Wednesday, July 30, 2008

Companies Act_Practical Problems_27

A Company wants to include the following clause in its Articles of Association- Each director shall be entitled to be paid out of the funds of the company for attending meetings of the Board or a committee thereof including adjourned meetings such sum as sitting fees as shall be determined from time to time by the Directors, but not exceeding a sum of Rs. 30,000 for each such meeting to be attended by the Director."

You are required to advise the Company as to the validity of such a clause and the correct legal position.

(a) The proposed clause shall be valid only if the approval of the Central Government is obtained. In the absence of the approval of the Central Government, sitting fees payable to the directors shall be such seeded in the articles or in the ordinary resolution, which is within the sum prescribed, i.e., Rs. 10,000 or Rs 20,000, as the case may be.
(b) Payment of sitting fees to every director is not permissible. If sitting fees is paid to a whole time director or managing director, then it will be considered as payment of remuneration to such directors.
(c) It is permissible to pay sitting fees for attending a meeting of a committee of directors.
(d) Where a Board meeting is adjourned for want of quorum or any other reason, the company may pay sitting fees to the directors who attended such Board meeting.
(e) An adjourned meeting is a continuation of the original meeting. Therefore, where a Board meeting is held and is adjourned to a later date, the sitting fees cannot be paid twice, since it is counted as one Board meeting only.

Companies Act_Practical Problems_26

Adam, a 15% shareholder of a company and other shareholders have lost confidence in the Managing Director (MD) of the company He is a director not liable to retire by rotation and was re-appointed as Managing Director for 5 years w.e.f. 1.4.2005 in the last Annual General Meeting of the company.

Mr. Adam seeks your advise to remove the MD after following the procedure laid down under the Companies Act, 1956.
(i) Specify the steps to be taken by Mr. Adam and the Company in this behalf;
(ii) Is it necessary to state reasons to support the resolution for his removal?

Sunday, July 27, 2008

Companies Act_Practical Problems_25

A is managing director of APAR Ltd He gave his resignation letter to the Chairman of the Board of directors on 31st December, 2005 and requested that he should be relieved immediately. When does the resignation of Mr. A take effect?

As per the decision in Achutha Pai v ROC, the resignation of Mr. A does not take effect immediately on submission of resignation. Thus, Mr. A shall continue as managing director until his resignation is accepted. Accordingly, Mr. A can be compelled to continue as managing director until his resignation is accepted. But, he must be relieved within a reasonable time.

After submission of resignation letter, Mr. A cannot withdraw his resignation except with the consent of the shareholders or the Board.

Saturday, July 26, 2008

Reasons for Growth of multinational enterprise

There are various forces driving the growth of MNCs:

The search for growth markets
Globalisation of markets
Desire to reduce production costs
Desire to shift production to countries with lower unit labour costs
Desire to avoid transportation costs
Desire to avoid tariff and non tariff barriers
Forward vertical integration
Extension of product life cycles
Deregulation of capital markets

Key features of globalisation

Rapid expansion of international trade
Internationalisation of products and services by large firms
Growing importance of multinational corporations
Increase in capital transfers across national borders
Globalisation of technology
Shifts in production from country to country
Increased freedom and capacity and firms to undertake economic transactions across national
Fusing of national markets
Economic integration
Global economic interdependence

What is globalisation?

Globalisation is a business philosophy based on the belief that the world is becoming more homogeneous - national distinctions are fading and will eventually disappear.
Globalisation is an increase in interconnectedness and interdependence of economic activity and social relations.
If the world is homogeneous then companies need to think globally and standardise their strategy across national boundaries.

Global business - competitiveness

International competitiveness
This refers to the ability of a country (or firm) to provide goods and services which provide better value than their overseas rivals. This is competitive advantage but on a international scale. As there is constant threat from foreign competition it is essential for business to strive to improve competitiveness.
Some determinants of International competitiveness
Price relative to competitors
Productivity - output per worker
Unit costs
State of technology
Investment in capital equipment
Lead time
Exchange rate
Relative inflation
Tax rates
Interest rates
Increasing competitiveness-Firms can increase their international competitiveness by:
Rationalisation output to get rid of high cost plants
Relocating to places where labour costs are lower
Process innovation
Product innovation
Incorporating the latest technology into investment
Sourcing from abroad where appropriate
Seeking out new market opportunities
Improving relationships with suppliers and customer
Government’s role to improve international competitivenessGovernments seek policies which aim to:
Encourage R&D spending (e.g. through tax breaks)
Improve the skills base
Improve the economic infrastructure
Promote competition between firms
Operate macro-economic policies favourable to business expansion
Reduce interest rates to stimulate investment
Reduce tax rates to stimulate enterprise, effort and investment
Deregulation to promote competition
Reduce bureaucracy
Encourage sharing of ideas and best practice
Reduce protectionist barriers to stimulate competition
Encourage investment in human capital

Porter Five forces model

Defining an industry

An industry is a group of firms that market products which are close substitutes for each other (e.g. the car industry, the travel industry).
Some industries are more profitable than others. Why? The answer lies in understanding the dynamics of competitive structure in an industry.
The most influential analytical model for assessing the nature of competition in an industry is Michael Porter's Five Forces Model, which is described in the beginning :

Porter explains that there are five forces that determine industry attractiveness and long-run industry profitability. These five "competitive forces" are
- The threat of entry of new competitors (new entrants)- The threat of substitutes- The bargaining power of buyers- The bargaining power of suppliers- The degree of rivalry between existing competitors

Threat of New Entrants
New entrants to an industry can raise the level of competition, thereby reducing its attractiveness. The threat of new entrants largely depends on the barriers to entry. High entry barriers exist in some industries (e.g. shipbuilding) whereas other industries are very easy to enter (e.g. estate agency, restaurants). Key barriers to entry include
- Economies of scale- Capital / investment requirements- Customer switching costs- Access to industry distribution channels- The likelihood of retaliation from existing industry players.

