On receipt of the complaint, SEBI will appoint an adjudicating officer for holding an inquiry in the prescribed manner after giving the person concerned a reasonable opportunity of being heard for the purpose of imposing any penalty.

The above question formed part of the November 2003 CA (Final) paper on corporate law and secretarial practice — a not too difficult paper overall. Of a total of 150 marks, company law accounted for 106 marks (70.6 per cent), FEMA 14 marks, SEBI 12, SC(R)A 10, Competition Act 4 and interpretation of statutes 4.

There may not be much change in the allocation of marks in the May 2004 paper. As a few more clauses have been notified, the Competition Act may carry 8 marks and interpretation of statutes the usual 7 marks.

In the Companies Act, queries on directors alone took up 34 marks. This is the usual trend. Students are, therefore, advised to pay maximum attention to this chapter.

A look now at the November 2003 paper:

Add on directors

THE maximum number of directors of each of the following companies — i) ABS Company Ltd; ii) DSP Trading Private Ltd; iii) Traders Association (a company registered under Section 25 of the Companies Act, 1956; and iv) Hindustan Paper Ltd (a government company registered under Section 617 of the Companies Act) — as per their articles of association (AoA) is 11.

The board of directors wants to increase the number of directors to 15. State with reference to the provisions of the Companies Act whether the Directors can do so? [5 marks]

The problem is based on Section 259 of the Companies Act, as per which, a company can increase the strength of its board beyond the maximum number prescribed by the articles by passing a special resolution at a general body meeting of its members. And if the proposed increase is beyond 12, Central Government approval is necessary.

However, a private company which is not subsidiary of a public company, a Section 25 company and government companies need not obtain Central Government approval. Thus, in case (i), the company being a public company and not falling under any of the aforesaid exemptions shall require special resolution and Central Government approval. But in cases (ii), (iii) and (iv), Central Government approval is not required. These companies will, therefore, be able to increase the strength of their boards to 15 by merely passing a special resolution.

Patel vs Mehta

PATEL has transferred the shares of a listed company registered in his name to Mehta. Mehta has failed to get the shares registered in his name before the company declared and paid the dividend on the shares. Examine with reference to the Securities Contracts (Regulation) Act, 1956 whether Patel is entitled to retain the dividend even though he has transferred the shares before declaration of dividend. [5 marks]

Section 27 of the Securities Contracts Act provides that it shall be lawful for the holder of any security whose name appears on the books of the company issuing the said security to receive and retain any dividend declared by the company in respect thereof for any year, notwithstanding that the said security has already been transferred by him for consideration, unless the transferee who claims for dividend from the transferor has lodged the security and all other documents relating to the transfer which may be required by the company with the company for being registered in his name within 15 days of the date on which the dividend became due. The period specified in Section 27 shall be extended in certain cases, which include death of the transferee, loss of the transfer deed by theft and so on, delay due to causes connected with the post.

However, the right of a company to pay any dividend to a registered shareholder is not affected. Again, the transferee shall have his rights against the transferor.

Thus, as per the aforesaid provisions, Patel can rightfully retain the dividend except where the shares were sold cum-dividend, in which case, Mehta can sue Patel for payment of those dividends to him.

Rule repair

SEBI is of the opinion that in the interest of investors, it is desirable to amend the rules of XYZ Stock Exchange prohibiting the appointment of the broker-member as President of the stock exchange. Explain with reference to the Securities Contracts (Regulation) Act whether it is possible for SEBI to amend the rules of the stock exchange, if the latter does not amend the rules. [5 marks]

Section 8 of the SC(R) Act empowers SEBI to direct any stock exchange to make or amend any rules in respect of all or any of the matters specified in Section 3(2) which, inter alia, include constitution of governing body of the stock exchange.

If any recognised stock exchange fails or neglects to comply with the direction, as aforesaid, within a period of six months, SEBI may make or amend the rules either as proposed in the order or with such modification thereof as may be agreed to between the stock exchange and SEBI. It may be noted that the aforesaid power is concurrently exercisable by the Central Government too.

Interested but silent

WITH the knowledge of all the directors of a public limited company, a mortgage was created over the property of the company in respect of a loan given by the brother of one of the directors of the company. But the interested director neither disclosed his interest nor abstained from voting at the board meeting, when the loan transaction was approved.

Examine with reference to the Companies Act whether there is any ban on such contracts and whether non-disclosure of interest and voting by the interested director would make the contract valid. [7 marks]

Candidates are expected to refer to Sections 299 and 300 of the Companies Act. Section 299 requires that every director of a company who is in any way, whether directly or indirectly, concerned or interested in a contract or arrangement, or proposed contract or arrangement, entered into or to be entered into, by or on behalf of the company, shall disclose the nature of his concern or interest at a meeting of the board.

Thus, disclosure at a board meeting is a pre-requisite; merely that directors have knowledge is not sufficient.

Again, Section 300 debars such a director to take part in the discussion of, or vote on, any such contract or arrangement.

Consequence of contravention of Section 299 (that is, non-disclosure) is a fine of up to Rs 50,000, and of Section 300 is that his discussion and vote shall be void and will also be liable to a fine up to Rs 50,000. Besides, as per Section 283, contravention of Section 299 shall result in vacation of office of the director. The contract shall, however, not be void.

