Suggested Answers

Master of Business Law II Year

Examination Held on 07-Feb-2011 (Investment Laws)




1. WHY DO WE NEED A CAPITAL MARKET?

A capital market is necessary to chanalise the savings of the public into desired sectors
of the economy resulting in both growth and a return on savings. Annual savings 33.7%
of GDP.

1) The capital market in India is in an organized manner created by the Securities
Contract regulation Act, 1956. The objectives were set forth:

Regulating the business of dealing in securities to prevent undesirable transactions in
securities and for this purpose recognition and regulation of stock exchanges. All
transactions and securities must take place on the floor of a recognized stock exchange
except spot contracts.

In the year 1992 a separate board called the Securities Exchange Board of India was
setup under Central legislation taking away must of the provisions of SCRA and certain
provisions of the Companies Act 1956 relating to issue of shares this broad based act
was meant to register all intermediaries in the market, prescribe regulations for each of
them, curb fraud and undesirable practices, permit buyback of shares etc all to
protect investors and promote the growth of the capital market

2) Economic activity hinges on availability capital made available by the suppliers of the
capital namely the savers and investors in the economy.

3) The savers in the economy look for productive parking of their savings in various
sectors of industries and services have a sense of participations, earn a return which is
more than the opportunity cost of capital. They also have platform for speculation,
though regulated, and trade in securities.

4) The capital market also values the value created by Corporate houses by way of
determining the market value of the shares issued by a company. For eg The
capitalization of a particular listed company share will show the market value of the
company. This also helps in making valuations in a merger and acquisition situation.

5) All companies issuing shares to the public must be compulsorily listed on a
recognized stock exchange where the trading in the shares take place. We have more
than 7000 listed companies of the various sector in the economy, the price movements
are daily captured in a sensex and enables investors to have full information of the
performance of the companies through interim financial statements and all other price
sensitive information.

6) The market gets divided into (1) Primary market where fresh issues and follow on
issues are made by companies to the public and (2) the secondary market where there
is trading of listed shares. Regulations fully protect investors through offer documents
in the primary market.
Rs.46,267cr raised through public issues in 2010- 11 (57 issues)

7) Foreign companies can also issue foreign currency denominated shares in the Indian
capital market through Indian depository receipts. The Indian investor has a chance to
participate in foreign companies.

8) When an Indian company has a successful listing and trading it can also issue
shares in a foreign stock exchanges through global depository receipts (GDR) &
American depository receipts (ADR).This helps shore up the image of an Indian
company across the globe.

9) Foreign institutional investors and non- resident Indians are also permitted to invest
in the Indian capital market. Portfolio flows have been quite high in the first half of
2010/11 at $23.8 billion, compared to about $18.0 billion in the corresponding period
of the previous year. The driving force for this has been the quite large foreign
Institutional Investors (FII) inflows in the first eight months of this year. In the first half,
FII inflows are estimated at $22.3 billion compared to $15.3 billion in the corresponding
period of last year.

10) A healthy corporate environment Capital market is a barometer of a countrys
economy also attracts foreign direct investments.

11) Public sectors company (Govt Companies) also issue shares to the public and
ensure private interest in public companies.

12) Government having a regulation for trading of securities on the floor of a recognition
stock exchange only, has the onus to protect the investors. This is achieve through a
regular flow of information to the investors helpful in decision making. The market
helps;

i) Determine the popularity of a scrip through trading volumes
ii) Sets the market price
iii) Sets assets valuation - market capitalization of a company
iv) Helps active investors to trade intraday and also trade in derivatives for hedging
or speculation ( risk mgt)
v) Investment in frequently traded shares affords liquidity.
vi) Demat form has speeded up the buying and selling of shares and avoids
hazards of delay and safe keeping of shares in physical form.
vii) An efficient payment and settlement system.
viii) Innovate products like mutual funds, derivative instruments hybrid
instruments(insurance plus equity) etc.

13) Protection through
1. Regulation of intermediaries prescribe a code of conduct
2. Regular flow of information through quarterly statements
3. Regulation to punish fraud and unfair practices
4. Orderly issue of shares to the public equity, rights, preferential issues
bonus- IDR.
5. Promote investors association and education programme
6. Promote self regulatory organizations eg Association of Mutual Funds
(AMFI), Association of Merchant banker of India (AMBI).
7. Corporatization and demutualization of stock exchanges.
8. Automated stock exchanges etc.


14) Protecting Shareholders is a continuous exercise having regard to the fact that
greed drives people in the market to manipulate and rig prices. SEBI is fully conscious
of its role in this regard.


2. DISTINGUISH BETWEEN VARIOUS PRODUCTS OF THE CAPITAL MARKET AND
THE REGULATORY ASPECT GOVERNING THE ISSUE OF SUCH PRODUCT.


1) Security is defined in SCRA.