Threat of Substitutes
The presence of substitute products can lower industry attractiveness and profitability because they limit price levels. The threat of substitute products depends on:
- Buyers' willingness to substitute- The relative price and performance of substitutes- The costs of switching to substitutes

Bargaining Power of Suppliers
Suppliers are the businesses that supply materials & other products into the industry.
The cost of items bought from suppliers (e.g. raw materials, components) can have a significant impact on a company's profitability. If suppliers have high bargaining power over a company, then in theory the company's industry is less attractive. The bargaining power of suppliers will be high when:
- There are many buyers and few dominant suppliers- There are undifferentiated, highly valued products- Suppliers threaten to integrate forward into the industry (e.g. brand manufacturers threatening to set up their own retail outlets)- Buyers do not threaten to integrate backwards into supply- The industry is not a key customer group to the suppliers

Bargaining Power of Buyers
Buyers are the people / organisations who create demand in an industry
The bargaining power of buyers is greater when
- There are few dominant buyers and many sellers in the industry- Products are standardised- Buyers threaten to integrate backward into the industry- Suppliers do not threaten to integrate forward into the buyer's industry - The industry is not a key supplying group for buyers
Intensity of Rivalry
The intensity of rivalry between competitors in an industry will depend on:
- The structure of competition - for example, rivalry is more intense where there are many small or equally sized competitors; rivalry is less when an industry has a clear market leader
- The structure of industry costs - for example, industries with high fixed costs encourage competitors to fill unused capacity by price cutting
- Degree of differentiation - industries where products are commodities (e.g. steel, coal) have greater rivalry; industries where competitors can differentiate their products have less rivalry
- Switching costs - rivalry is reduced where buyers have high switching costs - i.e. there is a significant cost associated with the decision to buy a product from an alternative supplier
- Strategic objectives - when competitors are pursuing aggressive growth strategies, rivalry is more intense. Where competitors are "milking" profits in a mature industry, the degree of rivalry is less
- Exit barriers - when barriers to leaving an industry are high (e.g. the cost of closing down factories) - then competitors tend to exhibit greater rivalry.

SWOT analysis

SWOT is an abbreviation for Strengths, Weaknesses, Opportunities and Threats

SWOT analysis is an important tool for auditing the overall strategic position of a business and its environment.

Once key strategic issues have been identified, they feed into business objectives, particularly marketing objectives. SWOT analysis can be used in conjunction with other tools for audit and analysis, such as PEST analysis and porter five force model. It is also a very popular tool with business and marketing students because it is quick and easy to learn.

The Key Distinction - Internal and External Issues
Strengths and weaknesses are Internal factors. For example, a strength could be your specialist marketing expertise. A weakness could be the lack of a new product.

Opportunities and threats are external factors. For example, an opportunity could be a developing distribution channel such as the Internet, or changing consumer lifestyles that potentially increase demand for a company's products. A threat could be a new competitor in an important existing market or a technological change that makes existing products potentially obsolete.

it is worth pointing out that SWOT analysis can be very subjective - two people rarely come-up with the same version of a SWOT analysis even when given the same information about the same business and its environment. Accordingly, SWOT analysis is best used as a guide and not a prescription. Adding and weighting criteria to each factor increases the validity of the analysis.

Friday, July 25, 2008

strategic planning - setting objectives

Objectives set out what the business is trying to achieve.

Objectives can be set at two levels:
(1) Corporate level
These are objectives that concern the business or organisation as a whole

Examples of “corporate objectives might include:

• We aim for a return on investment of at least 15%

• We aim to achieve an operating profit of over Rs.10 million on sales of at least Rs.100 million

• We aim to increase earnings per share by at least 10% every year for the foreseeable future

(2) Functional level- e.g. specific objectives for marketing activities
Examples of functional marketing objectives” might include:

• We aim to build customer database of at least 250,000 households within the next 12 months

• We aim to achieve a market share of 10%

• We aim to achieve 75% customer awareness of our brand in our target markets

Both corporate and functional objectives need to conform to the commonly used SMART criteria.
The SMART criteria (an important concept which you should try to remember and apply in exams) are summarised below:
Specific - the objective should state exactly what is to be achieved.
Measurable - an objective should be capable of measurement – so that it is possible to determine whether (or how far) it has been achieved
Achievable - the objective should be realistic given the circumstances in which it is set and the resources available to the business.
Relevant - objectives should be relevant to the people responsible for achieving them
Time Bound - objectives should be set with a time-frame in mind. These deadlines also need to be realistic.

What role does the mission statement play in marketing planning?

In practice, a strong mission statement can help in three main ways:

• It provides an outline of how the marketing plan should seek to fulfil the mission

• It provides a means of evaluating and screening the marketing plan; are marketing decisions consistent with the mission?

• It provides an incentive to implement the marketing plan


A strategic plan starts with a clearly defined business mission. Mintzberg defines a mission as follows:
“A mission describes the organisation’s basic function in society, in terms of the products and services it produces for its customers”.

A clear business mission should have each of the following elements:
(1) A Purpose
Why does the business exist? Is it to create wealth for shareholders? Does it exist to satisfy the needs of all stakeholders (including employees, and society at large?)

(2) A Strategy and Strategic Scope
A mission statement provides the commercial logic for the business and so defines two things:
- The products or services it offers (and therefore its competitive position)- The competences through which it tries to succeed and its method of competing
A business’ strategic scope defines the boundaries of its operations. These are set by management.
For example, these boundaries may be set in terms of geography, market, business method, product etc. The decisions management make about strategic scope define the nature of the business.

(3) Policies and Standards of Behaviour
A mission needs to be translated into everyday actions. For example, if the business mission includes delivering “outstanding customer service”, then policies and standards should be created and monitored that test delivery.
These might include monitoring the speed with which telephone calls are answered in the sales call centre, the number of complaints received from customers, or the extent of positive customer feedback via questionnaires.

