paper 1 : financial reporting · 3. it can be inferred from note 3 that the deferred tax...

PAPER – 1 : FINANCIAL REPORTING

Question No.1 is compulsory. Candidates are required to answer any four questions from the remaining five questions.

Wherever necessary, suitable assumptions may be made and disclosed by way of a note.

Working notes should form part of the answers.

Question 1

(a) Following are the financial statements of JSP Limited:

Balance Sheet

Particulars Note As at March, 2018

(` in lakh)

EQUITY AND LIABILITIES

Shareholders' Funds:

Share Capital (Share of ` 10 each)

Reserves and Surplus

Non-Current Liabilities:

Long-Term Borrowings

Deferred Tax Liabilities

Current Liabilities:

Trade Payables

Short Term Provisions

Other Current Liabilities

1

2

3

4

2,000

2,500

4,860

100

400

310

250

TOTAL 10,420

ASSETS

Non-Current Assets:

Fixed Assets

Deferred Tax Assets

Current Assets:

Inventories

Trade Receivables

Cash and Bank Balance

3

5

5,600

300

1,520

1,800

1,200

TOTAL 10,420

2 FINAL (NEW) EXAMINATION: MAY 2019

Statement of Profit & Loss

Particulars Note Year ended

March, 2018

(` in lakh)

Revenue from Operations (a) 7,500

Expenses :

Employe e benefit expenses 1,750

Operat in g Costs 2,860

Depreciation 800

Total Expenses (b) 5,410

Profit before tax (a)-(b) 2,090

Tax Expense (510)

Profit after tax 1,580

Notes to Accounts:

Note 1: Reserves and Surplus: (` in lakh)

Capital Reserve 400

Surplus from Profit & Loss .

Opening Balance 225

Additions 1,580 1,805

Reserves for foreseeable loss 295

Total 2,500

Note 2: Long Term Borrowings: (` in lakh)

Term Loan from Bank 4,860

Total 4,860

Note 3: Deferred Tax: (` in lakh)

Deferred Tax Asset 300

Deferred Tax Liability (100)

Total 200

Note 4: Other Current Liabilities: (` in lakh)

Unclaimed Dividends 10

Billing in Advance 240

Total 250

PAPER – 1 : FINANCIAL REPORTING 3

Note 5: Trade Receivables: (` in lakh)

Considered Good (Outstanding within 6 months) 1,565

Considered doubtful (due from past 1 year) 253

Provision for doubtful debts (18)

Total 1,800

Additional Information:

1. Share capital comprises of 200 lakh shares of ` 10 each.

2. Term Loan from bank for ` 4,860 lakh also includes interest accrued and due of ` 860 lakh as on the reporting date.

3. Reserves for foreseeable loss is created against a service contract due within 3

months.

You are required to :

(i) Identify and report the errors and misstatements in the above extract, wherever

applicable.

(ii) Prepare the corrected Balance Sheet and Statement of Profit and Loss. (16 Marks)

(b) Mike Ltd. has undertaken following various transactions in the financial year ended 31.03.2018: (`)

(a) Re-measurement of defined benefit plans · 1,54,200

(b) Current service cost 1,05,000

(c) Changes in revaluation surplus 75,000

(d) Gains and losses arising from translating the monetary assets in

foreign currency 45,000

(e) Gains and losses arising from translating the financial statements of a foreign operation

39,000

(f) Gains and losses arising from investments in equity instruments designated at fair value through other comprehensive income

60,000

(g) Income tax expenses 21,000

(h) Share based payments cost 2,01,000

Identify and present the transactions in the financial statements as per Ind AS 1.

(4 Marks)


Answer

(a) Analysis of the financial statements:

1. Reserve for foreseeable loss for ` 295 lakh, due within 3 months, should be a part of provisions. Hence it needs to be regrouped. If it was also part of previous year’s

comparatives, a note should be added in the notes to account for the regrouping done

this year.

2. Interest accrued and due of ` 860 lakh on term loan will be a part of current liabilities.

Thus, it should be shown under the heading “Other Current Liabilities”.

3. It can be inferred from Note 3 that the deferred tax liabilities and deferred tax assets

relate to taxes on income levied by the same governing taxation laws, hence these shall be set off, in accordance with AS 22. The net DTA of ` 200 lakh will be shown

in the balance sheet.

4. The notes to trade receivables is incorrectly presented. The recommended notes

would be as below:

(` in lakh)

Trade receivables (Unsecured) consist of the following:

(a) Over six months from the date they were due for payment

i. Considered good 0

ii. Considered doubtful 253

Less: Provision for doubtful debts (18)

(A) 235

(b) Others

i. Considered good 1,565

ii. Considered doubtful 0

Less: Provision for doubtful debts 0

(B) 1,565

Total 1,800

5. The Statement of Profit and Loss needs to represent earnings per share, to be

compliant with AS 20.

This question is based on Accounting Standards. It may be noted this topic is no more relevant fr om

November, 2019 examination under Final new course as per BOS announcement dated 24.06.2019.


6. As per the amendment made in Division I of Schedule III, now the term ‘Fixed Asset’

will be replaced by the term ‘Property, Plant and Equipment’.

Below also the revised extracts of the financial statements:

Balance Sheet (` in lakh)

Note No. As at March 31, 2018

EQUITY AND LIABILIT IES

Shareholders’ funds

Share capital 2,000

Reserves and surplus 1 2,205

Non-current liabilities

Long-term borrowings 2 4,000

Current liabilities

T rade payables

400

Short-term provisions (310 + 295) 605

Other current liabilities 4 1,110

TOTAL 10,320

ASSETS

Non-current assets

Property, Plant & Equipment 5,600

Deferred Tax Assets 3 200

Current assets

Inventories 1,520

Trade receivables 5 1,800

Cash and Cash Equivalents

1,200

TOTAL 10,320

Statement of Profit and Loss (` in lakh)

Note

No.

Year ended

March 31, 2018

Revenue from operations 7,500

Expenses

Employee Benefits Expense 1,750

Operating Costs 2,860


Depreciation 800

Total Expenses 5,410

Profit Before Tax 2,090

Tax Expense (510)

Profit for the period 1,580

Earnings Per Equity Share

Basic 7.90

Diluted 7.90

Number of equity shares (face value of ` 10 each) 200 lakh

Revised Notes to Accounts (wherever applicable):

Note 1 : Reserves and Surplus (` in lakh)

Capital Reserve 400

Surplus from Profit and Loss

Opening Balance 225

Additions 1,580 1,805

Total 2,205

Note 2 : Long Term Borrowings

Term Loan from Bank (4,860-860) 4,000

Total 4,000

Note 4 : Other Current Liabilities

Unclaimed dividends 10

Interest on Term Loan 860

Billing in Advance 240

Total 1,110

(b) Items impacting the Statement of Profit and Loss for the year ended 31st March, 2018 (` )

Current service cost 1,05,000

Gains and losses arising from translating the monetary assets in foreign

currency 45,000

Income tax expenses 21,000

Share based payments cost 2,01,000


Items impacting the other comprehensive income for the year ended 31st March, 2018 (` )

Remeasurement of defined benefit plans 1,54,200

Changes in revaluation surplus 75,000

Gains and losses arising from translating the financial statements of a

foreign operation

39,000

Gains and losses from investments in equity instruments designated at

fair value through other comprehensive income

60,000

Question 2

(a) Summarise d Balance Sheets of PN Ltd. and SR Ltd. as on 31st March, 2018 were given as below:

(Amount in `)

Particulars PN Ltd. SR Ltd.

Assets

Land & building

Plant & Machinery

Investme nt in SR Ltd.

Inventories

Trade Receivables

Cash & Cash equivalents

Total Assets

4,68,000

7,48,800

12,48,000

3,74,400

1,86,500

45,200

5,61,600

4,21,200

-

1,13,600

1,24,800

24,900

30,70,900 12,46,100

Equity & Liabilities

Equity Share Capital (Shares of ` 100 each fully paid)

Other Reserves

Retained Earnings

Trade Payables

Short-term borrowings

Total Equity & Liabilities

15,60,000

9,36,000

1,78,400

1,46,900

2,49,600

6,24,000

3,12,000

2,55,800

34,300

20,000

30,70,900 12,46,100

(i) PN Ltd. acquired 70% equity shares of ` 100 each of SR Ltd. on 1st October, 2017.

(ii) The Retained Earnings of SR Ltd. showed a credit balance of ` 93,600 on 1st April,

2017 out of which a dividend of 12% was paid on 15 th December, 2017.

(iii) PN Ltd. has credited the dividend received to its Retained Earnings.


(iv) Fair value of Plant & Machinery of SR Ltd. as on 1st October, 2017 was ` 6,24,000.

The rate of depreciation on Plant & Machinery was 10% p.a.

(v) Following are the increases on comparison of Fair Value as per respective Ind AS

with book value as on 1st October, 2017 of SR Ltd. which are to be considered while

consolidating the Balance Sheets:

(a) Land & Buildings ` 3,12,000

(b) Inventories ` 46,800

(c) Trade Payables ` 31,200.

(vi) The inventory is still unsold on Balance Sheet date and the Trade Payables are not

yet settled.

(vii) Other Reserves as on 31st March, 2018 are the same as was on 1st April, 2017.

(viii) The business activities of both the company are not seasonal in nature and therefore,

it can be assumed that profits are earned evenly throughout the year.

Prepare the Consolidated Balance Sheet as on 31st March, 2018 of the group of entities PN Ltd. and SR Ltd. as per Ind AS. (15 Marks)

(b) Mr. Unique commenced business on 1/04/17 with ` 20,000 represented by 5,000 units of the product @ ` 4 per unit. During the year 2017-18, he sold 5,000 units @ ` 5 per unit.

During 2017-18, he withdraw ` 4.000.

• 31/03/18: Price of the product @ ` 4.60 per unit

• Average price indices: 1/4/17: 100 & 31/3/18: 120

Find out:

(i) Financial capital maintenance at Historical Cost

(ii) Financial capital maintenance at Current Purchasing Power

(iii) Physical Capital Maintenance (5 Marks)

Answer

(a) Consolidated Balance Sheet of PN Ltd. and its subsidiary SR Ltd. as on

31st March, 2018

Particulars Note No. `

I. Assets

(1) Non-current assets

(i) Property, Plant & Equipment

(ii) Goodwill

(2) Current Assets

(i) Inventories

1

2

3

26,83,200

89,402

5,34,800


(ii) Financial Assets

(a) Trade Receivables

(b) Cash & Cash equivalents

Total Assets

II. Equity and Liabilities

(1) Equity

(i) Equity Share Capital

(ii) Other Equity

(2) Non-controlling Interest (W.N.3)

(3) Current Liabilities

(i) Financial Liabilities

(a) Trade Payables

(b) Short term borrowings

Total Equity & Liabilities

4

5

6

7

8

9

3,11,300

70,100

36,88,802

15,60,000

11,39,502

5,07,300

2,12,400

2,69,600

36,88,802

Notes to accounts

`

1.

2.

3.

4.

5.

8.

9.

Property, Plant & Equipment

Land & Building (4,68,000 + 5,61,600 + 3,12,000)

Plant & Machinery (W.N.5)

Goodwill

Inventories

PN Ltd.

SR Ltd. (1,13,600 +46,800)

Trade Receivables

PN Ltd.

SR Ltd.

Cash & Cash equivalents

PN Ltd.

SR Ltd.

Trade Payables

PN Ltd.

SR Ltd. (34,300 + 31,200)

Short-term borrowings

PN Ltd.

SR Ltd.

13,41,600

13,41,600

3,74,400

1,60,400

1,86,500

1,24,800

45,200

24,900

1,46,900

65,500

2,49,600

20,000

26,83,200

89,402

5,34,800

3,11,300

70,100

2,12,400

2,69,600


Statement of Changes in Equity:

6. Equity share Capital

Balance at the beginning of the reporting period

`

Changes in Equity share capital during the year `

Balance at the end of the reporting period

`

15,60,000 0 15,60,000

7. Other Equity

Share application

money

Equity component

Reserves & Surplus Total

`

Capital reserve

`

Retained Earnings

`

Other Reserves

`

Balance at the beginning of the

reporting period

0

9,36,000

9,36,000

Total comprehensiv e income for the year

0

1,78,400

1,78,400

Dividends 0 (52,416) (52,416)

Total comprehensiv e income attributable to parent

0

77,518

77,518

Gain on Bargain purchase

0 0

Balance at the end of reporting period

2,03,502

9,36,000

11,39,502

Working Notes:

1. Adjustments of Fair Value

The Plant & Machinery of SR Ltd. would stand in the books at ` 4,44,600 on

1st October, 2017, considering only six months’ depreciation on ` 4,21,200

90%

=

4,68,000; total depreciation being ` 64,68,000 ×10% × = 23,40012

. The value put on

the assets being ` 6,24,000 there is an appreciation to the extent of ` 1,79,400.

Acquisition date profits of SR Ltd. `

Reserves on 1.4.2017

Profit& Loss Account Balance on 1.4.2017

3,12,000

93,600


Profit for 2017-2018: Total [` 2,55,800-(93,600-74,880)]x 6/12 i.e. ` 1,18,540 upto 1.10.2017

Total Appreciation

Total

Holding Co. Share (70%)

1,18,540

5,07,000*

10,31,140

7,21,798

*Appreciation = Land & Building ` 3,12,000 + Inventories ` 46,800 + Plant & Machinery ` 1,79,400 – T rade Payables ` 31,200 = ` 5,07,000

2. Post-acquisition profits of SR Ltd. `

Profit after 1.10.2017 [2,55,800 - (93,600-74,880)] x 6/12

Less: 10% depreciation on ` 6,24,000 for 6 months less depreciation already charged for 2nd half of 2017-2018 on ` 4,68,800 (ie 31,200 - 23,400)

Total

Share of holding Co. (70%)

Share of NCI (30%)

1,18,540

(7,800)

1,10,740

77,518

33,222

3. Non-controlling Interest `

Par value of 1872 shares

Add: 30% Acquisition date profits [(10,31,140 – 74,880) x 30%]

30% Post-acquisition profits [W.N.2]

1,87,200

2,86,878

33,222

5,07,300

4. Goodwill `

Amount paid for 4,368 shares

Less : Par value of shares

Acquisition date profits-share of PN Ltd.

Goodwill

4,36,800

7,21,798

12,48,000

(11,58,598)

89,402

5. Value of Plant & Machinery: `

PN Ltd.

SR Ltd.

Add: Appreciation on 1.10.2017

Add: Depreciation for 2nd half charged on pre- revalued value

Less: Depreciation on ` 6,24,000 for 6 months

4,21,200

1,79,400

6,00,600

23,400

(31,200)

7,48,800

5,92,800

13,41,600


6. Consolidated Profit & Loss account `

PN Ltd. (as given)

Less: Dividend

Share of PN Ltd. in post-acquisition profits (W.N.2)

1,78,400

(52,416)

1,25,984

77,518

2,03,502

Note: Alternatively, the solution can be done on Net Assets approach on the date of

acquisition. In such a situation, answer in substance will be same. However, presentation

of working notes will be as below:

1. Net assets of SR Ltd. on the date of acquisition `

Share Capital

Reserves on 1.4.2017

Profit & Loss Account Balance on 1.4.2017

Profit for 2017-2018: Total [` 2,55,800-(93,600-74,880)] x 6/12 i.e. ` 1,18,540 upto 1.10.2017

Total Appreciation

Total

Holding Co. Share (70%)

Non-controlling Interest (30)

6,24,000

3,12,000

93,600

1,18,540

5,07,000*

16,55,140

11,58,598

4,96,542

*Appreciation = Land and Building ` 3,12,000 + Inventories ` 46,800+ Plant &

Machinery ` 1,79,400 – T rade Payables ` 31,200 = ` 5,07,000

3. Non-controlling Interest `

30% Share in net assets of SR Ltd on 1st October, 2017

30% Post-acquisition profits [WN 2]

Less: Dividend received (30% x 12% x 6,24,000)

4,96,542

33,222

(22,464)

5,07,300

4. Goodwill `

Amount paid for 4,368 shares

Acquisition date profits share of PN Ltd.

Goodwill

12,48,000

(11,58,598)

89,402

(b) Financial Capital Maintenance at historical costs

` `

Closing capital (` 25,000 – ` 4,000) 21,000

Less: Capital to be maintained


Opening capital (At historical cost) -

Introduction (At historical cost) 20,000 (20,000)

Retained profit 1,000

Financial Capital Maintenance at current purchasing power

` `

Closing capital (` 25,000 – ` 4,000) 21,000


Opening capital (At closing price) (5,000 x ` 4.80) 24,000

Introduction (At closing price) Nil (24,000)

Retained profit (3,000)

Physical Capital Maintenance

` `

Closing capital (` 25,000 – ` 4,000) 21,000


Opening capital (At current cost) (5,000 x ` 4.60) 23,000

Introduction (At current cost) Nil (23,000)

Retained profit (2,000)

Question 3

(a) Orange Ltd. contracts to renovate a five star hotel including the installation of new elevators on 01.10.2017. Orange Ltd. estimates the transaction price of ` 480 lakh. The expected

cost of elevators is ` 144 lakh and expected other costs is ` 240 lakh. Orange Ltd. purchases elevators and they are delivered to the site six months before they will be installed. Orange Ltd. uses an input method based on cost to measure progress towards

completion. The entity has incurred actual other costs of ` 48 lakh by 31.03.2018.

How much revenue will be recognised as per relevant Ind AS 115 for the year ended 31st March, 2018, i f performance obligation is met over a period of time? (5 Marks)

(b) CARP Ltd. is engaged in developing computer software. The expenditures incurred by

CARP Ltd. in pursuance of its development of software is given below:

(i) Paid ` 1,50,000 towards salaries of the program designers.

(ii) Incurred ` 3,00,00 0 towards other cost of completion of program design.

(iii) Incurred ` 80,000 towards cost of coding and establishing technical feasibility.

(iv) Paid ` 3,00,000 for other direct cost after establishment of technical feasibility.


(v) Incurred ` 90,000 towards other testing costs.

(vi) A focus group of other software develop ers was invited to a conference for the introduct ion of this new software. Cost of the conferen ce aggre gated to ` 60,000.

(vii) On March 15, 2018, the development phase was completed and a cash flow budget

was prepared.

Net profit for the year 2017-18 was estimated to be equal ` 30,00,000.

How CARP Ltd. should account for the above mentioned cost as per relevant Ind AS?

(5 Marks)

(c) XYZ Global Ltd. has a functional currency of USD and needs to translate its financial

statements into the functional and presentation currency of XYZ Info. (Euro).

