The Hindu Business Line : Dollars in demand for different purposes

i) Rule 3 of the Foreign Exchange Management Act (Current Account Transactions) Rules, 2000 prohibits drawal of foreign exchange by any person for certain purposes, including remittance out of lottery winnings. Accordingly, Mr Sane will not be allowed to obtain foreign exchange to remit $50,000 out of winnings on a lottery ticket.

ii) Rule 4 of FEMA provides for prior approval of the Central Government for drawal of foreign exchange for certain transactions, including cultural tours outside India. Thus, Mr Sane can obtain $1,00,000 but only after obtaining approval of the Central Government.

iii) As per Rule 5 , no person can draw foreign exchange for certain current account transactions exceeding the prescribed limits unless approval of the Reserve Bank of India has been obtained. With respect to business tours, the present ceiling is $25,000. In the given case, the requirement of Mr Sane being $50,000, permission of the RBI shall be necessary.

Restricting voting rights

THE governing body of City Stock Exchange Association Ltd is desirous of putting various restrictions on voting rights of its members to be exercised in a meeting and on their right to appoint a proxy. Is this permissible? Also, what is the role of the Central Government in this respect?

A recognised stock exchange may make or amend any rules made by it to provide for all or any of the following matters:

a) the restriction of voting rights to members only in respect of any matter placed before the stock exchange at any meeting;

b) the regulation of voting rights in respect of any matter placed before the stock exchange at any meeting so that each member may be entitled to have one vote only, irrespective of his share of the paid-up equity capital of the stock exchange;

c) the restriction on the right of a member to appoint another person as his proxy to attend and vote at a meeting of the stock exchange;

d) such incidental, consequential and supplementary matters as may be necessary to give effect to any of the matters specified in clauses (a), (b) and (c).

However, the rules of a recognised stock exchange made or amended in relation to any matters referred to in clauses (a) to (d) of sub-section (1) shall not have effect until they have been approved by the Central Government/SEBI and published in the Official Gazette. In approving the rules so made or amended, the Central Government/SEBI may make such modifications therein as it thinks fit, and on such publication, the rules as approved by the Central Government/SEBI shall be deemed to have been validity made, notwithstanding anything to the contrary contained in the Companies Act, 1956 [Section 7A(2)]. Accordingly, the proposed restrictions are in order.

A quorum query

THE Articles of Association of XYZ Computers Ltd provide for a maximum of 15 directors. But the company has only 10 directors and for two of them representing foreign collaborators, alternate directors have been appointed. The board meeting held on August 1, 2003, was attended by four directors, including two alternate directors.

Examine with reference to the relevant provisions of the Companies Act, 1956 whether quorum was present at the board meeting held on August 1, 2003. Will your answer be different if the articles provide for a quorum of six directors?

As per Section 287 of the Companies Act, the quorum of a board meeting shall be one-third of the board's total strength (fractions to be rounded of to the next whole number) or two directors, whichever is higher.

Articles can fix higher quorum and not a lower number (Amrit Kaur Puri vs Kapurthala Flour Oil & General Mills Co. (P) Ltd — 1984 56, Comp. Cas. 194 (P&H) SS-1 of ICSI). This is in agreement with the aforesaid decision of the Punjab and Haryana High Court.

`Total strength' for the purpose means total strength of the board as reduced by the number of positions vacant at that time.

In the given case, total strength of the board being 10 directors, one-third shall be four directors. Thus, valid quorum was present at the board meeting of August 1, 2003.

In case the articles stipulated a quorum of six directors, as per the decision of the P&H High Court in Amrit Kaur Puri vs Kapurthala Flour Oil and General Mills Co. (P) Ltd (1984), the requirement of quorum shall not be said to be satisfied.

However, the study material of the Institute of Chartered Accountants of India (ICAI) says that the articles cannot fix a quorum higher than stipulated under Section 287. The Institute of Company Secretaries of India (ICSI) does not agree with this view and has in Secretarial Standard-1 endorsed the view expressed by the P&H High Court.

Forex, share issues

EXPLAIN the restrictions, if any, under the Foreign Exchange Management Act, 1999 in respect of the following issue and transfer of shares:

Issue of equity shares of Rs 1 crore at face value accounting for 45 per cent of post-issue capital to non-resident Indians in the US on non-repatriation basis. The shares are issued by ABC Knitwear Ltd to finance the modernisation of its plants.

Foreign direct investment (FDI) in Indian companies has been allowed under automatic route subject to the following:

Foreign investment in shares in any industry up to 100 per cent is permitted, except in the following cases:

a) proposals requiring industrial licensing; b) investment of more than 24 per cent in equity, if the manufacturing item is reserved for small-scale industries (SSIs); c) item requiring industrial licence in terms of locational policy as per the policy of 1991; d) proposal where foreign collaborator had a previous venture/tie-up in India; e) proposals relating to acquisition of shares in an existing company in favour of a foreign/NRI investor; f) proposals outside the sectoral policy/caps or in sectors where FDI is not permitted.

As per (e) above, FDI will not qualify under automatic route and, therefore, approval of the Central Government (Foreign Investment Promotion Board) as well as that of the RBI will be required.

A non-resident Indian (NRI), who is holding equity shares in DEF Textiles Ltd, proposes to sell some shares to another NRI for a consideration of Rs 50 lakh and also transfer shares of face value of Rs 25 lakh to a person resident in India by way of gift.

An NRI can transfer by way of sale, the shares or convertible debentures held by him to another NRI only. Thus, the proposed transfer is permissible.

A person resident outside India may transfer any security held by him to a person resident in India by way of gift or may sell the same on a recognised stock exchange in India through a registered broker. Thus, since in the given problem transfer by way of gift is to a person resident in India, the same is in order.