(4) Values and Culture
The values of a business are the basic, often un-stated, beliefs of the people who work in the business. These would include:
• Business principles (e.g. social policy, commitments to customers)
• Loyalty and commitment (e.g. are employees inspired to sacrifice their personal goals for the good of the business as a whole? And does the business demonstrate a high level of commitment and loyalty to its staff?)
• Guidance on expected behaviour – a strong sense of mission helps create a work environment where there is a common purpose

Competitive Advantage

A competitive advantage is an advantage over competitors gained by offering consumers greater value, either by means of lower prices or by providing greater benefits and service that justifies higher prices.

Competitive Strategies

Michael Porter suggested four "generic" business strategies that could be adopted in order to gain competitive advantage. The four strategies relate to the extent to which the scope of a businesses' activities are narrow versus broad and the extent to which a business seeks to differentiate its products.

The differentiation and cost leadership strategies seek competitive advantage in a broad range of market or industry segments. By contrast, the differentiation focus and cost focus strategies are adopted in a narrow market or industry.

Strategy - Differentiation
This strategy involves selecting one or more criteria used by buyers in a market - and then positioning the business uniquely to meet those criteria. This strategy is usually associated with charging a premium price for the product - often to reflect the higher production costs and extra value-added features provided for the consumer. Differentiation is about charging a premium price that more than covers the additional production costs, and about giving customers clear reasons to prefer the product over other, less differentiated products.

Strategy - Cost Leadership
With this strategy, the objective is to become the lowest-cost producer in the industry. Many (perhaps all) market segments in the industry are supplied with the emphasis placed minimising costs. If the achieved selling price can at least equal (or near)the average for the market, then the lowest-cost producer will (in theory) enjoy the best profits. This strategy is usually associated with large-scale businesses offering "standard" products with relatively little differentiation that are perfectly acceptable to the majority of customers. Occasionally, a low-cost leader will also discount its product to maximise sales, particularly if it has a significant cost advantage over the competition and, in doing so, it can further increase its market share.

Strategy - Differentiation Focus
In the differentiation focus strategy, a business aims to differentiate within just one or a small number of target market segments. The special customer needs of the segment mean that there are opportunities to provide products that are clearly different from competitors who may be targeting a broader group of customers. The important issue for any business adopting this strategy is to ensure that customers really do have different needs and wants - in other words that there is a valid basis for differentiation - and that existing competitor products are not meeting those needs and wants.

Strategy - Cost Focus
Here a business seeks a lower-cost advantage in just on or a small number of market segments. The product will be basic - perhaps a similar product to the higher-priced and featured market leader, but acceptable to sufficient consumers. Such products are often called "me-too's".

Strategic Choice

This process involves understanding the nature of stakeholder expectations (the "ground rules"), identifying strategic options, and then evaluating and selecting strategic options

Strategic Analysis

This is all about the analysing the strength of businesses' position and understanding the important external factors that may influence that position. The process of Strategic Analysis can be assisted by a number of tools, including:

PEST Analysis - a technique for understanding the "environment" in which a business operates
Scenario Planning - a technique that builds various plausible views of possible futures for a business

Five Forces Analysis - a technique for identifying the forces which affect the level of competition in an industry

Market Segmentation - a technique which seeks to identify similarities and differences between groups of customers or users

Directional Policy Matrix - a technique which summarises the competitive strength of a businesses operations in specific markets

Competitor Analysis - a wide range of techniques and analysis that seeks to summarise a businesses' overall competitive position

Critical Success Factor Analysis - a technique to identify those areas in which a business must outperform the competition in order to succeed

SWOT Analysis - a useful summary technique for summarising the key issues arising from an assessment of a businesses "internal" position and "external" environmental influences.

Strategy at Different Levels of a Business

Strategies exist at several levels in any organisation - ranging from the overall business (or group of businesses) through to individuals working in it.

Corporate Strategy - is concerned with the overall purpose and scope of the business to meet stakeholder expectations. This is a crucial level since it is heavily influenced by investors in the business and acts to guide strategic decision-making throughout the business. Corporate strategy is often stated explicitly in a "mission statement".
Business Unit Strategy - is concerned more with how a business competes successfully in a particular market. It concerns strategic decisions about choice of products, meeting needs of customers, gaining advantage over competitors, exploiting or creating new opportunities etc.
Operational Strategy - is concerned with how each part of the business is organised to deliver the corporate and business-unit level strategic direction. Operational strategy therefore focuses on issues of resources, processes, people etc.

strategy - what is strategy?

Johnson and Scholes define strategy as follows:
"Strategy is the direction and scope of an organisation over the long-term: which achieves advantage for the organisation through its configuration of resources within a challenging environment, to meet the needs of markets and to fulfil stakeholder expectations".

In other words, strategy is about:
* Where is the business trying to get to in the long-term (direction)
* Which markets should a business compete in and what kind of activities are involved in such markets? (markets; scope)
* How can the business perform better than the competition in those markets? (advantage)?
* What resources (skills, assets, finance, relationships, technical competence, facilities) are required in order to be able to compete? (resources)?
* What external, environmental factors affect the businesses' ability to compete? (environment)?
* What are the values and expectations of those who have power in and around the business? (stakeholders)

ansoff's product / market matrix

The Ansoff Growth matrix is a tool that helps businesses decide their product and market growth strategy.

Ansoff’s product/market growth matrix suggests that a business’ attempts to grow depend on whether it markets new or existing products in new or existing markets.
The output from the Ansoff product/market matrix is a series of suggested growth strategies that set the direction for the business strategy. These are described below:

Market penetration
Market penetration is the name given to a growth strategy where the business focuses on selling existing products into existing markets.