The following is the statement of financial position of XYZ Global Ltd. prior to translation :

USD Euro

Property, plant and equipment 60,000

Receivables 9,00,000

Total assets 9,60,000

Issued capital 40,000 25,000

Opening retained earnings 25,000 15,000

Profit for the year 22,000

Accounts payable 8,15,000

Accrued liabilities 58,000

Total equity and liabilities 9,60,000

Additional information:

Relevant exchange rates are:

Rate at the beginning of the year - Euro 1 = USD 1.25

Average rate for the year - Euro 1 = USD 1.20

Rate at the end of the year - Euro 1 = USD 1.15

You are required to :

(i) Translate the statement of financial position of XYZ Global Ltd. into Euro which is ready for consolidation by XYZ Info. (Share capital and opening retained earnings

have been pre- calculated.)

(ii) Prepare a working of the cumulative balance of the foreign currency translation reserve as per relevant Ind AS. (5 Marks)


(d) In 2017-18, Diana Ltd. has around 3,000 employees in the company. As per the company policy, the employees are given 30 days of Privilege Leave (PL), 12 days of Sick Leave

(SL) and 12 days of Casual Leave. Out of the total PL and SL, 10 PL and 5 SL can be carried forward to next year. On the basis of past trends, it has been noted that 1,000 employees will take 5 days of PL and 2 days of SL and 2,000 employees will avail 10 as

PL and 5 as SL. Also the company has been incurring profits since incorporation. It has been decided in 2017-18 to distribute profits to its employees @ 8% during the year. However, due to the employee turnover in the organisation, the expected pay-out of the

Diana Ltd. is to be around 7%. The profits earned during 2017-18 is ` 12,000 lakh.

Diana Ltd. also has a post-employment benefit plan available which is in the nature of defined contribution plan where contribution to this fund amounts to ` 500 lakh which will fall due within 12 months from the end of accounting period. The company has paid

` 120 lakh to its employees in 2017-18.

What is the treatment for the short-term compensating absences, profit-sharing plan and

the defined contribution plan by Diana Ltd. as per the provisions of relevant Ind AS?

(5 Marks)

Answer

(a) Cost to be incurred comprises two major components – cost for elevators and cost of

construction service.

(a) The elevators are part of the overall construction project and are not a distinct

performance obligation

(b) The cost of elevators is substantial to the overall project and are incurred well in

advance.

(c) Upon delivery at site, customer acquires control of such elevators.

(d) There is no modification done to the elevators, which the company only procures and

delivers at site. Nevertheless, as part of materials used in overall construction project,

the company is a principal in the transaction with the customer for such elevators

also.

Therefore, applying the guidance on Input method –

- The measure of progress should be based on percentage of costs incurred relative

to the total budgeted costs.

- The cost of elevators should be excluded when measuring such progress and revenue

for such elevators should be recognized to the extent of costs incurred.


The revenue to be recognized is measured as follows:

Particulars Amount (` in lakh)

Transaction price 480

Costs incurred:

(a) Cost of elevators 144

(b) Other costs 48

Measure of progress 48 / 240 = 20%

Revenue to be recognised: (` in lakh)

(a) For costs incurred (other than elevators)

Total attributable revenue = 480 -144 = 336

% of work completed = 20%

Revenue to be recognised = 67.20

(b) Revenue for elevators (equal to costs incurred) 144

Total revenue to be recognised 144 + 67.2 = 211.20

Therefore, for the year ended 31st March, 2018, the company shall recognize revenue of ` 211.20 lakhs on the project.

Note: The above solution is given on the basis of Ind AS 115 irrespective of the

financial year mentioned in the question.

(b) Costs incurred in creating computer software, should be charged to research &

development expenses when incurred until technical feasibility/asset recognition criteria have been established for the product. Here, technical feasibility is established after

completion of detailed program design.

In this case, ` 5,30,000 (salary cost of ` 1,50,000, program design cost of ` 3,00,000 and

coding and technical feasibility cost of ` 80,000) would be recorded as expense in Profit

and Loss since it belongs to research phase.

Cost incurred from the point of technical feasibility are capitalised as software costs. But the conference cost of ` 60,000 would be expensed off.

In this situation, direct cost after establishment of technical feasibility of ` 3,00,000 and

testing cost of ` 90,000 will be capitalised.

The cost of software capitalised is = ` (3,00,000 + 90,000) = ` 3,90,000.

(c) Translation of the financial statements

USD Rate/Euro Euro

a b a/b

Property, plant and equipment 60,000 1.15 52,174


Receivables 9,00,000 1.15 7,82,609

Total assets 9,60,000 8,34,783

Issued capital 40,000 25,000

Opening retained earnings 25,000 15,000

Profit for the year 22,000 1.20 18,333

Accounts payable 8,15,000 1.15 7,08,696

Accrued liabilities 58,000 1.15 50,435

Total equity and liabilities 9,60,000 8,17,464

Foreign Currency Translation

Reserve (FCTR) (Refer the below working)

17,319

Total equity and liabilities 8,34,783

Working of the cumulative balance of the FCTR

Particulars Actual translated amount in Euro

Amount Difference translated at closing rate of

USD 1.15 / EURO

a b b-a

Issued capital 25,000 34,783* 9,783

Opening retained earnings 15,000 21,739** 6,739

Profit for the year 18,333 19,130*** 797

58,333 … 75,652 17,319

*40,000

34,7831.15

** 25,000

21,7391.15

*** 22,000

19,1301.15

(d) (i) For short term compensating expenses: Diana. Ltd. will recognise a liability in its books to the extent of 5 days of PL for 1,000 employees and 10 days of PL for

remaining 2,000 employees and 2 days of SL for 1,000 employees and 5 days of SL for remaining 2,000 employees in its books as an unused entitlement that has

accumulated in 2017-2018.

(ii) For profit sharing plan: Diana. Ltd. will recognise ` 840 lakh (12,000 x 7%) as a

liability and expense it in books of accounts.

(iii) For defined contribution plan: When an employee has rendered service to an entity during a period, the entity shall recognise the contribution payable to a defined

contribution plan in exchange for that service:

(a) Under Ind AS 19, the amount of ` 380 lakh (500-120) may be recognised as a

liability (accrued expense), after deducting contribution already paid. However,


if the contribution already paid would have exceeded the contribution due for service before the end of the reporting period, an entity shall recognise that

excess as an asset (prepaid expense); and

(b) Also, ` 380 lakh will be recognised as an expense in this case study which will

be disclosed as an expense in the statement of profit and loss.

Question 4

(a) Deepak Ltd., an automobile group acquires 25% of the voting ordinary shares of Shaun Ltd., another automobile business, by paying, ` 4,320 crore on 01.04.2017. Deepak Ltd. accounts its investment in Shaun Ltd. using equity method as prescribed under Ind AS 28.

At 31.03.2018, Deepak Ltd. recognised its share of the net asset changes of Shaun Ltd.

using equity accounting as follows:

(` in crore)

Share of Profit or Loss 378

Share of Exchange difference in OCI 54

Share of Revaluation Reserve of PPE in OCI 27

The carrying amount of the investment in the associate on 31.03.2018 was therefore ` 4,779 crore (4,320 + 378 + 54 + 27).

On 01.04.2018, Deepak Ltd. acquired remaining 75% of Shaun Ltd. for cash ` 13,500

crore. Fair value of the 25% interest already owned was ` 4,860 crore and fair value of Shaun Ltd.' s identifiable net assets was ` 16,200 crore as on 01.04.2018.

How should such business combination be accounted for in accordance with the applicable Ind AS? (8 Marks)

(b) The following information provided to you by JOHN Ltd.

(i) Equity Shares of ` 100 each of which ` 60 has been

called up 12,00,000 shares

(ii) Equity Shares in respect of which calls are in arrears @ 20 per share ` 14,00,000

(iii) General Reserve ` 1,64,00,000

(iv) Profit & Loss Account (balance at the beginning of the year) ` (25,00,000)

(v) Profit (Loss) for the year ` (7,20,000)

(vi) Industry Average Profitability 15%

(vii) 10% Debentures of ` 100 each 3,00,000

JOHN Ltd. is proposing to hire the services of Mr. Neil to turn the company around. Mr. Neil demanded minimum take home salary of ` 10,00,000 per month. Take home

salary is that remaining after employee's contribution to Provident Fund @ ` 1,25,000 per


month and after deduction of Income-tax on salary. Provident Fund contribution by JOHN Ltd. per month will be ` 1,25,000. PF contributions are tax exempt. Average Income Tax

rate on salaries after considering the impact of exemption amount of ` 3 lakh p.a. will be

25%. JOHN Ltd. expects 12% Profits over & above target by hiring Mr. Neil.

You are required to analyse the proposal and see whether it is worthwhile to employ Mr. Neil and also suggest the maximum emoluments that could be paid to him. (8 Marks)

(c) (1) Vastra Ltd. has 3 lakh units of Certified Emission Reduction (CER) under validation

stage and 1,20,000 units have been approved by UNFCCC. What is the treatment

required for the above?

(2) 2,00,000 units of carbon credit (CER) has been produced by ACL Ltd. Currently the

value of CER under different situations are as follows:

(i) Cost @ ` 250 per unit i.e. CER

(ii) Market Value @ ` 210 per unit i.e. CER

(iii) Net Realization Value ` 200 per unit i.e. CER

(iv) Disposal Value ` 190 per unit i.e. CER

Explain how income recognition will be done as per relevant and applicable Accounting

Standards. (4 Marks)

Answer

(a) Paragraph 42 of Ind AS 103 provides that in a business combination achieved in stages, the acquirer shall remeasure its previously held equity interest in the acquiree at its acquisition-date fair value and recognise the resulting gain or loss, if any, in profit or loss

or other comprehensive income, as appropriate. In prior reporting periods, the acquirer may have recognized changes in the value of its equity interest in the acquiree in other comprehensive income. If so, the amount that was recognised in other comprehensive

income shall be recognised on the same basis as would be required if the acquirer had

disposed of directly the previously held equity interest.

Applying the above, Deepak Ltd. records the following entry in its consolidated financial

statements:

(` in crore)

Debit Credit

Identifiable net assets of Shaun Ltd. Dr. 16,200

Goodwill (W.N.1) Dr. 2,160

Foreign currency translation reserve Dr. 54

PPE revaluation reserve Dr. 27

To Cash 13,500


To Investment in associate -Shaun Ltd. 4,779

To Retained earnings (W.N.2) 27

To Gain on previously held interest in Shaun Ltd.

recognised in Profit or loss (W.N.3)

135

(Recognition of acquisition of Shaun Ltd.)

Working Notes:

1. Calculation of Goodwill

` in crore

Cash consideration 13,500

Add: Fair value of previously held equity interest in Shaun Ltd. 4,860

Total consideration 18,360

Less: Fair value of identifiable net assets acquired (16,200)

Goodwill 2,160

2. The credit to retained earnings represents the reversal of the unrealized gain of

` 27 crore in Other Comprehensive Income related to the revaluation of property, plant and equipment. In accordance with Ind AS 16, this amount is not reclassified

to profit or loss.

3. The gain on the previously held equity interest in Shaun Ltd. is calcu lated as

follows: ` in crore

Fair Value of 30% interest in Shaun Ltd. at 1st April, 2018 4,860

Carrying amount of interest in Shaun Ltd. at 1st April, 2018 (4,779)

81

Unrealised gain previously recognised in OCI 54

Gain on previously held interest in Shaun Ltd. recognised in profit or loss

135

(b) Cost to Company in employing Mr. Neil

`

Salary before tax ` [(10,00,000 x 12 months)/75%] 1,60,00,000

This question is based on ‘Human Resource Reporting’. It may be noted this topic is no more relevant

from November, 2019 examination under Final new course as per the BOS announcement dated

24.06.2019.


Add: Employee’s PF contribution (1,25,000 x 12 months) 15,00,000

1,75,00,000

Add: Employer’s PF contribution (1,25,000 x 12 months) 15,00,000

1,90,00,000

Capital base

`

Equity Share Capital paid up (12,00,000 shares of ` 60 each) 7,20,00,000

Less: Calls in arrears (14,00,000)

7,06,00,000

General Reserve 1,64,00,000

Profit & Loss A/c (balance) at the beginning of the year (25,00,000)

Loss for the year (7,20,000)

10% Debentures of ` 100 each (3,00,000x100) 3,00,00,000

Capital base 11,37,80,000

Target Profit 15% of capital base 1,70,67,000

Profits achieved due to Mr. Neil (1,70,67,000 x 112%) 1,91,15,040

Thus, the company is advised to hire him as his CTC `1,90,00,000 is less than

` 1,91,15,040.

Maximum emoluments that can be paid to Mr. Neil = ` 1,91,15,040.

Note: The above solution is given on the basis that 12% expected profit is over the target profit of 15%. Alternatively, it can be interpreted that 12% profit is in addition to 15% target profit. In such a situation, 27% profit on capital base will be the expected profit

to be achieved due to hiring of Mr. Neil (i.e. ` 3,07,20,600). The conclusion will remain same even on the basis of this alternative. However, the maximum emoluments that can be paid to Mr. Neil will be ` 3,07,20,600.

(c) 1. CER does not come into existence unless it is validated by UNFCCC. Therefore, only 1,20,000 units will be accounted in the books. Even though CERs are intangible

assets these should be accounted for as per the requirements of AS 2.

2. As per AS 9, income will be recognised as and when CERs will be sold. However, at present CERs will be recognised in the books of ACL Ltd. as inventory. The entity

This question is based on ‘Accounting for Carbon Credits’. It may be noted this topic is no more relevant

from November, 2019 examination under Final new course as per the BOS announcement dated

24.06.2019.


should apply AS 2 to recognise CERs. Accordingly, CER should be valued at ` 200

per CER i.e. at NRV which is less than cost.

Question 5

(a) Perfect Ltd. issued 50,000 Compulsory Cumulative Convertible Preference Shares (CCCPS) as on 1st April, 2017 @ ` 180 each. The rate of dividend is 10% payable at the

end of every year. The preference shares are convertible into 12,500 equity shares (Face value ` 10 each) of the company at the end of 5th year from the date of allotment. When the CCCPS are issued, the prevailing market interest rate for similar debt without

conversion option is 15% per annum.

Transaction cost on the date of issuance is 2% of the value of the proceeds. Effective

Interest Rate is 15.86%. (Round off the figures to the nearest multiple of Rupee)

Discounting Factor @ 15%

Year 1 2 3 4 5

Discount Factor 0.8696 0.7561 0.6575 0.5718 0.4971

You are required to compute Liability and Equity Component and Pass Journal Entries for

entire term of arrangement i.e. from the issue of Preference Shares till their conversion into Equi ty Shares. Keeping in view the provisions of relevant Ind AS. (12 Marks)

(b) Beetel Holding Inc. grants 100 shares to each of its 300 employees on 1 st January, 2015. The employees should remain in service during the vesting period. The shares will vest at

the end of the

First year if the company's earnings increase by 13%

Second year if the company's earnings increased by more than 21% over the two -

year period

Third year if the entity's earning increased by more than 23% over the three-year

period.

The fair value per share at the grant date is ` 125.

In 2015, earnings increased by 9% and 20 employees left the organization. The company expects that earnings will continue at a similar rate in 2016 and expects that

the shares will vest at the end of the year 2016. The company also expects that additional 30 employees will leave the organization in the year 2016 and that 250 employees will

receive their shares at the end of the year 2016.

At the end of 2016, company's earnings increased by 19%. Therefore, the shares did

not vest. Only 20 employees left the organization during 2016. Company believes that additional 25 employees will leave in 2017 and earnings will further increase so that the

performance target will be achieved in 2017.


At the end of the year 2017, only 22 employees have left the organization. Assume that the company's earnings increased to desired level and the performance target has been

met.

Determine the expense for each year and pass appropriate journal entries. (8 Marks)

Answer

(a) This is a compound financial instrument with two components – liability representing

present value of future cash outflows and balance represents equity component.

Total proceeds = 50,000 Shares x ` 180 each = ` 90,00,000

Dividend @ 10% = ` 9,00,000

a. Computation of Liability & Equity Component

Date Particulars Cash

Flow

Discount

Factor

Net present

Value

01-Apr-2017

0 1 0.00

31-Mar-2018 Dividend 9,00,000 0.8696 7,82,640

31-Mar-2019 Dividend 9,00,000 0.7561 6,80,490

31-Mar-2020 Dividend 9,00,000 0.6575 5,91,750

31-Mar-2021 Dividend 9,00,000 0.5718 5,14,620

31-Mar-2022 Dividend 9,00,000 0.4971 4,47,390

Total Liability Component

30,16,890

Total Proceeds

90,00,000

Total Equity Component

(Bal fig)

59,83,110

b. Allocation of transaction costs

Particulars Amount Allocation Net Amount

a b a-b

Liability Component 30,16,890 60,338 29,56,552

Equity Component 59,83,110 1,19,662 58,63,448

Total Proceeds 90,00,000 1,80,000 88,20,000

c. Accounting for liability at amortised cost

- Initial accounting = Present value of cash outflows less transaction costs

- Subsequent accounting = At amortised cost, ie initial fair value adjusted for

interest and repayments of the liability.


Opening

Financial

Liability

A

Interest @ 15.86%

B

Cash Flow

(Dividend

payment)

C

Closing

Financial

Liability

A+B-C

01-Apr-2017 29,56,552 29,56,552

31-Mar-2018 29,56,552 4,68,909 9,00,000 25,25,461

31-Mar-2019 25,25,461 4,00,538 9,00,000 20,25,999

31-Mar-2020 20,25,999 3,21,323 9,00,000 14,47,322

31-Mar-2021 14,47,322 2,29,545 9,00,000 7,76,867

31-Mar-2022 7,76,867 1,23,133* 9,00,000 -

*Difference of ` 78 (adjusted in the interest value of 31st March, 2022) is due to

approximation of figures in the earlier years.

d. Journal Entries to be recorded for entire term of arrangement are as follows:

Date Particulars Debit Credit

` `

01-Apr-2017 Bank A/c Dr. 88,20,000

To Preference Shares A/c 29,56,552

To Equity Component of Preference

shares A/c 58,63,448

(Being compulsorily convertible preference shares issued. The same are divided into equity component and liability component as per the calculation)

31-Mar-2018 Preference shares A/c Dr. 9,00,000

To Bank A/c 9,00,000

(Being dividend at the coupon rate of

10% paid to the shareholders)

31-Mar-2018 Finance cost A/c Dr. 4,68,909


(Being interest as per EIR method

recorded)









recorded)








recorded)








recorded)








recorded)

31-Mar-2022 Equity Component of Preference shares A/c Dr.

58,63,448

To Equity Share Capital A/c 1,25,000


To Securities Premium A/c 57,38,448

(Being preference shares converted in equity shares and remaining equity component is recognised as securities premium)

(b) Since the earnings of the entity is non-market related, hence it will not be considered in fair value calculation of the shares given. However, the same will be considered while

calculating number of shares to be vested.

