Marks of Short Notes, Distinguish Between, Descriptive & Practical Questions

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1 Star Rating On the basis of Maximum marks from a chapter On the basis of Questions included every year from a chapter On the basis of Compulsory questions from a chapter Nil Nil 1 Introduction This Chapter Includes : Meaning of corporate restructuring, Need, Scope and modes of restructuring, Historical background, Global scenario, National scenario. Marks of Short Notes, Distinguish Between, Descriptive & Practical Questions SHORT NOTES June [8] (b) Write short notes on the following: (ii) Disinvestment policy of the government (3 marks) The term disinvestment refers to the act of transfering public sector undertaking to private sector. Question upto Dec are from CS Final Gr. II Old Course and from June 2009 onwards are from CS Professional Programme New Course. Q&A-4.13

2 Q&A-4.14 O Solved Scanner CS Prof. Prog. M-II Paper 4 Disinvestment is thus a method for privatisation which is one of the three objectives (LPG-Liberalisation, Privatisation and Globalisation) covered under the New Economic Policy (NEP). An advisory body in form of Disinvestment Commission was set up on 23 rd August 1996 so as to give advice in relation to disinvestment of public sector undertaking. The process undertaken for disinvestment is as follows : Proposals for disinvestment by Disinvestment Commission. Proposals reviewed by Cabinet Committee on Disinvestment (CCD) Clearance of proposal by CCD & appointment of advisor Advertisement & shortlisting of tentative bid Consent of Inter Ministerial Group over the share purchase & shareholders agreement. Evaluation by Comptroller & Auditor General (CAG) June [8] Write notes on the following: (i) Restructuring. (4 marks) Restructuring The term restructuring means to rebuild or rearrange. Restructuring is a means whereby the organisational structure is changed so that the organisation accomplishes its objectives. Corporate Restructuring is a term of wider importance and covers in its ambit restructuring or reorganizing or financial restructuring of any organisation done in order to operate more effectively and efficiently. DESCRIPTIVE QUESTIONS Dec [1] {C} (a) "On-going corporate restructuring is a must for survival due to globalisation, liberalisation and economic reforms." Discuss. (12 marks) On going corporate restructuring is a must for survival due to globalisation, liberalisation and economic reforms, The statement is quite apt taking into account the present scenario. Rapid economic reforms have been witnessed recently both at the national and international levels. Globalisation has gained momentum over these years and as a result the Indian economy has integrated with the world economy, proving the whole world to be global village.

3 [Chapter 1] Introduction O Q&A-4.15 Such globalisation have proved out to be both, a boon as well as a bane for the firms operating in such environment. Boon, because ample opportunities were provided by the so called economic reforms but simultaneously created fear and challenges on account of furious global competition. In order to combat such turbulences, it became all the more important for such organisations to go in for corporate restructuring. In order to survive, cost reduction became a pre-requisite. Corporate restructuring is the only possible solution since it is a means that can be employed to meet the challenges which confront business and helps them to accomplish their objectives June [1] {C} (a) Explain the procedure of arrangement for corporate restructuring that can be made without application to the court. (8 marks) Section 395 of the Companies Act, 1956 covers in its ambit the procedure of arrangement for corporate restructuring that can be made without application to the Court. Instead of going through the tedious and cumbersome process of corporate restructuring, one can follow the method of corporate restructuring prescribed under Section 395. Section 395 enables a company (known as transferee company) to acquire shares of another company (referred to as transferor company) by complying with the following takeover procedure :- The transferee company shall make an offer to the shareholders of transferor company to acquire their shares at pre-determined prices. The offer can remain open for a maximum period of 4 months. In case 90% of the shareholders of the transferor company accept the offer, then only Section 395 will come into scene. Wherein 90% of the shareholders agree to the scheme/offer so made by the transferor company, the transferee company can give a notice within the ceiling limit of 2 months of expiry of offer period, to the dissenting shareholders (Those who have not subscribed for the offer being less than 10% in number). The dissenting shareholders can make an application to the court within 1 month from the date of such notice not to permit the acquisition of their shares. In case the court makes an order in favour of the dissenting shareholders, the transferee company shall not be entitled to acquire the shares of such shareholders.