Market penetration seeks to achieve four main objectives:
• Maintain or increase the market share of current products – this can be achieved by a combination of competitive pricing strategies, advertising, sales promotion and perhaps more resources dedicated to personal selling
• Secure dominance of growth markets
• Restructure a mature market by driving out competitors; this would require a much more aggressive promotional campaign, supported by a pricing strategy designed to make the market unattractive for competitors
• Increase usage by existing customers – for example by introducing loyalty schemesA market penetration marketing strategy is very much about “business as usual”. The business is focusing on markets and products it knows well. It is likely to have good information on competitors and on customer needs. It is unlikely, therefore, that this strategy will require much investment in new market research.

Market development
Market development is the name given to a growth strategy where the business seeks to sell its existing products into new markets.

There are many possible ways of approaching this strategy, including:
• New geographical markets; for example exporting the product to a new country
• New product dimensions or packaging: for example
• New distribution channels
• Different pricing policies to attract different customers or create new market segments

Product development
Product development is the name given to a growth strategy where a business aims to introduce new products into existing markets. This strategy may require the development of new competencies and requires the business to develop modified products which can appeal to existing markets.

Diversification is the name given to the growth strategy where a business markets new products in new markets.
This is an inherently more risk strategy because the business is moving into markets in which it has little or no experience.
For a business to adopt a diversification strategy, therefore, it must have a clear idea about what it expects to gain from the strategy and an honest assessment of the risks.

Some latin terms

Abatement = Removal or stopping of a nuisance.
Ab initio = Latin phrase meaning ‘from the beginning’.
Abjure = To swear not to bear allegiance to another country.
Abscond = To go away without permission or not to return to the court after being
released on bail or to escape from prison.
Actus Reus= Latin phrase meaning ‘Guilty Act’, Act which is forbidden by the Criminal
Law, one of the two elements of a crime.
Ad Idem = Latin phrase meaning ‘in Agreement.’
Adjourn = To stop a meeting for a period, to put off a legal hearing to the later date.
Ad Litem = Latin phrase meaning ‘referring to the case at Law’
Guardian ad Letem = Person who acts on behalf of a minor who is a
defendant in a court case.
Ad valorem = Latin phrase meaning ‘according to value’.
Alieni Juris= Latin phrase meaning ‘of another’s right’. A person (such as minor) who
has a right under the authority of a guardian.
Amicus Curiae = Latin phrase meaning ‘friend of the court’: Lawyer who does not
represent a party in a case but who is called upon to address the court
to help clear up a difficult legal point or to explain something which is
in the public interest.
Ante = Latin adverb meaning ‘which has taken place earlier’ or ‘before’.
Status Quo Ante = the situation as it was before.
A posteriori = Latin phrase meaning ‘from what has been concluded afterwards’.
A posteriori argument = Argument based on observation.
Affidavit = written statement which is signed & sworn before a solicitor and which can
then be used as evidence in court hearings.
Animus = Intention.
Animus cancellandi = the intention to cancel.
Animus Furandi = Intention to steal.
Animus Manendi = Intention to stay (in a place)
Animus Revocandi = Intention to revoke (A will)
Annul = To cancel or to stop something having a legal effect.
Appeal = Asking a higher court to change a decision of a lower court.
Arson = Notifiable offence of setting fire to a building.
Audi Alteram Partem = Latin phrase meaning ‘Hear the other side’: A rule in natural
justice that everyone has the right to speak in his own defence
and to have the case against him explained to him.
Automatism = Defence to a criminal charge whereby the accused states he acted
Autopsy = Examination of a dead person to see what was the cause of death.
Autrefois Acquit = French phrase meaning ‘previously acquitted’. Plea that an accused
person has already been acquitted of the crime with which he is
Autrefois Convict = French phrase meaning ‘previously convicted’. Plea that an accused
person has already been convicted of the crime with which he is now
charged .
Aver = To make a statement or an allegation in pleadings.
Attorn = To transfer.
Asylum = Hospital for people who are mentally ill.
Arm’s length = Not closely connected, to deal with someone at arm’s length = To deal
as if there were no connections between the parties.
Appurtenant = To or belonging to.
Antedate = To put an earlier date o a document.
Amnesty = Pardon, often for political crimes, given to several people at he same
Alimony = Money which a court orders a husband to pay regularly to his separated or
divorced wife.
Adjoin = To touch another property.
Accretion = Enlargement of a piece of land by natural causes.
Accredited = (Agent) who is appointed by a company to act on its behalf.
Alienation = Transfer of property to someone else.
A fortiori = Latin phrase meaning ‘for a stronger reason
Affray = Public fight which frightens other people

Aggrieved = Who has been damaged/ harmed by a defendant’s actions
Autarchy = Situation where a state has total power over itself & rules itself without
outside interference
Autarky = Situation where a state is self-sufficient & can provide all its needs without
outside help.

Tuesday, July 22, 2008

Companies Act_Practical Problems_24

Bush and Tony Private Limited approached you seeking your opinion on the following appointments relating to Directors and their relatives.
(i) Appointment of Mr. Somen (relative of one of the Directors) as the Managing Director of the company on a monthly remuneration of Rs 35,000 and other perquisites as are currently being allowed to other executives of the company.

(ii) Appointment of Mr. Raman (relative of one of the Directors) as the General Manager-Sales of the company on a consolidated monthly remuneration of Rs. 30,000.

(iii) Appointment of Mr. Kabi (relative of one of the Directors) as an Accounts Manager of the company on a consolidated monthly remuneration of Rs 17,000.

Express your opinion explaining the relevant provisions of the Companies Act, 1956.

(i) Special resolution is required for the appointment of a relative of a director at an office or place of profit carrying a monthly remuneration of Rs. 10,000 or more.

However the office of a managing or whole time director has been held not to be an office or place of profit. A managing or whole time director draws remuneration to which he is entitled as a director. If he does not draw anything more than this, his holding office cannot be said to be an office or place of profit [Department Circular No. 4/76(8/12/314(1B)/75-CL-V), dated 11.2.1976]. Also, section 314(1) does not apply where the appointment is made at the office of a managing director.

