, e.g., where the words or phrase have more than one meaning and a doubt arises as to which of the two meanings is intended in the Act, then the Preamble can and ought to be referred to in order to arrive at the proper construction.
Question 16
“When two or more provisions of the same statue are repugnant to each other, the court will try to construe the provisions in such a manner, if possible, as to give effect to all”. Examine the statement with reference to the provisions of sections 166 and 210 of the Companies Act, 1956 which appear to be seemingly contradictory to each other for compliance.
(November 2007)
Answer
The statement in question is relates to an important rule of interpretation that is ‘Rule of Harmonious Construction of a statute. According to this rule when there is doubt about the meaning of the words of a statute, these should be understood in the sense in which they harmonise with the subject of the enactment and the object which the legislature had in view their meaning is found not so much in strictly grammatical or etymological propriety of language, nor even its popular use, as in the subject or in the occasion on which they are used and the object to be attained.
Where there are in an enactment two or more provisions which cannot be reconciled with each other, they should be so interpreted whichever possible as to give effect to all of them. This is what is known as the Rule of Harmonious Construction. Let us take an example: according to Section 166(i) of the Companies Act, 1956 there must be not more than fifteen months between tow consecutive annual general meetings of a Company. Section 210 requires the Board of Directors to lay at every annual general meeting of a company a profit and loss account, which must cover the period since the preceding account and must be made up to date not earlier than the date of the meeting by more than six months.
The account is required to be accompanied by a balance sheet as at the date to which the profit and loss account is made up. For some special reasons, however, the Registrar may give an extension for not more than 3 months to hold the meeting.
In such a case, the accounts must relate to a period not earlier than the date of the meeting by more than six months plus the extension period. From this, we can easily make out that except the first annual general meeting which is subject to different rules on annual general meeting is to be held subject to the following rules:
(i) The meeting must be held in each year
(ii) It must be held not later than 15 months (18 months if extension is granted) from the date of the previous general meeting.
(iii) Further, it must be held later than six months (or six months + extension) of the date of balance sheet.
These three requirements are cumulative and separate; failure to comply with any of them constitutes an offence. We would note that even where a company may hold its annual general meeting within the time limit of 15 moths (or 18 months, if extension is granted) it may still be guilty of contravention of Section 210. Therefore, to give effect to both the sections, they are to be interpreted harmoniously and in fixing the date of the annual general meeting Section 166 as well as 210 are to be taken into account. The following illustration will make things clear – the financial year of a company ends on 31st March each year, presumption that the annual general meeting to adopt the accounts etc. relating to the year ended on 31st March, 2006 was hold on 30th September, 2006 under Section 166 (i) the next general meeting need not be held till 31st December, 2007. But the relevant accounts would be those of the year ended on 31st March, 2007 which would be more than six months before the date of meeting. Therefore, the last date for holding that meeting would be 31st September, 2007.
Question 17
(i) Explain the rules relating to interpretation of statues when the terms “notwithstanding” and “Subject to” are used in any provision of an Act.
(ii) State the effect of the words “notwithstanding anything contained in this Act” used in Section 408 of the Companies Act, 1956 which vests certain powers in the Central Government to prevent oppression or mismanagement. (May 2008)
Answer
(i) The term ‘notwithstanding’ used along with the words ‘anything contained’ in an Act characterises the non obstante clause. It is used in a provision of an Act when the intention of the legislature is to give an over-riding effect to that provision over other provisions of that Act and/or over provisions of other Acts as may be specified later in such provision. If there is any inconsistency or departure between the non-obstante clause and other provisions, then the provisions as contained in the non-obstante clause shall prevail. [K Parsuramaiah Vs. pakari Lakshman AIR (1965) AP 220].
As against the above non obstante clause, the term ‘subject to’ is used in a provision of an Act to convey the intention of the legislature that the particular provision is yielding place to another provision or provisions to which is made ‘subject to’. Thus, it can be concluded that the effect of non obstante clause (i.e., not withstanding) is the opposite to a provision or provisions which includes the term “subject to”.
(ii) Section 408 of the Companies Act, 1956 starts with the words “notwithstanding anything contained in this Act”. This is a non obstante clause which vests over-riding powers in the Central Government to nominate directors to prevent mismanagement or oppression. [Oriental industrial Investment Corporation Ltd. Vs. Union of India (1981) 52 Comp. Cas. 487, 493]. This expression indicates that the appointment of the directors under this section is not to be controlled by other provisions of the Companies Act, 1956 such as maximum number or other proportion, if any, fixed by the said Act. Further, the directors so appointed are also not liable to be removed by the company at general meeting under the provisions of Section 284 of the Companies Act, 1956.
Question 18
The analysis of the language of Section 292 and Section 372A of the Companies Act, 1956 apparently discloses a conflict because the former provision permits the Board of Directors to delegate its powers to make loans whereas the latter provision requires approval of loan by resolution passed at a board meeting with the consent of all the directors present at the said meeting. To what extent the rule of “Harmonious construction” can be applied for the purpose of interpreting these two provisions of the companies Act, 1956. (November 2008)
Answer
HARMONIOUS CONSTRUCTION: Where there are in an enactment two or more provisions which can not be reconciled with each other, they should be so interpreted, wherever possible so as to give effect to all of them. This is what is known as the rule of Harmonious Construction. Importance should not be attached to a single clause in one section overlooking the provision of another section. If it is impossible to avoid inconsistency the provision which was enacted or amended later in point of time must prevail .The Rule of Harmonious Construction is applicable only when there is a real and not merely apparent conflict between the provisions of an Act and one of them has not been subject to the other.
Every loan falling within the preview of Section 372A of the Companies Act, 1956, must be sanctioned by a resolution of the Board of Directors passed at its meeting. Every such resolution must be passed with the consent of all the directors present at the Board meets unanimously so that there is no one dissenting.
Every loan covered by Section 372A falls within the preview of Section 292(1)(e). The Section permits delegation by the Board of Directors of its powers of making loans vide proviso to Section 292(I), subject to the conditions stipulated in Section 292(3). The condition is that the resolution delegating the power must specify the total amount up to which loans may made by the delegate, the purpose for which the loans may be made and the maximum amount of loans which may be made for each purpose in individual cases.
However by harmonious interpretation of both the provisions of Section 292 and Section 372A and in the absence of specific prohibition in Section 372A against delegation, the Board’s power under Section 372A may be delegated in accordance with the provisions of Section 292 by passing unanimous resolution of the Board. Any other interpretation will make provisions of Section 292 redundant.

NOTE

CA Final Law - Application of Secretarial Procedures and Practices

CHAPTER 6
APPLICATION OF SECRETARIAL
PROCEDURES AND PRACTICES
Question 1
Explain the procedure for passing the resolution by Circulation under Section 289 of the Companies Act, 1956. (November, 2000)
Answer
The procedure for passing resolution by circulation as under section 269 of the Companies Act, 1956 are as follows:
(a) Circulate the draft of the resolution in duplicate with all necessary papers if any, to all the directors then in India not being less in number than the quorum for a board meeting and to all other directors at their usual addresses in India for approval by signing one copy of the resolution and send it back to the company.
(b) If all are majority of the above directors as are entitled to vote on the resolution approve the resolution, the resolution shall deemed to have been duly passed by the Board.
(c) Record the resolution having been passed by circulation in the minutes of the immediate next Board meeting.
(d) See that the resolution do not pertain to the matters which cannot be passed by the Board by circulation (i.e. Sections 262(1), 292, 297, 299, 307 etc.
(e) Enclose a copy of the circular resolution to the Agenda of the ensuing immediately next Board meeting.