(h) Securities include

(i) shares, scrips, stocks, bonds, debentures, debenture stock or other marketable
securities of a like nature in or of any incorporated company or other body corporate;

(ia) derivative;

(ib) units or any other instrument issued by any collective investment scheme to the
investors in such schemes;]

(ic) security receipt as defined in clause (zg) of section 2 of the Securitisation and
Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002;]

(id) units or any other such instrument issued to the investors under any mutual fund
scheme;

(ii) Government securities;

(iia) such other instruments as may be declared by the Central Government to be
securities; and

(iii) rights or interest in securities;

Derivative means an instrument, to be settled at a future date, whose value is derived
from change in interest rate, foreign exchange rate, credit rating or credit index, price
of securities (also called underlying or a combination of more than one of them and
includes interest rate swaps, forward rate agreements, foreign currecy swaps, foreign
currency options or such other instruments as may be specified by the Bank from time
to time.

Option insecurities means a contract for the purchase or sale of a right to buy or sell,
or a right to buy and sell securities in future, and includes a teji, a mandi , a galli, a
put, a call or a put and call in securities.


2) The issue of shares to the public equity, right issue, bonus issue, IDRs are
regulated by SEBI under ICDR. ESOPs are also regulated by SEBI.

ICDR Regulations
a) Lay down a regulatory framework for issue of equity shares and other
instruments convertible on a later date into equity shares ( referred to as
specified securities in the ICDR Regulations);

Conditions for bonus issue.
Subject to the provisions of the Companies Act, 1956 or any other applicable law for
the time being in force, a listed issuer may issue bonus shares to its members if:

(a) it is authorized by its articles of association for issue of bonus shares, capitalization
of reserves, etc.
Provided that if there is no such provision in the articles of association, the issuer shall
pass a resolution at its general body meeting making provisions in the articles of
associations for capitalization of reserve;

(b) it has not defaulted in payment of interest or principal in respect of fixed deposits or
debt securities issued by it;

(c) it has sufficient reason to believe that it has not defaulted in respect of the payment
of statutory dues of the employees such as contribution to provident fund, gratuity and
bonus;

(d) the partly paid shares, if any outstanding on the date of allotment, are made fully
paid up

Restriction on bonus issue.
(1) No issuer shall make a bonus issue of equity shares if it has outstanding fully or
partly convertible debt instruments at the time of making the bonus issue, unless it has
made reservation of equity shares of the same class in favour of the holders of such
outstanding convertible debt instruments in proportion to the convertible part thereof.

(2) The equity shares reserved for the holders of fully or partly convertible debt
instruments shall be issued at the time of conversion of such convertible debt
instruments on the same terms or same proportion on which the bonus shares were
issued.

American Depositary Receipt

An American Depositary Receipt (ADR) is how the stock of most foreign companies
trades in United States stocks markets. Each ADR is issued by a U.S. depositary bank
and represents one or more shares of a foreign stock or a fraction of a share. If investors
own on an ADR they have the right to obtain the foreign stock it represents, but U.S.
investors usually find it more convenient to own the ADR. The price of an ADR is often
close to the price of the foreign stock in its home market, adjusted for the ratio of ADRs
to foreign company shares.
Depository banks have numerous responsibilities to the holders of ADRs and to the
non- U.S. company the ADRs represent. The largest depositary bank is The Bank of
New York. Individual shares of a foreign corporation represented by an ADR are called
American Depositary Shares (ADS).

Global Depositary Receipt

Global Depository Receipt (GDR) certificate issued by international bank, which can
be subject of worldwide circulation on capital markets. GDRs are emitted by banks,
which purchase shares of foreign companies and deposit it on the accounts. Global
Depository Receipt facilitates trade of shares, especially those from emerging markets.
Prices of GDRs are often close to values of related shares. Very similar to GDRs are
ADRs. GDRs are also spelled as Global Depository Receipt.
(ADR/GDR are regulated by RBI)


What is an IDR?
IDR stands for Indian Depository Receipts, and Standard Chartered is the first company
to come out with an IDR. StanChart derived 12% of its income from India in 2009, and
India contributed $1.06 billion of its $7.23 billion operating profit last year, and that
may have something to do with this first.
An Indian Depository Receipt is a way for a foreign company to raise money in India.
The foreign company deposits its shares with a custodian, and then the custodian
issues depository receipts based on these shares. To that extent, IDRs are derivative
instruments because they derive their value from the underlying shares. In this case,
Standard Chartered Bank, Mumbai is the domestic depository, and it has appointed
Bank of New York, Mellon as its overseas depository.
From time to time SEBI issues directions as regards trading in derivatives.
3. WHAT IS THE DESIGN OF THE PRIMARY MARKET IN TERMS OF (1)
ALLOTMENT FOR CATEGORIES OF INVESTORS (2) PRICING (3) METHOD OF
PAYMENT (4) INFORMATION ON DECISION MAKING (5) FOLLOW ON PUBLIC
OFFERS.

