DIRECTORS' REPORT TO The Members, Your directors have pleasure in presenting their Seventy Third Annual Report on the business and operations of the Company together with the Audited Statement of Accounts for the year ended 31st March 2016. 2. Dividend Due to loss, the Board of Directors has not recommended dividend for the year ended 31st March 2016. 3. Financial Performance and the state of the Company's affairs 3.1 Standalone On a Standalone basis, your Company achieved revenue of Rs 13,370.32 lakhs in FY 14-16 (18 months) from Continuing Operations as against Rs. 9,172.45 Lakhs in FY13-14 (12 Months). On an annualized basis revenue was lower by Rs 258.00 lakhs mainly due to reduced revenue from Automation and control segment by Rs 1,038.00 lakhs which was partly offset by increase in revenue from Network Management segment by Rs 780.00 lakhs. Loss before Tax from continuing operation has reduced from Rs 357.26 lakhs in FY 13-14 (12 months) to Rs 1.69 lakhs in FY 14-16 (18 months).This was mainly due to increase in high margin service income of VSAT division. The segment wise performance (Standalone) for the year was as follows : Automation & Control earned total revenue of Rs 1,300 lakhs in FY 14-16 (18 months) [Rs 1,906 lakhs in previous year (12 months)] and incurred a segment loss of Rs. 593 lakhs in FY 14-16 (18 months) [loss of Rs. 740 lakhs in previous year(12 months)]. Network Systems earned a total revenue of Rs.12,024 lakhs in FY14-16(18 months) [Rs. 7,241 lakhs in previous year (12 months)] and reported a segment profit of Rs. 3,204 lakhs in FY 14-16 (18 months) [profit of Rs. 2,029 lakhs in previous year (12 months)] Interest amounted to Rs.1,142 lakhs in FY 14-16 (18 months) [Rs. 619 lakhs in previous year (12 months)]. Other unallocable expenses (net of income) were Rs. 1,471 lakhs in FY 14-16 (18 months) as against un-allocable income (net of expenses) of Rs. 214 lakhs in the previous year (12 months). 3.2 Consolidated On a consolidated basis, revenue from Continuing Operations stood at Rs 20,043.98 lakhs in FY 16 (18 months) as against Rs.12,326.73 Lakhs in FY14 (12 Months). On an annualized basis revenue of the Company increased by Rs 1,036 Lakhs mainly on account of increased in revenue from Network Management segment by Rs 2,074 Lakhs and revenue from Automation and Control segment reduced by Rs 1,038 Lakhs. Loss before Tax from Continuing Operations reduced from Rs 268.73 Lakhs in FY 14 (12 months) to Rs 150.08 Lakhs in FY 16 (18 months). There were no material changes and commitments affecting the financial position of the Company which occurred between the end of the period under review and the date of this Report. 3.3 Operations Network System consisting of VSAT and SATCOM contributed to 93.49% of the consolidated continuing operations revenue during the 18 months period ended 31st March 2016 as against 84.50 % during 12 months period in FY 13-14. Automation Control consisting of Integrated Security & surveillance Solutions (ISSS), currently being operated on a restricted mode contributed to 6.51% of the continued operations during this 18 months period ended 31st March 2016 as against 15.50% during FY 13-14 (12 months) These are discussed in detail in the Management Discussion & analysis which forms a part of this report. During the period under review, the Members, as a part of restructuring process, approved (subject to other requisite approvals) the transfer of following businesses as a "going concern" on a "slump sale" basis: • Managed Services business ("MS Business") which was forming part of Network System segment, to Securens Systems Pvt. Ltd. at a consideration of Rs. 210 lakhs with effect from 1st April, 2015. The transaction was concluded on 31st August, 2015. • Unattended Ground Sensors business ("UGS Business") which was forming part of Automation & Control segment, to The Tata Power Co. Ltd. (The Parent Company) at a consideration of Rs. 831 lakhs with effect from 1st October, 2014. The conclusion of the transaction is pending for approval (which has already been applied and pursued) of Ministry of Defense (the Customer). 4. Reserves The Board of Directors has not proposed any amount for transfer to reserves for the period ended 31st March, 2016. 5. Subsidiary and Associate Company As on 31st March 2016, the Company had one Wholly Owned Subsidiary viz. Tatanet Services Ltd. and one Associate Company viz. Nelito Systems Ltd. There has been no major change in the nature of business of these Companies. Also none of the then existing Subsidiary or Associate ceased to be Subsidiary/ Associate of the Company during the period under review. During the period under review, the Company has infused Rs. 484 lakhs in its Wholly Owned Subsidiary by subscribing to the equity shares at par offered by it. The Policy for determining material subsidiaries of the Company has been provided in the following link: http://www.nelco.in/_content/investorrelations/Policy_for_determining_Material_Subsidiaries.pdf> 6. Directors and Key Managerial Personnel In terms of Section 149 of the Companies Act, 2013 ("Act") the