Question 2
Under Section 603 of the Companies Act, 1956, what are the particulars required for incorporating in a prospectus to be issued by an exiting Foreign Company? (November 2000)
Answer
Under Section 603, Companies Act, 1956, the prospectus to be issued by an existing or intended Foreign Company in India must be dated and contain the following particulars:
(a) the instrument constituting or defining the constitution of the company;
(b) the enactment’s or provisions under which the company was incorporated;
(c) the address of the place in India where the said instrument, enactments etc translation thereof in English if they are in some other Foreign language, can be inspected;
(d) the date on which and the country in which the company was incorporated; and
(e) whether there is a place of business in India and if so, the address of its principal office.
The provision contained in (a), (b) and (c) above, shall not be applicable if the prospectus is issued more than 2 years after the company had become entitled to commence business.
The prospectus of Foreign company must contain the matters laid down in specified in part-II of the schedule subject always to the provisions of Part-III of the schedule.
Question 3
Explain briefly the salient points to be taken into account while drafting the minutes of the Board of Directors. Draft a specimen Board resolution regarding the appointment of Mr. Sincere as the Managing Director of Full Cure Pharma Ltd. (May, 2001)
Answer
While drafting the minutes of the Board of directors, the following points have to be kept in mind.
(i) The minutes may be drafted in a tabular form or in the form of a series of paragraphs numbered consecutively and with relevant headings.
(ii) The place, date and time of the meeting should be stated.
(iii) The names of the persons present at the meeting should be stated.
(iv) Contents of the meeting giving serial number of the minute, brief subject heading, full terms of the resolutions adopted including the statistical details etc.
(v) Names of directors dissenting or not concurring with any resolution passed.
(vi) Reference about interested directors abstaining from voting is necessary.
(vii) Chairman’s signature and date of verification of minutes as correct.
Specimen board resolution: “Resolved that Shri Sincere who fulfills the conditions specified in Parts I and II of schedule XIII to the Companies Act, 1956 be and is hereby appointed as the Managing Director of the company for a period of 5 years effective from 1.4.2001 and that he may be paid remuneration by way of salary, commission and perquisites in accordance with Part II of Schedule XIII of the Act.
Resolved further that the Secretary of the company be and is hereby directed to file the necessary returns with the Registrar of Companies and to do all acts and things as may be necessary in this connection.”

Question 4
Some of the small shareholders of M/s Progressive Industries Ltd. approach you for advice regarding appointment of one of them as a director of the company. Explain the meaning of a small shareholder and the legal position regarding appointment of a director by such small shareholders. (November 2001)
Answer
According to Section 252 of the Companies Act, 1956 as amended, every public company having a paid up capital of Rs.5 cores or more and 1000 or more small shareholders may have a director elected by such small shareholders in the manner as may be prescribed. For this purpose, a small shareholder means a shareholder holding shares of nominal value of Rs.20,000 or less in a public company. If the paid up capital of M/s Progressive Industries Ltd., is more than Rs.5 crores and the Company has 1000 or more small share holders, then the small share holders can proceed to elect their nominee as a director. The appointment is to be made in accordance with Companies (Appointment of small shareholders-Director) Rules, 2001.
Question 5
The word “Misfeasance” is used in the Companies Act at several places but the same has not been defined. Explain as to how the meaning of the said word is ascertained in the absence of any definition. Examine whether misfeasance proceedings initiated against a director under the Companies Act can be continued even after his death. (May, 2002)
Answer
The word ”misfeasance” is not defined in the Companies Act, 1956. Where a particular word is not defined, it will be useful to refer to dictionary to find out the general sense in which the word is commonly used or understood. Further the judicial decisions laying down the meaning of the words in construing statues will have greater weight then the meaning furnished by the dictionaries. For technical terms reference is made to technical dictionaries. The dictionary meaning of the word “misfeasance” is improper performance of a lawful act. For creation of liability under section 543, it must be shown that there has been dishonesty or fraud or at least gross and culpable negligence. An honest mistake not amounting to culpable negligence or breach of duty, would not be misfeasance.
If in the course of winding up of a company, it appears that any person who had taken part in the formation or promotion of the company, any past or present director has misapplied or retained any money or property of the company or has been guilty of any breach of trust in relation to the company, the court may on the application of the official liquidator proceed against such person who is guilty of committing the offence.
The misfeasance proceedings initiated under section 543 of the Companies Act against any director can be continued on his death against his heirs and legal representative for the purpose of determining and declaring the loss or damage caused to the company though no compulsive order may be made. On conclusion of the proceedings, a declaration of liability may be made and such a declaration partakes the character of a decree and the same can be enforced against the properties of the deceased director.
Question 6
M/s A to Z Technologies Ltd. has been wound up and the official liquidator has been asked to take charge of the company. Briefly explain the relevant provisions regarding filing of statement of affairs in relation to the company in liquidation. (May, 2002)
Answer
According to section 454 of the Companies Act, 1956 where the Court has made a winding up order or the Official Liquidator has been appointed a provisional liquidator, a statement as regards the affairs of the company in the prescribed Form No. 57 shall be filed with the Official Liquidator. The said statement should be verified by an affidavit and contain particulars of (i) the assets of the company stating separately the cash balance in hand and at bank (ii) its debts and liabilities (ii) the details of creditors including their names, residence, occupations and amounts due to them as secured and unsecured (iv) the details of debtors including the particulars of securities and their values, the names and particulars of debtors (with estimated amount to be realised) and (v) such further or other information as may be prescribed or required by the Official Liquidator. The said statement is required to be verified by one or more directors at the time of passing the winding up order by the court. Further the said statement is required to be submitted within 21 days of the winding up order or within such extended time not exceeding three months as may be fixed by the Official Liquidator or the court for special reasons.
Question 7
The Board Meeting of M/s ABC Company Ltd. was adjourned for want of Quorum. Advise the procedure now to be followed and also whether a resolution can be passed by circulation. If so, how? (November 2002)
Answer
Quorum and Resolution by circulation: For the conduct of business in the Board Meeting quorum is required. The Board Meeting of M/s. ABC Company Ltd. is adjourned for want of quorum. Section 288 of the Companies Act, 1956 provides the procedure when a Board Meeting is adjourned for want of quorum. Thus, under section 288 of the Act, following procedure is applicable :
1. If a Board Meeting could not be held for want of quorum, then, unless the articles otherwise provide, the meeting shall automatically stand adjourned till the same day in the next week, at the same time and place, or if that day, is a public holiday, till the next succeeding day which is not a public holiday, at the same time and place.
2. The provisions of Section 285 shall not be deemed to have been contravened merely by reason of the fact that a meeting of the Board which had been called in compliance with the terms of that provision, could not be held for want of quorum.
When the question of passing resolution by circulation arises, the provisions of section 289 of the Companies Act, 1956 are applicable. For the passing of the circular resolution following conditions must be complied with:
1. The draft resolution, together with supporting papers has been circulated, to all the directors or members of the committee of the board thereof, then in India, not being less in number than the quorum fixed for a meeting of the Board or Committee, as the case may be.
2. to all the directors of the Board or member of the committee who are not in India, at their usual address in India, and
3. the same has been approved by such of the directors then in India, or by a majority of them, who are entitled to vote on the resolution.
Question 8
Explain the circumstances under which a Director retiring at an annual general meeting shall be deemed to have been re-appointed even though no such appointment has been made.
(May, 2003)
Answer
Section 256 of the Companies Act, 1956 deals with deemed re-appointment of a retiring director. The vacancies caused by the retirement of a director by rotation should be filled up at the same meeting or at an adjourned meeting. If it is not so done, the retiring director shall be deemed to have been re-appointed at such adjourned meeting except in the following cases:-
1. at any previous meeting, a resolution for his re-appointment was put to vote but was lost, or
2. the retiring director has, in writing expressed his unwillingness to continue or
3. he is not qualified or is disqualified for appointment, or
4. a special or ordinary resolution is necessary for his appointment by virtue of any provisions of the Companies Act; or
5. it is resolved to appoint two or more directors by a single resolution {Section 263(2) Proviso]; or
6. it is resolved not to fill the vacancy.
Question 9
Examine whether the following transactions are permissible under Foreign Exchange Management Act, 1999:
(i) Payment of remuneration to foreign technician.