Therefore, the appointment of Mr. Somen as managing director does not attract the provisions of section 314. However, his appointment as a managing director requires the approval of the Central Government or compliance with Schedule XIII (Section 269).

(ii) Special resolution is required for the appointment of a relative of a director at an office or place of profit carrying a monthly remuneration of Rs. 10,000 or more. Since the remuneration payable to Mr. Raman exceeds the monthly remuneration of Rs. 10,000, such appointment can be made only with the consent of shareholders by passing a special resolution. However, it shall be sufficient if the special resolution is passed at a general meeting of the company held for the first time after the holding of such office or place of profit.

(iii) Special resolution is required for the appointment of a relative of a director at an office or place of profit carrying a monthly remuneration of Rs. 10,000 or more. Since the remuneration payable to Mr. Kabi exceeds the monthly remuneration of Rs. 10,000, such appointment can be made only with the consent of shareholders by passing a special resolution. However, it shall be sufficient if the special resolution is passed at a general meeting of the company held for the first time after the holding of such office or place of profit.

Monday, July 21, 2008

Companies Act_Practical Problems_23

A is managing director of APAR Ltd He gave his resignation letter to the Chairman of the Board of directors on 31st December, 2005 and requested that he should be relieved immediately. When does the resignation of Mr. A take effect?

In the given problem, the managing director, Mr. A has submitted his resignation to the Chairman of the Board The Chairman of the Board has the ostensible authority to act on behalf of the company. Thus, it can be said that Mr. A has submitted his resignation to the company. The words 'resignation letter' implies that his resignation is in writing, and so his intention to resign is clear.

As per the decision in Achutha Pai v ROC, the resignation of Mr. A does not take effect immediately on submission of resignation. Thus, Mr. A shall continue as managing director until his resignation is accepted. Accordingly, Mr. A can be compelled to continue as managing director until his resignation is accepted. But, he must be relieved within a reasonable time.

After submission of resignation letter, Mr. A cannot withdraw his resignation except with the consent of the shareholders or the Board.

Sunday, July 20, 2008

Companies Act_Practical Problems_22

Mr. John has been appointed as additional director on the Board of MCX Ltd. on 12th January, 2006. Mr. John has filed his consent to Act as a director, if appointed, only with the company. Examine with reference to the provisions of the Companies Act, 1956 whether he is also required to file his consent with the Registrar of Companies.

An additional director is exempted from filing consent with the registrar, when he is appointed as a director In other words, when an additional director vacates his office in the annual general meeting, and he is immediately appointed as a regular director by the shareholders in the same annual general meeting (by complying with the requirements of section 257), he is not required to file his consent with the Registrar.

Thus, it is evident that when a person is appointed as an additional director, he is not exempted from filing consent with the Registrar. Accordingly, Mr. John is required to file his consent with the Registrar.

Companies Act_Practical Problems_21

The articles of association of DEF Ltd. mentioned in it that Mr. X and Mr. Y will act as directors of the company from the date of incorporation. The company was incorporated on 2nd January, 2007. The articles also provided that the directors will have to obtain qualification shares within one month from the date of appointment as director. Mr. X purchased the shares of the company on 28th February, 2007 and Mr. Y purchased on 28th March, 2007 thus violating the provisions contained in the articles. Having regard to the provisions of the Companies Act, examine the validity of the appointments of Mr. X and Mr. Y as directors.

The provisions relating to first directors are contained in section 254 of the Companies Act, 1956. As per section 254, the directors named in the articles shall be the first directors of the company.

As per section 270, every director shall obtain share qualification within 2 months of appointment. Further, the articles cannot require a person to hold qualification shares before appointment. Similarly, the articles cannot require that a director shall obtain the qualification shares within a shorter time than 2 months. Any provision in the articles shall be void in so far as it requires a person to hold the qualification shares before his appointment as a director or to obtain them within a shorter time than 2 months.

Applying the provisions of sections 254 and 270 to the given case, -

Mr. X and Mr. Y are named in the articles as first directors. Accordingly, w.e.f. 02.01.07 they are the first directors of DEF Ltd. The articles are void in so far as the articles require the directors to obtain the qualification shares within 1 month Accordingly, Mr. X and Mr. Y must acquire the qualification shares within 2 months of incorporation of DEF Ltd. Mr. X. can continue in office since he has obtained the qualification shares within 2 months. Mr. Y shall vacate his office since he failed to obtain the qualification shares within 2 months of corporation of DEF Ltd.

Saturday, July 19, 2008

Companies Act_Practical Problems_20

M/s Star Health Specialties Limited owns a Multi-specialty Hospital in Chennai. Dr. Hamilton, a practicing Heart Surgeon has been appointed by the company as its non-executive ordinary director and it wants to pay him fee, on case to case basis, for surgery performed on the patients at the hospital. A question has arisen whether payment of such fee to him would amount to payment of managerial remuneration to a director subject to any restriction under the Companies Act 1956. Advise the company, which seeks to ensure that the same does not contravene any provision of the Companies Act, 1956.

As per section 309, remuneration payable to a director for rendering services in any other capacity shall also be covered in 'overall managerial remuneration'. However, remuneration paid for rendering services in any other capacity shall not be so included, if-

(i) the services are rendered in a professional capacity; and
(ii) the Central Government has expressed the opinion that the director concerned possesses requisite professional qualifications.

In the given case, M/s Star Health Specialties Limited intends to pay fees for surgery performed by Dr. Hamilton its non-executive director, on case to case basis. Such payment of fees shall amount to payment of managerial remuneration unless -
(i) the services are rendered by Dr. Hamilton in a professional capacity; and
(ii) the central Government has expressed the opinion that Dr. Hamilton possesses requisite professional qualifications.