Determination of expenses for each year:

2015 2016 2017

a Total employees 300 300 300

b Cumulative- Employees left (Actual) (20) (40) (62)

c Employees expected to leave in the next year

(30)

(25)

-

d Year end – No of employees 250 235 238

e Shares per employee 100 100 100

f Fair value of a share at grant date 125 125 125

g Vesting period 1/2 2/3 3/3

h Cumulative expenses (d x e x f x g) 15,62,500 19,58,333 29,75,000

i Expenses to be recognised (h-h of

previous year)

3,95,833 10,16,667

Journal Entries

31st December, 2015 `

Employee benefits expenses Dr. 15,62,500

To Share based payment reserve (equity)

15,62,500

(Equity settled shared based payment expected vesting

amount)

31st December, 2016



3,95,833

(Equity settled shared based payment expected vesting amount)

31st December, 2017




10,16,667

(Equity settled shared based payment expected vesting amount)

Share based payment reserve (equity) Dr. 29,75,000

To Share Capital

2,97,5,000

(Share capital issued)

Question 6

(a) Shiv Ltd. purchased 70% stake in Shyam Ltd. for ` 21,22,400 on 01.04.2016. On the date of the acquisition, Shyam Ltd.'s assets & liabilities were ` 54,88,000 and

` 4,48,000 respe ct ive ly. The net assets position of Shyam Ltd. as on 31.03.2017 and 30.09.2017 were ` 78,40,000 and ` 1,10,6 0,0 0 0 respectively, the increase resulting from profits earned during the period. On 01.10.2017, Shiv Ltd. retained 30% stake in

Shyam Ltd. and sold balance for ` 50,00,000.

Discuss the nature of the relationship between the two companies on the relevant dates and the accounting adjustments that are necessary as a result of any change in the

relationship as per relevant Accounting Standard.

Also, calculate the profit arising on part sale of investment, carrying value of the portion

unsold & Goodwill/Capital Reserve that arises on change in nature of the investment.

(12 Marks)

(b) Mediquick Ltd. has received the following grants from the Central Government for its

newly started pharmaceutical business:

• ` 50 lakh received for immediate start-up of business without any condition.

• ` 70 lakh received for research and development of drugs required for the treatment

of cardiovascular diseases with following conditions:

(i) That drugs should be available to the public at 20% cheaper from current market

price and

(ii) The drugs should be in accordance with quality prescribed by the Govt. Drug

Control department.

• Three acres of land (fair value: ` 20 lakh) received for set up of plant.

• ` 4 lakh receiv ed- for purchase of machinery of ` 10 lakh. Useful life of machinery

is 4 years. Depreciation on this machinery is to be charged on straight-line basis.

How should Mediquick Ltd. recognize the government grants in its books of accounts

as per relevant Ind AS? (4 Marks)


(c) Narayan Ltd. provides you the following information and asks you to calculate the tax expense for each quarter with reference to AS 25, assuming that there is no difference

between the estimated taxable income and the estimated accounting income:

Estimated Gross Annual Income ` 33,00,000

(inclusive of Estimated Capital Gains of ` 8,00,000)

Estimated Income of Quarter I is ` 7,00,000, Quarter II is ` 8,00,000, Quarter III (including Estimated Capital Gains of ` 8,00,000) is ` 12,00,000 and Quarter IV is ` 6,00,000.

Tax Rates: On Capital Gains 12%

On Other Income: First ` 5,00,000 30%

Balance Incom e· 40%

(4 Marks)

OR

KAPC Ltd. acquired a machine on 1st April, 2010 for 10 crore that had an estimated useful life of 8 years. The machine is depreciated on straight line basis and does not carry any

residual value. On 1st April, 2014, the carrying value of the machine was reassessed at ` 7.10 crore and surplus arising out of the revaluation being credited to revaluation reserve. For the year ended March, 2016 conditions indicating an impairment of the machine existed

and the amount recoverable ascertained to be only ` 1.09 crore. You are required to calculate the loss on impairment of the machine and show how this loss is to be treated in the books of KAPC Ltd. KAPC Ltd, had followed the policy of writing down the revaluation

surplus by the increased charge of depreciation resulting from revaluation as per AS 28. (4 Marks)

Answer

(a) Shyam Ltd. became a subsidiary of Shiv Ltd. on 1st April, 2016 when 70% thereof was

acquired. The holding–subsidiary relationship continued till 30 th September, 2017 and from 1st October, 2017 the relationship between the two companies will change to Associate. As per para 24 of AS 21, “Consolidated Financial Statements”, the carrying value of the

investment at the date it ceases to be subsidiary is regarded as cost thereafter. Accordingly, if the nature of the investee changes to that of an associate, the carrying amount of the investment in Consolidated Financial Statements of the investor, as on date

it ceases to be a subsidiary, would be considered as cost of investment in the associate. Goodwill or capital reserve arising on account of the change in the nature of the investment

This question is based on Accounting Standards. It may be noted accounting standards are no more

relevant from Nov. 2019 examination under Final new course as per BOS announcement dated

24.06.2019.


will be computed as on the date of such change. Accordingly, when a part of the investment takes the form of an investment in an associate, the results of operations of the subsidiary

will be included in the consolidated statement of Profit and Loss for the period from the

beginning of the period until it ceased to be a subsidiary.

Ascertainment of Gain or Loss

on disposal of part of the investment in Shyam Ltd.

`

Proceeds received on sale of 40% holdings in Shyam Ltd. 50,00,000

Net Assets of Shyam Ltd. on the date of disposal 1,10,60,000

Less: Minority’s interest in Shyam Ltd. on the date of disposal (33,18,000)

Share of Shiv Ltd. in Net Assets 77,42,000

Less: Capital reserve on acquisition (Refer W.N.) (14,05,600)

Total value of investment in consolidated financial statements

of Shiv Ltd.

63,36,400

Less: Carrying Value of investment disposed off

[(63,36,400 / 70%) x 40%]

36,20,800

Profit on sale of 40% investment 13,79,200

Carrying value of the investment retained in the Consolidated Financial Statements

`

Total value of investment in consolidated financial statements of Shiv Ltd.

63,36,400

Less: Carrying value of investment disposed off (36,20,800)

Carrying Value of the investment retained in consolidated financial statements including capital reserve

27,15,600

This amount of ` 27,15,600 would be used to apply the equity method of accounting as specified in AS 23

Capital reserve arising on the carrying value of unsold portion of the investment

`

Carrying value of 30% holdings in Shyam Ltd. as on 1st October, 2017 27,15,600

Less: Share in value of equity of Shyam Ltd., as at date of investment

when subsidiary relationship is transformed to an associate (1,10,60,000 x 30%)

(33,18,000)

Capital reserve arising on such investment under Equity method as per

AS 23

(6,02,400)


Working Note:

Calculation of Goodwill / Capital Reserve on the Date of Acquisition of Shares in

Shyam Ltd.

`

Net Assets on Acquisition date (` 54,88,000 – ` 4,48,000) 50,40,000

70% thereof 35,28,000

Less: Cost of investment (21,22,400)

Capital reserve on acquisition 14,05,600

(b) Mediquick Ltd. should recognise the grants in the following manner:

• ` 50 lakhs have been received for immediate start-up of business. This should be recognised in the Statement of Profit and Loss immediately as there are no conditions

attached to the grant.

• ` 70 lakhs should be recognised in profit or loss on a systematic basis over the periods in which the entity recognises as expense the related costs for whic h the

grants are intended to compensate. However, for this compliance, there should be reasonable assurance that Mediquick Ltd. complies with the conditions attached to

the grant.

• Land should be recognised at fair value of ` 20 lakhs and government grants should

be presented in the balance sheet by setting up the grant as deferred income.

Alternatively, since the land is granted at no cost, it may be presented in the books

at nominal value.

• ` 4 lakhs should be recognised as deferred income and will be transferred to profit and loss account over the useful life of the asset. In this cases, ` 1,00,000 [` 4 lakhs/

4 years] should be credited to profit and loss account each year over the period of 4

years.

Alternatively, ̀ 4,00,000 will be deducted from the cost of the asset and depreciation will be charged at reduced amount of ` 6,00,000 (` 10,00,000 – ` 4,00,000) i.e.

` 1,50,000 each year.

(c) Either

As per para 29 of AS 25 ‘Interim Financial Reporting’, income tax expense is recognised

in each interim period based on the best estimate of the weighted average annual income

tax rate expected for the full financial year.

If different income tax rates apply to different categories of income (such as capital gains or income earned in particular industries) to the extent practicable, a separate rate is

applied to each individual category of interim period pre-tax income.


`

Estimated annual income exclusive of estimated capital gain (33,00,000 – 8,00,000) (A)

25,00,000

Tax expense on other income:

30% on ` 5,00,000 1,50,000

40% on remaining ` 20,00,000 8,00,000

(B) 9,50,000

Weighted average annual income tax rate = B

A=

9,50,00038%

25,00,000

Tax expense to be recognised in each of the quarterly reports

`

Quarter I - ` 7,00,000 x 38% 2,66,000

Quarter II -` 8,00,000 x 38% 3,04,000

Quarter III - ` (12,00,000 - 8,00,000) x 38% 1,52,000

` 8,00,000 x 12% 96,000 2,48,000

Quarter IV - ` 6,00,000 x 38% 2,28,000

10,46,000

Or

Statement Showing Impairment Loss

(` in crore)

Carrying amount of the machine as on 1st April, 2010 10.00

Depreciation for 4 years i.e. 2010-2011 to 2013-201410 crore

× 4 years8 years

(5.00)

Carrying amount as on 31.03.2014 5.00

Add: Upward Revaluation (credited to Revaluation Reserve account) 2.10

Carrying amount of the machine as on 1st April, 2014 (revalued) 7.10

Less: Depreciation for 2 years i.e. 2014-2015 and 2015-2016

7.10 crore

× 2 years4 years

(3.55)

Carrying amount as on 31.03.2016 3.55

Less: Recoverable amount (1.09)


Impairment loss 2.46

Less: Balance in revaluation reserve as on 31.03.2016:

Balance in revaluation reserve as on 31.03.2014 2.10

Less: Enhanced depreciation met from revaluation reserve

2014-2015 and 2015-2016 = [(1.775 – 1.25) x 2 years] (1.05)

Impairment loss set off against revaluation reserve balance as per para 58 of AS 28 “Impairment of Assets”

(1.05)

Impairment Loss to be debited to profit and loss account 1.41

PAPER – 2 : STRATEGIC FINANCIAL MANAGEMENT

Question No.1 is compulsory.

Attempt any four out of the remaining five questions.

Wherever appropriate, suitable assumptions should be made and indicated in the answer by the candidate.

Working notes should form part of the answer.

Question 1

(a) Compute Economic Value Added (EVA) of Good luck Ltd. from the following information:

Profit & Loss Statement

Particulars (` in Lakh)

(a) Income -

Revenue from Operations 2000

(b) Expenses -

Direct Expenses 800

Indirect Expenses 400

(c) Profit before interest & tax(a-b) 800

(d) Interest 30

(e) Profit before tax (c - d) 770

(f) Tax 231

(g) Profit after tax (e - f) 539

Balance Sheet

Particulars (` in Lakh)

Equity and Liabilities :

(a) Shareholder's Fund -

Equity Share Capital 1000

Reserve and Surplus 600

(b) Non- Current Liabilities -

Long Term Borrowings 200

(c) Current Liabilities 800

Total 2600

Assets :

(a) Non - Current Assets 2000

34 FINAL (NEW) EXAMINATION: MAY, 2019

(b) Current Assets 600

Total 2600

Other Information:

(1) Cost of Debts is 15%.

(2) Cost of Equity (i.e. shareholders' expected return) is 12%.

(3) Tax Rate is 30%.

(4) Bad Debts Provision of ` 40 lakhs is included in indirect expenses and ` 40 lakhs reduced from receivables in current assets. (8 Marks)

(b) The shares of G Ltd. we currently being traded at ` 46. The company published its results for the year ended 31st March 2019 and declared a dividend of ` 5. The company made a

return of 15% on its capital and expects that to be the norm in which it operates. G Ltd.

Also expects the dividends to grow at 10% for the first three years and thereafter at 5%.

(8 Marks)

You are required to advise whether the share of the company is being traded at a premium

or discount.

PVIF @ 15% for the next 3 years is 0.870, 0.756 and 0.658 respectively.

(c) State the important features of National Pension Scheme (NPS). (4 Marks)

Answer

(a) EVA = NOPAT – (Invested Capital x WACC)

NOPAT = EBIT – Tax + Non-Cash Expenses

= 800 lakhs – 231 lakhs + 40 lakhs

= ` 609 lakh

(OR)

Operating Income = Taxable Income + Interest + Non-cash Expenses

= 539 +30+40 = ` 609 lakh

Invested Capital = 1000 + 600 + 200 = 1800

= 1800 + 40 (Non-cash expenses)

= ` 1840 lakhs

WACC = 1600 200

X12% + X15% (1- 0.3)1800 1800

= 10.67% + 1.17% = 11.84%

Now, EVA = 609 – (1840 x 11.84%)

PAPER – 2 : STRATEGIC FINANCIAL MANAGEMENT 35

= 609 – 217.86

= ` 391.14 lakhs

OR

WACC = 1000 200

X12% + X15% (1- 0.3)1200 1200

= 10.00% + 1.75% = 11.75%

Now, EVA = 609 – (1840 x 11.75%)

= 609 – 216.20

= ` 392.80 lakhs

(b) Expected dividend for next three years

Year 1 (D1) = 5 (1.1) = 5.5

Year 2 (D2) = 5.5 (1.1) = 6.05

Year 3 (D3) = 6.05 (1.1) = 6.655

Required Rate (Ke) = 15%

Present Value of Dividends

= 5.5 (0.870) + 6.05 (0.756) + 6.655 (0.658)

= 4.785 + 4.574 + 4.379

= 13.74

Now, PV at growth rate of 5%

P3 = D4

Ke - g

= 6.655 (1.05)

0.15 - 0.05 =

6.988

0.1 = 69.88

Therefore, P0 = 69.88 x 0.658 = 45.98

Now, adding the PV of dividend at two different growth rates, we get,

13.74 + 45.98 = 59.72

Hence, it is clear that shares are being traded at discount i.e. undervalued because intrinsic

value of share is more than the market price.

(c) Important features of NPS are as under:

(i) Any citizen of India, whether resident or non-resident who are aged between 18 – 60

years as on the date of submission of his/her application can join NPS.


(ii) NPS is an easily accessible, low cost, tax-efficient, flexible and portable retirement

savings account.

(iii) Under the NPS, the individual contributes to his retirement account and his employer

can also co-contribute for the social security/welfare of the individual.

(iv) NPS is designed on defined contribution basis wherein the subscriber contributes to

his account.

(v) In NPS, there is no defined benefit that would be available at the time of exit from the system and the accumulated wealth depends on the contributions made and the

income generated from investment of such wealth.

(vi) In NPS, Accumulated Pension Wealth = Contributions + Investment Growth –

Charges.

Question 2

(a) Given is the following information:

Day Ltd. Night Ltd.

Net Earnings ` 5 crores ` 3.5 crores

No. of Equity Shares 10,00,000 7,00,000

The shares of Day Ltd. and Night Ltd. trade at 20 and 15 times their respective P/E ratios.

Day Ltd. considers taking over Night Ltd. By paying ` 55 crores considering that the market

price of Night Ltd. reflects its true value. It is considering both the following options:

I. Takeover is funded entirely in cash.

II. Takeover is funded entirely in stock.

You are required to calculate the cost of the takeover and advise Day Ltd. on the best alternative. (8 Marks)

(b) ABB Ltd. has a surplus cash balance of ` 180 lakhs and wants to distribute 50% of it to the equity shareholders. The company decides to buyback equity shares. The company

estimates that its equity share price after re-purchase is likely to be 15% above the buyback

price. if the buyback route is taken.

Other information is as under:

1. Number of equity shares outstanding at present (Face value ` 10 each) is ` 20 lakhs.

2. The current EPS is ` 5.

You are required to calculate the following:

I. The price at which the equity shares can be re-purchased, if market capitalization of the company should be ` 400 lakhs after buy back.


II. Number of equity shares that can be re-purchased.

III. The impact of equity shares re-purchase on the EPS, assuming that the net income remains unchanged. (8 Marks)

(c) List the main applications of Value At Risk (VAR). (4 Marks)

Answer

(a) Working Notes:

Day Ltd. Night Ltd.

Net Earnings ` 5 crores ` 3.5 crores

No. of Equity Shares 10,00,000 7,00,000

EPS 50 50

P/E 20 times 15 times

MPS ` 1000 ` 750

Market Value 1,00,00,00,000 52,50,00,000

(i) If takeover is funded by Cash

Since Market Price of Night Ltd. reflects its full value, cost of takeover to Day Ltd is 55 crore – 52.50 crore = ` 2.5 crore.

(ii) If the takeover is funded by stock

Number of shares to be issued to Night Ltd.

= ` 55 Crore/ ` 1000 = 550000 Lakhs

Market Value of Merged Firm = ` 1,00,00,00,000 + ` 52,50,00,000

= ` 1,52,50,00,000 i.e. ` 152.50 Crore

Proportion that Night Ltd.’s shareholders get in Day Ltd.’s Capital Structure will be:

= 5.5 Lakhs

5.5 Lakhs + 10 Lakhs = 0.3548

True Cost of Merger = ` 152.50 Crore x 0.3548 – ` 55 Crore

= -` 0.893 Crore

Since true cost is negative in case of funding from stock, Day Ltd. would better off by

funding the takeover by stock.

(b) (i) Let P be the buyback price decided by ABB Ltd.

Market Capitalisation after Buyback

400 lakhs = 1.15P (Original Shares – Shares Bought Back)


= 1.15P

50% of 180 lakhs20 lakhs -

P

= 23 lakhs P – 90 lakhs 1.15

= 23 lakhs P – 130.50 lakhs

Again, 23 lakhs P – 130.50 lakhs

or 23 lakhs P = 400 lakhs + 130.50 lakhs

or P = 503.50

23 = ` 21.89 per share

(ii) Number of Shares to be Bought Back :-

` 90 lakhs/ 21.89 = 4.111 lakhs (Approx.) or 411147 shares

(iii) Shares after buyback

= 20 lakhs – 4.111 lakhs = 15.889 lakhs

or 20,00,000 – 4,11,147 = 15,88,853 shares

EPS = 5 x 20 lakhs/ 15.889 lakhs = ` 6.29

Thus, EPS of ABB Ltd., increases to ` 6.29.

So, EPS of ABB Ltd. is increased by ` 1.29 (6.29 – 5.00)

(c) Applications of Value at Risk (VAR)

VAR can be applied

(a) to measure the maximum possible loss on any portfolio or a trading position.

(b) as a benchmark for performance measurement of any operation or trading.

(c) to fix limits for individuals dealing in front office of a treasury department.

(d) to enable the management to decide the trading strategies.

(e) as a tool for Asset and Liability Management especially in banks.

Question 3

(a) Following are the details of a portfolio consisting of 3 shares:

Shares Portfolio

Weight Beta

Expected

Return (%)

Total

Variance

X Ltd. 0.3 0.50 15 0.020

Y Ltd. 0.5 0.60 16 0.010

Z Ltd. 0.2 1.20 20 0.120


Standard Deviation of Market Portfolio Return = 12%

You are required to calculate the following:

(i) The Portfolio Beta.

