Corporate and Other LawsQuestion 5369 of 221
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Question 1 (a) 1,00,000 Equity shares of ` 100 each were issued at a premium of ` 2 per share by PQR Limited after offer for the same was received from the shareholders in terms of the prospectus issued by the company on 1st April, 2022. The prospectus specified that the amount received from the issue will be exclusively used for manufacturing and distributing some life-saving drugs. In August 2024, the company after proper market survey found that there is ample demand for Artificial Intelligence based software and therefore decided to go forward for development of such type of software. They also wanted to divert a small amount for investment in the equity shares of a large successful company. Since there was surplus money from the above issue of equity shares, the Board of Directors passed two resolutions for the above purpose; the first for investing ` 60,00,000 for development of Artificial Intelligence based software and the second for investing ` 5,00,000 in the Equity Shares in X Limited, which is a listed company. In order to avoid any unwarranted situation from the shareholders, the Directors called for an extra ordinary general meeting in which votes cast in favour of the proposal was in excess of the votes cast against it. Some shareholders objected to the above action of the Board on the following grounds: (i) that the resolution passed in the extra-ordinary general meeting was not proper since the required majority did not approve the same; (ii) that the prescribed details of the notice which was given to the shareholders should also have been published in newspapers (one in English and one in vernacular language), circulating in the city where the registered office of the company is situated indicating clearly the justification for such variation in the use of the funds; and (iii) that the resolution passed for investing 5,00,000 in the Equity Shares in X Limited is illegal. CORPORATE AND OTHER LAWS Referring to the applicable provisions of the Companies Act, 2013, decide, whether the contentions of the shareholders are tenable. (b) Sohan Lal was appointed as the statutory auditor of RST Ltd., a non- government company at the Annual General Meeting held on 30th September, 2023. He has resigned after two months as he wanted to discontinue the practice and surrendered his Certificate of Practice and joined a multinational company. Explain how the new auditor will be appointed by RST Ltd. and the conditions to be complied with in this regard. (c) Murari Lal, a person resident outside India, has invested in four residential immovable properties under construction in Kolkata. Each property is negotiated at ` 2 crore, with the companies owned by builders. This amount is to be paid in two instalments as 60% on immediate basis on booking and the balance on possession of the properties. The above transaction is done by the companies owned by builders through two brokers from USA on commission basis. Mr. Murari Lal as per the terms and conditions remitted 60% of the amount of all four immovable properties directly to the company.

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Detailed Solution & Explanation