(1) allotment for categories of investors

1) Retail individual bidder means an investor who applies or bids for specified
securities for a value of below Rs.2 laks

2) Non Institutional bidder:- Means an investor other than a retail individual
investor and qualified institutional buyer.

3) Qualified Institutional bidder:- means

i) A mutual fund, venture capital fund and foreign venture capital investor
registered with the Board ;

ii) A foreign institutional investor and sub- account (other than a sub- account
which is a foreign corporate or foreign individual), registered with the Board.


iii) A public financial institution as defined in section 4A of the Companies Act,
1956;

iv) A scheduled commercial bank.

v) A multilateral and bilateral development financial institution

vi) A state industrial development corporation

vii)An insurance company registered with the Insurance Regulatory and
Development Authority.

Viii) A provident fund with minimum corpus of twenty- five crore rupees;

ix) A pension fund with minimum corpus of twenty- five crore rupeesand

x) National Investment Fund set up by resolution No. F.No.2/3/2005- DDII
dated November 23, 2005, of the Government of India published in the Gazette
of India.

4) Eligible employees
There is a rebate allowed to retail investors which may go upto 10%. Recent
issues allowed only 5%.


Price fixing basis

The IPO is to be accompanied by an offer document. The Companies Act 1956 by
section 55A has delegated the administration of issue of shares etc. to SEBI. SBI has
recently come out with a detailed regulation called SEBI (Issue of capital and Disclosure
Requirements) Regulation 2009 (ICDR) replacing an earlier Disclosure of Investors
Protection Guidelines.

Pricing (Clause 28)

1) An issuer may determine the price of specified securities in consultation with
the lead merchant banker or through the book building process.

2) An issuer may determine the coupon rate and conversion price of convertible
debt instruments in consultation with the lead merchant banker or through the
book building process

3) The issuer shall undertake the book building process in a manner specified in
schedule XI.

Differential pricing

An issuer may offer specified securities at different prices, subject to the following:

a) Retail individual investors or retail individual shareholders may be offered
specified securities at a price lower than the price at which net offer is made to
other categories of applicants:

Provided that such difference shall not be more than ten percent of the price
at which specified securities are offered to other categories of applicants;

b) In case of a book built issue, the price of the specified securities offered to an
anchor investor shall not be lower than the price offered to other applicants;
(anchor Investors means qualified Institutional buyer, an application for a value
of ten crore or more in a public issue made through the book building process.

c) In case of a composite issue, the price of the specified securities offered in the
public issue may be different from the price offered in rights issue and
justification for such price difference shall be given in the offer document.

3. Method of Payment : Identified with demat account; enables blocking the amount in
a bank account without actual payment
ICDR deals with issuing shares to the public. The core part of it is pricing.
4). Information on decision making

Appointment of merchant banker and other intermediaries.

(1) The issuer shall appoint one or more merchant bankers, at least one of whom shall
be a lead merchant banker and shall also appoint other intermediaries, in consultation
with the lead merchant banker, to carry out the obligations relating to the issue.

(2) The issuer shall, in consultation with the lead merchant banker, appoint only those
intermediaries which are registered with the Board.

(3) Where the issue is managed by more than one merchant banker, the rights,
obligations and responsibilities, relating inter alia to disclosures, allotment, refund and
underwriting obligations, if any, of each merchant banker shall be predetermined and
disclosed in the offer document as specified in Schedule I.

(4) The lead merchant banker shall, only after independently assessing the capability of
other
intermediaries to carry out their obligations, advise the issuer on their appointment.

(5) The issuer shall enter into an agreement with the lead merchant banker in the
format specified in Schedule II and with other intermediaries as required under the
respective regulations applicable to the intermediary concerned:

Provided that such agreements may include such other clauses as the issuer and the
intermediary may deem fit without diminishing or limiting in any way the liabilities and
obligations of the merchant bankers, other intermediaries and the issuer under the Act,
the Companies Act, 1956, the Securities Contracts (Regulation) Act, 1956, the
Depositories Act, 1996 and the rules and regulations made thereunder or any statutory
modification or statutory enactment thereof:
Provided further that in case of ASBA process, the issuer shall take cognisance of the
deemed
agreement of the issuer with Self Certified Syndicate Banks.
(6) An issuer shall, in case of an issue made through the book building process, appoint
syndicate members and in the case of any other issue, appoint bankers to issue, at all
mandatory collection centres as specified in Schedule III and such other collection
centres as it may deem fit.
(7) The issuer shall appoint a registrar which has connectivity with all the depositories:
Provided that if issuer itself is a registrar to an issue registered with the Board, then
another
registrar to an issue shall be appointed as registrar to the issue:
Provided further that the lead merchant banker shall not act as a registrar to the issue
in which it is also handling the post issue responsibilities.
Explanation: For the purpose of this regulation, in case of a book built issue, the lead
merchant banker appointed by the issuer shall act as the lead book runner.