Members, at the 72nd Annual General Meeting (AGM) held on 28th January 2015, appointed the following Independent Directors of the Company till 27th January, 2020: • Mr. R.R.Bhinge • Mr. P.K.Ghose • Mr. R.Savoor • Mr. K.Raghuraman • Mr. K.Ramachandran • Ms. Hema Hattangady Due to pre-occupation and other commitments, Mr.P.K.Ghose and Mr. R. Savoor, Independent Directors and Mr. V.K.Deshpande and Mr. Sanjay Dube, Non-Independent Directors stepped down from the Directorship with effect from 18th March 2015. The Board places on record its sincere appreciation for their valuable guidance and contribution during their tenure as Directors of the Company. Pursuant to the "Governance Guidelines for Tata Companies on Board Effectiveness" adopted by the Board of Directors of the Company at its meeting held on 18th March, 2015, Mr. R.R.Bhinge did not fall under the category of Independent Director. Hence, effective from 18th March, 2015, his category/status of Directorship has been changed from Independent Director to Non-Independent Director liable to retire by rotation. Hence, in accordance with the requirements of the Act and the Articles of Association of the Company, Mr. R.R. Bhinge retires by rotation at the ensuing AGM and is eligible for re-appointment. Additional information and brief profile as stipulated under SEBI (Listing Obligations & Disclosure Requirements), Regulations, 2015 with respect to Director seeking re-appointment is annexed to the Notice of AGM. In terms of Section 203 of the Act, the Board has designated the following persons as Key Managerial Personnel of your Company: • Mr. P.J. Nath, Executive Director & CEO • Mr. Uday Banerjee, Chief Financial Officer • Mr. Girish Kirkinde, Company Secretary During the period under review, twelve Board Meetings were held. For further details, please refer Report on Corporate Governance. The Company has received declarations from all the Independent Directors confirming that they meet the criteria of independence as prescribed under the Act and SEBI (Listing Obligations & Disclosure Requirements) Regulations, 2015. Governance Guidelines: The Company has adopted Governance Guidelines on Board Effectiveness. The said Guidelines covers aspects related to composition and role of the Board, Chairman and Directors, Board diversity, definition of independence, Director's term, retirement age and Committees of the Board. It also includes aspects relating to nomination, appointment, induction and development of Directors, Director Remuneration, subsidiary oversight, Code of Conduct, Board Effectiveness Review and mandates of Board Committees. 7. Annual Evaluation of Board Performance and Performance of its Committees and Individual Directors. As required under the Act and SEBI (Listing Obligations & Disclosure Requirements) Regulations, 2015, the Board has carried out an annual evaluation of its own performance, performance of the Directors individually as well as the evaluation of the working of its Committees. The following process was adopted for Board Evaluation: Feedback was sought from each Director about their views on the performance of the Board covering various criteria such as degree of fulfillment of key responsibilities, Board structure and composition, establishment and delineation of responsibilities to various Committees, effectiveness of Board processes, information and functioning, Board culture and dynamics, quality of relationship between the Board and the Management and efficacy of communication with external stakeholders. Feedback was also taken from every Director on his assessment of the performance of each of the other Directors. The Nomination and Remuneration Committee (NRC) then discussed the above feedback received from all the Directors. Based on the inputs received, the Chairman of the NRC also made a presentation to the Independent Directors at their meeting, summarizing the inputs received from the Directors as regards Board performance as a whole, and of the Chairman. The performance of the non-independent non-executive Directors and Board Chairman was also reviewed by them. Post the meeting of the Independent Directors, their collective feedback on the performance of the Board (as a whole) was discussed by the Chairman of the NRC with the Chairman of the Board. It was also presented to the Board and a plan for improvements was agreed upon. Every statutorily mandated committee of the Board conducted a self-assessment of its performance and these assessments were presented to the Board for consideration. Areas on which the Committees of the Board were assessed included degree of fulfillment of key responsibilities, adequacy of Committee composition and effectiveness of meetings. Feedback was provided to the Directors, as appropriate. Significant highlights, learning and action points arising out of the evaluation were presented to the Board. 