(ii) Remittance of dividend to non-residents.
State also the procedure to be followed with regard to payment of dividend to non-residents.
(November 2003)
Answer
Foreign Technician: Salary payable to a foreign technician is a current account transaction. According to Section 5 of Foreign Exchange Management Act, 1999, any person can sell or draw foreign exchange to or from authorised person if such sale or drawal is a current account transaction and reasonable restrictions on current account transaction can be imposed by the Central Government in public interest, in consultation with RBI. Hence, basically all current account transactions are free, unless specifically restricted by the Central Government. Hiring of foreign nationals as technician is permissible without any restrictions. There is no ceiling on salary, which can be paid as per contract. Their salary can be remitted abroad, after tax deducted at source.
Remittance of dividend: Since remittances of dividend on investment are current account transactions, these are permitted without restrictions, if the shares were issued as per guidelines/regulations/permission. Dividend is restricted only when permission for issue of shares to non-residents was granted with condition for dividend balancing.
Procedure for remittance of dividend to non-residents: The procedure involved is briefly as follows:
1. Application in Form A2 - Application should be submitted in Form A2 to authorised dealers. It should be accompanied by (a) List of non-resident shareholders (b) dividend to be remitted - the amount will be payable in Indian Rupees and payment will be made to payee in foreign exchange at current exchange rate.
2. Supporting documents: Application should be accompanied by copies of supporting documents to establish that the issue of shares was permissible as per regulations/specific approval was obtained as required. Copy of resolution in general meeting/Board meeting approving dividend/interim dividend should be submitted.
3. Certificates: Certificate from Chartered Accountant, practicing Company Secretary in respect of amount payable and details of calculation should be submitted. A certificate from Chartered Accountant that tax has been properly deducted at source should be submitted.
Remittance of dividend:- The dividend may be remitted through normal banking channels. If shareholder has issued instructions, the amount can be credited to NRE/FCNR account of NRI.
Question 10
An existing society seeks your advice as to its eligibility to be registered as a 'Producer Company' under the Companies Act, 1956 and the procedure to be followed for such registration. Advise explaining the relevant provisions of the Companies Act, 1956.
(November 2003)
Answer
Producer Company: Any existing inter-state co-operative society with objects not confined to one State may make an application to the Registrar of Companies for registration as 'Producer Company under the Companies Act, 1956. The conversion is purely optional (Section 581J(1)].
'Inter-State Co-operative Society' means a 'Multi-State Co-operative Society' within the meaning of Multi-State Co-operative Societies Act, 2002 and includes any co-operative society registered under any other law for the time being in force which has, subsequent to its formation, excluded any of its objects to more than one State by enlisting the participation of persons or by extending any of its activities outside the State, whether directly or indirectly through an institution of which it is a constituent [Section 581A(e)]. Hence a co-operative society registered under Multi-state Co-operative Societies Act, 2002 or any other State Act with objects not confined to one State may opt for conversion into a 'producer company' under Companies Act, 1956.
The application to the Registrar of companies must be accompanied by the following:
(1) A copy of the special resolution of not less than two-third of total members of inter-state co-operative society, for its incorporation as a producer company under the Companies Act.
(2) A statement showing the names and addresses or the occupation of the directors and Chief Executive.
(3) A statement showing the list of members.
(4) A statement indicating that the Inter-State Co-operative Society is engaged in one or more of the objectives specified in Section 581B.
(5) A declaration by two or more directors of the Inter-State Co-operative Society (certifying that the particulars given in the above statements are correct. [Section 581J(2)].
When an Inter-State Co-operative Society is registered as a 'producer company', the words 'Producer Company Limited' shall form part of its name with any word or expression to show its identity preceding it [Section 581J(3)].
On completion of all formalities, the Registrar of Companies shall register and incorporate such society to be a 'Producer Company' under Part IXA of the Companies Act, 1956 (Section 581J (4)].
Upon registration as a Producer Company, the Registrar of Companies shall forthwith intimate the Registrar with whom the erstwhile Inter-State Co-operative Society was earlier registered for appropriate deletion from its register [Section 581J(7)].
Question 11
Draft a resolution proposed to be passed at a General Meeting of a Public Company giving consent to the Board of Directors for borrowing upto a specified amount in excess of the limits laid down under Section 293(1)(d) of the Companies Act, 1956 and also state the borrowings, which are to be excluded from the said limits. (May, 2004)
Answer
Draft of ordinary resolution under Section 293(1)(d)
Resolved that the company hereby consents to the Board of Directors borrowing monies not exceeding Rs……(Rupees………………..) in excess of the aggregate of the paid-up capital of the company and its free reserves, that is to say reserves not set apart for any specific purpose, as provided in Section 293(1)(d) of the Companies Act, 1956, and in addition to any temporary loans obtained from the company’s bankers in the ordinary course of business.
Borrowings
Section 293(1)(d) does not apply to the borrowing by a company by way of temporary loans obtained from the company’s bankers in the ordinary course of business. Therefore, in calculating the limits stipulated in this provision, temporary loans obtained from the company’s bankers in the ordinary course of business shall be excluded.
The expression ‘temporary loans’ in i.e. (d) means loans repayable and demand or within six months from the date of the loan such as short term cash credit arrangements, the discounting of bills and the issue of other short terms loans of a seasonal character, but does not include loans raised for the purpose of financing expenditure of capital nature [Explanation II to Section 293(1)].
Question 12
ABC Engineering Limited proposes to invest Rs.20 lakhs in the Equity shares of PQR Trading Limited. The proposed investment together with the investments in securities of companies and loans to body corporates already made exceed 60 per cent of the paid-up share capital and also 100 per cent of free reserves of the company. The company has taken term loans from IDBI.
Explain the procedure to be followed by ABC Engineering Limited to give effect to the proposed investment. (May, 2004)
Answer
Investment in Shares: The proposed investment together with the investments, loans already made exceed 60% of the paid-up share capital of the company and also 100% of the free reserves. Hence, the proposed investment must be approved by a special resolution passed in a general meeting [Proviso to Section 372A (i)].
The Board of Directors must convene a general meeting for the purpose of passing a specific special resolution authorizing the proposed investment. The special resolution should specify:
(a) The limit upto which Board is to be authorized to make investment;
(b) Particulars of the body corporate in which the investment is proposed to be made;
(c) The purpose of the proposed investment;
(d) The source of funds to be invested; and
(e) Other relevant details (3rd proviso to Section 372A(1).
The special resolution passed at the general meeting will be filed with the Registrar of Companies.
As the total amount of inter-corporate investments, loans, etc. exceeds 60% of the paid-up share capital prior approval of public financial institution i.e. IDBI must be taken [Section 372A(2)].
Board meeting must be convened and the proposed investment must be sanctioned by a resolution passed with the consent of all the directors present at the Board meeting (Section 372A(2)].
The following particulars must be entered in the ‘Register of Investments, Loans, Guarantees and Securities pursuant to Section 372A:
(a) Name of the body corporate on which the investment is made.
(b) Amount invested.
(c) Type and nature of securities in which investment is made.
(d) Main terms of the issue of the securities.
(e) The date on which the investment is made.
Particulars must be entered in the register in respect of each investment chronologically within 7 days of the making of the investment. [Section 372A(5)].
The register must be kept at the registered office of the company. Any member of the company can inspect the register. [Section 372A(6)].
Question 13
Answer any one of the following:
(i) Board of Directors of DBM Limited held a board meeting on 2nd May, 2008 at its registered office. You are required to state the salient points to be taken into account while drafting the minutes of the said board meeting.
(ii) Draft a board resolution for appointment of Mr. Paul as the managing director for 5 years with effect from 1st June, 2008 of DBM Limited passed in the above stated board meeting. (May 2008)
Answer
(i) While drafting the minutes of a board meeting following salient points should be kept in mind:
(a) the minutes may be drafted in a tabular form or they may be drafted in the form of a series of paragraphs, numbered consecutively and with relevant headings.