What is IPO grading?

ICRAs Grading of Initial Public Offerings (IPOs) is a service aimed at facilitating
assessment of equity issues offered to the public. The Grade assigned to any individual
IPO is a symbolic representation of ICRAs assessment of the fundamentals of the
issuer concerned relative to other listed securities.
IPO Grades are assigned on a five-point point scale, where IPO Grade 5 indicates the
highest grading and IPO Grade 1 indicates the lowest grading, i.e a higher score
indicates stronger fundamentals. An IPO Grade is not an opinion on the price of the
issue, pre- or post-listing.

1. IPO grading
2. Due diligence by the merchant Bank
3. Information promoters of issue purpose of issue of shares
4. Track record


4 (i) EXCHANGE TRADED FUND (ETF)

Another investment option (apart from Gold, Equity shares, mutual fuds, insurance) for
those interested in tapping the gains of a booming share market is Exchange Traded
Fund or ETF. Today one can trade on index based derivative Eg, National Stock
Exchange (NSE) Index, a basket of 50 shares of listed Companies, that captures their
price movement. You can buy an NSE Index ETF, just as you buy a share. The price is
close to the index, say Rs 5,000/-. It is traded as a mutual fund. Equity ETFs are listed
on stock exchange ETFs may be attractive as investments because of their low costs,
efficiency and stock like features.

ETFs are priced continually and can be bought or sold throughout the trading day.
Buying/selling ETFS is as simple as buying/selling any other stock on the exchange.
Other advantage of ETF is you can buy even one unit and hence take exposure in entire
index at very small amounts, viz Rs 500 aunit. Since the index is not that volatile as an
individual share, the profit margin may not be very high.

ETF can be bought/sold just by a call to the broker or through the internet trading
account. This provides investors the power to react swiftly to changes in the market and
place limit orders while trading, ETFs can be held in your DP account with the other
portfolio holdings.

Thus, with ETFs, one can benefit both from the flexibility of a stock as well as the
diversification.

Uses

Due to unique structure of ETFs, all types of investors whether retail or institutional,
long term or short term, can use it their advantage.

Individuals
Corporate
Institutions
Use it to build a long term core holding of equity by systematically investing in
various index funds like Nifty ETF, Nifty Junior ETFs, Nifty sharia ETF, bank ETF
etc.
If bullish on market, just buy a index ETF and no need to do individual stock
picking.
If you have some stock in your portfolio, just do a switch trade by selling the stocks
in your portfolio and buying an index ETF of your choice.



Advantages

Buy the Index as a share
Real time NAV and prices close to 1/10 of the index value
No hassles of margin calls (like futures)
Low expense ratio
Taxation is like a share (Long term Capital Gain is Zero and Short Term is 15%)
Listed and Traded on NSE with a minimum lot size of 1 unit


2) Sectoral Indices
Index based on prices of various sectors like infrastructure, pharma, information
technology etc this helps judge, the performance of vital sectors of the economy and to
figure out which sector is contributing to the rise or fall of the benchmark index. It also
helps investors to decide in the sector to enter or exit. The index also helps in judging a
sector with reference to global trends and impact of national policies.

3) Circuit Breakers

To prevent a runaway speculation during the trading the exchange have introduced
what is called a circuit breaker for certain Scrips and the Sensex/Nifty itself. Beyond a
specific point when the whistle blows the weight is put on the pressure cooker.


Index based Market wide Circuit Breakers/Price Bands for Securities
An index based market wide circuit breaker system applies at three stages of the
index movement either way at 10%, 15% and 20%. These circuit breakers bring about a
coordinated trading halt in trading on all equity and equity derivatives markets across
the country. The breakers are triggered by movements in either Nifty 50 or Sensex,
whichever is breached earlier.

In cases of a 10% movement in either of these indices, there would be a one hour
market halt if the movement takes place before 1.00 p.m. In case the movement
takes place at or after 1.00. p.m but before 2:30 p.m. there would be a trading halt
for hour. In case movement takes place at or after 2:30 p.m. there will be no
trading halt at the 10% level and market would continue trading.

In cases of a 15% movement of either index, there should be a two hour halt if the
movement takes place before 1 p.m. If the 15% trigger is reached on or after 1:00
p.m but before 2: 00 p.m., there should be a one hour half. If the 15% trigger is
reached on or after 2:00 p.m. the trading should halt for remainder of the day

In case of a 20% movement of the index, trading should be halted for the remainder
of the day.