4 Q&A-4.16 O Solved Scanner CS Prof. Prog. M-II Paper 4 However, in case the application of the dissenting shareholders is rejected, the transferee company shall acquire the shares of the dissenting shareholders at the same terms of acquisition as originally agreed upon June [2] (b) "The reconstruction involves the idea of substantially the same persons carrying on substantially the same undertaking or enterprise in the name of a new company." Elucidate the statement in the light of legal provisions and judicial pronouncements. (5 marks) The term reconstruction refers to carrying on substantially the same business by substantially the same persons. The above viewpoint was also held by Supreme Court in "Textile Machinery Corporation Ltd." Reconstruction can takes place by following the given procedure : The whole of the undertaking or business of the transferor company is transferred to new company especially formed for this purpose. The shareholders of the transferor company are issued shares of the transferee company. Thus, the very same shareholders become the shareholders of the new company also. Hence, we can conclude that reconstruction involves the idea of substantially the same persons carrying on substantially the same undertaking or enterprise in the name of a new company June [4] (c) The creditors present at a meeting for approving the scheme of restructuring but remain neutral or abstain from voting will be counted in ascertaining the majority in number of value. Comment. (4 marks) No, the creditors present at a meeting for approving scheme of restructuring but remain neutral or abstain from voting will not be counted in ascertaining the majority in number of value. Section 391(2) of the Companies Act clearly states that if a majority in member representing three-fourths in value of the creditors, or class of creditors or member or class of members, as the case may be present and voting either in person or where proxies are allowed by proxy, at the meeting, agree to any compromise or arrangement. Thus, the Section 391(2) clearly states that only the creditors and members present & voting shall be taken into consideration for approving the scheme of restructuring.

5 [Chapter 1] Introduction O Q&A-4.17 The same view point was also held in the case of Hindustan General Electric Corporation. Those remaining neutral cannot be regarded as supporter and hence will not be considered for the computation of three-fourth Dec [5] (b) What is `disinvestment'? Discuss the salient features evolved by the Government of India for disinvestment in the public sector undertakings (PSUs). (5 marks) (c) What is the concept of `core competency'? What are the factors that help to identify the core competencies in a company? (5 marks) (b) Please refer to June [8] (b) (ii) on page no. 13 (c) Core competency refers to the distinctive skills as well as intangible, invisible intellectual assets and cultural capabilities that makes it ahead of its competitors. These can be created by superior integration of technological, physical and human resources in the best possible manner. According to Prahalad and Hamel, following are the factors that help in identifying the core competencies in a company : Core competencies should be difficult to be followed. It should provide wider accessibility to markets Dec [8] (a) "Corporate restructuring is one of the means that can be employed to meet the challenges which confront business." Discuss this statement and outline the scenario on corporate restructuring in India. (8 marks) The term restructuring means to rebuild or rearrange. Restructuring is a means whereby the organisational structure is changed so that the organisation accomplishes its objectives. Corporate restructuring is a term of wider importance & covers in its ambit restructuring or reorganizing or financial restructuring of any organisation. Justice Dhananjaya has rightly regarded Corporate restructuring as one of the means that can be employed to meet the challenges which confront business. Corporate restructuring has wide applications and cover restructuring in respect of all forms of business enterprises be it sole proprietorship, partnership or company for that matter. The concept of corporate restructuring is gaining momentum day by day. Indian companies are resorting to corporate restructuring techniques like merger and amalgamation to carve out their global existence. Such strategies help them to increase their core competencies and also diversify its risk.

6 Q&A-4.18 O Solved Scanner CS Prof. Prog. M-II Paper 4 Examples of such strategical acquisitions carried on by Indian companies are as follows: Tata Corus Mittal Arcelor Hindalco- Novelis Tata Steel- Singapore Matsteel Dec [7] Advise on the following with supporting judicial decisions, if any: (iv) Is it correct to say that the term 'arrangement' has wider scope than 'compromise' under Section 390(b)? Give your considered views. (4 marks) The term compromise refers to an agreement between two or more persons for determining their right when some differences crop in or controversy arises in relation to enforcement of their rights. Arrangement, on the other hand is the readjustment of the rights and liabilities of the members or class of members or creditors or class of creditors. Compromise reflects a narrow scope while arrangement has wider ambit. Compromise implies existence of some dispute or conflict, which it seeks to settle. Arrangement has wider purview as it includes, reorganisation of the share capital of the company. In both compromise and arrangement parties make some sort of concession. Thus, it is correct to say that the term arrangement has wider scope than compromise under Section 390 (b) of the Companies Act, June [5] (c) Corporate restructuring increases shareholders wealth. Critically examine this statement contrasting demerger and buy-back as tools of restructuring. (6 marks) Corporate restructuring is a term of wider importance and covers in its ambit restructuring or reorganising or financial restructuring of any organisation. Justice Dhananjaya has rightly regarded corporate restructuring as one of the means that can be employed to meet the challanges which confront business. Corporate restructuring has wide application and cover restructuring in respect of all forms of business enterprises, be it sole proprietorship or partnership or company. The concept of corporate restructuring is gaining momentum day by day. Merger, amalgamation, demerger, buyback, disinvestment constitute important strategies of corporate restructuring. Demerger :