7.1 Committees of the Board The Committees of the Board focus on certain specific areas and make informed decisions in line with the delegated authority. The following substantive Committees constituted by the Board function according to their respective roles and defined scope: • Audit Committee of Directors • Nominations, HR and Remuneration Committee (NRC) • Stakeholders Relationship Committee • Executive Committee of the Board Details of composition, terms of reference and number of meetings held for respective Committees are given in the Report on Corporate Governance which forms part of the Annual Report. The details of the familiarization programs for Independent Directors are disclosed on the Company's website and the web link for the same is: <http://www.nelco.in/_content/investor-relations/Familiarisation_Programme.pdf> The Board has laid down separate Codes of Conduct for Non-Executive Directors and Senior Management personnel of the Company and the same are posted on the Company's website. All Board Members and Senior Management personnel have affirmed compliance with the Code of Conduct. The Executive Director & CEO has also confirmed and certified the same. The certification is enclosed at the end of the Report on Corporate Governance. 7.2 Remuneration Policy for the Directors, Key Managerial Personnel and other Employees. In terms of Section 178(3) of the Act and Part D of Schedule II of SEBI (Listing Obligations & Disclosure Requirements) Regulations, 2015, the NRC is responsible for formulating the criteria for determining qualification, positive attributes and independence of a Director. The NRC is also responsible for recommending to the Board a policy relating to the remuneration of the Directors, Key Managerial Personnel and other employees. In line with this requirement, the Board has adopted the Policy on Board Diversity, which is reproduced in Annexure-I and Remuneration Policy for Directors, Key Managerial Personnel and other employees of the Company, which is reproduced in Annexure-II forming part of this report. Except the Performance Linked Payment (PLP) which is a part of his Cost to the Company (CTC), the Executive Director & CEO has not received any commission from the Company and also not received any commission / remuneration from its Holding or Subsidiary Company. 7.3 Particulars of Employees and Remuneration The information required under Section 197 (12) of the Act read with Rule 5 of The Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014, is provided in Annexure - III (A) forming part of this Report. The information required under Rule 5 (2) and (3) of The Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014, is provided in the Annexure - III (B) forming part of this Report. In terms of the first proviso to Section 136 of the Act, the Report and Accounts are being sent to the members excluding the aforesaid Annexure III (B). Any member interested in obtaining the same may write to the Company Secretary at the Registered Office of the Company. None of the employees listed in the said Annexure III (B) is related to any Director of the Company. 8. Significant and material Orders passed by the Regulators or Courts or Tribunal There were no significant and material orders passed by the Regulators / Courts or Tribunal which would impact the going concern status of the Company and its future operations. Further, no penalties have been levied by Regulators during the period under review. Sales Tax matters of Tatanet Services Ltd. (TNSL) Wholly Owned Subsidiary. Maharashtra Sales Tax Department has issued orders against TNSL demanding payment of MVAT on the entire satellite communication services provided by TNSL on the ground that "The facility to use the transponders is property, is commercial in nature and goods and therefore, transaction of lease of facility to use the transponders is a deemed sale and accordingly MVAT is applicable". The orders issued for financial year 2006-07 to 2010-11 and aggregate amount under dispute is Rs 38.36 crs. The Company has filed writ petition in Bombay High Court and outcome of judgment is being awaited. As per legal opinion sought by Company, it has very strong case. Since TNSL provide only services to its customers and pays service tax, there are no goods or right to use of goods are involved in it. Income Tax matters of Nelco Ltd:- Income Tax Department has reduced certain liabilities of Rs.1,893.00 lakhs while computing long term Capital Gain which was not related to business sold under slump sale for Assessment Year 2011-12 due to which a Tax demand of Rs 631 lakhs has been raised on the Company. As per legal opinion sought by Company, it has a very strong case. Matter presently lying with Commission of Appeal. 8.1 Corporate Governance Pursuant to SEBI (Listing Obligations & Disclosure Requirements) Regulations, 2015 and relevant provisions of the Act, a Management Discussion and Analysis Statement, Report on Corporate Governance and Auditors' Certificate, are included in the Annual Report. 