(b) the place, date and time of the meeting should be stated.
(c) the minutes should contain the constitution of the meeting, i.e., persons present and the capacity in which present, e.g. name of the person chairing the meeting, names of the directors and secretary, identifying them as director or secretary, names of persons in attendance like auditor, internal auditor etc. The minutes should also contain the subject of leave of absence granted, if any, to any of the board members.
(d) content of the meeting giving serial number of the minute, brief subject heading, full terms of the resolution adopted including the statistical details, if any.
(e) names of the directors dissenting or not concurring with any resolution passed at the board meeting.
(f) reference about interested directors abstaining from voting is also required to be stated in the minutes.
(g) Chairman’s signature and date of verification of minutes as correct.
(ii) Resolution passed at the meeting of board of directors of DBM Limited held at its registered office situated at ……………………… on 2nd May, 2008 at ………… AM.
“RESOLVED that subject to the approval by the shareholders in a general meeting and pursuant to provisions of Sections 198, 309, 310, Schedule XIII and other applicable provisions of the Companies Act, 1956, Mr. Paul be and is hereby appointed as the Managing Director of the Company with effect from 1st June, 2008 for a period of five years on a remuneration approved by the Remuneration Committee as enumerated below:
(1) Salary: Rs. ……………………… per month
(2) Perquisites, Benefits and Facilities …………………………….
“RESOLVED FURTHER that Mr. Paul, so long as the functions as the Managing Director of the Company shall not be entitled to any sitting fee for attending any meeting of the board of directors or any committee thereof and that he shall not be liable to retire by rotation.”
“RESOLVED FURTHER that Mr. Paul till he holds the office of Managing Director of the Company shall not become interested or concerned in any selling agency directly or through his wife or minor children in future without prior approval of the Central Government.”
“RESOLVED FURTHER that Mr. Paul, the Chairman, as well as the Company shall have right to terminate the appointment by giving 3 (three) months’ notice in writing.”
“RESOLVED FURTHER that the Secretary of the company be and is hereby directed and authorized to file necessary returns with the Registrar of Companies and to do all other necessary things required under the provisions of the Companies Act, 1956.”

CA Final Law - SEBI Act, 1992

CHAPTER 5
THE SECURITIES AND EXCHANGE BOARD
OF INDIA ACT, 1992
PART I
Question 1
What are the default for which a stock-broker may be penalized under the provisions of Securities and Exchange Board of India Act,1992 in respect of his dealings with the investors? State the factors that must be taken into account by the adjudicating officer while determining the quantum of penalty in such cases. (May, 2000)
Answer
Penalty for default in case of stock brokers: Section 15F of Securities and Exchange Board of India Act, 1992 provides for penalty for default in case of stock brokers. If any person who, is registered, as a stock broker under this Act:
(a) fails to issue contract notes in the form and in the manner specified by the stock exchange of which such broker is a member, he shall be liable to a penalty not exceeding five times the amount for which the contract note was required to be issued by that broker.
(b) fails to deliver any security or fails to make payment of the amount due to the investor in the manner or within the period specified in the regulations, he shall be liable to a penalty of one lakh rupees for each day during which such failure continues or one crore rupees, whichever is less.
(c) charges an amount of brokerage which is on excess of the brokerage specified in the regulations, he shall be liable to a penalty of one lakh rupees or five times the amount of brokerage charged in excess of the specified brokerage, whichever is higher.
Factors to be taken into account by the adjudicating officer: Section 15J of SEBI Act stipulates that the following factors shall be taken into account by the adjudicating officer while adjudging the quantum of penalty:
(a) the amount of disproportionate gain or unfair advantage, wherever quantifiable as a result of the default.
(b) the amount of loss caused to an investor or group of investors as a result of the default.
(c) the repetitive nature of the default.
Question 2
What provision has been made under Section 15G of the SEBI Act, 1992, in connection with penalty for insider trading? (November, 2000)
Answer
If any insider who:
(i) either on his own behalf or on behalf of any other person, deals in securities of a body corporate on any stock exchange on the basis of any unpublished price sensitive information; or
(ii) communicates any unpublished price sensitive information to any person, with or without his request for such information except as required in the ordinary course of business or under any law; or
(iii) counsels, or procures for, any other person to deal in any securities of any body corporate on the basis of unpublished price sensitive information,
shall be liable to a penalty of twenty-five crore rupees or three times the amount of profits made out of insider trading, whichever is higher. [Section 15, SEBI Act, 1992].
Question 3
A group of investors are upset with the functioning of two leading stock brokers of Calcutta Stock Exchange and want to make a complaint to SEBI for intervention and redressal of their grievances. Explain briefly the purpose of establishing SEBI and what type of defaults by the stock brokers come within the purview of SEBI Act, 1992. (May, 2002)
Answer
The Securities and Exchange Board of India (SEBI) was established primarily for the purpose of (1) to protect the interests of investors in securities (ii) to promote the development of securities market (iii) to regulate the securities market and (iv) for matters connected therewith and incidental thereto.
The following defaults by stock brokers come within the purview of SEBI Act:
(a) any failure on the part of the stock broker to issue contract notes in the form and in the manner specified by the Stock Exchange.
(b) any failure on the part of the broker to deliver any security or to make payment of the amount due to the investor in the manner or within the period specified in the regulations.
(c) any collection of charges by way of brokerage in excess of the brokerage as specified in the regulations. (Section 15 F, SEBI Act, 1992.)

Question 4
(a) On the complaint of Mr. Kamlesh Gupta, after enquiry SEBI finds that Mr. P. Mehta a Chief Executive Officer of the Company, on the basis of unpublished price sensitive information, has indulged in the trading of the securities of that company. Explain, on the basis of the said finding, what action can SEBI take against Mr. P. Mehra under the Securities and Exchange Board of India Act, 1992.
(b) Mr. Clever who is Registered as an Intermediary fails to enter into an agreement with his client and hence penalised by SEBI under Section 15B of the SEBI Act. Advise Mr. Clever as to what remedies are available to him against the order of SEBI. (May, 2002)
Answer
(a) Section 15G of the Securities and Exchange Board of India (SEBI) Act, 1992 deals with penalty for Insider Trading. According to this, if any insider
(i) either on his own behalf or on behalf of any other person, deals in securities of a body corporate on any stock exchange on the basis of any unpublished price sensitive information; or
(ii) communicates any unpublished price sensitive information to any person, with or without his request for such information except as required in the ordinary cause of business or under any law, or
(iii) counsels or procures for, any other person to deal in any securities of any body corporate on the basis of unpublished price sensitive information,
shall be liable to a penalty of twenty-five crore rupees or three times the amount of profits made out of insider trading, whichever is higher.
As such SEBI can, after following the prescribed procedure, impose a penalty on Mr. P.Mehra. The maximum penalty that SEBI can impose is Rupees twenty-five crores or three times the amount of profits made out of insider trading, whichever is higher.
(b) Remedies against SEBI order
Section 15B of the Securities and Exchange Board of India Act, 1992 lays down that if any person, who is registered as an intermediary and is required under this Act or any rules or regulations made there under, to enter into an agreement with his client, fails to enter into such agreement, he shall be liable to a penalty of one lakh rupes for each day during which such failure continues or one crore rupees, whichever is less.
Mr. Clever has been penalised under the above mentioned provision. Two remedies are available to Mr. Clever in this matter :-
(i) Appeal to the Securities Appellate Tribunal :
Section 15 T of the SEBI Act, 1992 provides that any person aggrieved by an order of the Board made, on and after the commencement of the Security Laws (Second Amendment) Act, 1999, under this Act or the rules or regulations made there under may prefer an appeal to a Securities Appellate Tribunal having jurisdiction in the matter.
Such appeal shall be filed within a period of 45 days from the date on which a copy of the order made by the Board is received and it shall be in such form and be accompanied by such fee as may be prescribed. However, the Tribunal may entertain an appeal after satisfied that there was sufficient cause for not filing it within the said period.