4) Book Building means a process undertaken to elicit demand and to assess the price
for determination of the quantum or value of specified securities or Indian Depository
Receipts, as the case may be, in accordance with these regulations;

Guidelines for Book Building

An issuer company proposing to issue capital through book building shall comply with
the following:

75% Book Building Process

In an issue of securities to the public through a prospectus the option for 75% book
building shall be available to the issuer company subject to the following:

The option of book building shall be available to all body corporate which are
otherwise eligible to make an issue of capital to the public.
The book - building facility shall be available as an alternative to, and to the extent of
the perentage of the issue which can be reserved for firm allotment, as per these
guidelines.


The issuer company shall have an option of either reserving the securities for firm
allotment or issuing the securities through book-building process.

The issue of securities through book-building process shall be separately
identified/indicated as placement portion category in the prospectus

The securities available to the public shall be separately identified as net offer to the
public.
The requirement of minimum of 25% of the securities to be offered to the public shall
also be applicable.

In case the book building option is availed of, underwriting shall be mandatory to the
extent of the net offer to the public.






KEY ANSWERS
M.B.L. PART II EXAM iG"" f Beg. ~ 0' \
LAW OF INSURANCE
1) a) Two parties, Premium, Risk, public policy, written form and all essential under
sec 10 of Contract Act
b) Nature of Insurance Contract is yat bhavati tat nasyati, Insurable Interest,
'aleatory contract', contract of uberimma fide, contract of' indemnity', not a
wager contract, special doctrines .
Discussion of all these points under Life, Fire and Marine Ins with decided
cases .

2) page 138 & 139 of Modern Law ofInsurance by Murthy and Sarma, 4th Ed.
3) page 241 to 250 of - Modern Law ofInsurance by Murthy and Sarma, 4th Ed
4) - New India Assurance Company Ltd. v. MIs Zuari industries Ltd, (2009)9
SCC 70
(a) Whether flashover and fire was proximate cause of damage in question?
- flashover/fire which started chain of events which resulted in damage - It is evident
from chain of events that fire was efficient and active cause of damage.
(b) Whether damages caused were covered under fire policy? - if proximate cause of
loss or destruction to any other including other machines, apparatus, fixtures, fittings
etc. or part of electrical installation is due to fire which is started in an electrical
machine or apparatus all such losses because of fire in other machinery or apparatus is
covered by Policy. As long as there is a fire which caused damage claim is
maintainable, even if fire is for a fraction of a second. In fire policy word used therein
is 'fire' and not 'sustained fire'. Repudiation of policy on ground that there was no
sustained fire' not justified.
-Not followed principle laid down in Everett & Am. vs. The London Assurance
- Remedies under Consumer Protection Act, 1986- Jurisdiction/ Limitation
5) Section 45 ofInsurance Act of 1938
6) - Sec 135 ofTP Act- Assignment of the policy along with sale.
- Reynor v Preston, (1881)
7
a) -Consumer Forum : Merits of Consumer Forum - Pecuniary Jurisdiction -
Territorial Jurisdiction- Imprisonment - Enforceability- Merits and Demerits
-Insurance Ombudsman: Redressal of Public Grievances Rules, 1998; Merits and
Demerits.
b) Nomination -Sec. 39. IA 1938
Married Women's Property Act 1874, sec.6
Assignment:
LIC- Insurance Act 1938 : See 38.Assignment and transfer of msurance
policies and Married Women's Property Act 1874, sec.6
- Fire Ins: Sec135 ofTP Act, 1882
- Marine Ins: Sees. 17, 52 & 53 of MIA 1963

NATIONAL LAW SCHOOL OF INDIA UNIVERSITY, BANGALORE
MBL PART II SUPPLEMENTARY EXAMINATION (FEB) 2011
Law Relating To Foreign Trade Answer Keys


1. a) Critically evaluate the concept of 'seaworthiness' under the Carriage of Goods by
Sea Act, 1925.

The carrier is required to provide seaworthy vessel to transport goods by sea.
Therefore, the concept of seaworthiness plays a central role in the liability
regime provided by the Hague Rules, 1923. The concept of seaworthiness
generally means the ability of the ship to complete the voyage stipulated by the
contract of carriage. Falls within the ambit of this concept is the concept of
cargo worthiness of the ship. The latter expression refers to the kind of facility
to be provided by the carrier to transport specific type of goods. For example,
providing proper refrigeration system in case of perishable goods. Besides this
obligation is non-derogable one.

b) Discuss the nature of liability of the consignor for damages and expenses directly
or indirectly caused by shipment of dangerous goods under the Hague Rules.

Under Article IV of the Hague Rules, the carrier is entitled to claim damages
for any loss suffered or damage caused due to the dangerous nature of the
cargo. However, this right does not exist if the carrier had accepted the cargo
with knowledge that it was dangerous. In the case of Effort Shipping Co., Ltd
(The Giannis NK) case the court held that the words goods of dangerous
nature were to be given a wide interpretation and were not restricted to goods
which were liable to cause only direct physical damage.