(ii) Residual Variance of each of the three shares.

(iii) Portfolio Variance using Sharpe Index Model. (8 Marks)

(b) Mr. John established the following spread on the TTK Ltd.'s stock:

1. Purchased one 3-month put option with a premium of ` 15 and an exercise price of ` 900.

2. Purchased one 3-month call option with a premium of ` 90 and an exercise price of

` 1100.

TTK Ltd.'s stock is currently selling) at ` 1000. Calculate gain or loss, if the price of stock

of TTK Ltd. –

(i) Remains at ` 1000 after 3 months.

(ii) Falls to ` 700 after 3 months.

(iii) Raises to ` 1200 after 3 months.

Assume the size of option is 200 shares of TTK Ltd. (8 Marks)

(c) Briefly explain the steps involved in Mechanism of Securi tization. (4 Marks)

Answer

(a) (i) Portfolio Beta

0.30 x 0.50 + 0.50 x 0.60 + 0.20 x 1.20

= 0.15 + 0.3 + 0.24

= 0.69

(ii) Residual Variance

To determine Residual Variance first of all we shall compute the Systematic Risk as

follows:

2 2

β ×σX M = (0.5)2(0.12)2 = 0.0036

2 2

β ×σY M

= (0.6)2(0.12)2 = 0.0052

2 2β ×σ

Z M= (1.20)2(0.12)2 = 0.0207

Residual Variance = Total Variance – Systematic Risk

X 0.020 – 0.0036 = 0.0164


Y 0.010 – 0.0052 = 0.0048

Z 0.120 – 0.0207 = 0.0993

(iii) Portfolio variance using Sharpe Index Model

Portfolio Variance = Systematic Risk of the Portfolio + Unsystematic Risk of the

Portfolio

Systematic Variance of Portfolio = (0.12)2 x (0.69)2 = 0.006856

Unsystematic Variance of Portfolio = 0.0164 x (0.30)2 + 0.0048 x (0.50)2 +

0.0993 x (0.20)2 = 0.006648

Total Variance = 0.006856+ 0.006648 = 0.013504

(b) (i) Total premium paid on purchasing a call and put option

= (` 15 per share × 200) + (` 90 per share × 200).

= ` 3,000 + ` 18,000 = ` 21000

In this case, Mr. John exercises neither the call option nor the put option as both will

result in a loss for him.

Ending value = – ` 21000 + zero gain = - ` 21000

i.e. Net loss = ` 21000

(ii) Since the price of the stock is below the exercise price of the call, the call will not be

exercised. Only put is valuable and is exercised.

Net Gain = (Exercise Price – Current Price) x No of Shares – Premium Paid

Total premium paid = ` 21000

Ending value = – ` 21000 + ` [(900 – 700) × 200] = ` 19,000

Net gain = ` 19,000

(iii) In this situation, the put is worthless, since the price of the stock exceeds the put’s

exercise price. Only call option is valuable and is exercised.

Total premium paid = ` 21000

Ending value = – ` 21000 + ` [(1200 – 1100) × 200] = -` 1000

Net Loss = ` 1,000

(c) The steps involved in mechanism of securitization are as follows:

(i) Creation of Pool of Assets: The process of securitization begins with creation of

pool of assets by segregation of assets backed by similar type of mortgages in terms

of interest rate, risk, maturity and concentration units.


(ii) Transfer to SPV: Once assets have been pooled, they are transferred to Special

Purpose Vehicle (SPV) especially created for this purpose.

(iii) Sale of Securitized Papers: SPV designs the instruments based on nature of

interest, risk, tenure etc. based on pool of assets. These instruments can be Pass

Through Security or Pay Through Certificates.

(iv) Administration of assets: The administration of assets in subcontracted back to

originator which collects principal and interest from underlying assets and transfer it

to SPV, which works as a conduit.

(v) Recourse to Originator: Performance of securitized papers depends on the

performance of underlying assets and unless specified in case of default they go back

to originator from SPV.

(vi) Repayment of funds: SPV will repay the funds in form of interest and principal that

arises from the assets pooled.

(vii) Credit Rating to Instruments: Sometime before the sale of securitized instruments

credit rating can be done to assess the risk of the issuer.

Question 4

(a) A Mutual Fund Company introduces two schemes - Dividend Plan and Bonus Plan. The

face value of the Unit is `10 on 1-4-2014. Mr. R invested ` 5 lakh in Dividend Plan and

` 10 lakh in Bonus Plan. The NAV of Dividend Plan is ` 46 and NAV of Bonus Plan is

` 42. Both the plans matured on 31-03-2019. The particulars of Dividend and Bonus

declared over the period are as follows:

Date Dividend % Bonus Ratio NAV of Dividend Plan

NAV of Bonus Plan

(`) (`)

31-12-2014 12% - 47.0 42.0

30-09-2015 - 1 : 4 48.0 43.0

31-03-2016 15% - 49.5 41.5

30-09-2017 - 1 : 6 50.0 44.0

31-03-2018 10% - 48.0 43.5

31-03-2019 - - 49.0 44.0

You are required to calculate the effective yield per annum in respect of the above two plans. (8 Marks)


(b) Following financial information’s are available of XP Ltd. for the year 2018:

Equity Share Capital (` 10 each) ` 200 Lakh

Reserves and Surplus ` 600 Lakh

10% Debentures (` 100 each) ` 350 Lakh

Total Assets ` 1200 Lakh

Assets Turnover Ratio 2 times

Tax Rate 30%

Operating Margin 10%

Dividend Payout Ratio 20%

Current Market Price per Equity Share ` 28

Required Rate of Return of Investors 18%

You are required to:

(i) Prepare Income Statement for the year 2018.

(ii) Determine its Sustainable Growth Rate.

(iii) Determine the fair price of the company's share using Dividend Discount Model.

(iv) Give your opinion on investment in the company's share at current price. (8 Marks)

(c) Explain briefly the sources for funding a Start-up. (4 Marks)

Answer

(a) Dividend Plan

Unit acquired = 5,00,000

46 = 10869.57

Date Units held Dividend Reinvestment New Total

% Amount Rate Units Units

01.04.2014 10869.57

31.12.2014 10869.57 12 13043.48 47.0 277.52 11147.09

31.03.2016 11147.09 15 16720.64 49.5 337.79 11484.88

31.03.2018 11484.88 10 11484.88 48.0 239.27 11724.15

31.03.2019 Maturity Value (` 49.0 X 11724.15) ` 5,74,483.35

Less: Cost of Acquisition ` 5,00,000.00

Total Gain ` 74483.35


Effective Yield = 74,483.35 1

× ×100 5,00,000 5

`

` = 2.98%

Bonus Plan

Units Acquired = 10,00,000

42 = 23809.52

Date Particulars Calculation Working No. of Units NAV (`)

1.4.14 Investment 23809.52 42

30.9.15 Bonus 23,809.52 / 4 = 5952.38

29761.90 43

30.9.17 " 29761.9 / 6 = 4960.32

34722.22 44

31.3.19 Maturity Value 34722.22 x ` 44 = 15,27,777.68

Less: Investment 10,00,000.00

Gain 5,27,777.68

Effective Yield 5,27,777.68 1

x x10010,00,000 5

= 10.56%

(b) Workings:

Asset turnover ratio = 2 times

Total Assets = ` 1200 lakh

Turnover ` 1200 lakhs × 2 = ` 2400 lakhs

Interest on Debentures = 350 lakh x 10% = 35 lakhs

Operating Margin = 10%

Hence operating cost = (1 - 0.10) 2400 lakhs = ` 2160 lakhs

Dividend Payout = 20%

Tax rate = 30%

(i) Income statement

(` Lakhs)

Sale 2400

Operating Exp 2160

EBIT 240

Interest 35


EBT 205

Tax @ 30% 61.5

EAT 143.5

Dividend @ 20% 28.7

Retained Earnings 114.8

(ii) SGR = Return on Equity (1- Dividend Payout Ratio)

= ROE (1-b)

ROE = PAT

and NW = Rs. 200 lakh + Rs. 600 lakh = Rs. 800 lakhNW

ROE = Rs. 143.5 lakhs

Rs. 800 lakhsх 100 = 17.94%

SGR = 0.1794 (1 - 0.20) = 14.35% or 0.1794 × 0.80

1 - 0.1794 × 0.80=

0.14352

0.85648= 16.76%

(iii) Calculation of fair price of share using dividend discount model

Po = D (1+ g)o

k - ge

Dividends = 28.7 lakhs

20 lakhs

` = ` 1.435

Growth Rate = 14.35% or 16.76%

Hence Po = 1.435 1+ 0.1435

0.18 - 0.1435

`=

1.64

0.0365

` = ` 44.93 or 44.96

or 1.435(1 + 0.1676)

0.18 - 0.1676=

1.676

0.0124

`= ` 135.16 or 135.12

(iv) Since the current market price of share is ` 28, the share is undervalued. Hence, the

investor should invest in the company.

(c) Some of the sources for funding a start-up:

(i) Personal financing: It may not seem to be innovative but you may be surprised to note that most budding entrepreneurs never thought of saving any money to start a

business. This is important because most of the investors will not put money into a

deal if they see that you have not contributed any money from your personal sources.

(ii) Personal credit lines: One qualifies for personal credit line based on one’s personal credit efforts. Credit cards are a good example of this. However, banks are very


cautious while granting personal credit lines. They provide this facility only when the

business has enough cash flow to repay the line of credit.

(iii) Family and friends: These are the people who generally believe in you, without even

thinking that your idea works or not. However, the loan obligations to friends and

relatives should always be in writing as a promissory note or otherwise.

(iv) Peer-to-peer lending: In this process group of people come together and lend money to each other. Peer to peer to lending has been there for many years. Many small and

ethnic business groups having similar faith or interest generally support each other in

their start up endeavors.

(v) Crowdfunding: Crowdfunding is the use of small amounts of capital from a large number of individuals to finance a new business initiative. Crowdfunding makes use

of the easy accessibility of vast networks of people through social media and

crowdfunding websites to bring investors and entrepreneurs together.

(vi) Microloans: Microloans are small loans that are given by individuals at a lower interest to a new business ventures. These loans can be issued by a single individual

or aggregated across a number of individuals who each contribute a portion of the

total amount.

(vii) Vendor financing: Vendor financing is the form of financing in which a company lends money to one of its customers so that he can buy products from the company

itself. Vendor financing also takes place when many manufacturers and distributors are convinced to defer payment until the goods are sold. This means extending the payment terms to a longer period for e.g. 30 days payment period can be extended

to 45 days or 60 days. However, this depends on one’s credit worthiness and payment

of more money.

(viii) Purchase order financing: The most common scaling problem faced by startups is the inability to find a large new order. The reason is that they don’t have the necessary

cash to produce and deliver the product. Purchase order financing companies often advance the required funds directly to the supplier. This allows the transaction to

complete and profit to flow up to the new business.

(ix) Factoring accounts receivables: In this method, a facility is given to the seller who

has sold the good on credit to fund his receivables till the amount is fully received. So, when the goods are sold on credit, and the credit period (i.e. the date up to which payment shall be made) is for example 6 months, factor will pay most of the sold

amount upfront and rest of the amount later. Therefore, in this way, a startup can

meet his day to day expenses.

Question 5

(a) A Rice Trader has planned to sell 22000 kg of Rice after 3 months from now. The spot price of the Rice is ` 60 per kg and 3 months future on the same is trading at ` 59 per kg. Size

http://www.investopedia.com/terms/s/social-media.asp


of the contract is 1000 kg. The price is expected to fall as low as ` 56 per kg, 3 months hence. What the trader can do to mitigate its risk of reduced profit? If he decides to make

use of future market, what would be the effective realized price for its sale when after 3 months, spot price is ` 57 per kg and future contract price for 3 months is ` 58 per kg?

(8 Marks)

(b) On 1st January 2019 Global Ltd., an exporter entered into a forward contract with BBC Bank to sell US$ 2,00,000 on 31st March 2019 at ` 71.50/$. However, due to the request

of the importer, Global Ltd. received the amount on 28 February 2019. Global Ltd. requested the Bank to take delivery of the remittance on 2nd March 2019. The Inter- banking

rates on 28th February were as follows:

Spot Rate ` 71.20/71.25

One month premium 5/10

If Bank agrees to take early delivery then what will be the net inflow to Global Ltd. assuming that the prevailing prime lending rate is 15%. Assume 365 days in a year. (8 Marks)

(c) State the benefits of listing to a Small and Medium Enterprise (SME). (4 Marks)

Answer

(a) In order to hedge its position trader would go short on future at current future price of

` 59/kg. This will help the trade to realize sure ` 59 per kg. after 3 months.

Particulars

(a) Quantity of Rice to be hedged 22000 kg.

(b) Contract Size 1000 kg.

(c) No. of Contracts to be sold (a/b) 22

(d) Future Price ` 59/kg.

(e) Exposure in the future market (a x d) ` 12,98,000

After 3 months, trader would cancel its position in the future by buying a future contract of

same quantity and will sell Rice in the spot market and position shall be as follows:

Particulars `

(a) Price of Future Contract 58/kg.

(b) Amount bought = 22000 x 58 12,76,000

(c) Gain(Loss) on future position (12,98,000 – 12,76,000) 22,000

(d) Spot Price 57/kg

(e) Amount realized by selling in the spot market (22000 x 57) 12,54,000

(f) Effective Selling Amount (c + e) 12,76,000

(g) Effective Selling Price (12,76,000/22000) 58/kg.


(b) On 28th February 2019 bank would purchase form the exporter US$ 200000 at the agreed rate i.e. ` 71.50/$. However, bank will charge for this early delivery consisting of Swap

Difference and Interest on outlay of funds.

(i) Swap Difference

Bank sells at ` 71.20

It buys at ` 71.35

Swap loss per US$ ` 0.15

Swap loss for $ 200000 is ` 30,000

(ii) Interest on Outlay of funds

On February Bank sell $ in Market ` 71.20

Bank buys from customer ` 71.50

Outlay per US $ ` 0.30

Outlay of funds for US$ 200000 ` 60,000

Interest of outlay of funds on ` 60,000 for 31 days (1st March 2019 to 31st March 2019) at 15% p.a. i.e. ` 764

(iii) Charges for early delivery

Swap Loss ` 30,000

Interest on Outlay of Funds ` 764

` 30,764

(iv) Net Inflow to Global Ltd.

Proceed of US $ 200000@` 71.50 ` 1,43,00,000

Less: Charges for early delivery ` 30,764

Net Inflow ` 1,42,69,236

(c) Benefits of Listing to a Small and Medium Enterprise (SME) have been discussed as below:

• Easy access to Capital: BSE SME provides an avenue to raise capital through equity infusion for growth oriented SME’s.

• Enhanced Visibility and Prestige: The SME’s benefit by greater credibility and enhanced financial status leading to demand in the company’s shares and higher valuation of the company.

• Encourages Growth of SMEs: Equity financing provides growth opportunities like expansion, mergers and acquisitions thus being a cost effective and tax efficient mode.

• Ensures Tax Benefits: In case of listed securities Short Term Gains Tax is 15% and there is absolutely no Long Term Capital Gains Tax.


• Enables Liquidity for Shareholders: Equity financing enables liquidity for shareholders provides growth opportunities like expansion, mergers and acquisitions, thus being a cost effective and tax efficient mode.

• Equity financing through Venture Capital: Provides an incentive for Venture Capital Funds by creating an Exit Route and thus reducing their lock in period.

• Efficient Risk Distribution: Capital Markets ensure that the capital flows to its best uses and those riskier activities with higher payoffs are funded.

• Employee Incentives: Employee Stock Options ensures stronger employee commitment, participation and recruitment incentive.

Question 6

(a) Sun Limited, an Indian company will need $ 5,00,000 in 90 days. In this connection,

following information is given below:

Spot Rate - $1 = ` 71

90 days forward rate of $1 as of today = ` 73

Interest Rates are as follows:

Particulars US India

90 days Deposit Rate 2.50% 4.00%

90 days Borrowing Rate 4.00% 6.00%

A call option on $ that expires in 90 days has an exercise price of ` 74 and a premium of

Re. 0.10. Sun Limited has forecasted the spot rates for 90 days as below:

Future Rate Probability

` 72.50 25%

` 73.00 50%

` 74.50 25%

Which of the following strategies would be the most preferable to Sun Limited:

(i) A Forward Contract;

(ii) A Money Market hedge;

(iii) An Option Contract;

(iv) No Hedging.

Show your calculations in each case. (8 Marks)

(b) K Ltd. currently operates from 4 different buildings and wants to consolidate its operations

into one building which is expected to cost ` 90 crores. The Board of K Ltd. had approved the above plan and to fund the above cost, agreed to avail an External Commercial


Borrowing (ECB) of GBP 10 m from G Bank Ltd. on the following conditions:

• The Loan will be availed on 1st April, 2019 with interest payable on half yearly rest.

• Average Loan Maturity life will be 3.4 years with an overall tenure of 5 years.

• Upfront Fee of 1.20%.

• Interest Cost is GBP 6 months LIBOR + Margin of 2.50%.

• The 6 month LIBOR is expected to be 1.05%.

K Ltd. also entered into a GBP-INR hedge at 1 GBP = INR 90 to cover the exposure on

account of the above ECB Loan and the cost of the hedge is coming to 4.00% p.a.

As a Finance Manager, given the above information and taking the 1 GBP = INR 90:

(i) Calculate the overall cost both in percentage and rupee terms on an annual basis.

(ii) What is the cost of hedging in rupee terms?

(iii) If K Ltd. wants to pursue an aggressive approach, what would be the net gain/loss for K Ltd. if the INR depreciates/appreciates against GBP by 10% at the end of the 5

years assuming that the loan is repaid in GBP at the end of 5 years?

Ignore time value and taxes and calculate to two decimals. (8 Marks)

(c) Discuss briefly the important constituents of International Financial Centre (IFC).

OR

What are the differences between Islamic Finance and Conventional Finance? (4 Marks)

Answer

(a) (i) Forward contract:

Rupees needed in 90 days = $5,00,000 x ` 73 = ` 3,65,00,000

(ii) Money market hedge:

Amount in $ to be invested = 5,00,000/1.0250 = ` 4,87,805

Amount of ` needed to convert into $ = 4,87,805 x 71 = ` 3,46,34,155

Interest and principal on ` loan after 90 days

= ` 3,46,34,155 x 1.06 = ` 3,67,12,204

(iii) Call option:

Expected Spot rate

(1)

Prem./unit

(2)

Exercise Option

(3)

Total price per unit

(4)

Total price for $5,00,000 x

(4)

= (5)

Prob. Pi

(6)

Pixi (5) x (6)

(7)

72.50 0.10 No 72.60 3,63,00,000 0.25 90,75,000


73.00 0.10 No 73.10 3,65,50,000 0.50 1,82,75,000

74.50 0.10 Yes 74.10* 3,70,50,000 0.25 92,62,500

3,66,12,500

Add: Interest on Premium @ 6% (50,000 x 6% ) 3,000

3,66,15,500

* (` 74 + ` 0.10)

(iv) No hedge option:

Expected Future spot rate ` needed Xi Prob. Pi Pi xi

72.50 3,62,50,000 0.25 90,62,500

73.00 3,65,00,000 0.50 1,82,50,000

74.50 3,72,50,000 0.25 93,12,500

3,66,25,000

Decision: Forward Contract Strategy is most preferable strategy because it requires

the least amount to arrange $5,00,000.

