Model Test Paper - 1 CS Professional Programme Module - I Paper - 3 (New Syllabus) Corporate Restructuring, Valuation and Insolvency PART A

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1 Model Test Paper - 1 CS Professional Programme Module - I Paper - 3 (New Syllabus) Corporate Restructuring, Valuation and Insolvency PART A 1. (a) What is the difference between compromise and arrangement? Compromise and Arrangement The word arrangement means reorganization of share capital of the company by consolidation of shares of different classes or division into different classes of shares or both. On the other hand compromise presupposes the existence of a dispute which it seeks to settle. The word arrangement has a wider meaning when compared to compromise. Arrangement may include reorganization of the share capital, takeover of shares of one company by another. (b) The scheme of amalgamation is to be prepared by the companies which have arrived at consent to merge. List out the key clauses to be covered in a scheme of amalgamation. The scheme should be suitably drafted and should cover the following points: 1. Details of transferor & transferee companies. 2. Terms of transfer of assets & liabilities from transferor to transferee. 3. Appointed date of the scheme. 4. Effective date of the scheme. 5. Details as to the share capital of transferor and transferee company. 6. Exchange ratio. 7. Purchase consideration in shares, cash etc. 8. Terms regarding payment of dividend and its distribution. 9. Employees status after merger of two companies. 10. Details regarding income tax dues, contingencies etc. 3.1

2 3.2 Solved Scanner CS Prof. Prog. M-I Paper 3 (New Syllabus) 11. Details regarding cost, expenses to be borne by amalgamating or amalgamated company. 12. Other relevant terms & conditions. (c) The Tribunal is duty-bound to ascertain the bonafide of a scheme. The Tribunal will not act merely as a rubber stamp while sanctioning a scheme. When would the Tribunal not sanction a scheme? Support your answer with relevant case law. Yes, the Tribunal is duty bound to ascertain the bonafide of a scheme. While sanctioning the scheme of amalgamation the Tribunal shall look into the fairness of the scheme. In case of Miheer H. Mafatlal V/s Mafatlal Industries Ltd. the Supreme Court held that the Tribunal must see that the scheme as a whole is just, fair & reasonable. Apart from this, the Supreme Court rules out that Tribunal must ensure the following: That all statutory procedures are complied with. That all requisite meetings were held and conducted. The majority has voted in scheme of amalgamation. That scheme does not violate any provisions of law. That, there is no coercion on minority. That the scheme as a whole is just, fair and reasonable from the point of view of prudent men of business, taking a commercial decision, beneficial to the class represented by them. Thus, the Tribunal in each case is duty bound to check the bonafide of scheme. The Tribunal should not act as rubber stamp just because the statutory majority has approved the scheme and there is no opposition to it. It must scrutinise the scheme to find out whether it is reasonable arrangement and can be regarded as beneficial to those who are likely to be affected by it. (d) Section 230 is a boon to the corporate restructuring. Critically examine the statement and discuss the relevant provisions relating

3 Model Test Paper 3.3 to corporate restructuring. (4 marks) Corporate restructuring is a term of wider importance and cover in its ambit restructuring or reorganising or financial restructuring of any organisation. Section 230 of the Companies Act is surely a boon for corporate restructuring. Section 230 is a complete code in itself and constitutes a single window clearance system. The said section gives enormous powers to the Tribunal to sanction the scheme of arrangement or compromise. In the case of Oceanic Steam Navigation Co. it was held that Section 230 contemplates a compromise between a company and its creditors or any class of them, or its members or class of them and also provides a mechanism whereby such a compromise or arrangement may be binding on other persons too. Following persons can make application under Section 230 to the Tribunal for the purpose of calling meeting of creditors/members as the case may be with the company for compromise and arrangement. 1. The Company 2. Creditor/Member 3. Liquidator in case of the company being wound up. 2. (a) Aastha Ltd. amalgamated with Magic Ltd. which was 15 days old company. An objection was raised that since Aastha Ltd. is a new company having no assets and liabilities, the amalgamation should not be allowed. Whether the objection is tenable? Discuss in the light of case law. There is no bar on a company to amalgamate with a newly formed company under any provisions of the Companies Act. [Apco Industries Ltd. (1996) 86 Comp. Cas 457(Guj)]. So in the above question Astha Ltd. can amalgamate with Magic Ltd. which is just 15 days old company.