2. Critically evaluate the liability of the air carrier for damage caused to the goods and
personal injury caused to passengers under the (a) Warsaw Convention and (b) the
amended Warsaw Convention.

Under Art.20 (2) of the Warsaw Convention, the carrier is not liable for damage to
the goods caused by negligent pilotage. The Hague Protocol (the amended
Warsaw Convention) 1955 abolished this dichotomy and the air carrier shall be
held liable, unless the carrier proves that he and his servants have taken all
necessary measures to avoid the damage.

Under the Warsaw Convention, the maximum compensation payable by a carrier is
1,25,000 francs and this is doubled under the amended Warsaw Convention. The
compensation payable with respect to the goods (i.e 250 francs per kilogram)
remains the same.



3. A Multimodal transport operator (MTO) registered in India enters into a contract
of carriage with a consignor to transport goods from Mumbai to Hamburg in
Germany. The cargo was damaged in the course of carriage by sea due to the
mishandling of the cargo by the crew. Discuss the liability of multimodal transport
operator.

The issue in the present problem is whether the multimodal transport operator
(MTO) shall be held liable for an act/negligence of the sea carrier under the Indian
Multimodal Transportation of Goods Act, 1993. The MTO as per the Indian Act,
enters into a contract of carriage in his own name and as principal. Therefore, he
must be considered as the principal contractual party to the contract. Thus, his
liability is independent of the liabilities of the carriers of the constituent segments.
However, if it is clearly proved that the damage occurred in a particular segment,
the legal regime of that segment will be applicable. In the present problem, facts
are very clear that the damage was caused during sea carriage (COGSA). Under
the Carriage of Goods by Sea Act, 1925 the carrier is exempted from liability
because of nautical fault. So, it may not be fair to hold the MTO liable.

4. What is meant by 'nachfrist principle'? Discuss the scope of this concept under the
Vienna Convention on International Sale of Goods, 1980.

Under the principle of nachfrist of the CISG, 1980 a party to a contract may be
given additional period of reasonable length to perform his obligation. This right is
available both to the seller as well as buyer under Articles 47 and 63 of the CISG,
respectively.

The concept interalia underscores the ideal of the CISG that contractual obligations
should be performed in good faith and parties shall resort to avoid the contract as
last resort. A successful application of nachfrist principle requires an unambiguous
notice by the party not in breach.

5. 'A', a seller entered into a contract with 'B', a buyer to supply certain quantity of silk
materials from certain places in Mysore, quite well known for this purpose. Soon
thereafter, because of a strange disease, the silkworms in that region perished in large
scale. As a result, silk materials became scarce and the price doubled. Hence, 'A'
could not supply the agreed quantity of silk materials. 'B' filed a suit against' A'.
Discuss the liability of' A' under the Indian law (Indian Sale of Goods Act and the
Indian Contract Act) and the Vienna Convention on International Sale of Goods,
1980.

The doctrines of frustration of contract and force majeure stand distinctly
different with respect to the legal effect of economic hardship. The CISG, in Art.79
takes a lenient view of the economic situation. Here, the failure of A was due to
an impediment beyond its control. Hence, A will not be liable.
a. The Common Law follows the doctrine of frustration of contract under
which the issue is whether the contract is physically or legally possible to
perform, though it would impose undue hardship on the seller. So, A will
be held liable.

6. Critically evaluate the definition of foreign arbitral award in India with special
reference to the commercial reservation clause.

In Kamani case, the Bombay High Court was of the opinion that technical and
advisory service contract did not qualify as commercial contract. This reasoning
was followed in the Indian Organic case by the same court. However, the Indian
Supreme Court in R M Investment case favored a more flexible and broad
interpretation of the word Commercial based on the general legal perceptions in
India (Art.301 of the Indian Constitution) and the explanation to the word
Commercial in the UNCITRAL Model Law on International Commercial
Arbitration, 1985 (footnote to Art.I)

7. Write short notes on:

a) Renusagar v. General Electric Company case;

In the Renusagars case, the Supreme Court held that the doctrine of public
policy in the context of the NY Convention should be narrowly construed. The
doctrine, hence, would encompass the fundamental law and policy of India, the
interest of India and justice and morality.

b) Right to cure under the CISG.

Right to cure is a concept recognized in the CISG, 1980. According to Art.34 of
the Convention the seller may cure any lack of conformity in the documents if
he had handed over documents before the stipulated time. But the seller cannot
exercise this right if exercise of this right would inconvenience the buyer. The
buyers right to claim damages is not affected. Similarly, the seller may exercise
this right in connection with delivery of goods (Art.37), with similar conditions.