8.2 Vigil Mechanism The Company believes in the conduct of the affairs of its constituents in a fair and transparent manner by adopting highest standards of professionalism, honesty, integrity and ethical behaviour. In line with the Tata Code of Conduct (TCOC), any actual or potential violation, howsoever insignificant or perceived as such, would be a matter of serious concern for the Company. The role of the employees in pointing out such violations of the TCOC cannot be undermined. Pursuant to Section 177(9) of the Act, a vigil mechanism has been established for Directors and employees to report to the management the instances of unethical behaviour, actual or suspected, fraud or violation of the Company's code of conduct or ethics policy. The Vigil Mechanism provides a mechanism for employees of the Company to approach the Chief Ethics Counselor (CEC)/ Chairman of the Audit Committee of the Company. 9. Risks and Concerns The Company is faced with risks of different types, all of which need different approaches for mitigation. Details of various risks faced by the Company are provided in Management Discussion & Analysis. 9.1 Risk Management Framework and Internal Financial Controls Risk Management framework: The Company and its Subsidiary have Risk Management framework to inform the Audit Committee and Board members about risk assessment and minimization procedures and periodical review to ensure that Executive Management controls risks by means of properly designed framework. The Company has also established a risk management policy based on which risks are identified and assessed across its businesses. The Risk Management Committee which comprises of the CEO, CFO and key business and operations heads, ensures that existing and future risk exposures of the Company are identified, assessed, quantified, appropriately mitigated, minimized and managed. The Company's framework of risk management process provides clear basis for informed decision making at all levels of the organization on an ongoing basis, having duly evaluated likely risks and their mitigation plans being controllable and within risk appetite. There are no elements of risk, which in the opinion of the Board may threaten the existence of the Company. Internal Financial Control and Systems: The Company has an internal control system, commensurate with size, scale and complexity of its operations. Testing of such control systems form a part of internal audit schedule. The Company has appointed independent Internal Auditors who oversee governance, risks management and internal controls. The scope and authority of internal audit is defined in Audit Committee Charter adopted by the Company. Internal control has been discussed in detail in Management Discussion & Analysis in this report. 10. Sustainability 10.1 Corporate Social responsibility As per Section 135 of the Act, every Company having a net worth of Rs. 500 crore or more, or turnover of Rs.1,000 crore or more, or net profit of Rs. 5 crore or more during any financial year shall be required to constitute Corporate Social Responsibility Committee (CSRC). As your Company presently does not fall under any of the criterion mentioned above, the CSRC has not been constituted. 10.2 Safety, Health and Environment: The Company accords high priority to health, safety, and environment treating these as integral part of all its activities. The operations of the Company are not of a hazardous nature. However, the Company emphasizes on maintaining a healthy and safe environment in and around its facilities as well as contract sites where projects are under execution. To ensure success of safety initiatives, the Company involves the line management along with contract workforce in all initiatives rolled out from time to time. Safety Awareness is inculcated through regular Safety Awareness Programs, basic fire safety training, mock drills, regular Safety Committee meetings and capturing employees' voices through safety observation and near miss reporting. The employees working at project sites are given requisite training for ensuring safety during work. Periodic Safety Audit is carried out and action taken to eliminate unsafe conditions. 11. Human Resources Some of the major human resource initiatives undertaken by the Company during the period under review to supplement efforts towards organizational growth include: • Manpower: As on March 31st, 2016, the Company had employee strength of 160. During the period under review, 21 employees were recruited and 42 employees were separated (including those transferred as part of divestment of Managed Services business). None of the employees related to the business were retrenched due to the divestment of business but were transferred with full benefit of service continuity and service conditions not less favorable than the existing employment conditions. • Employee Engagement: Company's employee engagement platforms are inclusive and empowering. It connects employees with leaders, their peers and Human Resource function. Forums such as Open house, Employee Connect meetings, Skip level meetings, Manager connect meetings, weekly review meetings like AHM (All Hands Meet) provide interactive platforms for sharing information and feedback and also conferring rewards and recognitions. Various initiatives in the field of Employee Recreation have also been