Minimum contribution

AN UNLISTED company, having paid-up share capital of Rs 3 crore consisting of 30,00,000 equity shares of Rs 10 each fully paid-up, proposes to make an initial public offer of 90,00,000 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 January 1, 2000, and another 10,00,000 shares on January 1, 2004, at face value. 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?

State also the period for which the promoters are required to hold these shares and also the shares, if any, acquired by the promoters in excess of the required minimum contribution.

As per SEBI Guidelines, 2000 (as amended by Notification dated August 14, 2003), promoters' contribution with respect to an initial public offer (IPO) by an unlisted company has to be at least 20 per cent of the post-issue capital.

In the given case, post-issue capital of the company shall be Rs 3 crore plus Rs 13.5 crore = Rs 16.5 crore. Twenty per cent of this (that is, Rs 16.5 crore — the post-issue capital) amounts to Rs 4.125 crore.

The promoters have already acquired shares to the extent of Rs 2 crore on January 1, 2000 and January 1, 2004, at face value. SEBI guidelines in this regard stipulate that the shares issued to the promoters during the preceding one year at a price lower than the price at which equity is being offered to the public shall not be eligible for computation of promoters' contribution.

Thus, the subscription of January 1, 2004, will not be taken into account. Promoters should, therefore, bring in Rs 3.125 crore towards their contribution at least one day before the opening of the issue.

ii) Lock-in period: The promoters' contribution shall be subject to a lock-in (that is, promoters cannot sell or transfer except amongst promoters inter-se) period of three years.

However, where shares held by promoter(s) are lent to the stabilising agent under the green shoe option, they shall be exempted from the lock-in requirements specified, for the period starting from the date of such lending to the date when they are returned to the same promoter(s).

Lock-in of excess contribution by promoters: In case the promoters' contribution in the proposed issue exceeds the required minimum contribution, such excess contribution shall be locked in for a period of one year.

Seizure of broker's records

EXPLAIN the powers of SEBI under the SEBI Act, 1992 to seize the records of a stockbroker or other intermediaries associated with the securities market.

Section 11C of the SEBI Act inserted by the SEBI (Amendment) Act, 2002, empowers SEBI to order investigation of any intermediary or persons associated with the securities market.

Investigation may be ordered where SEBI has reasonable ground to believe that:

the transactions in securities are being dealt with in a manner detrimental to the investors or the securities market; or

any intermediary or any person associated with the securities market has violated any of the provisions of this Act or the rules or the regulations made or directions issued by the board thereunder.

In case of the aforesaid order having been made, any of the following persons shall be required to preserve and produce all the books, registers, other documents and records of and relating to the company/ intermediary/ other person being in its custody or power:

i) every manager, managing director, officer and other employee of the company;

ii) every intermediary referred to in Section 12; and

iii) every person associated with the securities market.

Investigating authority has also been empowered to secure an order for seizure of books, registers, other documents and record by making an application to the judicial magistrate. Such an application can be made where in the course of investigation, the investigating authority has reasonable ground to believe that the books, registers, other documents and records of, or relating to, any intermediary or any person associated with securities market in any manner, may be destroyed, mutilated, altered, falsified or secreted.

After considering the application and hearing the investigating authority, if necessary, the magistrate may, by order, authorise the investigating authority:

to enter, with such assistance, as may be required, the place or places where such books, registers, other documents and record are kept;

to search that place or those places in the manner specified in the order; and

to seize books, registers, other documents and record it considers necessary for the purpose of the investigation.

Further, records seized must be returned back to the company/body corporate after the conclusion of the investigation.

Search and seizure, as aforesaid, shall be carried out in accordance with the provisions of the Code of Criminal Procedure, 1973 relating to searches or seizures made under that code.

Agreement to understand

AN UNDERSTANDING has been reached among the manufacturers of cement to control cement prices, but the understanding is not in writing; and it is also not intended to be enforced by legal proceedings.

Examine whether this understanding can be considered as an `agreement' within the meaning of Section 2(b) of the Competition Act, 2002.

As per Section 2(b) of the Competition Act, 2002, `agreement' includes any arrangement or understanding or action in concert, i) whether or not, such arrangement, understanding or action is formal or in writing; or ii) whether or not such arrangement, understanding or action is intended to be enforceable by legal proceedings.

The element of mutuality is, however, inherent in the word agreement.

Thus, a mere direction or recommendation by one party in circumstances which do not warrant the acceptance of any obligation (whether legal or moral) by the other party cannot constitute an arrangement.

Case law under the MRTP Act: For the purpose of ascertaining the existence of an agreement under the Act, what is to be seen is whether there is union of thought and action among the parties concerned (Delhi Automobiles Private Ltd and Others).

Proviso effect

THE normal function of a proviso is to exclude something out of the enactment or to qualify something stated in the enactment which would be within its purview if the proviso were not there.

The effect of the proviso is to qualify the preceding 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.

It is a cardinal rule of interpretation that a proviso to a particular provision of a statute only embraces the field which is covered by the main provision.

It carves out an exception to the main provision to which it has been enacted as a proviso and to no other (Ram Narain Sons Ltd vs Assistant Commissioner of Sales Tax 1955).

(Suggested answers to the May 2004 CA (Final) paper on corporate laws and secretarial practice.)

To access Mentor archives visit www.thehindubusinessline.com/mn/arcmn.htm

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
Dollars in demand for different purposes

Can I ask for a zero TDS Form-16?

Bollywood bet to get big business out of the woods

The best quality inspector is your conscience

You can make a living by being yourself

Sticklish Issues

Cartoon