Strictly for Internal Purposes
NLSIU 2011
Confidential Page 1 of 3
NATIONAL LAW SCHOOL OF INDIA UNIVERSITY
BANGALORE
MBL PART II SUPPLEMENTARY EXAMINATION (FEB) 2011
TAXATION OF CORPORATIONS & COMMODITIES
Key Hint Answers
Answer anv 4 Questions
PART A
4 X ] 0 = 40 Marks
1. There are exceptions to 'income earned Previous Year is taxed in the Assessment Year' as mentioned below:
Shipping business of Non Resident
Persons leaving India during the current assessment year or shortly after its expiry and he has no present intention of
returning to India.
Individuals/AOP/BOI/AJP formed for a particular event/purpose likely to be dissolved in the same Assessment Year
in which it is formed or immediately after such assessment year, the Assessing Officer can make assessment of the
total income of such person up to the date of dissolution.
Persons likely to transfer the property to avoid tax
Discontinued business any sum received after the discontinuance shall be deemed to be the income of the recipient
and charged to tax accordingly in the year of receipt.
2. Income tax does not define these terms. Hence the meaning depends upon natural meaning of concepts and decided
cases. Income is defined uls 2(24) of IT Act. Any income which is supposed to appreciate the capital is a capital income.
Nature of income depends on the receiver, referencing to circulating capital and ordinary course of business, substance v
form.
Income in disposition of fixed assets and in pursuance
of fixed capital
Automatic increase in capital accumulation
To be credited in capital account
Not to be calculated in assessable income
receipt in substitution of a source of income
Revenue Receipt
Earned in usual course of business, hence
regular in flow
Income in assistance with the working
capital and current assets
No increase in capital accumulation
To be credited in final profit and loss
account
Chargeable under Income Tax Act
receipt in substitution of an income
amount received under an agreement as
comoensation for loss of future orofit
3. Broad Features of taxation of Companies under Income Tax Act are:
Company has a separate legal entity and limited liability.
Corporate veil can be lifted if evade tax
Residential status, classification (domestic and foreign) with flat rates,
Avail carry forward and set off of losses in certain cases,
tax incentives are provided for economic growth, tax avoidance,
presumptive tax on book profits, MAT,
Tonnage Tax, DDT, Withholding tax, TDS/TCS, etc.,
4. Salient features are mentioned below:
Status Jurisdiction
.5OlA '< 4'..- Stttftt8 Jurisdiction
-Jurisdictional connection is the personal status rather than
-This is continental system
the source of income of the taxpayers
-Jurisdictional connection is the source of income
-In case of companies the place of incorporation is the
-Only income from domestic sources is taxed
jurisdictional test
-Territorial rule of jurisdiction follows schedular system
-Pays tax on global income tax
-France and some middle east countries follow this method
-tax rates are applied on the total global income -Economically advanced countries follow this method
Strictly for Internal Purposes
India follows mix of both the methods (hybrid)
NLSIU 2011
Confidential Page 2 of 3
5. Service tax is a central tax governed by Finance Act 1994 contained in Chapter V (sections 64-96)
It is indirect tax levied on certain cervices and is a consumption based destination tax and value added tax.
(Service tax and Vat are mutually exclusive.). There is no separate statute
Constitutional Amendment 2003 inserted Article 268C and entry 92C in the seventh schedule of Indian
Constitution
Payable by service provider except in few cases, tax is payable by service receiver, under reverse charge method.
Governed and administered by CBECS and provides for voluntary self compliance by levy of flat rate on about
117 Taxable Services
Service provider can avail cenvat credit of service tax paid on input services and excise duty paid on inputs and
capital goods. The credit can be utili sed for payment of service tax on output services.
Exemption from paying service tax is available to Small Service Providers, SEZ, services provided by RBI, etc.,
6. As per Section 2(f) of the CE Act provides inclusive definition (a process incidental/ancillary for completion of the
manufactured product) understood based on judicial decisions. This is relevant for identifying the taxable event. In the
case Union ofIndia V. Delhi Cloth and General Mills Co. Ltd; SC ofIndia held Manufacture means:
a new and identifiable product must emerge
identity ofthe original article should be lost
commercially it has to be different commodity.
this test does not apply in case of 'deemed manufacture'. Reference to deemed manufacture/produced.
PARTB
Answer anv 4 Questions
4 X IO =40 Marks
7. There are number of sources of tax laws;
First source is the Basic Act, identified by title and year and sometimes also by number; Each Act establishes
basis of tax, who pays it, when payable, when and how it is collected and other details of the taxing authority.
Then Constitution of India and its Articles having direct bearing on the tax statute.
Other Acts (Companies Act, Partnership Act, LLP Act, Hindu and other Personal Laws, etc.,) which affect the
levy and incidence of tax.
Judicial decisions published in AIR, tax law reports like ITR, etc.,
Decisions by Appellate Tribunal, CBDT, Settlement Commission, etc.,