(b) (i) Calculation of Overall Cost

Upfront Fee (GBP 10 M @ 1.20%) ` 1,20,000

Interest Payment (GBP 10 M x 3.55% x 3.4) ` 12,07,000

Hedging Cost (GBP 10 M x 4% x 3.4) ` 13,60,000

Total ` 26,87,000

Or ` 2.687 million

Overall cost in % terms on Annual Basis = 2.687million 1

x(1,00,00,000 -1,20,000) 3.4

= 2.687 1

x x1009.88 3.4

= 8%

Overall Cost in Rupee terms@ GBP 1 = ` 90x2.687

x1003.4

=` 711.26 lakhs

OR

Overall cost in % terms on Annual Basis = 2.687million 1

x(1,00,00,000 ) 3.4

= 2.687 1

x x1001.00 3.4

= 7.9%

Overall Cost in Rupee terms@ GBP 1 = 10,000,000 X 7.90% X 90

= ` 71,100,000


OR

Calculation of overall cost

Interest & Margin (A) = 3.55%

Hedging cost (B) = 4%

7.55%

Onetime fee = 1.20%

Average loan maturity = 3.4 years

Per annum cost 1.2/3.4 (C) = 0.35%

Annual overall cost in % terms (A+B+C) = 7.9%

Overall Cost in Rupee terms@ GBP 1 = 10,000,000 X 7.90% X 90

= ` 71,100,000

(ii) Cost of Hedging in terms of Rupees

` 13,60,000 x 90 = ` 12,24,00,000 = ` 12.24 crores in Total

OR

GBP10,000,000 X 90 X 4% = ` 3,60,00,000 on Annual Basis

(iii) If K Ltd. pursues an aggressive approach then Gain/Loss in INR Depreciation/

Appreciation shall be computed as follows:

(a) If INR depreciates by 10%

Re. loss per GBP = 90 x 10% = ` 9

Total Losses GBP10M = ` 90 Million

Less: Cost of Hedging = ` 36 Million

Net Loss = ` 54 million

(b) If INR appreciates by 10%

` Gains per GBP = ` 90 x 10% = ` 9

Total Gain on Repayment of loan = 90 Million

Add: Saving in Cost of Hedging = 36 Million

Net Gain = 126 Million

(c) Some of the important constituents of International Financial Centre (IFC) are as follows:

(i) Highly developed Infrastructure: - A leading edge infrastructure is prerequisite for

creating a platform to offer internationally completive financial services.


(ii) Stable Political Environment: - Destabilized political environment brings country risk investment by foreign nationals. Hence, to accelerate foreign participation in

growth of financial centre, stable political environment is prerequisite.

(iii) Strategic Location: - The geographical location of the finance centre should be

strategic such as near to airport, seaport and should have friendly weather.

(iv) Quality Life: - The quality of life at the centre showed be good as centre retains

highly paid professional from own country as well from outside.

(v) Rationale Regulatory Framework: - Rationale legal regulatory framework is another

prerequisite of international finance centre as it should be fair and transparent.

(vi) Sustainable Economy: - The economy should be sustainable and should possess

capacity to absorb all the shocks as it will boost investors’ confidence.

OR

Major differences between Islamic finance and other form of finance (Conventional

Finance) are as follows:

Basis Islamic Finance Conventional Finance

Promotion Islamic Finance promotes just, fair and balanced society. Hence, interest is prohibited.

Based on commercial objectives and interest must be paid irrespective of outcome of business.

Ethical framework Structured on ethical and moral framework of Sharia. Verses from the holy Quran and tradition from As-Sunnah are two divine guidance.

No such framework.

Speculation The financial transactions should be free from the element of uncertainty (Gharar) and gambling (Maisir)

No such restrictions.

Unlawful Goods and Services

Islamic Finance must not be involved in any transactions not involve trade not allowed as per Islamic principles such as alcohol, armaments, pork and other socially detrimental products.

There are no such restrictions

PAPER – 3 : ADVANCED AUDITING AND PROFESSIONAL ETHICS

Question No. 1 is compulsory

Answer any four out of remaining five

Question 1

(a) You are engaged by M/s Active Ltd. to examine and report on prospective financial information which the management of the company has prepared for presentation at an Investor meet program organized by a State Government to attract investment in their

state.

The company in its vision document descripted various plans and proposals of the company with projected financial goals and means to achieve the same and various benefits accruing to the economic development of the State. What important matters will

be considered by you while determining the nature, timing and extent of examination procedure to be applied in the review of the same? (5 Marks)

(b) Dice Ltd. appointed two CA firms MN & Associates and PQ & Co. as joint auditors for

conducting audit for the year ended 31st March, 2019.

In the course of audit, it has been observed that there is a major understatement in the

value of inventory. The inventory valuation work was looked after by MN & Associates but

there was no documentation for the division of the work between the joint auditors.

Comment on the above situation with regard to responsibilities among joint auditors.

(5 Marks)

(c) After accepting the statutory audit of M/s All in One Ltd., a departmental store, you became aware of the fact that management of the company have imposed certain limitations on the

scope of your assurance function which may adversely affect and result in your inability to obtain sufficient appropriate audit evidence to discharge your responsibility required by the statute. Indicate the consequences and your response to the limitations imposed by the

management on your scope. (4 Marks)

Answer

(a) Examination Procedures: As per SAE 3400, “The Examination of Prospective Financial

Information”, when determining the nature, timing and extent of examination procedures,

the auditor should consider matters such as:

(i) the knowledge obtained during any previous engagements;

(ii) management’s competence regarding the preparation of prospective financial

information;

(iii) the likelihood of material misstatement;

(iv) the extent to which the prospective financial information is affected by the

management’s judgment;


(v) the sources of information considered by the management for the purpose, their adequacy, reliability of the underlying data, including data derived from third parties,

such as industry statistics, to support the assumptions;

(vi) the stability of entity’s business; and

(vii) the engagement team’s experience with the business and the industry in which the

entity operates and with reporting on prospective financial information.

(b) Responsibility and Co-ordination among Joint Auditors: As per SA 299, “Joint Audit of Financial Statements”, where joint auditors are appointed, they should, by mutual

discussion, divide the audit work among themselves. The division of the work would usually be in terms of audit identifiable units or specified area. In some cases due to the nature of the business entity under audit, such a division of the work may not be possible. In such

situations, the division of the work may be with reference to items of assets or liabilities or income or expenditure or with reference to period of time. The division of the work among joint auditors as well as the areas of work to be covered by all of them should be adequately

documented and preferably communicated to the entity.

In respect of the audit work divided among the joint auditors, each joint auditor is responsible only for the work allocated to him, whether or not he has prepared a separate audit of the work performed by him. On the other hand all the joint auditors are jointly and

severally responsible –

(i) The audit work which is not divided among the joint auditors and is carried out by all

joint auditors;

(ii) Decisions taken by all the joint auditors under audit planning phase concerning the nature, timing and extant of the audit procedure to be performed by each of the

auditor;

(iii) Matters which are bought to the notice of the joint auditors by any one of them and

on which there is an agreement among the joint auditors;

(iv) Examining that the financial statements of the entity comply with the requirements of

the relevant statute;

(v) Presentation and disclosure of financial statements as required by the applicable

financial reporting framework;

(vi) Ensuring that the audit report complies with the requirements of the relevant statutes, the applicable Standards on Auditing and the other relevant pronouncements issued

by ICAI;

The joint auditors shall also discuss and document the nature, timing, and the extent of the

audit procedures for common and specific allotted areas of audit to be performed by each of the joint auditors and the same shall be communicated to those charged with governance. After identification and allocation of work among the joint auditors, the work

allocation document shall be signed by all the joint auditors and the same shall be

PAPER – 3 : ADVANCED AUDITING AND PROFESSIONAL ETHICS 55

communicated to those charged with governance of the entity.

Hence, in respect of audit work divided among the joint auditors, each joint auditor shall be responsible only for the work allocated to such joint auditor including proper execution

of the audit procedures.

In the instant case. Dice Ltd. appointed two CA Firms MN & Associates and PQ & Co. as joint auditor for conducting audit. As observed during the course of audit that there is a major understatement in the value of inventory and the inventory valuation work was

looked after by MN & Associates.

In view of SA 299 MN & Associate will be held responsible for the same as inventory valuation work was looked after by MN & Associates only. Further, there is violation of SA

299 as the division of work has not been documented.

(c) Consequence of an Inability to Obtain Sufficient Appropriate Audit Evidence Due to

a Management-Imposed Limitation after the Auditor Has Accepted the Engagement: As per SA 705, Modification to the Opinion in the Independent Auditor’s Report”, if, after accepting the engagement, the auditor becomes aware that management has imposed a

limitation on the scope of the audit that the auditor considers likely to result in the need to express a qualified opinion or to disclaim an opinion on the financial statements, the auditor

shall request that management remove the limitation.

If management refuses to remove the prescribed limitation, the auditor shall communicate

the matter to those charged with governance, unless all of those charged with governance are involved in managing the entity and determine whether it is possible to perform

alternative procedures to obtain sufficient appropriate audit evidence.

If the auditor is unable to obtain sufficient appropriate audit evidence, the auditor

shall determine the implications as follows:

(i) If the auditor concludes that the possible effects on the financial statements of undetected misstatements, if any, could be material but not pervasive, the auditor

shall qualify the opinion; or

(ii) If the auditor concludes that the possible effects on the financial statements of

undetected misstatements, if any, could be both material and pervasive so that a qualification of the opinion would be inadequate to communicate the gravity of the

situation, the auditor shall:

1. Withdraw from the audit, where practicable and possible under applicable law

or regulation; or

2. If withdrawal from the audit before issuing the auditor’s report is not practicable

or possible, disclaim an opinion on the financial statements.

If the auditor withdraws as discussed above, before withdrawing, the auditor shall communicate to those charged with governance any matters regarding misstatements

identified during the audit that would have given rise to a modification of the opinion.


Question 2

(a) CA Dabu has been appointed as an auditor of M/s MAP Technocraft Ltd. to conduct statutory audit. While conducting audit, he came across some difficulties which the management could not explain to him properly and, therefore, he decided to take services

of Mr. Jay, an engineering consultant. Mr. Jay performed his work and submitted details to CA Dabu. State the specific procedure which CA Dabu should follow to evaluate the adequacy of work performed by Mr. Jay. (5 Marks)

(b) ALM Associates has been appointed as auditor of M/s Hary Ltd. which acquired 55%

shares-in M/s Sam Ltd. on 15th October, 2018. During audit of Harry Ltd., the auditors found that the company has not prepared consolidated financial statements because on the date of acquisition the fair value of certain assets & liabilities has not been ascertained

which is significant and are accounted for on estimated basis only. Help ALM Associates in framing opinion paragraph of audi t report. (4 Marks)

(c) A professional accountant in public practice is always subject to various threats in compliance with fundamental principles of his profession and you, as a professional

accountant, are worried about engagement specific threat in your audit assignment of M/s Soft Ltd. and want to implement some measures to eliminate and reduce the same. Enumerate some engagement specific safeguards which you may introduce in your work

environment to ward off such threats. (5 Marks)

Answer

(a) Evaluating the Adequacy of the Auditor’s Expert’s Work: As per SA 620 on “Using the Work of an Auditor’s Expert”, specific procedures to evaluate the adequacy of the auditor’s

expert’s work for the auditor’s purposes may include:

(i) Inquiries of the auditor’s expert.

(ii) Reviewing the auditor’s expert’s working papers and reports.

(iii) Corroborative procedures, such as:

o Observing the auditor’s expert’s work;

o Examining published data, such as statistical reports from reputable, authoritative sources;

o Confirming relevant matters with third parties;

o Performing detailed analytical procedures; and

o Re-performing calculations.

(iv) Discussion with another expert with relevant expertise when, for example, the findings

or conclusions of the auditor’s expert are not consistent with other audit evidence.

(v) Discussing the auditor’s expert’s report with management.


Therefore, as per SA 620 on “Using the Work of an Auditor’s Expert”, the auditor shall

evaluate the adequacy of the auditor’s expert’s work for the auditor’s purposes, including:

(i) The relevance and reasonableness of that expert’s findings or conclusions, and their

consistency with other audit evidence;

(ii) If that expert’s work involves use of significant assumptions and methods, the relevance and reasonableness of those assumptions and methods in the

circumstances; and

(iii) If that expert’s work involves the use of source data that is significant to that expert’s

work, the relevance, completeness, and accuracy of that source data.

If the auditor determines that the work of the auditor’s expert is not adequate for the

auditor’s purposes, the auditor shall:

(i) Agree with that expert on the nature and extent of further work to be performed by

that expert; or

(ii) Perform further audit procedures appropriate to the circumstances.

(b) Opinion Paragraph of Audit Report: In the instant case, M/s Hary Ltd. acquired 55%

shares in M/s Sam Ltd. and the company did not prepare the consolidated financial statements because on the date of acquisition the fair value of certain assets and liabilities has not been ascertained. Therefore, accounting is done on estimate basis only which is

not correct as the financial statements are materially misstated due to non-consolidation of subsidiary. The material misstatement is deemed to be pervasive to the consolidated financial statements. Thus, the auditor shall express an adverse opinion when the auditor,

having obtained sufficient appropriate audit evidences, concludes that misstatements,

individually or in the aggregate, are both material and pervasive to the financial statements.

Adverse Opinion

In our opinion and to the best of our information and according to the explanations given to us, because of the significance of the matter discussed in the Basis for Adverse Opinion

section of our report, the accompanying consolidated financial statements do not give a true and fair view in conformity with the accounting principles generally accepted in India, of their consolidated state of affairs of the Group, its associates and jointly controlled

entities, as at March 31, 2019, of its consolidated profit/loss, (consolidated position of

changes in equity) and the consolidated cash flows for the year then ended.

Basis for Adverse Opinion is given below:

As explained in Note X, the M/s Hary Ltd. has not consolidated subsidiary M/s Sam Ltd. that the M/s Hary Ltd acquired during 2018 because it has not yet been able to determine

the fair values of certain of the subsidiary’s material assets and liabilities at the acquisition date. This investment is therefore accounted for on an estimate basis. Under the


accounting principles generally accepted in India, the Group should have consolidated this subsidiary and accounted for the acquisition based on provisional amounts. Had M/s Sam

Ltd. been consolidated, many elements in the accompanying consolidated financial statements would have been materially affected. The effects on the consolidated financial

statements of the failure to consolidate have not been determined.

(c) Engagement-specific safeguards in the work environment may include:

(i) Involving an additional professional accountant to review the work done or otherwise

advise as necessary.

(ii) Consulting an independent third party, such as a committee of independent directors,

a professional regulatory body or another professional accountant.

(iii) Discussing ethical issues with those charged with governance of the client.

(iv) Disclosing to those charged with governance of the client the nature of services

provided and extent of fees charged.

(v) Involving another firm to perform or re-perform part of the engagement.

(vi) Rotating senior assurance team personnel.

Question 3

(a) You have been appointed as an auditor of M/s Real Ltd. in which total number of directors in the board is 9. As an auditor, state the points to be considered in verification of

composition of Board under Regulation 17 of The Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015. (6 Marks)

(b) Banks, because of certain characteristics, are distinguished from other commercial

enterprises and hence it needs special audit consideration.

As an auditor of a bank, specify the various peculiarities which may necessitate special

audit consideration to be taken care by you. (4 Marks)

(c) CA Natraj, in practice, accepted an assignment as·advisor and consultant to the public

issue of shares by his client M/s Super Ltd.

Besides helping the company as an advisor, he also underwrote the public issue of the company to the extent of 25% at a commission of 1%. Remaining shares were underwritten

by banks and other financial institutions at the same rate of commission. He contends that above assignments are part of management consultancy work permitted by the council of the Institute. Do you agree with the view of CA Natraj? Decide in the light of applicable

code of conduct. (4 Marks)

Answer

(a) Verification regarding Composition of Board [Regulation 17]

(i) The auditor should ascertain whether, throughout the reporting period, the Board of Directors comprises an optimum combination of executive and non-executive


directors, with at least one woman director and not less than 50% of the Board of Directors comprising non-executive directors. The minutes of the Board of Directors’

meetings should be verified to ascertain whether a director is an executive director or

a non-executive director.

(ii) The auditor should also verify that where the Chairperson of the Board is a non-executive director, at least one-third of the Board should comprise of independent

directors and in case the listed entity does not have a regular non-executive Chairperson, at least half of the Board of Directors should comprise independent directors. Further, if the regular non-executive Chairperson is a promoter of the listed

entity or is related to any promoter or person occupying management positions at the Board level or at one level below the Board, at least one-half of the Board of the listed

entity shall consist of independent directors.

In determining the number of requisite independent directors and/or non-executive

directors, the fraction, if any, in the number of one-half or one-third as the case may be, should be rounded off. Since the terms in this clause refer to ‘not less than’ and ‘at least’, it would be appropriate to compute the number by rounding off any fraction

to the next integer. For example, in a Board headed by a non-executive Chairman and comprising of six other directors (i.e., seven directors), the independent directors

should be three or more.

(iii) Annual disclosure submitted by the directors to the Board of Directors may be

examined for this purpose. If the Board of Directors has followed any particular procedure(s) to ascertain the independence of directors, the auditor should examine the same. Effect of changes in the composition of the Board and/or its Chairman and

its impact on compliance throughout the reporting period should also be examined.

(iv) An independent non-executive director, apart from receiving remuneration, should not have any material pecuniary relationship with the listed entity, its holding, subsidiary or associate company, or their promoters, or directors, during the two

immediately preceding financial years or during the current financial year. Also, such independent director, either by himself or with any of his relatives should not be a material supplier, service provider or customer or a lessor or lessee of the listed entity

and should not also be a substantial shareholder of the listed entity. In determining ‘not a substantial shareholder’, he (together with his relatives) should not own 2% or

more of total voting power of the listed entity.

(b) Special audit considerations arise in the audit of banks because of:

(i) the particular nature of risks associated with the transactions undertaken;

(ii) the scale of banking operations and the resultant significant exposures which can

arise within short period of time;

(iii) the extensive dependence on IT to process transactions;

(iv) the effect of the statutory and regulatory requirements;


(v) the continuing development of new products and services and banking practices which may not be matched by the concurrent development of accounting principles

and auditing practices;

(vi) Evolution of technology and providing services through Net Banking and Mobiles has

exposed banks to huge operational and financial risk.