FEMA check

EXAMINE whether the following transactions are permissible under the Foreign Exchange Management Act, 1999: i) payment of remuneration to foreign technician; and ii) remittance of dividend to non-residents.

State also the procedure to be followed with regard to payment of dividend to non-residents. [7 marks]

Candidates should essentially note that scheme of FEMA is to freely allow current account transactions subject only to approvals of the Central Government/RBI in certain cases. A few transactions are, however, prohibited. Hiring of foreign technicians and payment of remuneration to them is a current account transaction and not included in the list of prohibited transactions or transactions that require Central Government/RBI approval.

Thus, there is no bar to payment of remuneration to a foreign technician. However, as per the RBI circular of October 29, 1997, the foreign technician should hold an employment visa and the salary paid can be remitted outside India but after TDS.

Again, remittance of dividend is a current account transaction and not covered under prohibited/restricted transactions. Therefore, it shall be permitted without any restrictions provided the investment is as per regulations/permission.

The procedure involved includes: i) application to authorised dealer in Form A-2 along with the list of non-resident shareholders and dividend to be remitted; ii) copy of resolution of board meeting as well as general meeting; iii) certificate from a practising chartered accountant or company secretary in respect of amount payable.

The dividend may be remitted through normal banking channels or may be credited to NRE/FCNR Account of the NRI, if he so desires.

Between bhais

RAM, a citizen of India, left India for employment in the US on June 1, 2002. He purchased a flat at New Delhi for Rs 15 lakh in September 2003. His brother, Gopal, employed in New Delhi, also purchased a flat in the same building in September 2002 for 15 lakh. Gopal's flat was financed by a loan from a housing finance company and the loan was guaranteed by Ram.

Examine with reference to FEMA whether purchase of flat and guarantee by Ram are capital account transactions and whether these are permissible. [7 marks]

As per Section 2(w) of FEMA, read along with Section 2(v), a person resident in India becomes a non-resident if he leaves India for employment abroad. Thus, Mr Ram became an NRI w.e.f. June 1, 2002. NRIs are allowed to purchase immovable property in India for their own use. Again, guarantee by Ram (NRI) of a loan to Gopal, a resident of India, is a capital account transaction but has been permitted under Schedule II to Foreign Exchange management (Permissible Capital Account Transactions) Regulations 2000.

Bonus advice

THE following information and figures are noticed from the annual accounts for the year ended March 31, 2003, of MNP Ltd, a listed company:

i) Authorised share capital Rs 10 crore comprising of one crore equity shares of Rs 10 each.

ii) Paid-up share capital of Rs 4.5 crore comprising 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 in cash.

iii) Securities premium account, Rs 10 crore.

iv) 2,50,000 fully convertible debentures of Rs 100 each. These debentures are due for conversion on June 30, 2003, in full and fully paid equity shares of Rs 10 each in the ratio of two equity shares for one debenture.

v) General reserves, Rs 5 crore.

vi) Fixed asset revaluation reserves, Rs 2.5 crore.

It was further ascertained that the partly paid shares were made fully paid by June 30, 2003. The directors of MNP Ltd 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 on interest on fixed deposits? [8 marks]

The question requires the candidates to state and apply SEBI guidelines with respect to issue of bonus shares which, inter alia, require provision in the articles, resolution of the board of directors to be passed, bonus to be paid out of general reserves plus share premium account in the given case; revaluation reserve cannot be utilised, reservation for convertible debentures, and so on.

Looking to the facts of the case, the total paid-up capital is Rs 5 crore and equity resulting out of conversion of debentures will be another Rs 5 crore. Authorised capital being Rs 10 crore, bonus will be within the specified authorised capital, and, assuming that the articles contain a permissive clause, the board shall be empowered to issue bonus shares in the ratio of 1:1, as the amount standing to the credit of General Reserves and Share Premium Account is Rs 25 crore, which is more than the required amount of Rs 10 crore.

However, if the company has defaulted in payment of interest on fixed deposits, SEBI guidelines forbid the issue of bonus shares till the default is made good.

Competition Commission

HOW will the chairperson and other members of the Competition Commission of India be appointed? State whether the chairperson shall be only a person, who has been or is qualified to be a judge of a High Court.

[4 marks]

This is a simple question based on Section 8 of the Competition Act, 2002. As per Section 8(2), the chairperson and every other member shall be a person of ability, integrity and standing and who has been, or is qualified to be, a judge of a High Court or has special knowledge of and professional experience of not less than 15 years in international trade, economics, business, commerce, law, finance, accountancy, management, industry, public affairs, administration or in any other matter which, in the opinion of the Central Government, may be useful to the Commission.

Thus, a chairperson need not necessarily be a person who has been or is qualified to be a judge of a High Court. However, the Supreme Court in one of its recent judgment on a public litigation observed that in view of the judicial functions of the Competition Commission, it must be headed by a person from judiciary.

(To be continued)

(Suggested answers to the November 2003 CA (Final) paper on corporate laws and secretarial practice.)

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