Circulars issued by CBDT, both circulars and press notes reliable being indicative of official policy.
8. Wealth tax is on non-productive assets and tax rate is 1% on amount by which 'net wealth' exceeds
15 lakhs (currently 30 lakhs)
Specific exemptions mentioned in Section 5
Any property held by assessee under trust/other legal obligation for any public purpose of charitable/religious
nature in India.
Interest in the coparcenary property of any HUF of which he is a member.
One building in the occupation of a former ruler.
Jewellery in the possession of a former ruler.
Assets belonging to Indian Repatriates
One house or a part of house belonging to an individual or HUF or a plot of land not exceeding 500 Sq meters.
Any residential property, which has been let for a minimum period of 300days in a year is also exempted from
wealth tax
9. The provisions contained in Sections 245N to 245 V cefl~.al ill the Income Tax govern AAR.
AAR is a quasi judicial authority with its Headquarters at Delhi. Central Government constitute AAR consisting
of one Chairman (retired Judge of SC of India) + two other Members (one from IRS who is qualified to be a
member of the CBDT and other from ILS or is qualified to be an Additional Secretary to the Government 'of
India.)
Mention qualified applicants to file applications before AAR(Section 245N(b)
Ruling shall be binding as aforesaid unless there is a change in law or facts on the basis of which the advance
ruling has been pronounced on the applicant who had sought it; in respect of the transaction in relation to which
Strictly for Internal Purposes
NLSIU 2011
Confidential Page 3 of 3
the ruling had been sought; and on the Commissioner, and the IT authorities subordinate to him, in respect of the
applicant and the said transaction.
The procedure prescribed is simple, inexpensive, expeditious and authoritative. (reference to application @
Rs.2500. Applicant may withdraw application within ninety days from the date of application. AR shall
pronounce the advance ruling within six months after the receipt of the application.)
10. The provisions contained in Section 245A- 245M contained in the Income Tax based on the Wanchoo Commission
recommendations govern sc.
Settlement Commission is a quasi judicial authority.
Constituted by Central Government consisting of Chairman and as many Vice-Chairman and other members as
thinks fit. Bench for which Chairman is the Presiding Officer is called Principal Bench and other benches are
Additional Benches)
Reference to immunity from Prosecution & Penalty, levy/waive of interest, impact of amendment 2007 Finance
Act
Application only in respect of "case". Tax on undisclosed income should be above Rs 3 lakhs (currently it is
other cases 10 lakhs and 50 lakhs in case of search cases)
Tax should be paid on or before making the application in the prescribed Form.
Order of Settlement commission to be conclusive
11. The provisio~s contained in Section 144 contained in the Income Tax provides for Best Judgment Assessment~ ex-
e assessment
Applicability
-If a Person fails to make returns/revised return or has not made a return U/S 139 OR
-fails to comply to the terms of notice/direction under 142 OR
-having made return fails to comply with all terms of notice issued under section 143;
AO after taking all relevant material which is gathered give opportunity of hearing to
assessee makes assessment of Total Income/Loss to the best of his judgment and
determines the sum payable on such terms. Opportunity is not required if u/s 142( 1) prior
notice to making of assessment.
Types: Discretionary and Compulsory
Principles
-involvement of guess work
-assessment to be just, fair
and non arbitrary
-adhere to principles of
natural justice
12. Brief Facts [2003] 263 ITR 706 (SC)/ [2003] 132 Taxman 373 (SC)
- Agreement between Govt. of India and Govt. of Mauritius in respect of avoidance of double taxation and prevention
of fiscal evasion with respect to taxes on income and capital gains and for the encouragement of mutual trade and
investment. CBDT circular No. 621, 682 and 789
Principles of Fiscal Residence, Treaty Shopping, Rule in McDowell; reference to report of the Working Group on
Non-Resident Taxation, JPC Report
SC Held Circular is void and efficacious.
Double taxation agreement between India and Mauritius is valid in law and attempt by resident of a third party to take
advantage of existing provisions ofDTAC is per se not illegal
PARTC
Answer both Questions
2 X 20 = 20 Marks
13. Reference Case: Rosbanlal Oil Mills (P) Ltd V CCE (1998) (103) ELT 96] (1997 (94) ELT 230 (Tri) Del]
Appeal to Collector (Appeals) dismissed; prepare memo to CEGATS (condoned and grant exemption since not his
fault/negligence) and satisfactorily explain the reasons for delay and filed the required Certificate. Should not be
penalized for the delay on part of Directorate. Not entitled to the benefit in respect of that quantity for which failed to
produce the required Certificate. But avail in respect of that quantity for which produced the required Certificate.
14. Reference Case: Collector of Customs v. Sun Industries (1988)35 ELT 241(SC). Section 2(18) of Customs Act
Lucas TVS v Asst Collector (987)
Drawback is concerneq; exporter is entitled the moment the goods are loaded on ship in completion of the
formalities and duty in connection tbere with is paid.
Proof that goods had reached a place outside India
Unloading in a foreign port is not required to constitute 'export'