The Tribunal may, after giving the parties an opportunity of being heard, pass such orders as it thinks fit, confirming, modifying or setting aside the order appealed against.
(ii) Appeal to the High Court
Section 15 Z of the SEBI Act, 1992 provides that any person aggrieved by any decision or order of the Securities Appellate Tribunal may file an appeal to the High Court within 60 days from the date of communication of the decision or order to him on any question or fact or law arising out of such order. The High Court may, if it is satisfied that the appellant was prevented by sufficient cause from filing the appeal with in the said period, allow it to be filed within a further period not exceeding 60 days.
Question 5
SEBI received a complaint from an investor that he has not received the payment due to him from a registered stock broker. Explain the action that can be taken by SEBI against the stock broker under the provisions of Securities and Exchange Board of India Act, 1992 and the factors that will be taken into account while taking such action. (May, 2003)
Answer
The registered stock broker is liable to a penalty under section 15F of SEBI Act, 1992 in respect of certain defaults. According to section 15F (b), if a registered stock broker fails to make payment of the amount due to the investor in the manner or within the period specified in the regulations, he shall be liable to a penalty of one lakh rupees for each day during which such failure continues or one crore ruppes, whichever is less [SEBI (Amendment) Act, 2002].
For the purpose of adjudging under section 15 F, SEBI shall appoint any of its officers not below the rank of Division Chief to be an adjudicating officer for holding an enquiry in the prescribed manner after giving the person concerned a reasonable opportunity of being heard for the purpose of imposing any penalty. While holding an inquiry, the adjudicating officer has certain powers laid down in Section 15I(2).
While adjudging quantum of penalty under section 15J, the adjudicating officer shall have due regard to the following factors:
(a) the amount of disproportionate gain or unfair advantage, wherever quantifiable, made as a result of the defaults.
(b) the amount of loss to an investor or group of investors as a result of the default.
(c) the repetitive nature of the default.
Taking into consideration the above factors, the adjudicating officer may levy a maximum penalty as prescribed in Section 15F for default by the concern stock broker in making the payment to the investor.
Question 6
Mr. Raman, an investor is not satisfied with the dealings of his stock broker who is registered with Delhi Stock Exchange. Mr. Raman approaches you to guide him regarding the avenues available to him for making a complaint against the stock broker under Securities and Exchange Board of India Act, 1992 and also the grounds on which such complaint can be made. You are required to briefly explain the answer to his queries. (November, 2003)
Answer
Securities and Exchange Board of India (SEBI) was established for regulating the various aspects of stock market. One of its function is to register and regulate the stock brokers. In the light of this, Mr. Raman is advised that the complaint against the erring stock broker may be submitted to SEBI.
The grounds on which or the defaults for which complaints may be made to SEBI are as follows:
(a) Any failure on the part of the stock broker to issue contract notes in the form and manner specified by the stock exchange of which the stock broker is a member.
(b) Any failure to deliver any security or any failure to make payment of the amount due to the investor in the manner within the period specified in the regulations.
(c) Any collection of charges by way of brokerage which is in excess of the brokerage specified in the regulations.
Question 7
Explain briefly the powers of SEBI under Securities and Exchange Board of India Act, 1992 to seize the records of a Stock broker or other Intermediaries associated with Securities Market.
(May, 2004)
Answer
Seizure of records
Section 11C was inserted by SEBI (Amendment) Act, 2002. Where SEBI has reasonable grounds to believe that (a) transactions in securities are being dealt with in a manner detrimental to the investors or securities market or (b) any intermediary or any person associated with securities has violated provisions of SEBI Act, rules, regulations or directions issued by SEBI, SEBI can appoint an investigating Authority to investigate the affairs of such intermediary/person and report matter thereon to the Board [Section 11C (1)].
If Investigating Authority is of the opinion that the records are likely to be destroyed or mutilated or secreted or altered, he can make application to Judicial Magistrate of First Class for an order of seizure of such books, registers, other documents and record [Section 11C(8). The Magistrate can authorize Investigating Authority to enter premises search and seize records. But Magistrate will authorize seizure of records of a listed company or company intending to be listed only if it is indulging in insider trading or market manipulation [11C(9)]. The seized records will be kept by Investigating Authority till conclusion of investigation and then return it to person concerned after placing identification marks on them [11C(10)].
Question 8
SEBI received complaints from some investors alleging that ABC Ltd. And some brokers are indulging in price manipulation in the shares of ABC Ltd. Explain the powers that can be exercised by SEBI under the Securities and Exchange Board of India Act, 1992 in case the allegations are found to be correct. (May, 2006)
Answer
SEBI Act, 1992: Price manipulation in the shares of ABC Ltd. can be considered as fraudulent and unfair trade practices relating to securities market. In this case SEBI may exercise the following powers under Section 11(4) of securities and Exchange Board of India Act, 1992.
(i) Suspend the trading of any security (in this case the securities of ABC Ltd.) in a recognized stock exchange.
(ii) Restrain persons (in this case ABC Ltd.) from accessing the securities market. It can also prohibit any person associated with securities market (i.e. brokers who have indulged in price manipulation) to buy, sale or deal in securities market.
SEBI may issue the above orders for reasons to be recorded in writing. SEBI shall, either before or after passing such orders give an opportunity of hearing to company and brokers concerned (proviso 2 to Section 11(4))
SEBI may also appoint an adjudicating officer who may levy penalty under Section 15 HA after holding an enquiry in the prescribed manner. According to Section 15HA if any person indulges in fraudulent and unfair trade practices relating to securities, he shall be leviable to a penalty of Rs. 25 crores or 3 times the amount of profits made out of such practices, whichever is higher.
Prohibition on manipulation and deceptive practices: Further according to Section 12A, no person shall directly or indirectly indulge in following (i.e.) (a) using in manipulative or deceptive device in connection with purchase, sale or securities listed (b) Employ any scheme or device to defraud in connection with dealing in securities which are listed (c) engage in an act which would operate as fraud on deceit upon any person in connection with dealing in securities which are listed. SEBI may impose penalty upto Rs. 1 crore on any person who fails to comply with any provisions of SEBI Act (Section 15 HB).
Question 9
State the circumstances under which Securities and Exchange Board of India may exercise the following powers:
(i) Prohibit a company from issuing prospectus, any offer document or advertisement soliciting money from public for the issue of securities.
(ii) Pass cease and desist order in respect of any listed company.
Explain the remedies available under Securities and Exchange Board of India Act, 1992 to companies aggrieved by the above orders of SEBI (November 2006)
Answer
Power of SEBI and remedies available to aggrieved persons: Section 11 of SEBI Act, 1992 specifies that the basic duty of SEBI is to protect the interests of investors in securities and regulate the securities market. The certain measures which can be taken by SEBI are to fulfill its objectives are listed in Section 11, 11A, 11 AA, 11B, 11C and 11 D. Section 11 A(2)(b)(i) specifically empowers SEBI to prohibit any company from issuing prospectus, any offer document or advertisement soliciting money from the public for the issue of securities by general or special order if such prohibition is necessary to the purpose of protection of investors.
According to proviso to Section 11 D, SEBI can issue cease and desist order in respect of any listed company only if SEBI has reasonable grounds to believe that such company has indulged on insider trading or market manipulation and not otherwise.
Aggrieved companies may appeal against orders of SEBI made under SEBI Act, rules or regulations to Securities Appellate Tribunal (SAT) under Section15T (1)(a). Such appeal should be filed within 45 days from the date on which a copy of the order of SEBI is received by the company. It shall be in the prescribed form accompanied by prescribed fees. Delay in filing appeal can be condoned by SAT for sufficient reasons (Section 15 T(3) Efforts will be made by SAT to dispose of appeal within 6 months [Section 15T(6)].