The auditor should consider the effect of the above factors in designing his audit approach. It is imperative for Branch Auditor and SCAs to have detailed knowledge of the products

offered and risks associated with them, and appropriately address them in their audit plan

to the extent they give rise to the risk of material misstatements in the financial statements.

In today’s environment, the banks use different applications to carry out different transactions which may include data flow from one application to other application; the

auditor while designing his plans should also understand interface controls between the

various applications.

(c) Assignment as Advisor and Consultant: The Council of the Institute of Chartered Accountants of India (ICAI) pursuant to Section 2(2)(iv) of the Chartered Accountants Act,

1949 has passed a resolution permitting “Management Consultancy and other Services” by a Chartered Accountant in practice. A clause of the aforesaid resolution allows Chartered Accountants in practice to act as advisor or consultant to an issue of securities

including such matters as drafting of prospectus, filing of documents with SEBI, preparation of publicity budgets, advice regarding selection of brokers, etc. It is, however, specifically stated that Chartered Accountants in practice are not permitted to undertake the activities

of broking, underwriting and portfolio management services.

In the instant case, CA Natraj accepted an assignement as advisor and consultant to the public issue of shares by his client M/s Super Ltd. In addition, he also underworte the public issue of the company to the extent of 25% at a commission of 1%. Contention of CA. Natraj

that advisor, consultant and underwriting work is part of management consultancy work and permitted by the council is not correct as Chartered Accountants in practice are not permitted to undertake the activities of broking, underwriting and portfolio management

services.

Conclusion: In view of this, CA. Natraj would be guilty of misconduct under the Chartered

Accountants Act, 1949.

Question 4

(a) A newly qualified professional has received his first appointment as auditor of a large company and is very much concerned about the effectiveness of internal control and wants to assess and evaluate the control environment as· part of his audit program. Towards

achieving his objective, he seeks your help in knowing the Standard Operating Procedures (SOPs) of assessment and evaluation of control . (5 Marks)

(b) PQ & Co. is an audit firm with P and Q as partners. For the financial year 2018-19, the firm has been appointed as statutory auditor of M/s Mango Orchards Hotel Ltd. The audit firm


is a regular customer of the hotel and the partners usually stay in the same hotel at various locations in the course of travelling for their various professional assignments. Normally,

payments for such stay are settled against quarterly bills raised by the company. Give your comment with respect to the Companies Act, 2013. (4 Marks)

(c) On receipt of statutory audit report on 30-03-2018 of M/s Sunlight Ltd., a government company, C&AG on 25-05-2018 appointed M/s Veeru & Associates to conduct

supplementary audit u/s 143(6)(a) of the Companies Act, 2013. They submitted their report to C&AG as per their scope of work. The Company held its AGM on 01-09-2018 but directors did not think it necessary to discuss supplementary auditor's report and comment

of the C&AG. Is the approach of the directors of Sunlight Ltd. correct? Guide the company wi th the provisions related to supplementary audi t. (5 Marks)

Answer

(a) Standard Operating Procedures (SOPs): A well-defined set of SOPs helps define role, responsibilities, process & controls & thus helps clearly communicate the operating controls to all touch points of a process. The controls are likely to be clearly understood &

consistently applied even during employee turnover.

(i) Enterprise Risk Management: An organization which has robust process to identify & mitigate risks across the enterprise & its periodical review will assist in early identification of gaps & taking effective control measures. In such organizations,

surprises of failures in controls is likely to be few.

(ii) Segregation of Job Responsibilities: A key element of control is that multiple activities in a transaction/decision should not be concentrated with one individual. Segregation of duties is an important element of control such that no two commercial

activities should be conducted by the same person.

(iii) Job Rotation in Sensitive Areas: Any job carried out by the same person over a long period of time is likely to lead to complacency & possible misuse in sensitive areas. It is therefore important that in key commercial functions, the job rotation is

regularly followed to avoid degeneration of controls. For example, if the same buyer continues to conduct purchase function for long period, it is likely that he gets into comfort zone with existing vendors & hence does not exercise adequate controls in

terms of vendor development, competitive quotes etc.

(iv) Delegation of Financial Powers Document: As the organization grows, it needs to delegate the financial & other powers to their employees. A clearly defined document on delegation of powers allows controls to be clearly operated wi thout being

dependent on individuals.

(v) Information Technology based Controls: With the advent of computers & enterprise resource planning (ERP) systems, it is much easier to embed controls through the system instead of being human dependent. The failure rate for IT

embedded controls is likely to be low, is likely to have better audit trail & is thus easier


to monitor. For example, at the stage of customer invoicing, application of correct rates in invoices or credit control can all be exercised directly through IT system

improving control environment.

(b) Indebtedness to the Company: According to the section 141(3)(d)(ii) of the Companies Act, 2013, a person who is indebted to the company for an amount exceeding ` 5,00,000 shall be disqualified to act as an auditor of such company and further under section 141(4)

he shall vacate his office of auditor when he incurs this disqualification subsequent to his

appointment.

Further a person or a firm who directly or indirectly has business relationship with a company or its subsidiary or its holding or associate company, is also not qualified to be

appointed as auditor of the company. But here business relationship does not include commercial transactions which are in the ordinary course of the business of the company

at arm’s length price.

However, where the person has liquidated his debt before the appointment date, there is

no disqualification to be construed for such appointment.

In the given case, PQ & Co., an audit firm with P & Q as partners is appointed as statutory auditor of M/s Mango Orchards Hotel Ltd. and the audit firm is a regular customer of the hotel and the partners usually stay in the same hotel at various locations. They also settle

the payments for such stay against quarterly bills raised by the company.

Assuming the balance amount at any time during the year due to the hotel does not exceed the prescribed limits of rupees 5,00,000, PQ & Co., is not disqualified to be appointed as statutory auditor of M/s Mango Orchards Hotel Ltd as per section 141(3)(d)(ii), in the

absence of the same the auditor shall be disqualified to act as an auditor and shall vacate

his office of auditor when he incurs this disqualification subsequent to the appointment.

Since in term of section 141(3)(e) of Companies Act, 2013 PQ & Co. is not a person or a firm who, whether directly or indirectly, has business relationship with the company, or its

subsidiary, or its holding or associate company or subsidiary of such holding company or associate company of such nature as may be prescribed, the auditor shall not be

disqualified to act as an auditor and shall not required to vacate his office of auditor.

(c) The Comptroller and Auditor-General of India shall within 60 days from the date of

receipt of the audit report have a right to,

(i) conduct a supplementary audit under section 143(6)(a), of the financial statement of the company by such person or persons as he may authorize in this behalf; and for the purposes of such audit, require information or additional information to be

furnished to any person or persons, so authorised, on such matters, by such person or persons, and in such form, as the Comptroller and Auditor-General of India may

direct; and

(ii) comment upon or supplement such audit report under section 143(6)(b): It may

be noted that any comments given by the Comptroller and Auditor-General of India


upon, or supplement to, the audit report shall be sent by the company to every person entitled to copies of audited financial statements under sub-section (1) of section 136

i.e. every member of the company, to every trustee for the debenture-holder of any debentures issued by the company, and to all persons other than such member or trustee, being the person so entitled and also be placed before the annual general

meeting of the company at the same time and in the same manner as the audit report.

In view of above provisions, the approach of directors of Sunlight Ltd. is not correct. They are required to mandatory send the Supplementary Audit Report and comments of C&AG to every member of the company etc. as prescribed and also be placed

before the annual general meeting of the company in the same manner as in case of audit report. Since in the given case neither the report has been distributed nor discussed in the Annual General Meeting, the directors of the company will be liable

for contravention of aforesaid sections.

Question 5

(a) The volatility, unpredictability and pace of fast changes that exists in the automated

environment today is far greater than in the past and consequently it throws more risk to business which requires them to have a need to continuously manage such risks. State

various risks which an enterprise may have to face and manage.

Or

A professional accountant is often required to give certificates or report for special

purposes required by various authorities and statute and he needs to take careful evaluation of such engagement. However, issuing such special purpose certificates or reports has some inherent limitations which could limit his review and evaluation.

Enumerate some of the limitations associated with such special purpose report or certi ficates. (5 Marks)

(b) In the course of your tax audit assignment u/s 44AB of the Income Tax Act, 1961 of Dream Bank Ltd., you have instructed your assistant to find out receipt of capital nature which

might not have been credited to Profit & Loss Account and needs to be reported in Para 16(e) of Form 3CD. Your audit assistant seeks your guidance in reporting the same. Specify any four illustrative examples of such receipt. (4 Marks)

(c) You have been appointed as a forensic accountant in M/s Secure Ltd. to carryout various

analysis as a part of your assignment to arrive at a particular result. Specify the various analysis which might have to be carried out by you to arrive at your resul t. (5 Marks)

Answer

(a) Various Risk: Businesses today operate in a dynamic environment. The volatili ty, unpredictability and pace of changes that exist in the business environment today is far

greater than in the past. Some of the reasons for this dynamic environment include globalization, use of technology, new regulatory requirements, etc. Because of this dynamic environment the associated risks to business have also increased and companies


have a need to continuously manage risks.

Examples of risks include:

• Market Risks;

• Regulatory & Compliance Risks;

• Technology & Security Risks;

• Financial Reporting Risks;

• Operational Risks;

• Credit Risk;

• Business Partner Risk;

• Product or Project Risk;

• Environmental Risks.

OR

(a) Inherent Limitations: A practitioner is expected to provide either a reasonable assurance

(about whether the subject matter of examination is materially misstated) or a limited assurance (stating that nothing has come to the practitioner’s attention that causes the practitioner to believe that the subject matter is materially misstated) since it is difficult to

reduce engagement risk to zero due to inherent limitations of the audit. The inherent

limitations could arise from:

(i) the nature of financial reporting;

(ii) the use of selective testing;

(iii) the inherent limitations of internal controls;

(iv) the fact that much of the evidence available to the practitioner is persuasive rather

than conclusive;

(v) the nature of procedures to be performed in a specific situation;

(vi) the use of professional judgment in gathering and evaluating evidence and forming

conclusions based on that evidence;

(vii) in some cases, the characteristics of the underlying subject matter when evaluated

or measured against the criteria; and

(viii) the need for the engagement to be conducted within a reasonable period of time and

at a reasonable cost.

Therefore, whenever a practitioner is required to give a “certificate” or a “report” for special

purpose, the practitioner needs to undertake a careful evaluation of the scope of the engagement, i.e., whether the practitioner would be able to provide reasonable assurance

or limited assurance on the subject matter.


(b) Capital Receipts which, if not credited to the profit and loss account, are to be stated

under clause 16(e) of Form 3CD:

(a) Guidance for reporting capital receipts: Capital receipts are not generally credited

to profit and loss account hence the auditor should take enough care to check out

any transaction generating the capital receipts by –

• Enquiring whether the assessee is in receipt of any amount of capital nature during the previous year.

• Going through the financial statements, in particular reserve account, to ascertain whether the assessee has received any such receipts and credited them directly to reserve account.

• Enquiring whether the assessee has credited such receipts to profit and loss account.

• Checking that any such receipts is accounted for in terms of method of accounting followed by the assessee.

(b) Illustrative examples of capital receipts: The following is an illustrative list of capital receipts which, if not credited to the profit and loss account, are to be stated

under clause 16(e) of Form 3CD-

(i) Capital subsidy received in the form of Government grants, which are in the

nature of promoters’ contribution i.e., they are given with reference to the total investment of the undertaking or by way of contribution to its total capital outlay.

For e.g., Capital Investment Subsidy Scheme.

(ii) Government grant in relation to a specific fixed asset where such grant is shown

as a deduction from the gross value of the asset by the concern in arriving at its

book value.

(iii) Compensation for surrendering certain rights.

(iv) Profit on sale of fixed assets/investments to the extent not credited to the profi t

and loss account.

(c) Perform the Analysis: The actual analysis performed will be dependent upon the nature

of the assignment and may involve:

(i) calculating economic damages;

(ii) summarizing a large number of transactions;

(iii) performing a tracing of assets;

(iv) performing present value calculations utilizing appropriate discount rates;

(v) performing a regression or sensitivity analysis;

(vi) utilizing a computerized application such as a spread sheet, data base or computer

model; and


(vii) utilizing charts and graphics to explain the analysis.

Question 6

(a) Pearl Ltd. is an exporter of precious and semi-precious stones. The turnover of the company is ` 150 crore, out of which ` 105 crore is from export business and remaining ` 45 crore from domestic sales. Amount received from export business is all in foreign

currency. Directors of Pearl Ltd. are of the opinion that cost audit is not applicable to their company as maximum revenue has been generated from export business. Give your opinion. (4 Marks)

(b) You have been appointed as an auditor of ABC Insurance Co. Ltd. and found that M/s PQR

Ltd. got their Plant & Machinery insured on 01-10-2018 but the amount of premium has been paid by them on 15-10-2018. In the meanwhile, on 10-10-2018 a fire has broken out in the factory and the company filed a claim for damages of plant & machinery with the

Insurance company. Advise the insurance company in this regard. (5 Marks)

(c) CA Sant, a newly qualified professional with certificate of practice, approached CA Pant, the auditor of his father's company M/s Max Ltd., to allow him to have some practical and professional knowledge and experience in his firm before he can set up his own

professional practice. CA Pant allowed him to sit in his office for 6 month and allotted a small chamber with other office infrastructure facility. In the course of his association with CA Pant' s office, he used to provide tax consultancy independently to the client of the firm

and also filed few IT and GST return and represented himself before various tax authorities on behalf of the firm although no documents were signed by him. During his association in CA Pant's office, he did not get any salary or share of profit or commission but only

re-imbursement of usual expenses like conveyance, telephone etc. was made to him. After the end of the agreed period, he was given a lump sum amount of ` 3,00,000 by CA Pant

for his association out of gratitude.

Examine the case in the light of code of professional misconduct. (5 Marks)

Answer

(a) Cost Audit Rules not to apply in certain cases: The requirement for cost audit shall not

be applicable to a company whose revenue from exports, in foreign exchange, exceeds seventy-five per cent of its total revenue, which is operating from SEZ and which is engaged in the generation of electricity for captive consumption through captive generating

plant. (as per Rule 3 of the Companies (Cost Records and Audit) Rules, 2014).

In the instant case, Pearl Ltd. is an exporter of precious and semi-precious stones and the turnover of the company is rupees 150 crore out of which rupees 105 crore i.e. 70% is from export business and remaining rupees 45 crore i.e. 30% from domestic sales. It is neither

operating from SEZ nor involved in captive power generation.

Thus, opinion of director is not tenable as revenue from exports in foreign exchanges is below prescribed limit. Therefore, cost audit is applicable on Pearl Ltd. as per Rule 3 of the Companies (Cost Records and Audit) Rules, 2014. Pearl Ltd. has to appoint cost


auditor to get the cost accounts of the company audited.

(b) No Risk Assumption without Premium: No risk can be assumed by the insurer unless the premium is received. According to section 64VB of the Insurance Act, 1938, no insurer

should assume any risk in India in respect of any insurance business on which premium is ordinarily payable in India unless and until the premium payable is received or is guaranteed to be paid by such person in such manner and within such time, as may be

prescribed, or unless and until deposit of such amount, as may be prescribed, is made in advance in the prescribed manner. The premium receipt of insurance companies carrying on general insurance business normally arise out of three sources, viz., premium received

from direct business, premium received from reinsurance business and the share of co-

insurance premium.

Therefore, in the instant case, PQR Ltd. signed the insurance documents on 01.10.2018 but did not paid the premium. In case of non-payment of insurance premium if any

accidental incident occurs insurance company will have no liability to pay claim. In the given case, fire is occurred on 10 th October, 2018 in factory and premium has been paid on 15 October 2018, the ABC Insurance Company Ltd. will not be liable for claim for

damages of plant and machinery.

(c) Clause (1) of Part I of the First Schedule to the Chartered Accountants Act, 1949 states that a chartered accountant in practice shall be deemed to be guilty of professional misconduct if he allows any person to practice in his name as a chartered accountant

unless such person is also a chartered accountant in practice and is in partnership with or

employed by him.

The above clause is intended to safeguard the public against unqualified accountant practicing under the cover of qualified accountants. It ensures that the work of the

accountant will be carried out by a Chartered Accountant who may be his partner, or his

employee and would work under his control and supervision.

In the instant case, CA Pant allowed CA Sant (who is a newly qualified CA professional with COP) to sit in his office for 6 months, and allowed him to provide tax consultancy

independently to his firm’s clients, filing of some IT and GST Returns. He also allowed him to appear before various tax authorities on behalf of his firm. CA Sant was only reimbursed with his usual expenses and was not paid any salary or share of profit for the same.

However, after the end of agreed period he was given a lump-sums of rupees 3,00,000 for

his association out of gratitude.

Thus, in the present case CA. Pant will be held guilty of professional misconduct as per Clause (1) of Part I of First Schedule to the Chartered Accountants Act, 1949 as he allowed

CA Sant to practice in his name as Chartered accountant and CA Sant is neither in

partnership nor in employment with CA. Pant.

PAPER- 4 – CORPORATE AND ECONOMIC LAWS

Question No. 1 is compulsory.

Answer any four out of the remaining five questions

Question 1

(a) Two (2) out of Ten (10) directors on the board of XYZ Limited have retired by rotation at an Annual General Meeting. These two (2) vacancies or place of retiring directors is not filled up and the meeting has also not expressly resolved ‘not to fill the vacancy’. Since

the AGM could not complete its business, it is adjourned to a later date. Neither place of retiring directors could be filled up at this adjourned meeting nor did the meeting expressly

resolve 'not to fill the vacancy'.

Analyse & apply relevant provisions of the Companies Act, 2013 and decide:

(i) Whether in such a situation the retiring directors shall be deemed to have been

reappointed at the adjourned meeting?

(ii) What will be your answer in case at the adjourned meeting, the resolutions for

reappointment of these directors were lost?

(iii) Whether such directors can continue in case the directors do not call the Annual General Meeting? (8 Marks)

(b) M/s Tristar Ltd. (an unlisted public limited company) with the annual turnover of ` 700

crores entered into a contract of purchasing of raw material from M/s. PTC Pvt. Ltd. during the year 2018. M/s Tristar Ltd. appointed Mr. Sudhir, a Director of the Company, to act in this deal of transaction on behalf of the company. Mr. Sudhir is also one of the member of

M/s PTC Pvt. Ltd. Mr. Sudhir settled the said transaction of purchase for ` 85 crores and entered into the contract. After a few transactions executed under the contract, the Board of M/s Tristar Ltd. finds degradation in the quality of the raw material supplied. Further, in

a board meeting this contract was challenged considering it as a related party transaction and in contravention to section 188 (1) of the Companies Act, 2013 read with rules framed thereunder. During the period Mr. Sudhir was appointed as director in a newly incorporated

company M/s Raaga Limited.

In the light of the given facts, examine the following situations as per the Companies Act,

2013.