4 3.4 Solved Scanner CS Prof. Prog. M-I Paper 3 (New Syllabus) (b) Explain funding through swaps or stock to stock merger. Funding through swaps or stock to stock mergers. The swaps or stock to stock merger takes place when the holders of target company's stock receives shares of the acquiring company stock. Under this type of merger, the payment is made to the holder of company's share in the form of shares & not in cash. A merger arbitrage specialist will sell the acquiring company's stock short and will purchase a long position in the target company, using the same ratio as that of the proposed transaction. (c) For a merger, it is the shareholders who decide whether the company will merge with another company or not. There is no hostile process/method to force merger by the other company. However, the Companies Act, 2013 empowers someone who can force amalgamation of more than one company in public interest. You are required to answer the following: (i) Which authority can force the merger? (ii) What is the underlying situation for that? (iii) What is the remedy in the hands of the affected persons? (iv) (v) (i) (ii) How is it implemented? What are the pre-conditions in case of amalgamation of banks? (1 mark each) Central Government has special powers under section 237 of the Companies Act, 2013 to order amalgamation of two or more companies into a single company, if the government is satisfied that it is essential in the public interest that two or more companies should amalgamate. Central Government may pass such an order in the notified Official Gazette, only where the Government is satisfied that it is essential in the public interest that two or more companies should amalgamate.

5 Model Test Paper 3.5 (iii) As per Sec. 237(4), any person aggrieved by any assessment of compensation made by the prescribed authority under sub-section (3) may, within thirty days from the date of publication of such assessment in the Official Gazette, prefer an appeal to the tribunal and thereupon the assessment of the compensation shall be made by the tribunal. (iv) Central Government may pass such an order only where the government is satisfied that it is essential in the public interest that two or more companies should amalgamate; The order passed by Central Government must be published in the Official Gazette; A copy of the proposed order to be provided in draft to each of the companies concerned; The time for preferring the appeal under sub-section (4) has expired, or where any such appeal has been preferred, the appeal has been finally disposed of; The Central Government shall consider and make such modifications, if any, in the draft order as may seem to it desirable in the light of any suggestions and objections which may be received by it from any such company within such stipulated period as the Central Government may fix. (v) In the case of amalgamation of two or more banking companies, the Central Government must consult the RBI before passing any order under section 237 of Companies Act, (OR) 2.A Management buy-out and management buy-in. Meaning Management buy-out It refers to the acquisition of the whole or part of the business b y e xisting management or investors of the company. Management buy-in Acquisition of business whole or part by group of managers outside the business is termed as management buy-in.

6 3.6 Solved Scanner CS Prof. Prog. M-I Paper 3 (New Syllabus) Management group The existing management buys out the company from its owners. In case of management buy-in it is not the existing m a n a g e m e n t w h i c h acquires the business. B. Hardnut Ltd. wants to buy-back its equity shares. The company has equity share capital of ` 100 crore (face value of ` 10 fully paid-up) and free reserves of ` 200 crore. Partly paid equity shares are ` 60 crore. Preference share capital of face value ` 100 fully paid is ` 40 crore. The company seeks your opinion about the quantum of shares that can be bought back. Equity Shares : ` 100 crore Free Reserves : ` 200 crore Partly paid equity shares : ` 60 crore Preference shares capital : ` 40 crore Maximum amount upto which board can approve buy-back of shares is 10% of total paid up equity capital & free reserves of the company. In this case, Matrix Ltd. has a paid up equity capital = ` 160 crore and Free Reserves = ` 200 crore,total = ` 360 crore. Maximum amount board can approve buy-back of shares = 10% of ` 360 crore = ` 36 crore. Maximum amount upto which the shareholders can approve buy-back of shares is 25% of paid up capital & free reserves. In this case, total paid up capital & free reserves = (` 100 crore + ` 60 crore + ` 40 crore + ` 200 crore) = ` 400 crore. Shareholders can approve upto 25% of ` 400 crore = ` 100 crore Buy-back of equity shares should not exceed 25% of total paid up equity capital of the company in any financial year. So, equity shares can be bought back maximum to the extent of 25% of (` 100 crore ` 60 crore) = ` 40 crore.