the following explaining the provisions of the Foreign Exchange Management Act (FEMA), 1999: (i) Whether investment by Mr. Murari Lal and payment of commission on this transaction is permissible? (ii) How much maximum amount of commission can be paid to each broker without RBI approval? (Ignore the USD - Rupee Exchange Rate) Answer (a) According to section 27(1) of the Companies Act, 2013 (the Act), the terms of a contract referred to in the prospectus or objects for which the prospectus has been issued can be varied, but only with the authority of the company given by it in a general meeting by way of a special resolution passed through Postal Ballot. The first proviso to sub-section (1) requires that prescribed details of the notice which has been given to the shareholders are to be published in newspapers (one in English and one in vernacular language) circulating in the city where the registered office of the company is situated indicating clearly the justification for such variation. The second proviso to sub-section (1) also prescribes that such company is not to use any amount raised by it through prospectus for buying, trading or otherwise dealing in equity shares of any other listed company. **Section 27(2)** of the Act provides that the dissenting shareholders (i.e. those who did not agree to the variation) are to be given an exit offer by promoters or controlling shareholders at such exit price and in such manner and conditions as may be specified by SEBI by making regulations for this purpose. In the given question, PQR Limited has raised amount through issue of equity shares. It was specified that the amount so received will be used exclusively for manufacturing and distributing some life saving drugs. However, now the company wants to use the surplus money left from the mentioned issue of shares, for development of Artificial Intelligence software and for investing in Equity Shares of X Limited (a listed company). As per facts of the question and the provisions of the Act: The company called an extraordinary general meeting for the above proposals of using the surplus amount. In this meeting, votes cast in favor were in excess of votes cast against. **Section 27(1)** requires that a special resolution be passed in case of variation of terms of objects for which the prospectus has been issued can be varied. In view of the above provisions, the contentions of the shareholders are discussed as below: (i) In terms of the provisions of sub-section (1) of section 27 stated above, the first contention of the shareholders is tenable since the resolution passed in the extra ordinary general meeting was not proper as it was not passed by the required majority. CORPORATE AND OTHER LAWS (ii) In terms of the first proviso to sub-section (1) of section 27 stated above, the second contention of the shareholders is also tenable since the required publication was not made in the newspapers as mentioned in the above referred proviso. (iii) In terms of the second proviso to sub-section (1) of section 27 stated above, the third contention of the shareholders is also tenable since the Act prohibits the company to use any amount raised by it through the prospectus for buying, trading or otherwise dealing in equity shares of any other listed company. In the given case, X Ltd., is a listed company, hence PQR Ltd., cannot invest in the equity shares of X Ltd. Hence, the resolution passed for investing ₹5,00,000\displaystyle \text{₹}5,00,000 in the equity shares in X Limited is not valid. (b) Filling Up Casual Vacancy [ **Section 139(8)**] Any vacancy arising in the office of the auditor due to any reason except on the expiry of his term is known as a casual vacancy. As per section 139(8) of the Companies Act, 2013 (the Act), the Board of Directors (other than a Government Company) has power to fill casual vacancy in the office of the auditor within 30 days. In case of casual vacancy due to the resignation of the auditor, such appointment shall be approved by the company by passing an ordinary resolution at a General Meeting convened within three months of the recommendation of the Board. Any auditor so appointed in a casual vacancy shall hold office until the conclusion of the next annual general meeting. Appointment of auditors to fill casual vacancy shall be made after taking into account the recommendation of the Audit Committee, (if any). [**Section 139(11)**]. Written and signed consent and certificate shall be obtained from the auditor stating the appointment shall be in accordance with the conditions as may be prescribed under **Rule 4** of the Companies (Audit and Auditors) Rules, 2014 and satisfies the criteria provided in **Section 141** of the Act. The Company shall inform the auditor concerned of his or its appointment. Compliances: As per section 140(2) and (3) of the Act read with **Rule 8** of Companies (Audit and Auditors) Rules, 2015, the resigning auditor shall file Form ADT-3 with the company and the Registrar of Companies (ROC) along with valid reasons within 30 days of the date of resignation. The company shall file a notice of appointment in Form ADT-1 with the ROC within fifteen days of the meeting in which the auditor is so appointed. The new auditor appointed under **Rule 3** shall submit a certificate that: (i) the individual or the firm, as the case may be, is eligible for appointment and is not disqualified for appointment under sections 139, 141, and other applicable provisions of the Companies Act, 2013, the Chartered Accountants Act, 1949 and the rules or regulations made thereunder; (ii) A written consent to act as the auditor. (iii) the proposed appointment is within the limits laid down by or under the authority of the Act; (iv) The list of proceedings against the auditor or audit firm or any partner of the audit firm pending with respect to professional matters of conduct, as disclosed in the certificate, is true and correct. (v) The new auditor must communicate with the resigning auditor to ensure there are no professional or ethical concerns. Thus, the Statutory Auditor can be appointed as per the procedure mentioned above. (c) The investment in immovable properties in India by Mr. Murari Lal, a resident outside India, is a Capital Account Transaction which is permissible as per Schedule II of the Foreign Exchange Management (Permissible Capital Account Transactions) Regulations, 2000 which permits Acquisition and Transfer of Immovable Property in India by a Person Resident Outside India. CORPORATE AND OTHER LAWS According to Schedule III to Foreign Exchange Management (Current Account Transactions) Rules, 2000, remittances by persons other than individuals shall require prior approval of the Reserve Bank of India if Commission, per transaction, to agents abroad for sale of residential flats or commercial plots in India exceeds USD 25,000 or five percent of the inward remittance whichever is more. As per the facts of the question and mentioned provisions, the following are the answers to the questions asked: (i) Yes, the investment by Mr. Murari Lal and payment of commission on this transaction is permissible. (ii) Calculation of maximum commission that can be paid without the approval of RBI. The maximum amount of commission that can be paid to each broker for each transaction, without RBI approval is, more of- USD 25,000 or ₹6\displaystyle \text{₹}6 lakh [i.e. 5% of (60% of 2 crore)]. Thus, ₹6,00,000\displaystyle \text{₹}6,00,000 can be paid to each broker as commission without taking any prior approval of the RBI.

More Questions from Corporate and Other Laws

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