7 [Chapter 1] Introduction O Q&A-4.19 Section 2(19AA) of the Income Tax Act, 1961 defines demerger in relation to companies as transfer, pursuant to a scheme of arrangement under Section 391 to 394 of the Companies Act, 1956 by a demerged company of its one or more undertaking to any resulting company. Demerger is a term coined to reveal some sort of partition or separation of undertaking held by some common corporate umbrella. In case of Lucas TVS Ltd. it was held that demerger is a scheme of business reorganisation that has an effect of corporate partition. Downsizing or giving up such unprofitable undertakings inturn results in concentration over the profitable ventures & inturn increase in shareholders wealth. Buyback : For this part of the Ans Please refer to Dec [7] (c) on page no Dec [6] (a) What do you mean by 'corporate restructuring'? What are the different kinds of restructuring? (6 marks) Please refer to 2007 June [8] (i) on page no Different kinds of restructuring are as follows : Financial Restructuring : It takes into account restructuring using the capital base and deals with the acquisitions & takeovers, mergers and amalgamation & like strategies. Organisational Restructuring : It deals with reforming procedures and changing the organisational structure so as to adopt the organisation to cater to the changing environment. Market Restructuring : The purview of market restructuring is with regards to restructuring of the product market segments. Technological Restructuring : As the very name suggest, technological restructuring is the one to gain technological expertise by entering into alliance with other organisations Dec [7] (c) Can a private or an unlisted public company buy-back its own shares? Answer citing relevant provisions of the law. (6 marks) Buy Back is an important strategy of corporate restructuring. It provides a means to companies to buy back its equity shares & securities. Section 77A, 77AA and 77B of the Companies Act 1956 ambits in itself the provisions relating to buy back. Provisions of these sections apply to private as well as unlisted public companies.

8 Q&A-4.20 O Solved Scanner CS Prof. Prog. M-II Paper 4 Private Limited company and Unlisted Public Limited Company (Buy-Back of Securities) Rules 1999 specifically provides the procedure to be followed by such companies to carry on the buy back of securities. Rule 3 of the aforementioned rules provide that unlisted companies can buy-back its shares from existing shareholders on proportionate basis by giving private offers. Obtaining approval of Board of Directors is a pre-requisite. Rule 4 provides explanatory statement along with notice needs to be sent to the shareholder before passing the resolution. Rule 5 prescribes that the company need to file the draft letter of offer with the ROC As per Rule 6, letter of offer needs to be despatched to member within a period of 21 days of its filing to ROC. Rule 7 contains the provisions relating to payment and stipulates that the company needs to open a special bank at the end of the offer & deposit the sum needed for buy back. Rule 8 provides that the information contained in the letter of offer should not be misleading and must be true & factual. Rule 9 requires the filing of return with ROC on completion of buy back procedure. Rule 10 lays down the compulsion over the company to extinguish & physically destroy the certificates within 7 days of acceptance of shares Dec [2] (a) Section 391 is a boon to the corporate restructuring. Critically examine the statement and discuss the relevant provisions relating to corporate restructuring. (8 marks) Corporate restructuring is a term of wider importance & cover in its ambit restructuring or reorganising or financial restructuring of any organisation. Section 391 of the Companies Act is surely a boon for corporate restructuring. Section 391 is a complete code in itself and constitutes a single window clearance system. The said section gives enormous powers to the courts to sanction the scheme of arrangement or compromise. In the case of Oceanic Steam Navigation co. it was held that Section 391 contemplates a compromise between a company & its creditors or any class of them, or its members or class of them & also provides a machinery whereby such a compromise or arrangement may be binding on other persons too June [2] (b) Define corporate restructuring. What are the various kinds of restructuring? (5 marks)

9 [Chapter 1] Introduction O Q&A-4.21 (b) Please refer to Dec [6] (a) on page. no June [1] {C} (a) Corporate restructuring aims to achieve certain predetermined objectives at corporate level. Comment and explain how corporate restructuring would help bringing an edge over competitors. (5 marks) PRACTICAL QUESTIONS June [1] {C} (b) Strong Ltd. of which you are the company secretary has two business units, cement unit and steel unit. The core competency of Strong Ltd. is in steel business. The Board of directors of the company is considering exiting from its non-core area, i.e., cement business. You are asked to prepare a detailed note outlining the procedures and steps involved therein. (6 marks) The two ways to exit the non core area of cement business are as follows: Demerger : Section 2[19AA] of the Income Tax Act 1961 defines demerger as transfer, pursuant to a scheme of arrangement under Section 391 to 394 of the Companies Act 1956 by a demerged company of its one or more undertaking to any resulting company. Scheme of demerger is to be approved by Board of Directors. Separate applications by both demerged and resulting companies need to be made to the High Court. Convene general meeting as per the directions of the High Court. Get the resolution passed by 3/4 th of the members present and voting. Seek approval of the court. File the copy of order with R.O.C. Disposing the non core cement business by following procedure enunciated under Section 293(1) (a) of the Companies Act Convene a board meeting and get the proposal approved by Board of Directors. Hold a general meeting and get the scheme sanctioned by passing an ordinary resolution.

10 Q&A-4.22 O Solved Scanner CS Prof. Prog. M-II Paper 4 Repeatedly Asked Questions No. Question Frequency 1 Define corporate restructuring. What are the various kinds of restructuring? 08 - Dec [6] (a), June [2] (b) 2 Times Table Showing Marks of Compulsory Questions Year 08 D 09 J 09 D 10 J 10 D 11 J 11 D 12 J 12 D 13 J Descriptive 5 Total 5