7 Model Test Paper 3.7 C. How can 'post-merger efficiency' be measured? Enumerate the main parameters involved. The various indicators which can be useful in measuring the post merger efficiency are: 1. The earning performance of a merged company can be measured by return on total assets and return on net worth. 2. Whether the merged business creates a larger business organisation & provides a basis for growth. 3. Whether the merged company is able to earn larger net profit than before or higher return on total funds employed. 4. Efficiency can also be measured through other factors like improved debtor realisation, reduction in non-performing assets, economies due to large scale production. 5. Efficiency can also be measured by focusing on fair market value. 6. Inter firm comparison can also proves to be useful. Comparison of performance of the merged company with the similar sized company in the same business in respect of: (i) Sales (ii) Assets (iii) Net profits (iv) Earning per share. 7. Dividend rate & payouts also determine its efficiency. 8. Gains to shareholders in terms of increase or decrease in share prices of the merged company. 9. Increase not only in the size of the merged company but also in its sources and resources to optimize its end earnings. 3. (a) State whether any stamp duty is payable on transfer of properties under the order of amalgamation. Briefly comment with relevant case law. The scheme of amalgamation sanctioned by the Tribunal would be an instrument where by the properties are transferred from the transferor company to the transferee company based on compromise arrived at between the two companies.

8 3.8 Solved Scanner CS Prof. Prog. M-I Paper 3 (New Syllabus) The state legislature would have the jurisdiction to levy stamp duty under Entry 44, List II of the Seventh Schedule of the Constitution on the order of the Tribunal sanctioning the scheme of amalgamation. Hence, stamp duty is payable on transfer of properties under the order of amalgamation. Stamp duty would be levied not on the gross assets transferred but on net assets i.e. assets less liabilities. In Hindustan Lever Ltd. v. State of Maharashtra, honourable Supreme Court held that a document creating or transferring a right is an instrument and an order effectuating the transfer is also a document, hence stamp duty is chargeable on transfer of properties under the order of amalgamation. (b) (i) Merger and acquisition. (ii) Effective date and transfer date in a scheme of merger. (i) Merger: Merger is the combination of two or more companies which can be merged together either by way of amalgamation or absorption or by formation of a new company. The combination of two more companies is made generally by offering the shareholders of the transferor company, the shares of the transferee company which is also called as share swap. Merger may be Horizontal Merger Vertical Merger Co generic Merger Conglomerate Merge Acquisition: Acquisition is also called as Take over. Acquisition or Takeover occurs when an acquirer takes over the control of the target company. Normally this type of acquisition is undertaken to achieve market supremacy. It may be friendly or hostile takeover. In friendly takeover, one company takes over the management of the target company with the permission of the board. In hostile takeover, one company takes over the management of the target company without its knowledge and against the wish of their management.

9 (ii) Model Test Paper 3.9 Effective Date : This is the date on which the transfer and vesting of the undertaking of the transferor company shall take effect i.e. all the requisite approvals would have been obtained. Transfer Date : It is the first day of the financial year, preceding the financial year for which audited accounts are available with the companies. Transfer date can also be known as cut off date from which all the movable and immovable properties including all rights, powers, privilege of every kind, nature and description of the transferor company shall be transferred or deemed to be transferred without any further act, deed or thing to the transferee company. This date is also called as appointed date. (c) 'Appointed date' and 'effective date'. "Appointed-Date" means the date with effect from which the Scheme shall be applicable or such other date as may be approved by the Tribunal. "Effective Date" shall means the date on which the last of the approvals/events specified in the respective clause of the scheme are obtained/have occurred. The respective clause is the clause which requires for obtaining all the necessary orders/necessary consents from the persons stated therein. PART B 4. (a) X Ltd. is considering the proposal to acquire Y Ltd. and the financial information is given below : X Ltd. Y Ltd. No. of equity shares 10,00,000 6,00,000 Market price per share (`) Market capitalisation (`) 3,00,00,000 1,08,00,000 X Ltd. intends to pay ` 1,40,00,000 in cash for Y Ltd. If Y Ltd s market price reflects only its value as a separate entity, calculate the cost of merger when merger is financed by cash. In the above case, merger is financed by cash Cost of merger =1,40,00,000-1,08,00,000 = ` 32,00,000