(i) What is the legal position of the contract entered between M/s Tristar Ltd. through its

director Mr. Sudhir, and M/s. PTC Pvt. Ltd.?

(ii) Is there any contravention of section 188 (1)? If yes, then state the liability of the

wrongdoer.

(iii) Comment upon the appointment of Mr. Sudhir as a Director in M/s Raaga Limited.

(6 Marks)

PAPER – 4 : CORPORATE AND ECONOMIC LAWS 69

Answer

(a) In accordance with the provision of the Companies Act, 2013, as contained in section

152(7)(a) which provides that if at the annual general meeting at which a director retires and the vacancy is not so filled up and the meeting has not expressly resolved not to fill the vacancy, the meeting shall stand adjourned to same day in the next week, at the same

time and place, or if that day is a national holiday, till the next succeeding day which is not

a holiday, at the same time and place.

Section 152(7)(b) further provides that if at the adjourned meeting also, the place of the retiring is not filled up and that meeting also has not expressly resolved not to fill the

vacancy, the retiring director shall be deemed to have been re-appointed at the adjourned meeting, unless at the adjourned meeting or at the previous meeting a resolution for the reappointment of such directors was put and lost or he has given a notice in writing

addressed to the company and the Board of Directors expressing his desire not to be re-

elected or he is disqualified.

Therefore, in the given circumstances answer to the questions as asked shall be:

(i) In the first case, applying the above provisions, the retiring directors shall be deemed

to have been re-appointed.

(ii) In the second case, where the resolutions for the reappointment of the retiring

directors were lost, the retiring directors shall not be deemed to have been re-

appointed.

(iii) Section 152(6)(c) states that 1/3rd of the rotational directors shall retire at every AGM. They retire at the AGM and at its conclusion. Hence, they will retire as soon as the

AGM is held. Further, as per section 96 (dealing with annual General Meeting) of the Companies Act, 2013, every company other than a One Person Company shall in each year hold an Annual General Meeting. Hence, it is necessary for the company

to hold the AGM, whereby these directors will be liable to retire by rotation.

Further Section 97 states that, if any default is made in holding the annual general meeting of a company under section 96, the Tribunal may, on the application of any member of the company, call, or direct the calling of, an annual general meeting of

the company. Such general Meeting shall be deemed to be an annual general meeting

of the company under this Act.

(b) (i) As per the given facts, Mr. Sudhir, a director of M/s Tristar Ltd., was also a member of M/s PTC private Ltd. with which he entered into contract for the purchase of the

raw material. In terms of section 2(76) of the Companies Act, 2013, M/s Tristar Ltd.

is a related party to M/s PTC private Ltd..

Also, as per section 188(1) of the Act, no company shall enter into any contract or arrangement with a related party with respect to the transaction related to the sale,

purchase or supply of any goods or materials or made through an appointment of any agent for purchase or sale of goods, materials, services or property, except with

http://ebook.mca.gov.in/Actpagedisplay.aspx?PAGENAME=17479


the consent of the Board of Directors given by a resolution at a meeting of the Board and subject to such conditions as given in rule 15 of the Companies (Meetings of

Board and its Powers) Rules, 2014 .

However, no contract or arrangement, in the case of a company having a paid-up share capital of not less than such amount, or transactions not exceeding such sums, as prescribed in Rule 15(3) of the Companies (Meetings of Board and its Powers)

Rules, 2014, shall be entered into except with the prior approval of the company by

a resolution. [First proviso to section 188(1)]

A company shall not enter into transaction/s related to sale, purchase or supply of any goods or materials, directly or through appointment of agent, where the

transaction or transactions to be entered into is amounting to 10% or more of the turnover of the company or rupees 100 crore, whichever is lower, except with the prior

approval of the company by a resolution.

Since in the given case, M/s Tristar Ltd. has turnover of ` 700 crore. The transaction

of purchase settled by Mr. Sudhir, is ` 85 crore which is more than 10% of the turnover (i.e., 700 crore x10/100= 70 crore). Neither M/sTristar Ltd. had taken prior approval of the company by a resolution, nor it was ratified by the shareholders at a meeting

within three months from the date on which such contract or arrangement was entered

into. [Section 188(3)]

(i) So, in terms of the above provision, this contract is of voidable nature at the option of the shareholders according to section 188(3) of the Companies Act,

2013.

(ii) Contravention of Section 188(1): Yes, as per the answer given under Part (i),

there is a contravention of section 188(1).

Following is the liability of the Sudhir, Director of M/s Tristar Ltd: Section 188(3) specifies, if the contract or arrangement is with a related party to any

director, or is authorised by any other director, the directors concerned shall

indemnify the company against any loss incurred by it.

Therefore, M/s Tristar Ltd, may proceed to recover loss. Section 188 (4) provides that it shall be open to the company to proceed against a director or any other

employee who had entered into such contract or arrangement in contravention of the provisions of this section for recovery of any loss sustained by it as a

result of such contract or arrangement.

Penalty: Any director or any other employee of a company, who had entered

into or authorised the contract or arrangement in violation of the provisions of this section shall be punishable with fine which shall not be less than 25,000

rupees but which may extend to 5 lakh rupees.

(iii) Appointment of Director in M/s Raaga Ltd.: As per section 164(1)(g) of the

Companies Act,2013, a person shall not be eligible for appointment as a director


of a company, where he has been convicted of the offence of dealing with related party transactions under section 188 at any time during the last preceding 5

years;

In the given instance, Mr. Sudhir was not convicted rather only the contract was challenged in the board meeting considering it as a related party transaction which is in contravention to section 188(1) and may attract penalty in terms of

Section 188(5) against the offence dealt with related party transaction hence

Mr. Sudhir remains eligible to be appointed as a director of M/s Raaga Ltd.

Question 2

(a) (i) A group of shareholders consisting of 30 members decide to file a petition before the Tribunal for relief against oppression and mismanagement by the Board of Directors of M/s. Aravalli Manufacturing Company Limited having a paid up Share

Capital of ` 1 crore. The company has a total of 500 members and the group of 30 members holds one-tenth of the total paid-up share capital accounting for one-fifteenth of the issued share capital. The grievance of the group is that due to the

mismanagement by the Board of Directors, the company is incurring losses and has not declared any dividend for the past five years. In the light of the provisions of the Companies. Act, 2013, please advise the group of shareholders regarding the

admission of the peti tion and the relief thereof. (4 Marks)

(ii) A meeting of members of ABC Limited was convened as per the orders of the Court to consider a scheme of compromise and arrangement. Notice of the meeting was sent to 1000 members holding in aggregate 500000 equity shares. The meeting was

attended by 800 members holding 350000 shares. 450 members holding 240000 shares voted in favour of the scheme; 200 members holding 60000 shares voted against the scheme. The remaining 150 members abstained from voting. Explain with

reference to the provisions of the Companies Act, 2013, whether the scheme is approved by the requisi te majority. (4 Marks)

(b) A Nationalized Bank had provided a term loan of ` 20 crores to Allwell Pharma Limited at an interest rate of 12% p.a. and principal amount is payable in equal half yearly installments

of ` 2 crores in 5 years from the date of disbursement of loan. The loan is fully secured against the plant and machinery of the company. The company was regular in paying 3 half yearly installments along with the interest during the first two years. Due to recession

in the market and increased competition from multinational companies, the price of the goods manufactured by the company had fallen down and consequently the company has to close down the plant. Hence, the company failed to pay the 4th installment but it paid

the interest amount as and when due. After a period of 2 months (60 days) from the due date of the 4th installment, the Bank decided to sell the loan to an Asset Reconstruction company. It has also decided to sell a loan of ` 50 lakhs given to a farmer which is secured

against the agricultural lands. The Manager seeks your advice on the above proposals in the light of the Provisions of the SARFAESI Act, 2002. (6 Marks)


Answer

(a) (i) Section 244 of the Companies Act, 2013 provides the right to apply to the Tribunal

for relief against oppression and mis-management. This right is available only when

the petitioners hold the prescribed limit of shares as indicated below:

(1) In the case of company having a share capital, not less than 100 members of the Company or not less than one tenth of the total number of its members

whichever is less or any member or members holding not less than one tenth of the issued share capital of the company, provided that the applicant(s) have paid

all calls and other dues on the shares.

(2) In the case of company not having share capital, not less than one-fifth of the

total number of its members.

As per the facts, a group of 30 members decided to file a petition. Total number of members are 500 & one tenth of 500 will be 50 and lower of above is 50. Thus, the group of shareholders who decides to file the petition are less than

50. However, the group of 30 members holds one-fifteenth of the issued share capital which is less than the required one tenth of the issued share capital. In view of this, the group is not having requisite number of shares and shareholding

for being eligible to approach the Tribunal for relief.

Also, the shareholders may not succeed in getting any relief from the tribunal as continuous losses cannot, by itself, be regarded as oppression (Ashok Betelnut Co. P. Ltd. vs. M.K. Chandrakanth). Similarly, the failure to declare dividend or

payment of low dividends also does not amount to oppression. (Thomas Veddon

V.J. Vs. Kuttanad Rubber Co. Ltd.)

(ii) As per section 230 (6), of the Companies Act, 2013 where majority of persons at a meeting held representing 3/4th in value, voting in person or by proxy or by postal

ballot, agree to any compromise or arrangement and if such compromise or arrangement is sanctioned by the Tribunal by an order. The majority of person

representing 3/4th Value shall be counted of the following:

• the creditors, or

• class of creditors or

• members or

• class of members, as the case may be,

Usage of word “majority” in the provision is dual in nature i.e., may be taken into account in number & in value. A simple majority of those voting is sufficient. Whereas the ‘three-fourths’ requirement relates to value. The three-fourths value is to be

computed with reference to paid-up capital held by members present and voting at

the meeting.


In this case, out of 1000 members, 800 members attended the meeting and 450 members voted in favor of the scheme, thus, the requirement relating to majority in

number (i.e. more than 325) is satisfied.

Further, as per the facts, total 650 members participated in the meeting holding 3,00,000 shares. According to the provision, three-fourth of which works out to

2,25,000, while 450 members who voted for the scheme held 2, 40,000 shares.

Hence, the requirements as to the holding of 3/4 th values of shares as a majority is

also met.

Therefore, the scheme is approved by the requisite majority.

(b) The term loan sanctioned was ` 20 crore and the present balance is Rs 14 crore since 3 instalments of ` 2 crore are paid. This is more than 20 % of the total principal and interest amount as per section 31 (j). Therefore, the loan is to be treated as a financial asset and

the bank has security interest over the property as defined in the Act.

As per the provisions of the Act, for enforcement of security, there has to be a default as defined under section 2(1)(j) which requires the loan to be classified as a Non Performing Asset (NPA) in the present case, the debts are overdue by two months only which is less

than 90 days. Therefore, it is not yet classified as NPA unlike the other loan given to a

farmer as agricultural loan.

Hence, the loan given to Allwell Pharma Limited cannot be sold to an Asset Reconstruction

company.

Further the loan given to a farmer being secured against agricultural land, cannot be sold

as per the provisions of SARFAESI Act are not applicable to such assets as per section

31(j).

Question 3

(a) Info-tech Overtrading Ltd. was ordered to be compulsory wound up by an order dated 10 th March, 2019 by the Tribunal. The official liquidator who has taken control of the assets

and other records of the company has noticed that :

(i) One of the contributory whose calls are pending to be paid is about to leave India for

evading payment of calls and;

(ii) A person having books of accounts of the company his possession may abscond to

avoid examination of books of accounts in respect of the affairs of the company.

Apprehending such possibilities, Tribunal detained such contributory for next 6 month disallowing him to leave India as well as arrest & seized books of accounts from the person

which may possibly abscond to avoid examination of the affairs of the company.

Referring to the provisions of Companies Act, 2013, answer the following in current

scenario :


(i) What is the validity of Tribunal's order for detention of contributory disallowing him to

leave India?

(ii) Is it correct from Tribunal's part to arrest and seize books of accounts from the person

planning to abscond to avoid examination of books of accounts in respect of the affairs of the company? (8 Marks)

(b) (i) Mr. Dawood Moosa, a known smuggler was caught in transfer of funds illegally exporting narcotic drugs from India to some countries in Africa. State the maximum

punishment that can be awarded to him under Prevention of Money Laundering Act, 2002. (2 Marks)

(ii) Mr. Robert has been arrested for a cognizable and non-bailable offence under Part-A of the schedule punishable for a term of imprisonment for more than three years

under the Prevention of Money Laundering Act, 2002. He seeks your advice as to how can he be released on bail. Advise him. (4 Marks)

Answer

(a) According to section 301 of the Companies Act, 2013, at any time either before or after

passing a winding up order, if the Tribunal is satisfied that

• a contributory or

• a person having property, accounts or papers of the company in his possession

is about to leave India or otherwise to abscond, or is about to remove or conceal any of his property, for the purpose of evading payment of calls or of avoiding examination

respecting the affairs of the company,

the Tribunal may cause—

(a) the contributory to be detained until such time as the Tribunal may order; and

(b) his books and papers and movable property to be seized and safely kept until such

time as the Tribunal may order.

In the instant case, by taking into account the above provisions:

(i) The Tribunal’s order for detention of contributory for next 6 months disallowing him to

leave India, is valid.

(ii) It is correct from Tribunal’s part to arrest and seize books of accounts from the person

planning to abscond to avoid examination of books of accounts in respect of the

affairs of the company.

(b) (i) Paragraph 2 of Part A of the Schedule to the Prevention of Money Laundering Act, 2002, covers Offences under the Narcotic Drugs and Psychotropic Substances Act,

1985. Whereby, illegal import into India, export from India or transshipment of narcotic drugs and psychotropic substances (section 23) is covered under paragraph 2 of Part

A.


Punishment: Section 4 of the said Act provides for the punishment for Money-Laundering. Whoever commits the offence of money-laundering shall be punishable

with rigorous imprisonment for a term which shall not be less than 3 years but which may extend to 7 years and shall also be liable to fine. But where the proceeds of crime involved in money-laundering relate to any offence specified under paragraph

2 of Part A of the Schedule, the maximum punishment may extend to 10 years instead

of 7 years. Thus, in the given case, the maximum punishment may extend to 10 years.

(ii) Section 45 of the Prevention of Money Laundering Act, 2002 provides that the offences under the Act shall be cognizable and non bailable. Notwithstanding

anything contained in the Code of Criminal Procedure, 1973, no person accused of

an offence [under this Act shall be released on bail or on his own bond unless-

(i) The Public Prosecutor has been given an opportunity to oppose the application

for such release and

(ii) Where the Public Prosecutor opposes the application, the court is satisfied that

there are reasonable grounds for believing that he is not guilty of such offence

and that he is not likely to commit any offence while on bail.

In case of any person who is under the age of 16 years or in case of a woman or in case of a sick or infirm or is accused either on his own or along with other

co-accused of money-laundering a sum of less than one crore rupees may be

released on bail,if the the Special Court so directs.

In compliance to above provision, Mr. Robert can be released on bail.

Question 4

(a) (i) ABC Primex Ltd., an unlisted company is into profitable manufacturing business. It has net worth of more than ` 10 crore since preceding last four full years with net tangible assets of ` 5 crore in each of the four preceding years. Around 80% of the net tangible

assets are held in monetary assets (readily convertible into cash). It has consistent track record of declaring dividend for last 5 years. With the expansion plan, Company

plans to raise funds through Initial Public Offer (IPO). Advice the Company on:

(A) Eligibility of the Company to raise funds through IPO route.

(B) Will it be eligible for IPO if Company has changed its name to XYZ Primex Ltd.

since last 6 months and 60% of the revenue for the preceding one full year

earned by it from the activity indicated by the new name?

(C) Will your answer be different if there are any outstanding convertible securities issued by the company earlier? (4 Marks)

(ii) (A) What are the factors to be considered by the Adjudicating Officer while

adjudging the quantum of penalty under Sec. 23I of the Securities Contract (Regulation) Act, 1956? (2 Marks)


(B) Define the term "Derivative" as appearing in the Securities Contract (Regulation) Act, 1956. (2 Marks)

(b) After giving a reasonable opportunity of being heard, Central Government cancelled the

certification of registration of Toastea Ltd, a company registered under FCRA on the ground of public interest 2.5 years have passed since such cancellation. Company has submitted its written declaration not to involve in such activity again and request to restore

the registration. Advise Toastea Ltd. on its eligibility for re-registration or grant of prior permission. Also state the circumstance under which Government can cancel the certificate of registration granted to a person under the Foreign Contribution (Regulation)

Act, 2010. (6 Marks)

Answer

(a) (i) Under SEBI (ICDR) Regulations, 2009 guidelines have been provided that regulate

the public issues by unlisted companies.

(A) Eligibility of company to raise funds through IPO route: Following are the

particulars given in the question:

(i) The company have a net tangible assets of ` 5 crore in each of the four preceding years. Around 80% of the net tangible assets are held in

monetary assets (readily convertible into cash). This does not satisfy the requirement of having a net tangible assets of atleast ` 3 crore in each, of the preceding three full years (of twelve months each), of which not more

than 50% are held in monetary assets.

(ii) It has net worth of more than ` 10 crore since preceding last four full years. This satisfies the requirement of having net worth of atleast ` 1 crore in

each of the preceding 3 full years (of twelve months each).

(iii) *It has consistent track record of declaring dividend for last 5 years. This

satisfies the requirement.

Since, the company is not complying with all the conditions given in the said

regulation, ABC Primex Ltd. is not eligible to raise funds through IPO route.

(B) If company has changed its name to XYZ Primex Ltd. since last 6 months and 60% of the revenue for the preceding one full year earned by it from the activi ty

indicated by the new name, the company is eligible for IPO as it has complied with the requirement of regulation regarding obtaining of minimum fifty percent

of the revenue for the preceding one full year (Before change of name).

Note: It may be presumed that part (B) is not an independent question and to

be replied in relation to part (A), there in such case, the company is not eligible for IPO as the company has not complied with the requirements of raising the

fund through IPO.


(C) If there are any outstanding convertible securities issued by the company earlier,

the company shall not make an IPO.

*The point “track record of distributable profits which deals with the declaration of

dividends” asked in the question is not in existence due to change in the SEBI (ICDR) Regulation, 2009 vide SEBI (ICDR) fourth amendment Regulation, 2012. Though it’s

not effecting on the answering of the question.

(ii) (A) Factors to be taken into account by Adjudicating Officer [Section 23J of

Securities Contract (Regulation) Act, 1956]

While adjudging the quantum of penalty under section 23-I, 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 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.

The power of the Adjudicating Officer to adjudge the quantum of penalty levied under sections 23A to 23C shall be and shall always be deemed to have

exercised under the provisions of this section.

(B) According to section 2(ac) of the Securities Contract (Regulation) Act, 1956,

Derivative includes –

i. a security derived from a debt instrument, share, loan, whether secured or unsecured, risk instrument or contract for difference or any other form of

security;

ii. a contract which derives its value from the prices, or index of prices, of

underlying securities.

iii. Commodity derivatives;

iv. Such other instruments as may be declared by the Central Government to

be derivatives.