The company is advised to make an application to the Central Government. Since Dr. Hamilton possesses requisite professional qualifications (since he is a qualified doctor), and it is proposed that Dr. Hamilton shall render the services in a professional (since the company intends to pay him fees on case to case basis) it is very much probable that the Central Government will express its opinion that the services are rendered in professional capacity by Mr. Hamilton possessing requisite professional qualifications. In such a case the fess paid by Star Health Specialities to Dr. Hamilton shall not be included in overall managerial remuneration and other limits of remuneration specified under the Act

Companies Act_Practical Problems_19

Articles of Association of a listed company has fixed payment of sitting fee for each Meeting of Directors subject to maximum of Rs.10 000 in view of increased responsibilities of independent directors of listed companies, the company proposes to increase the sitting fee to Rs, 25,000 per meeting. Advise the company about the requirements under the Companies Act. 1956 to give effect to this proposal.

The given problem relates to section 309 of the Companies Act, 1956, as explained below:
(a) The amount of sitting fees shall not exceed the sum prescribed. As per Notification No. GSR 580(E),dated 24.7.2003, the sum prescribed is -

(i) Rs. 20,000, in case the aggregate of paid up share capital and free reserves of the company is Rs. uses or more or the turnover of the company is Rs. 50 crores or more;
(ii) Rs.10, 000, in case of any other company.

(b) Sitting fees in excess of the sum prescribed can be paid only with the approval of the Central Government.
Thus, in the given case, the increase in sitting fees from Rs. 10,000 to Rs. 25,000 per Board meeting is not permissible unless approval of the Central Government is obtained.

Friday, July 18, 2008

What is the difference between Voluntary delisting and Compulsory delisting?

Compulsory delisting refers to permanent removal of securities of a listed company from a stock exchange as a penalizing measure at the behest of the stock exchange for not making submissions/comply with various requirements set out in the Listing agreement within the time frames prescribed. In voluntary delisting, a listed company decides on its own to permanently remove its securities from a stock exchange.

What is meant by delisting of securities?

The term "delisting" of securities means permanent removal of securities of a listed company from a stock exchange. As a consequence of delisting, the securities of that company would no longer be traded at that stock exchange.

Thursday, July 17, 2008

Consumer Protection Act_Practical Problems_8

My car met with an accident. The insurance claim was rejected on the ground that my driver was not holding valid driving license. Should I approach a Consumer Court for seeking the Insurance claim?

The Consumer Court will not be able to grant you any relief since the driver employed by you did not have a driving license. You were bound under law to check the ability of the person employed by you and the failure in holding a license for driving well debar you from claiming the Insurance Claims.

Consumer Protection Act_Practical Problems_7

I had applied for subscription in Rajlakshmi scheme of UTI. The essence of the scheme was that the sum of money deposited with the UTI would grow 21 times in 28 years. However subsequently, the UTI extended the maturity date by two years. Can I approach a Consumer Court?
Unilateral alteration of terms of payment by the UTI in their above scheme is “Deficiency in Service” for which you can seek relief in a consumer court.

Tuesday, July 15, 2008

Companies Act

Can a company secretary appointed under section 383A(1) be appointed as the manager under section 269?

Companies Act_Practical Problems_18

Mr. A, a member of ICSI is employed in XYZ Limited as Asst. Manager – Secretarial. He has been informed by XYZ Limited that he shall act as the Company Secretary of PQR Limited which is a subsidiary/ group company of XYZ Limited. Mr. A has filed Form 32 with the ROC and has signed the annual accounts in the capacity of Company Secretary of PQR Limited.

PQR Limited requires appointment of a Company Secretary pursuant to section 383A of the Companies Act. No formal letter of deputation etc. has been issued to Mr. A by XYZ Limited. Mr. A is also attending to the duties at XYZ Limited and salary, PF, TDS etc. is paid by XYZ Limited.

Question is:

a) Since Mr. A is an employee of XYZ Limited as per records, whether PQR Limited is said to have complied with the provisions of Section 383A w.r.t. appointment of a Secretary on whole-time basis ?

b) Whether Mr. A invites any penalties or violations by being employed in one company and signing annual accounts of second company in the capacity of a Company Secretary?

c) Any other consequence?

Companies Act_Practical Problems_17

Mr. A is a qualified company secretary. He is an employee of X Ltd a public company having paid-up share capital of Rs. 8 crores. Can Mr. A function as a company secretary of a subsidiary of X Ltd, while remaining on the rolls of X Ltd or should Mr. A be in the employment of the subsidiary in order to ensure compliance with section 383A of the Companies Act 1956?

Monday, July 14, 2008

Companies Act_Practical Problems_16

A Pvt. Ltd has 5 directors- 3 Indian and 2 German. On a matter concerning the company’s business, an urgent decision is necessary. Hence, a Board meeting is held at which all three Indian directors are present. They seek the German directors’ consent to the resolution by videoconference with them. The articles require at least 2 directors from each side to vote for a resolution at a Board meeting. The resolution passed in this way unanimously. Is the resolution valid?

Companies Act_Practical Problems_15

In the Board meeting, where quorum was of three Directors, four Directors were present at the meeting when it began. All participated in the discussions (audio recording is available) but only two signed the attendance register and other two refused to sign. Does this invalidate the meeting?

Is it necessary that quorum should be present at the time of each & every agenda being discussed at the meeting? OR Is it sufficient if it is present only at the beginning at the meeting? Whether the answer is same for Board and General Meetings?

Companies Act_Practical Problems_14

In the Board meeting, where quorum was of 4 Directors, Five Directors were present at the meeting when it began. All signed the attendance sheet but during the meeting due to difference of opinion, two left the meeting in between and while walking out scratched their names & signatures from the attendance sheet. Will that affect the validity of the quorum?

Companies Act_Practical Problems_13

Quorum for the Board meeting is 1/3rd of the total number of Directors. The Board had 10 members till 30th April 06. On 5th May 06 Mr. X , Director of the company died. For the meeting to be held on 3rd June 2006, what would be the quorum?