If the company is aggrieved by the order of SAT, further appeal against the order of SAT can be made to Supreme Court within 60 days from the date of communication of the order on any question of law arising out of such order. The period can be extended by Supreme Court upto further 60 days if sufficient cause is shown (Section 15Z).
Thus, appeal lies only on question of law. As far as facts are concerned, decision of SAT is final. Further, Section 20 A bars jurisdiction of civil court in respect of orders issued by SEBI.
Question 10
As on 31st December, 2006, following information and figures are noticed from the Annual Accounts for the year ended 31st March, 2006 of CAS Ltd., a Company listed with the Stock Exchange, Mumbai:
(i) Authorised Share Capital Rs. 20.22 Crores comprising of 2 Crore Equity Shares of Rs. 10 each.
(ii) Paid up Share Capital Rs. 9.00 Crores comprising of 80 lac Equity Shares of Rs. 10 each fully paid up and 20 lac Equity Shares of Rs. 10 each called and paid upto Rs. 5 each. The total paid up capital is paid up in cash.
(iii) Securities Premium Account Rs. 20.00 Crores.
(iv) 5 lac Full Convertible Debentures of Rs. 100 each. These debentures are due for conversion on 31st March, 2007 in full into fully paid Equity Shares of Rs. 10 each in the ratio of one Debenture: two Equity Shares.
(v) General Reserve Rs. 30.00 crores.
(vi) Fixed Assets Revaluation Reserve Rs. 10.00 crores.
(vii) Outstanding Liabilities in respect of Bonus to Employees & workers Rs. 25.00 lacs.
(viii) Outstanding Liabilities in respect of Interest payable on Public Deposits comprising of Fixed Deposits from general public Rs. 15.00 lacs.
Following other information is gathered from the books of account and other records of the said Company for the period upto 31st December, 2006:
(a) The partly paid shares were made fully paid prior to 30th June, 2006.
(b) Bonus to employees and workers was paid on 15th September, 2006.
(c) Interest on Public Deposits was outstanding on 31st December, 2006.
The Directors of CAS Ltd. Wants to issue Bonus Shares on or after 1st April, 2007 in ratio of 1:1. Advise the Directors on the matter with reference to the guidelines issued by Securities and Exchange Board of India on Bonus Issue. (May 2007)
Answer
According to Guidelines issued by Securities & Exchange Board of India on Bonus Issue, a listed Company proposing to issue bonus shares has to comply with the following:
(i) Pending the conversion of Fully Convertible Debentures (FCDs) / Partly Convertible Debentures (PCDs), the Company cannot issue shares by way or bonus unless similar benefit is extended to the holders of FCDs / PCDs through reservation of shares and the shares so reserved may be issued at the time of conversion of FCDs / PCDs on the same terms on which the bonus issues were made.
(ii) The bonus issue is made out of free reserve built out of genuine profits or securities premium collected in cash only.
(iii) Fixed Assets Revaluation Reserves are not capitalized for the purpose of bonus issue.
(iv) The bonus issue is not made in lieu of dividend.
(v) The bonus issue can be made only after any partly paid shares are made fully paid.
(vi) The Company should not have defaulted in payment of interest or principal in respect of fixed deposits and interest on existing debentures or principal on redemption.

(vii) The Company should have sufficient reasons to believe that it has not defaulted in respect of the payment of statutory dues like contribution to P.F., Gratuity and bonus to employees etc.
(viii) The Board of Directors’ proposal to make bonus issue is implemented within six months from the date of approval by the Board of Directors and the same can not be revoked.
(ix) The bonus issue must be permitted by the Articles of Association and if the Articles ofAssociation does not contain such a clause, then first the same should be suitably amended.
(x) If Authorised Capital is not sufficient to accommodate the post bonus issue paid up capital, the capital clause of the Memorandum of Association should be suitably amended.
(xi) A compliance certificate by the Company duly countersigned by the statutory auditor or company secretary in practice is to be submitted to SEBI.
Based on the abovementioned guidelines of SEBI, the Board of Directors is advised as follows:
(a) Check the Articles of Association whether it allows the issue of bonus shares. If not, the Articles of Association should be amended to include the relevant clause.
(b) The Paid up Share Capital of the Company as on 31st March, 2006 was Rs. 9.00 Crores and after the partly paid shares were made fully paid, the paid up share capital became Rs. 10.00 Crores. Moreover, after the conversion of 5 lac FCDs, the paid up capital will increase by 10 lac shares of Rs. 10/- each, that means the paid up capital shall become 11.00 Cores as on 31st March, 2007. The Directors want to make bonus issue in the ratio of 1:1. Therefore, the post bonus issue paid up capital shall become Rs. 22.00 crores. But the Authorised Share Capital is only Rs. 20.00 Crores, hence, the Directors are required to take steps to increase the authorized capital to at least Rs. 22.00 crores.
(c) The Company is having sufficient amount in General Reserve and Securities Premium Account and the Directors can use from Any/both of thse accounts for bonus issue. But they should not utilize any amount from the Fixed Assets Revaluation reserve.
(d) Since the Bonus to employees and workers have been paid within the time allowed by the Payment of Bonus Act, the requirement of the SEBI Guidelines have been fulfilled.
(e) The default in paying the interest on fixed deposits should be rectified by paying the necessary amount as provided in the Companies (Acceptance of Deposit Rules) 1975.
(f) The Directors should pass necessary resolution in the meeting of Board of Directors and take further steps to issue the bonus shares within six months from the passing of such resolution.
(g) After the issue of bonus shares, the company should forward a compliance certificate duly counter signed by its statutory auditor or a company secretary in practice to SEBI.

Question 11
(i) What do you understand by the term “Price Sensitive Information” as contemplated in the Securities and Exchange Board of India Act, 1992 ? What are the information which can be deemed to be “Price Sensitive Information”.
(ii) MGR Ltd. wants to issue certain shares on preferential basis and has sought your advise in respect of pricing the shares for such issues. You are required to state the Guidelines issued by Securities and Exchange Board of India in respect of pricing of the issue of shares on a preferential basis. (May 2008)
Answer
(i) Any information which relates directly or indirectly to a company and which if published is likely to materially affect the price of securities of the company, is referred to as “Price Sensitive Information”.
The following can be deemed to be “Price Sensitive Information”:
(i) Periodical financial results of the company
(ii) intended declaration of dividends (both interim and final)
(iii) issue of securities or buy-back of securities
(iv) any major expansion plans or execution of new projects
(v) Amalgamation or merger or takeovers
(vi) disposal of the whole or substantial part of the undertaking
(vii) any significant changes in policies, plans or operations of the company.
(ii) According to the Securities and Exchange Board of India (Disclosure and investor Protection) Guidelines, 2000 the issue of shares on a preferential basis can be made at a price not less than the higher of the following:
(i) the average of the weekly high and low of the closing prices of the related shares quoted on the stock exchange during the six months preceding the relevant date;
or
(ii) the average of the weekly high and low of the closing prices of the related shares quoted on a stock exchange during the two weeks preceding the relevant date.
For the purpose of above, “relevant date” means the date thirty days prior to the date on which the meeting of General Body of shareholders is held, in terms of Section 81(1A) of the Companies Act, 1956 to consider the proposed issue.
Question 12
Mr. DB is a member of RPA Ltd. He obtains an order against the company for redressal of his grievances against the company. But the company fails to redress the grievances of DB within the time fixed by the SEBI. The Board thereafter imposed penalty upon the company U/s 15C of the SEBI Act. RPL Ltd. seeks your advice whether it has any remedy against the order of SEBI. Advise. (November 2008)
Answer
Section 15C of Securities Exchange Board of India Act, 1992 lays down that if any listed company or any person who is registered as an intermediary, after having been called upon by the board in writing, to redress the grievances of investors, fails to redress such grievances within the time specified by the board, such company or intermediary shall be liable to a penalty of one lakh rupees for each day during which such failure continues or one crore rupees, whichever is less.