10 3.10 Solved Scanner CS Prof. Prog. M-I Paper 3 (New Syllabus) (b) XYZ Ltd. is intending to acquire. ABC Ltd. by merger and the following information is available in respect of both the companies : XYZ Ltd. ABC Ltd. No. of equity shares 5,00,000 3,00,000 Profit after tax (`) 25, 00,000 9,00,000 Market price per share (`) (i) Calculate the present EPS of both companies. (1 mark) (ii) If the proposed merger takes place, what would be the new EPS for XYZ Ltd.? Assume that the merger takes place by exchange of equity shares and the exchange ratio is based on the current market price. (2 marks) (iii) Will you recommend the merger of both the companies? Justify your answer. (2 marks) XYZ Ltd. ABC Ltd. PAT = 25,00,000 9,00,000 Shares = 5,00,000 3,00,000 (i) EPS = 5 3 (ii) Exchange ratio = = Shares to be issued = 3,00,000 Post merger EPS = = 2,00,000 shares = ` = ` 4.86 (approx) (iii) EPS of XYZ Ltd. falls to 4.86 Earnings of ABC Ltd. rises to 9,72,000 [2,00, ]

11 Model Test Paper 3.11 (c) The share capital of Suraj Ltd. is ` 1,00,00,000 (60,000 equity shares of ` 100 each and 4,00,000, 12.5% preference shares of ` 10 each). The company has earned a profit of ` 65,00,000 after payment of 35% income-tax amounting to ` 35,00,000. Calculate earnings per share (EPS) of Suraj Ltd. Equity shares = 60,000 equity shares of ` 100 each 12.5% Preference shares = 4,00,000 preference shares of ` 10 each Profit after tax = ` 65,00,000 Less: Preference dividend (12.5% of ` 40,00,000) = ` 5,00,000 Profit available for equity shareholders = ` 65,00,000 ` 5,00,000 = ` 60,00,000 Earnings per share = ` 60,00,000/60,000 = (a) Why would you recommend discounted cash flow (DCF) technique as a method for valuation of securities? Some of the benefits derived from the Discounted Cash Flow (DCF) technique as a method for valuation of securities can be explained as under: This technique recognises the time value of money. This technique relates the value of an asset to the present value of expected future cash flows on that asset. It helps in determining the Net Present Value (NPV). It helps the acquirer to find out the proposal whose cash inflows has greater values than the cash outflows. It takes into account the objectives of wealth maximisation. Under this technique, the buyer will estimate future cash flows and discount these into present values The reason for discounting of future cash flow is that a rupee in future is at risk of being worth less than a rupee now. There are some business based real risks like acquired company loosing a contract, or new competitor entering the market or an adverse regulation passed by government, which necessitated discounting of

12 3.12 Solved Scanner CS Prof. Prog. M-I Paper 3 (New Syllabus) cash flows. (b) Explain the formula for pricing of shares in a preferential allotment. The provisions for preferential allotment are as under : Where the equity shares of a company are listed for a period of 26 weeks or more, the issue shall be made at a price not less than higher of : (i) The average of the weekly high & low of the closing prices of the related shares quoted on stock exchange during the 26 weeks preceding the relevant date; or (ii) The average of the weekly high & low of the closing prices of shares quoted on stock exchange during the two weeks preceding the relevant date. Where the equity shares have been listed for a period of less than twenty six weeks as on relevant date, then the issue can be made at a price not less than the higher of the following : (i) Price at which shares were issued by company in its IPO or the value per share arrived at in a scheme of arrangement under the provisions of the Companies Act, (ii) The average of the weekly high & low of the closing prices of the related shares quoted on stock exchange during the period shares have been listed preceding the relevant date. (iii) The average of the weekly high & low of the closing prices of the shares quoted on stock exchange during the two weeks preceding the relevant date. For QIB, issue shall be made at a price not less than the average of weekly high & low of the closing prices during the 2 weeks preceding the relevant date. (c) Write a note on valuation of slump sale. Slump Sale: Section 2(42C) of the Income tax Act, 1961 define the term slump