Sunday, July 13, 2008

Consumer Protection Act_Practical Problems_6

I had applied for electricity connection. However, power supply was not provided to me. Can I seek redressal of my grievance in Consumer Court?
Your grievances is that you application for electricity connection was not granted. Electricity may be a service but the hiring of the service is not complete till the Electricity Board sanctions
service. Hence, you can’t approach a Consumer Court for redressal of your said grievance. Your remedy is to file a civil suit in the Court of law against the Electricity Board.

Consumer Protection Act_Practical Problems_5

The transformer, which was supplying electricity to me, got burned and was replaced by the department after about two months. However, However I was billed with consumption charges. Am I liable to pay any such charges when there was no consumption of electricity by me?

When the electricity was not supplied and the electricity bills produced by you showed that there was no consumption of electricity by you and admittedly the reason for that was burning
of the transformer, you are not liable to pay any minimum charges.

Friday, July 11, 2008

The legal effects of frustration

At common law: the contract is automatically brought to an end at the time of the frustrating event. The relevant statute is the Law Reform (Frustrated Contracts) Act 1943. It only applies where there’s no express provision in the contract for what happens if it’s frustrated.
The key provisions are:
If some sort of pre-payment or deposit has been made, the buyer can get that pre-payment back, minus any expenses incurred by the seller.
If the contract has already been partly performed, it’s a bit more complicated. You have to pay for any benefit you’ve already received. Suppose the contract is for a complete garden makeover, and at the time of the frustrating event, the contractor has already installed a swimming pool in your garden. You have to compensate the gardener for the expenses he’s incurred in installing your pool.

Consumer Protection Act_Practical Problems_4

Does rejection of application for grant of loan by a Bank constitute deficiency in service for which I can approach the Consumer Court?

The Bank has a wide discretion in the matter of granting loans and advances and continuing disbursement of loans sanctioned. The Consumer Courts cannot sit in judgement over the discretion exercised by the Bank and as such you will not succeed in any such action, if taken by you.

Consumer Protection Act_Practical Problems_3

I was allotted a Maruti Car. There was a delay in delivery of the car. Subsequently, the dealer called upon me to make further payment as the price of the car had gone up. Am I liable to bear the price increase on account of delay caused by the dealer?

You are not liable to pay any price increase in the above mentioned circumstances since the increase in price is totally on account of the delay on the part of the dealer for which a
consumer cannot be made to suffer.

Wednesday, July 09, 2008

FEMA_Practical Problems_9

An NRI sells shares of an unlisted Indian Pvt. Company, these shares were originally acquired by him when he was a resident. The sales proceeds are credited to his NRO account. Money is not taken out of India. Does the transaction attracts provisions of transfer of shares by NR to R and related pricing and reporting requirements ? Is there any specific exemption for sale by NRI (on non-repatriation basis) for shares which were acquired as a resident ?

Monday, July 07, 2008

Practical Problems_Contract Act_80

F picks up a diamond on the floor on k's shop. He hands it over to K to keep it till true owner is found out. No one appears to claim it for quite some weeks in spite of the wide advertisement in the newspapers. F claims the diamond from K Who refuses to return. Comment.
A person, who finds goods to another and takes them into his custody, is subject to the same responsibilities as a bailee. He is bound to take as much care of the goods as a man of ordinary prudence would, under similar circumstances, take of his own goods of the same bulk, quality and value. If he does not, he will be guilty of wrongful conversion of the property. Till the owner is found out, the property in goods will vest in the finder and he can retain the goods as his own against the whole world. K is bound to return the diamond to F who is entitled to retain the diamond against the whole world except the true owner.

Sunday, July 06, 2008

Consumer Protection Act_Practical Problem_2

I had got a confirmed ticket on Sahara Airways. The flight was later cancelled on account of technical snag. Is it a deficiency in service?
Cancellation of flight on account of technical snag is not deficiency in service as it is due to unavoidable circumstances. However, you ought to be allowed refund of the fare but no
compensation can be granted on account of any loss suffered by you (if any) because of the said cancellation.

Conuser Protection Act_Practical Problem_1

I had purchased seeds from a party. The seeds did not germinate. The other party took the plea that I was not a consumer. Whether purchase of seeds for the purpose of agriculture is purchase for commercial purpose?

Purchase made for agriculture is not for commercial purpose. Therefore, the complainant is a consumer and entitled to seek redressal of his grievance in a Consumer Court against the party
which supplied defective seed to him.

Medical practitioner can be sued under CPA ?

I have instituted a complaint before the Consumer Court against a Medical Practitioner. My complaint has been challenge on the ground that a Medical Practitioner cannot be sued under the Consumer Act. What does law provide?

Yes, a medical practitioner can be sued under the Consumer Protection Act 1986 for his or her professional negligence resulting in damage to patient. Section 2 (d) in defining a consumer in Clause (ii) uses the expression ‘hires and avails of”. The word “hire” means employ of wages or fees”.

Secondly the words “any service” in s. 2 (d) (ii) in Consumer Protection Act. A eloquent to bring the delinquent medical practitioners within the ambit of Consumer Protection Act. Thirdly, s. 2 (o), Consumer Protection Act which defines service exempts only two types of services, one “service free of charge” and another “contract of personal service” postulates a relationship of master and servant. A medical man whose service is requisitioned for a patient answers the clause “ contract of service” but never “a contract of personal service”. So, a negligent medical professional can be proceeded under the Consumer Protection Act 1986.

Friday, July 04, 2008

How to File a Complaint under Consumer Protection Act ?

Procedures for filing complaints and seeking redressal are simple.

There is no fee for filing a complaint before the District Forum, the State Commission or the National Commission. ( A stamp paper is also not required) There should be 3 to 5 copies of the complaint on plain paper. The complainant or his authorized agent can present the complaint in person. The complaint can be sent by post to the appropriate Forum / Commission.