RPA limited was penalized under the provisions of above-mentioned section. Now two remedies are available to RPA limited in this matter:
(i) Appeal to the Securities Appellate Tribunal: Section 15T of the SEBI Act, 1992 provides that any person aggrieved by an order of the Board made, on and after the commencement of the security laws (second amendment) act 1999, under this act or the rules or regulations made there under may prefer an appeal to a Securities Appellate Tribunal having jurisdiction in the matter.
Such appeal shall be filed within a period of 45 days from the date on which a copy of the order made by the Board is received and it shall be in such form and be accompanied by such fee as may be prescribed. However the Tribunal may entertain an appeal after the expiry of the said period of forty-five days if it is satisfied that there was sufficient cause for not filing it within the said period.
The Tribunal may, after giving the parties an opportunity of being heard, pass such orders as it thinks fit, confirming, modifying or setting aside the order appealed against.
(ii) Appeal to the Supreme Court: Section 15Z of the SEBI Act, 1992 provides that any person aggrieved by any decision or an order of the Securities Appellate Tribunal may file an appeal to the Supreme Court within 60 days from the date of communication of the decision or an order to him on any question of law arising out of such order. The Supreme Court may, if it is satisfied that the appellant was prevented by sufficient cause from filing the appeal within the said period, allow it to be filed within a further period not exceeding 60 days.
PART II

Question on SEBI (DIP) guidelines 2000 given here are for reference only. Answers have not been given as the guidelines are subject to changes from time to time. Students are advised to refer either the Study material or visit the Sebi’s Web Site www.sebi.gov.in
Question 1
What is the specific advantage of Book-building process in connection with issue of securities by a company? State the guidelines issued by SEBI in this regard in respect of the following matters:
(i) Determination of issue price and that of successful bidders.
(ii) Reservation for individual investors who have not participated in the bidding process and basis of allotment to such investors. (May, 2000)
Question 2
The Balance Sheet of M/s Get Rich Quick Ltd. as at 31.3.2001 disclosed the following details:
(i) Share Capital Rs. 150 crores
(ii) Reserves and Surplus Rs. 750 crores
The company has issued in the year 1996, fully convertible debentures of Rs.100 crores, which are due for conversion in the year 2001. The company proposes to issue bonus shares in the ratio of 1 : 1. Explain briefly the SEBI guidelines to be followed by the company
(May, 2001)
Question 3
M/s Ambitious Financiers Ltd., an existing unlisted Public Company, is planning to issue to the public five lakhs fully convertible debentures of Rs. 100 each. Explain the eligibility norms to be fulfilled by the company as per SEBI guidelines before making the issue. (May, 2001)
Question 4
State briefly the guidelines issued by SEBI for compliance by the companies making an initial public offer of equity shares or any other security convertible at a later date into equity shares proposing to list them on the Over the Counter Exchange of India. (November, 2001)
Question 5
M/s Herbal Pharma Limited, a listed company, decides to make a public issue of equity shares. Explain briefly the eligibility norms prescribed by SEBI guidelines to be complied with by the company. (May, 2002)
Question 6
Super Chemicals Limited, a closely held unlisted company, is in need of about Rs. 20 crores for financing its expansion programme. The company has not declared any dividend so far though it has made good profits from the commencement of commercial operations on 1st January, 1995. The paid-up capital of the company was increased to Rs. 3.5 crores on 1st April, 1998. The net worth of the company as per latest audited Balance Sheet as at 31st March, 2002 is Rs. 5 crores. The company seeks your advice as to its eligibility to raise Rs. 20 crores through public issue of equity shares at a premium. Advise with reference to relevant guidelines issued by SEBI. (May, 2003)

Question 7
Following information and figures are noticed from the Annual Accounts for the year ended 31st March, 2003 of MNP Limited, a listed company:
(i) Authorised Shares Capital Rs.10 crores comprising of one crore Equity shares of Rs.10 each.
(ii) Paid-up Share Capital of Rs.4.5 crores comprising of 40,00,000 Equity shares of Rs.10 each fully paid-up and 10,00,000 Equity shares of Rs.10 each called and paid-up to Rs.5 each. The total paid-up capital is paid up in cash.
(iii) Securities Premium Account Rs.10 crores.
(iv) 2,50,000 fully convertible debentures of Rs.100 each. These debentures are due for conversion on 30th June, 2003 in full into fully paid Equity shares of Rs.10 each in the ratio of two equity shares for one debenture.
(v) General Reserve Rs.15 crores.
(vi) Fixed asset revaluation reserves Rs.2.5 crores.
It was further ascertained that the partly paid shares were made fully paid by 30th June, 2003.
The Directors of MNP Limited propose to issue bonus shares in the ratio of 1:1.
Advise the Directors on the matter with reference to the guidelines issued by SEBI on bonus issue. What will be your advice, if the company has defaulted in the matter of payment of interest on fixed deposits? (November, 2003)
Question 8
An unlisted Company, having paid-up Share Capital of Rs.3 crores consisting of 30,00,000 Equity Shares of Rs. 10 each fully paid-up, proposes to make an initial Public offer of 90,000 Equity Shares of Rs.10 each at a premium of Rs.5 per share, in July, 2004. The promoters acquired 10,00,000 shares on 1st January, 2000 and another 10,00,000 shares on 1st January, 2004 at face value:
(i) What should be the minimum contribution that should be made by the promoters of the above company in order to comply with the guidelines issued by SEBI?
(ii) State also the period for which the promoters are required in excess of the enquired minimum contribution. (May, 2004)
Question 9
The Annual Accounts of CALM Ltd., a listed company from for the year ended 31st March, 2003 were finalized on 31st May, 2004. The Company had a paid up capital of Rs.50.00 Lacs and free reserves of Rs.100.00 Lacs. The Company did not have any accumulated losses. The Board of Directors of the Company wishes to make a public issue of Equity Shares amounting to Rs. 10.00 Crores comprising of offer to public through offer document, firm allotment and promoters contribution. State, how this can be done under SEBI Guidelines.
What would be your answer in the following cases:
(a) If CALM Ltd. was a Private Sector Bank known as CALM Bank Ltd.
(b) If the issue of above mentioned Rs.10.00 Crores was a right issue (November, 2004)
Question 10
(a) As on 31st December, 2004, following information and figures are noticed from the Annual Accounts for the year ended 31st March, 2004 of SKP Ltd., a Company listed with The Stock Exchange, Mumbai:
(i) Authorised Share Capital Rs.20.00 Crores comprising of 2 Crore Equity Shares of Rs.10 each.
(ii) Paid up Share Capital Rs.9.00 Crores comprising of 80 lac Equity Shares of Rs.10 each fully paid up and 20 lac Equity Shares of Rs.10 each called and paid up to Rs.5 each. The total paid up capital is paid up in cash.
(iii) Securities Premium Account Rs.20.00 Crores.
(iv) 5 lac Fully Convertible Debentures of Rs.100 each. These debentures are due for conversion on 31st March, 2005 in full into fully paid Equity Shares of Rs.10 each in the ratio of one Debenture: two Equity Shares.
(v) General Reserve Rs.30.00 Crores.
(vi) Fixed Assets Revaluation Reserve Rs.10.00 Crores.
(vii) Outstanding Liabilities in respect of Bonus to Employees and Workers Rs.25.00 lacs.
(viii) Outstanding Liabilities in respect of Interest payable on Public Deposits comprising of Fixed Deposits from general public Rs.15.00 lacs.
Following other information is gathered from the books of account and other records of the said Company for the period upto 31st December, 2004:
(a) The partly paid shares were made fully paid prior to 30th September, 2004.
(b) Bonus to employees and workers was paid on 15th September, 2004.
(c) Interest on Public Deposits was outstanding on 31st December, 2004.
The Directors of SKP Ltd. wants to issue Bonus Shares on or after 1st April, 2005 in the ratio of 1:1. Advise the Directors on the matter with reference to the guidelines issued by Securities and Exchange Board of India on Bonus Issue.