(b) Restoration of Registration: As per section 14(3) of the Foreign Contribution (Regulation) Act, 2010, any person whose certificate has been cancelled under this section shall not be

eligible for registration or grant of prior permission for a period of three years from the date

of cancellation of such certificate.

In the instant case, Toastea Ltd. is not eligible for re-registration or grant of prior permission as only 2.5 years have passed since such cancellation. So, requirement of 3 years of

cooling period from the date of cancellation of such certificate for re-registration is not

complied with.


Circumstances for cancellation of certificate of registration [Section 14(1) of the

Foreign Contribution (Regulation) Act, 2010]

(i) The Central Government may, by an order, cancel the certificate if —

(a) the holder of the certificate has made a statement in, or in relation to, the application for the grant of registration or renewal thereof, which is incorrect or false; or

(b) the holder of the certificate has violated any of the terms and conditions of the certificate or renewal thereof; or

(c) in the opinion of the Central Government, it is necessary in the public interest to cancel the certificate; or

(d) the holder of certificate has violated any of the provisions of this Act or rules or order made there under; or

(e) if the holder of the certificate has not been engaged in any reasonable activi ty in its chosen field for the benefit of the society for two consecutive years or has become defunct.

Question 5

(a) Gulmohar Ltd. is a company registered in India for last 5 years. Since last 2 financial years, it has not been carrying on any business or operations and has not filed financial statements and annual returns saying that it has not made any significant accounting

transaction during the last two financial years. Considering the current situation, Directors of the Company is contemplating to apply to Registrar of Companies to obtain status of

dormant or inactive company. Advise them on :

(i) Whether Gulmohar Ltd. is eligible to apply to Registrar of Companies to obtain

dormant status for the company?

(ii) Will your answer be different if Gulmohar Ltd is continuing payment of fees to Registrar of Companies and payment of rentals for its office and accounting records

for last two financials years?

(iii) Is special resolution in general meeting a pre-requisite to make an application to

Registrar of Companies for obtaining the status of dormant company?

(iv) What will be your answer if it is found after making an application of dormant company to Registrar of Companies that an investigation is pending against the company which was ordered 6 months ago? (8 Marks)

(b) The following particulars relate to M/s. Star House (P) Limited which has gone into

Corporate Insolvency Resolution Process (CIRP):

S. No. Particulars Amount in Rupees

1. Amount realized from the sale of liquidation of Assets 7,00,000


2. Secured Creditors who has relinquished the security 2,50,000

3. Unsecured Financial Creditors. 2,00,000

4. Income Tax Payable within a period of two years preceding the liquidation commencement date.

25,000

5. Cess Payable to State Government within a period of one year preceding the liquidation commencement date.

10,000

6. Fees payable to resolution professional. 37,500

7. Expenses incurred by the resolution professional in running the business of M/s. Star House (P) Limited on going concern.

17,500

8. Workmen salary payable for a period of thirty months preceding the liquidation commencement date. The workmen salary is equal per month.

1,50,000

9. Equity Shareholders. 5,00,000

State the priority order in which the liquidator shall distribute the proceeds under the Insolvency & Bankruptcy Code, 2016. (6 Marks)

Answer

(a) (i) According to section 455 of the Companies Act, 2013, an inactive company may make an application to the Registrar in such manner as may be prescribed for obtaining the

status of a dormant company.

Here, “inactive company” means a company which has not been carrying on any

business or operation, or has not made any significant accounting transaction during the last two financial years, or has not filed financial statements and annual returns

during the last two financial years.

Gulmohar Ltd., since from last two years is not carrying on business or operations

and has not filed financial statements and annual returns saying it has not made any significant accounting transaction during the last two financial years. Thus, it falls within the definition of inactive company as stated above and hence is eligible to apply

to Registrar of Companies to obtain the status of Dormant company.

(ii) According to Explanation to section 455, “significant accounting transaction” means

any transaction other than—

(1) payment of fees by a company to the Registrar;

(2) payments made by it to fulfill the requirements of this Act or any other law;

(3) allotment of shares to fulfill the requirements of this Act; and

(4) payments for maintenance of its office and records.

Thus, Gulmohar Ltd. is still eligible to apply to the Registrar of Companies to obtain the status of Dormant company even if it has continued ‘payment of fees to Registrar


of Companies and payment of rentals for its office and accounting records’ for last two years, as these transactions have been kept outside the purview of significant

accounting transactions.

(iii) According to the Rule 3 of the Companies (Miscellaneous) Rules, 2014, a company may make an application in prescribed form to the Registrar for obtaining the status of a Dormant Company in accordance with the provisions of section 455 after passing

a special resolution to this effect in the general meeting of the company or after issuing a notice to all the shareholders of the company for this purpose and obtaining

consent of at least 3/4th shareholders (in value).

Thus, special resolution is a prerequisite to make an application to Registrar of

Companies for obtaining the status of dormant company.

(iv) According to the Rule 3 of the Companies (Miscellaneous) Rules, 2014, a company shall be eligible to apply under this rule only, if no inspection, inquiry or investigation

has been ordered or taken up or carried out against the company.

According to section 455(6), the Registrar shall strike off the name of a dormant

company from the register of dormant companies, which has failed to comply with the

requirements of section 455.

In the given case, Gulmohar Ltd. was not eligible to apply for the status of a dormant company as an investigation was pending against the company which was ordered 6

months ago. But since, it has already made an application and then it came to the light about the pending investigation against the company, the Registrar shall not register it as a dormant company and if already registered as a dormant company,

strike off the name of a dormant company from the register of dormant companies as

the company has contravened the necessary requirements.

(b) The priority order in which the liquidator shall distribute the proceeds will be as

under:

Particulars Amount (in ` )

Amount realised from the sale of liquidation of assets 7,00,000

Less: (i) Fees payable to resolution professional

(ii) Expenses incurred by the resolution professional in running the business of M/s Star House (P) Ltd. on going concern

37,500

17,500

(55,000)

Balance available 6,45,000

Less: (i) Secured creditors who has relinquished the

security

(ii) Workmen salary payable for a period of 24 months preceding the liquidation commencement date [1,50,000*(24/30)]

2,50,000

1,20,000

(3,70,000)


Balance available 2,75,000

Less: Unsecured Financial Creditor 2,00,000 (2,00,000)

Balance available 75,000

Less: (i) Income tax payable

(ii) Cess payable to State Government

25,000

10,000

(35,000)

Balance available 40,000

Less: Balance Workmen salary payable (apart for a period of 24 months preceding the liquidation commencement date) [1,50,000 – 1,20,000]

30,000 (30,000)

Balance Available for equity shareholders 10,000

Question 6

(a) M/s Bright Motors (P) Limited at the Annual General Meeting (AGM) held on 30.09.2016

appointed Mr. Anmol as a Non-Executive Director on the board of the company for a period of three years. On 2nd October, 2017 Mr. Anmol suffered a severe heart failure and expired. The board of directors of the company on 16 th October, 2017 appointed Mr. Prateek to fill

the casual vacancy so created. The appointment of Mr. Prateek was made for a term of three years by the board. Subsequently at the AGM held on 29-09-2018 Mr. Prateek's appointment was not proposed or approved as the board was of the view that it is not

required. But the CFO of the company is of the opinion that the board of directors have contravened the provisions of the Companies Act, 2013 in respect of non-approval of the appointment of Mr. Prateek and his office tenure. Decide. (4 Marks)

OR

The following information is provided in respect of M/s Fortune Limited under three different

case scenarios on the borrowing powers of the Board of Directors of the company. Mr. Murli, the CFO seeks your advice with explanations as to the nature of resolution which needs to be passed under each of the case scenarios as per the provisions of section 180

(1) (c) of the Companies Act, 2013. Detailed workings should form part of your answer.

Particulars Case I

(` in Crores)

Case ll

(` in Crores)

Case III

(` in Crores)

Equity Share Capital (Paid- up) 150 150 150

Preference Share Capital (Paid-up) 50 50 50

Securities Premium Account 50 50 50

Free Reserves 20 20 20

Total: 270 270 270


Working Capital Loan (repayable on demand-Existing) from Sigma Capital Limited

50 50 50

Cash Credit Limit from a scheduled bank (repayable on

demand-Existing) 120 120 120

6 months loan for purchase of Plant & Machinery from scheduled bank (proposed)

30 40 130

24 months loan for purchase of Plant & Machinery from scheduled bank (proposed)

10 20 150

Total 210 230 450

(4 Marks)

(b) Mr. Dhruv is a Director of M/s. LT Limited and XT Limited respectively. M/s. LT Limited did not file its financial statements for the year ended 31st March, 2016, 2017 & 2018

respectively with the Registrar of Companies (ROC) as mandated under the Companies Act, 2013. M/s. LT Limited also did not pay interest on loans taken from a public financial institution from 1st April, 2017 and also failed to repay matured deposits taken from public

on due dates from 1st April, 2017 onwards.

Answer the legality of the following in the light of the relevant provision of the Companies

Act, 2013 :

(i) Whether Mr. Dhruv is disqualified under Companies Act, 2013 and if so, whether he can continue as a Director in M/s LT Limited? Further can he also seek reappointment

when he retires by rotation at the AGM of M/s. XT limited scheduled to be held in

September, 2019?

(ii) Mr. Dhruv is proposed to be appointed as an Additional Director of M/s. MN Limited in June 2019. Is he eligible to be appointed as an Additional Director in M/s. MN

Limited? Decide. (4 Marks)

(c) (i) Who is a "Reporting Entity" under the Prevention of Money Laundering Act, 2002 and what are the obligations cast on them under Sec. 12 of the Act? The Bank account of Amar has been attached by the order of an Assistant Director for a period of 180

days. The lawyer of Amar objected to this attachment. Decide the validity of the attachment. (3 Marks)

(ii) Continental Rubber Limited is a supplier of raw materials to Smooth Latex Limited. It filed a petition before the NCLT for the recovery of ` 10,00,000 from Smooth Latex

Limited. Smooth Latex Limited, the Corporate Debtor, has other financial creditors to the extent of ` 1,50,00,000 and they also joined together and filed petitions to NCLT. The Corporate Debtor has a total of 40 financial creditors and 2 operational creditors.

Further, all the financial creditors are having equal voting rights/shares.

Notice was issued on 1st August, 2018 for the conduct of the first meeting to be held on 5th August, 2018 at a common venue. The meeting was attended by all 40 financial


creditors and 2 operational creditors. A resolution was passed to appoint Mr. TK as a Resolution Professional. 25 of the financial creditors voted in favour of the resolution

and 10 voted against the resolution and 5 financial creditors and 2 operational creditors abstained from voting. Decide whether the resolution passed is valid? In the light of the provisions of Insolvency and Bankruptcy Code, 2016 read with rules

framed thereunder, explain the requirements of issue of notice and quorum for the conduct of the meeting. (3 Marks)

Answer

(a) According to section 161(4) of the Companies Act, 2013, if the office of any director appointed by the company in general meeting is vacated before his term of office expires in the normal course, the resulting casual vacancy may, in default of and subject to any

regulations in the articles of the company, be filled by the Board of Directors at a meeting of the Board which shall be subsequently approved by members in the immediate next

general meeting.

Provided that any person so appointed shall hold office only up to the date up to which the

director in whose place he is appointed would have held office if it had not been vacated.

In the given question, the casual vacancy caused due to death of Mr. Anmol (who was appointed by the company in AGM held on 30.9.2016, for a period of 3 years) is filled by the Board of Directors by appointing Mr. Prateek for a period of three years. However, the

appointment of Mr. Prateek for a period of three years is in contravention of above stated provisions as he can hold office only up to the date up to which Mr. Anmol would have held

office if it had not been vacated.

Further, as per the provisions of the Act, the appointment of Mr. Prateek ought to be

approved by members in the immediate next general meeting. However, the appointment of Mr. Prateek was not even proposed or approved in the AGM held on 29.9.2018. Hence, the appointment of Mr. Prateek is in contravention of the provisions of the Companies Act,

2013.Therefore, the opinion of CFO is correct.

OR

According to section 180(1)(c) of the Companies Act, 2013, the Board of Directors of a

company shall exercise the following powers only with the consent of the company by a special resolution, namely:—(c) to borrow money, where the money to be borrowed, together with the money already borrowed by the company will exceed aggregate of

its paid-up share capital, free reserves and securities premium, apart from temporary loans

obtained from the company’s bankers in the ordinary course of business:

Explanation—For the purposes of this clause, the expression “temporary loans” means loans repayable on 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-term loans of a seasonal character, but does not include loans raised for the purpose of financial

expenditure of a capital nature.

http://ebook.mca.gov.in/notificationdetail.aspx?acturl=6CoJDC4uKVUR7C9Fl4rZdatyDbeJTqg3uaDT7Vp4Q4+IKNKeCtqm/bYxIwX6In3FVuDVHQX7WpHA3l8mLvDg0g==


Particulars Case I

(` In crores)

Case II

(` In crores)

Case III

(` In crores)

Total amount of Paid up share capital, free reserves and securities premium

270 270 270

Hence, Total amount that the company can borrow without passing Special Resolution

Amount (A)

270

270

270

(a) Existing Working Capital Loan

(Repayable on demand) from Sigma Capital Limited since it is not a banker

(b) Total amount of Loan that Company needs is:

(i) 6 months loan for purchase of Plant & Machinery

(ii) 24 months loan for purchase if Plant & Machinery

Amount (B)

50

30

10

40

90

50

40

20

60

110

50

130

150

280

330

Is Amount (A)> Amount (B), then SR need

not be passed

SR not to

be passed

SR not to

be passed

SR to be

passed

Working Notes:

1. Paid up share capital includes both equity share capital and Preference share capital

2. ‘Cash credit limit from scheduled bank’ are temporary loans as they are repayable on

demand.

3. ‘6 months loan for purchase of Plant & Machinery’ is not treated as a temporary loan

as temporary loans does not include loans raised for the purpose of financial

expenditure of a capital nature.

(b) According to section 164(2) of the Companies Act, 2013, no person who is or has been a

director of a company which—

(a) has not filed financial statements or annual returns for any continuous period of three

financial years; or

(b) has failed to repay the deposits accepted by it or pay interest thereon or to redeem any debentures on the due date or pay interest due thereon or pay any dividend declared and such failure to pay or redeem continues for one year or more, shall be

eligible to be re-appointed as a director of that company or appointed in other company for a period of five years from the date on which the said company fails to

do so.




Provided that where a person is appointed as a director of a company which is in default of clause (a) or clause (b), he shall not incur the disqualification for a period

of six months from the date of his appointment.

Also, according to section 167(1)(a), the office of a director shall become vacant in

case he incurs any of the disqualifications specified in section 164;

Provided that where he incurs disqualification under sub-section (2) of section 164, the office of the director shall become vacant in all the companies, other than the

company which is in default under that sub-section.

Thus, in the light of the said provisions of the Act and the facts of the question:

(i) Yes, Mr. Dhruv is disqualified under the Companies Act, 2013, as M/s LT Limited did not file financial statements for a period of three years. Also, the M/s LT Limited has defaulted in the repayment of matured deposits taken from public

since 1st April, 2017 (i.e. the default has continued for more than one year).

Mr. Dhruv can continue as a director in M/s LT Limited as proviso to section 167(1)(a) provides that where the director incurs disqualification under section 164(2), the office of the director shall become vacant in all the companies, other

than the company which is in default under that sub-section. Whereas he has to

vacate the office of director in M/s XT Limited.

Mr. Dhruv cannot be reappointed (in the AGM to be held in September 2019) as

director in M/s. XT Limited.

(ii) Mr. Dhruv cannot be appointed as an Additional Director (in the AGM to be held

in June 2019) of M/s MN Limited because as per section 164(2), he is not eligible to be appointed in other company for a period of five years from the date of such

default.

(c) (i) “Reporting entity” means a banking company, financial institution, intermediary or a

person carrying on a designated business or profession.

Section 12 of the Prevention of Money Laundering Act, 2002 provides for the

obligation of Banking Companies, Financial Institutions and Intermediaries.

According to section 12,

1. Maintenance of records: Every reporting entity shall –

(a) maintain a record of all transactions,

(b) furnish to the Director information relating to such transactions, whether

attempted or executed, the nature and value of the said transactions;

(c) verify the identity of its clients

(d) identify the beneficial owner, if any, of its clients,

(e) maintain record of documents evidencing identity of its clients and



beneficial owners as well as account files and business correspondence

relating to its clients.

2. Maintenance of records related to the transactions (i.e. for above clause a): The

records shall be maintained for a period of five years from the date of transaction

between a client and the reporting entity.

3. Maintenance of records related to evidencing identity of its clients and beneficial owners (i.e., for above clause e): The records shall be maintained for a period

of five years after the business relationship between a client and the reporting

entity has ended or the account has been closed, whichever is later.

In the instant case, the bank account of Amar has been attached by the order of an Assistant Director for a period of 180 days. As per section 5 of the Prevention

of Money Laundering Act, 2002, attachment of a property can be done by the Director or any other officer not below the rank of Deputy Director. Here the order is issued by an Assistant Director who is below the rank of the Deputy

Director. Therefore, the objection of the lawyer of Amar is valid.

(ii) According to section 22 of the Insolvency and Bankruptcy Code, 2016,

First Meeting of Creditors

• The first meeting of the committee of creditors shall be held within seven days

of the constitution of the committee of creditors.

• The committee of creditors in the first meeting may by a majority vote of not less

than sixty-six per cent. of the voting share of the financial creditors, either

resolve to appoint the interim resolution professional as a resolution professional

or to replace the interim resolution professional by another resolution

professional.

Notice of the Meeting

The resolution professional shall give notice of each meeting of the committee of

creditors to:-

(a) Members of Committee of creditors, including the authorised representatives

referred to in sub-sections (6) and (6A) of section 21 and sub-section (5);

(b) Members of the suspended Board of Directors or the partners of the corporate

persons, as the case may be;

(c) Operational creditors or their representatives if the amount of their aggregate

dues is not less than ten per cent. of the debt.

Quorum for the Meeting

• A meeting of committee of creditors shall quorate if members of the committee

of creditors representing at least thirty three percent of the voting rights are


present either in person or by video/audio means.

• If the requisite quorum for committee of creditors is not fulfilled the meeting

cannot be held and the meeting shall automatically stand adjourned at the same

time and place on the next day.

• The adjourned meeting shall quorate with the members of the committee

attending the meeting.

As per the facts of the question and the provisions of law:

(1) The first meeting of committee of creditors was validly held within three days of

the constitution of the committee of creditors.

(2) The requisite quorum was present in the meeting as all 40 financial creditors

attended the meeting.

(3) The Act requires that not less 66% of the financial creditors shall resolve to appoint resolution professional. However, in the given case 71.4% [(25/35)* 100]

voted in favour of Mr. TK. Hence, the said appointment is valid.

paper 1 : financial reporting · 3. it can be inferred from note 3 that the deferred tax...

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