A complaint should contain the following information
(a) The name, description and the address of the complainant.
(b) The name , description and address of the opposite party or parties, as the case may be, as far as they can be ascertained;
(c) The facts relating to complaint and when and where it arose;
(d) Documents, if any, in support of the allegations contained in the complaint.
(e) The relief which the complainant is seeking.

The complaint should be signed by the complainant or his authorized agent. The complaint is to be filed within two years from the date on which cause of action has arisen.

Thursday, July 03, 2008

Object of the Consumer Protection Act, 1986

The main objective of the act is to provide for the better protection of consumers. Unlike existing laws, which are punitive or preventive in nature, the provisions of this Act are compensatory in nature. The act is intended to provide simple, speedy and inexpensive redressal to the consumers’ grievances, and reliefs of a specific nature and award of compensation wherever appropriate to the consumer. The act has been amended in 1993 both to extend its coverage and scope and to enhance the powers of the redressal machinery.

The basic rights of consumers as per the Consumer Protection Act (CPA) are

1. The right to be protected against marketing of goods and services which are hazardous to life and property
2. The right to be informed about the quality, quantity, potency, purity, standard and price of goods, or services so as to protect the consumer against unfair trade practices
3. The right to be assured, wherever possible, access to variety of goods and services at competitive prices
4. The right to be heard and be assured that consumers’ interests will receive due consideration at appropriate forums
5. The right to seek redressal against unfair trade practices or restrictive trade practices or unscrupulsous exploitation of consumers
6. The right to consumer education

An Indian Mind

An Indian man walks into a bank in New York City and asks for the loan officer.
He tells the loan officer that he is going to India on business for two weeks and needs to borrow $5,000.

The bank officer tells him that the bank will need some form of security for the loan,
so the Indian man hands over the keys and documents of new Ferrari parked on the street in front of the bank. He produces the title and everything checks out. The loan officer agrees to accept the car as collateral for the loan.

The bank's president and its officers all enjoy a good laugh at the Indian for using a $250,000 Ferrari as collateral against a $5,000 loan. An employee of the bank then drives the Ferrari into the bank's underground garage and parks it there.

Two weeks later, the Indian returns, repays the $5,000 and the interest, which comes to $15.41.
The loan officer says, "Sir, we are very happy to have had your business, and this transaction has worked out very nicely, but we are a little puzzled. While you were away, we checked you out and found that you are a multi millionaire. What puzzles us is, why would you bother to borrow "$5,000" ?

The Indian replies: "Where else in New York City can I park my car for two weeks for only $15.41 and expect it to be there when I return'"

Tuesday, July 01, 2008

Bonus Act_Practical Problems_30

We are a factory, manufacturing engineering products. We have laid off workmen for 30 days in the year 2004, and paid them lay-off compensation as statutorily prescribed. Please advise us whether we should take into account lay-off compensation for computing bonus.

The definition of salary or wage under section 2(21) of the Bonus Act excludes only retrenchment compensation but not lay-off compensation. Further section 13 of the Bonus Act states that where an employee who is eligible for bonus remained absent from duty, the amount of bonus shall be proportionately reduced. Again, section 14 of the Act lays down that in arriving at the number of days for which an employee worked, an employee shall be deemed to be on duty on those days during which he is laid-off this support the view that lay-off compensation is not excluded from the purview of wages under the Bonus Act and therefore it shall be considered for computing bonus. Please refer to Mohan Kumar v. Dy. Labour Commissioner, 1996 II CLR 154 (Ker.DB)

Bonus Act_Practical Promblems_29

We are a software company we have suspended an employee for committing theft and are paying subsistence allowance. He has claimed bonus for the year 2004 during which he was under suspension. Is he entitled to the bonus.

Section 2(21) of the Bonus Act defines salary or wage for the purpose of computing bonus. It means any remuneration, capable of being a expressed in terms of money, if the terms of employment, express or implied were fulfilled. But subsistence allowance is payable to an employee who is suspended pending enquiry/investigation under standing orders or rules or regulations. During suspension, the contract of employment remains suspended, not requiring the employee not to do any work and the employer not to pay. However, in order to mitigate the financial hardship to the suspended employee and his family some amount. that is stipulated under a statute or standing order is paid as subsistence allowance. Thus the subsistence allowance is not paid for the work done by the employee and hence cannot partake the character of remuneration within the meaning of salary or wage and therefore cannot be taken into account for computing bonus. Please refer to Motor Industries Company Ltd, v. Popat Muralidhar Patel & Ors., 1997 I CLR 169 (Bom.HC)

Bonus Act_Practical Problems_28

We are a Sugar Factory and thus seasonal in character. We pay retention allowance to our workers during off season. Please advise us whether retention allowance is a wage for the purpose of computing bonus.

Normally the seasonal workers, employed in sugar factories, as per the terms of employment, are paid retention allowance during the off season. The definition of salary or wage under section 2(21) of the Bonus Act includes all allowances paid as per the terms of employment or contract of service excluding the exceptions specified in the section. Retention allowance does not fall under any of the excluded categories. Therefore it forms part of wages for the purpose of Bonus Act. Please refer to Bhag Sahakari Karkhana v. Rashtriya Sakhar Kamgar Union., 2001 III LLN 552 (Bom.HC)

Bonus Act_Practical Problems_27

We are a charitable institution engaged in social welfare activities and establishment without any object of making profit. Please advise us whether we are liable to pay bonus to our employee under The Payment of Bonus Act, 1965 since our employees are demanding the same.

It is understood that the institution is engaged in social welfare activities and is not established for making profit therefore it squarely falls within the exemptions specified by clause(c) of section 32 of the Bonus Act. Therefore no bonus is admissible under the Act. Please refer to the case of Swarajya Ashram Karmachari Sangh v. swarajya Ashram., 1995 I LLJ 486 (S.C.)