13 Model Test Paper 3.13 sale as transfer of one or more undertakings as a result of the sale for a lump sum consideration without values being assigned to the individual assets and liabilities. The undertaking has to be transferred as a result of sale. The consideration for transfer is a lump sum consideration. This consideration should be arrived at without assigning values to individual assets and liabilities. Valuation of Slump Sale: Slump sale should be valued as the difference between the aggregate value of total assets of the undertaking or division and the value of its liabilities as appearing in books of account. The aggregate value of total assets of the undertaking or division is the sum total of : 1. WDV as determined u/s 43(6)(c)(i)(C) in case of depreciable assets. 2. The book value in case of other assets. PART C 6. (a) What are the legal challenges and complexities faced while dealing with insolvency? (4 marks) While dealing with Insolvency, the following Challenges and Complexities encountered: (i) The present law encourages the dishonest borrowers to misuse the law by prolonging the proceedings to many years and allows them to siphon away the funds which otherwise belong to the creditors; (ii) Insolvency courts which handle the insolvency cases have mostly worked with such number of benches which have been highly inadequate to dispose off the same in time; (iii) Lack of clarity in law about the priority of various debts due to contradiction of Federal and State Enactments and also due to conflicting interpretation of the said law by different courts. (iv) Lack of decision making or delay in decision making on the part of the secured creditors which mostly are state owned banks about the restructuring compromise of their debt;

14 3.14 Solved Scanner CS Prof. Prog. M-I Paper 3 (New Syllabus) (v) With the growth of economy and increased business uncertainties, the number of insolvency cases is likely to increase and therefore the insolvency mechanism needs to be made efficient effective and expeditious to take care of the increasing insolvency cases. (b) Adarsh, a promoter of Diligent Ltd,. desires to make a competitive bid for Diligent Ltd. which has turned sick and is currently under the control of an operating agency appointed by BIFR. Advise him. (6 marks) Adarsh who is one of the promoter of Diligent Ltd. can make competitive bid even though Diligent Ltd has turned sick and is currently under the control of an operating agency appointed by BIFR. Though competitive bidding has been prohibited in case of financially weak companies, however Adarsh can make competitive bid as following are permitted for making competitive bids even in case of financially weak company: Promoter Persons in charge of management. Since Adarsh falls in the category of promoter, he can very well make competitive bid. (c) What is non performing asset (NPA) under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002? "Non-performing asset" means an asset or account of a borrower, which has been classified by bank or financial institution as sub-standard, doubtful or loss asset. (a) In case such a bank or financial institution is administered or regulated by an authority or body established, constituted or appointed by any law for the time being in-force, in accordance with the directions or guidelines relating to asset classification issued by such authority or

15 Model Test Paper 3.15 body. (b) In any other case in accordance with the directions & guidelines relating to asset classification & issued by the Reserve Bank of India. (d) Laxmi Bank Ltd. has approached you for your professional advice about the rights available to it for enforcing the security interest under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, Highlight the rights and the advantages to the bank by resorting to that mode of recovery citing the relevant provisions of the said Act. The provisions relating to enforcement of security interest are as follows: 1. No intervention of court or tribunal in enforcement of security interest: Any security interest created in favour of any secured creditor may be enforced, without the intervention of court or tribunal by such creditor in accordance with the provisions of the Act. 2. Notice by secured creditors to borrower to discharge liabilities within 60 days: The secured creditor may require the borrower by notice in writing to discharge in full his liabilities to the secured creditors within 60 days from the date of notice failing which the secured creditor shall be entitled to exercise all or any right under Sub Section (4). 3. Secured creditor to consider the representation or objection of the borrower: If borrower makes any representation or raises any objection, the secured creditor shall consider such representation or objection and if the creditor comes to the conclusion that the representation made by borrower are not tenable shall communicate within fifteen days of receipt of objection together with the reasons for non-acceptance of objections or representation. 4. Measures for secured creditor in case of default by the borrower [Section 13(4)]: In case if the borrower fails to pay amount due within specified time, the secured creditor may take recourse to one or more of the following