(b) Excel Ltd., a public limited company listed with The Stock Exchange, Mumbai, wants to make issue of equity shares on preferential basis pursuant to a scheme approved under Corporate Debt Restructuring framework specified by Reserve Bank of India to various persons as may be selected by the Board of Director of the Company. Following information relevant to the preferential issue is available:
(i) Total No. of equity shares to be issued: 50 Lac equity shares of Rs.10 each out of which 30 lac equity shares will be allotted on 30th June, 2005 as fully paid up and balance 20 lac equity shares shall be allotted on the same date but paid up to Rs.5 each and balance Rs.5 shall be called upon at a later date and shall be paid up on 30th November, 2005.
(ii) Out of the proposed allottees some persons are holding their shares in Excel Ltd. in physical form and not in dematerialed form and some persons had sold their entire shareholding in Excel Ltd. in January, 2005.
(iii) The meeting of general body of shareholders for approving the preferential issue was held on 15th March, 2005.
Based on the above information you are required to answer the following queries with reference to the SEBI (Disclosure and Investor Protection Guidelines, 2000:
(i) What would be the lock-in period for the shares allotted on preferential basis?
(ii) Who are the persons not entitled for allotment of shares on preferential basis?
( May 2005)
Question 11
(a) An investor has complained to SEBI that he has not received the payment due to him from the stock-broker registered with Calcutta Stock Exchange Association Ltd. The complainant has requested SEBI to take appropriate action against the stock-broker. You are required to state with reference to the provisions of Securities and Exchange Board of India Act, 1992 the answer to the following:
(i) What action SEBI can take against the stock-broker on the complaint as stated above?
(ii) What is the procedure to be adopted and what are the factors that will be taken into account while taking such action?
(b) Following information is available from the records of Star Chemicals & Engineering Ltd.:
(i) The Company is a closely held unlisted Company.
(ii) The paid up share capital of the Company since 1st April, 1999 is Rs.3.00 crores and its net worth as at 31st March, 2005 was Rs.5.00 crores as per audited Balance Sheet.
(iii) The Net Tangible Assets of the Company as per last 3 (three) audited Balance Sheet as at 31st March, 2003, 2004 and 2005 were Rs.4.00 crores, 4.50 crores and 5.00 crores respectively, out of which monetary assets were less than Rs.50 lacs in each of three years.
(iv) The Company was incorporated in 1996 and commenced its business on 1st April, 1996 and since then it has earned good profits and it has not incurred any loss in any year in past.
(v) The Company has not declared any dividend so far, but according to the profits earned so far, the management could have declared the dividend in each of the last five years.
(vi) The name of the Company was changed from Star Engineering Ltd. to its present name with effect from 1st October, 2004.
The Company wants to make a public issue of shares to raise Rs.20.00 crores by issuing equity shares at premium. For the purpose of including the information in the prospectus, the company has prepared its accounts for 12 months ended 30th September, 2005 showing segment-wise revenue, which reveals that revenue from Chemical segment is more than the revenue from Engineering segment.
You are required to state the relevant guidelines issued by SEBI and your conclusion whether the company can make the desired issue of equity shares based on the facts stated above. ( November 2005)
Question 12
A designated Financial Institution under the Companies Act, 1956 proposes to go for issue of shares. Referring to the SEBI guidelines the institution seeks your advice on the following:
(i) What minimum reservation to promoters is to be made by the Financial Institution ?
(ii) To what conditions shall the Financial Institution be subject to, for reservation for employees out of the proposed issue? Advise.
Question 13
XYZ Automobiles Ltd. intends to make a public issue of 2,00,00,000 equity shares of Rs. 10 each through the 100% book building process indicating a price band.
You are required to answer the following with reference to the SEBI (Disclosure and Investor Protection) Guidelines:
(i) What is the price band that can be indicated in the red herring prospectus, if the floor prince is proposed to be fixed at Rs. 300 per equity share ?
(ii) What are the restrictions, if the company wants to revise the price band during the bidding period?
(iii) How the shares are to be allocated to different categories of investors like Qualified institutional buyers, Retail individual investors, etc.? (November 2006)
Question 14
Securities and Exchange Board of India (SEBI) has issued certain guidelines in respect of fixation of exit price through “Book Building” process for the shares to be bought back by the listed companies, who want to voluntarily delist their shares from the stock exchanges. You are required to state the salient features of the said “Book Building” process.
(May 2007)

Question 15
KYC a recognized Stock Exchange has not maintained proper books of account of the stock exchange, on the ground that such books of account are not essential. A compliant in this regard was made to SEBI who appointed Mr. E. An expert to make an enquiry. Explain whether SEBI is authorized to make inquiry and take action against the stock exchange.
(November 2007)
Question 16
M/s Earth Chemicals and Engineering Ltd. is a closely held unlisted company with a paid up share capital of Rs. 3.00 crores, since 1st April, 2001 and its net worth as on 31st March, 2007 was Rs. 5.00 crores. The net tangible assets of the company as per last three audited balance sheets as at 31st March, 2005, 2006 and 2007 were Rs. 4.00 crores, 4.50 crores and 5.00 crores respectively out of which momentary assets were less than Rs. 50 lakhs in each of the three years. The company was incorporated in 1998 and commenced its business on 1st April, 1998 and since then it was earned good profits and it has not incurred any loss in any year in the past. The company has not declared any dividend so far. But according to the profits earned so far, the management could have declared dividends in each of the last five years. The name of the company was changed from Earth Engineering ltd. to its present name effective from 1st October, 2006. The company wants to make a public issue of shares to raise Rs. 20.00 crors by issuing equity shares at premium. For the purpose of including the information in the prospectus. The company has prepared its accounts for 12 months ended 30th September, 2007 showing segment wise revenue, which reveals that revenue from chemical segment was more than the revenue from engineering segment. Keeping the relevant guidelines issued by SEBI into account, examine whether the company can make the desired issue of equity shares based on the facts stated above. (November 2007)
Question 17
An investor has complained to SEBI that he has not received the payment due to him from the stock broker registered with Calcutta Stock Exchange Association Ltd. The complainant has requested SEBI to take appropriate action against the stock broker. State with reference to the provisions of Securities and Exchange Board of India Act, 1992. The action that can be taken against the stock broker, the procedure to be adopted and the factors that will be taken into account of SEBI. (November 2007)
Question 18
Excel Ltd., a Public Limited Company listed with the Stock Exchange, Mumbai, wants to make issue of equity shares on preferential basis pursuant to a scheme approved under Corporate Debt Restructuring framework specified by Reserve Bank of India to various persons as may be selected by the Board of Directors of the Company. Following information relevant to the preferential issue is available.
(i) Total No. of equity shares to be issued : 50 lac equity shares of Rs. 10 each out of which 30 lac equity shares will be allotted on 30th June, 2008 as fully paid up and balance 20 lac equity shares shall be allotted on the same date but paid up to Rs. 5 each and balance Rs. 5 shall be called upon at a later date and shall be paid up on 30th November, 2008.
(ii) Out of the proposed allottees some persons are holding their shares in Excel Ltd. in physical form and not in dematerialed form and some persons had sold their entire shareholding in Excel Ltd. in January, 2008.
(iii) The meeting of general body of shareholders for approving the preferential issue was held on 15th March, 2008.
Based on the above information you are required to answer the following queries with reference to the SEBI (Disclosure and Investor Protection) Guidelines, 2000:
(i) What would be the lock-in period for the shares allotted on preferential basis?
(ii) Who are the persons not entitled for allotment of shares on preferential basis?
(May 2008)
Question 19
The promoters of ABC Ltd. an unlisted company decide to go for a public issue. They seek your advice in respect of the following matters:
Whether equity shares can be reserved in a firm allotment category for promoters at a price different from the price at which shares are offered to the public.
Circumstances in which the equity shares can be issued in denomination of Rs.2 per share.
Need for past track record of distributable profits.
Requirement of net tangible assets in the previous years. (November 2008)