16 3.16 Solved Scanner CS Prof. Prog. M-I Paper 3 (New Syllabus) measures to recover his secured debt, namely: (a) Take possession of the secured asset of the borrower, including the right to transfer by way of lease, assignment. (b) Takeover of the management of the business of the borrower including right to transfer by way of lease assignment. (c) Appoint any person to manage any secured asset. (d) Require any person who has acquired any of the secured assets from the borrower, to pay the secured creditor, so much of the money as is sufficient to pay the secured debt. 5. Right of action in case of joint finance of a financial asset- In that case no secured creditor shall be entitled to exercise any or all of the rights, conferred on him unless exercise of such right is agreed upon by a secured creditors representing not less than 3/4 in value of the amount outstanding as on a record date. And such action shall be binding on all the secured creditors. 6. In case the full amount is not realised on sale of secured asset then unsatisfied amount may be recovered by filing application in debt recovery tribunal. Advantages of Enforcement of Security Interest Under (SARFAESI) Act Banks can take possession of the security and sell without the intervention of court. 2. A very efficient & time effective process. 3. Shareholder cannot pass resolution or appoint directors without the consent of the bank. 4. It is only when bank consent has been taken that a proceeding of winding up of a borrower company or appointment of receiver shall be in any court. 5. As soon as the notice of taking over of management of the business of the borrower is issued all the directors of the company shall be deemed to have vacated the office.

17 Model Test Paper 3.17 (OR) 6.A Overriding effect of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (4 marks) Overriding effect of the Recovery of Debt due to Bank and Financial Institutions Act, 1993 (Section 34) 1 Save as provided under sub-section (2), the provisions of this Act shall have effect notwithstanding anything inconsistent therewith contained in any other law for the time being in force or in any instrument having effect by virtue of any law other than this Act. 2 The provisions of this Act or the rules made thereunder shall be in addition to and not in derogation of, the other Act. B It is cardinal principle of law that a person can be insolvent but a company cannot be adjudged insolvent. In the light of this statement, state the reasons why a company can t be adjudged insolvent but, it can be dissolved that too in case it is running in proper health and able to pay its obligation. Further, you are required to differentiate between the insolvency of an individual and winding-up of a company and their legal status during insolvency and winding-up process. (4 marks) In case of a winding up, the members of a company can have a desire that company should be dissolved if it has become insolvent or is otherwise unable to pay its debts, or if for any reason it seems desirable that it should cease to exist, it is wound up. So it is clear that a company may also be wound up even if it is perfectly solvent, for the purpose of reconstruction. A company can be wound up but it cannot be declared as insolvent. A company can be wound up even too in case it is running in proper health & is able to pay its obligation. But an individual can be declared as insolvent only if he is unable to pay is debts.

18 3.18 Solved Scanner CS Prof. Prog. M-I Paper 3 (New Syllabus) Legal status during insolvency and winding up. In case of a winding up the official liquidator is appointed. All the assets & properties of company are transferred or hand over to the liquidator. He realises the debt, pay off the liabilities. But even during winding up the status of company continues. Whereas, in case of insolvency, the whole of the insolvent's property is taken out of his hands and vest in the Tribunal, under the Provincial Insolvency Act, 1920 or to the official assignee under the Presidency Town Insolvency Act. C Under some circumstances including the completion of basic objective of incorporation of a company, the company may be wound-up by knocking the door of a Tribunal of law. You are required to explain: (i) Circumstances under which a company may be wound-up. (4 marks) (ii) The procedure to be followed for winding-up of a company.(4 marks) (iii) Why, in your view, the provisions of voluntary winding-up are contained in the Companies Act, 2013? (2 marks) (i) Circumstances under which a company may be wound up voluntarily are as under: Where the period fixed for the duration of the company has expired. That event has occurred on the occurrence of which the articles provide that the company is to be dissolved. If the company passes special resolution for winding up of the company. (ii) In case of expiry of the term fixed for duration of the company or on the occurrence of the event as provided in the articles, only an ordinary resolution may be passed in the general meeting of the company for winding of the company voluntarily. Otherwise, a special resolution is required to be passed at meeting for voluntarily wound up of company for which a proper notice is

19 Model Test Paper 3.19 required to be given to all members & the resolution when passed must be advertised within 14 days in official Gazette & in regional newspaper where the registered office of the company is situated. (iii) Provisions of voluntary winding up are essential in the Companies Act, It enables members/creditors to initiate the winding up process. It is an easier process of winding up. D Meaning of State within the UNCITRAL Model Law (2 marks) The word State, as used in the preamble and throughout the UNCITRAL Model Law, refers to the country that enacts the Law (the enacting State ). The term should not be understood as referring, for example, to a state in a country with a federal system.