instrumental in taking engagement levels to the next level. The incessant efforts towards empowering people has resulted in overall participation being 96% and overall satisfaction score being 87% for 2016 as compared to 48% last year in the Employee engagement survey conducted by Aon. • Capability Development: In order to build organizational capability that will enable the Company to sustain competitiveness in the market, a comprehensive exercise was undertaken to map the attributes required to develop Competency Framework for key functions. The training programs for the learning growth of employees have been developed based on the set of these identified competencies. • Talent Management: As part of efforts for capability building of employees at all levels a personalized coaching on Interpersonal skills for 7 Senior management employees was conducted. Similarly, 8 Hi-potential employees have undergone Online Development Centre (ODC) which was conducted by Tata Power in collaboration with their talent partners CEB-SHL • Industrial Relations: In the Industrial Relations front, the Company maintained cordial relations with its employees during the period. • Policy for Prevention, Prohibition and Redressal of Sexual Harassment at work place: The Company has in place a Policy for Prevention, Prohibition and Redressal of Sexual Harassment at Work Place. Appropriate reporting mechanisms are in place for ensuring protection against Sexual Harassment and the right to work with dignity. During the year under review, the Company has not received any complaints in this regard. 12. Credit Rating During the year, rating agency CRISIL has downgraded its rating on Company's bank facilities and debt programme to CRISIL BBB+/Stable/CRISIL A2 form CRISIL A-/negative /CRISILA2+. Revised rating done by CRISIL based on their criteria on notching up rating for parent support. The downgrade reflects reassessment of the strategic importance of Nelco to the parent, The Tata Power Company Ltd. (TPCL), while continuing to factor the support that Nelco receives from TPCL and other Tata group companies. 13. Loans, Guarantees, Securities and Investments (LGSI) Details of LGSI covered under Sec 186 of the Act are given in Annexure - IV forming part of this report. 15. Auditors M/s. Deloitte Haskins & Sells LLP (DHS LLP), who are the statutory auditors of your Company, hold office until the conclusion of the Seventy Fifth AGM to be held in the year 2018, subject to ratification of their appointment at every AGM. The Members, year on year, will be requested, to ratify their appointment as Auditors and to authorize the Board of Directors to fix their remuneration. In this connection, the attention of the Members is invited to Item No.4 of the Notice. 16. Auditors' Report The consolidated financial statements of the Company have been prepared in accordance with Accounting Standard 21 on Consolidated Financial Statements and Accounting Standard 23 on Accounting of Investments in Associates issued by the Council of The Institute of Chartered Accountants of India. The Notes to the Accounts referred to in the Auditors' report are self-explanatory and therefore do not call for any further clarification under section 134(3)(f) of the Act. 17. Cost Auditors and Cost Audit Report M/s. P.D. Dani & Co., Cost Accountants was appointed Cost Auditors of your Company for the period ended 31st March, 2016. In accordance with the requirement of the Central Government and pursuant to Section 148 of the Act, your Company carries out every year, an audit of cost accounts relating to Telecommunication (ISP) activities and Electronics Products. The Cost Audit Report and the Compliance Report of your Company for the Financial Year ended 30th September 2014, which was due for filing by 31st March 2015, was filed on 25th March 2015 with the Ministry of Corporate Affairs through Extensive Business Reporting Language (XBRL) by M/s P.D. Dani & Co., Cost Accountants. 18. Secretarial Audit Report M/s. Bhandari & Associates, Practicing Company Secretaries, were appointed as Secretarial Auditors to conduct Secretarial Audit of records and documents of the Company for the period ended 31st March, 2016. The Secretarial Audit Report confirms that the Company has generally complied with the provisions of the Act, Rules, Regulations, and Guidelines, etc. The Secretarial Audit Report is given in Annexure -V forming part of this report. There are no remarks, qualifications or reservations in the Secretarial Audit Report. 19. Conservation of Energy and Technology Absorption The information on conservation of energy and technology absorption stipulated under Section 134 (3) (m) of the Act read with Rule 8 of The Companies (Accounts) Rules, 2014, is attached as Annexure - VI forming part of this report. 20. Related Party Transactions The transaction of sale and transfer of Company's Defense business consisting mainly of the UGSs to the Parent/Promoter Company, The Tata Power Co. Ltd. (being a related party) was entered on an arm's length basis, based on the valuation arrived at by an independent valuer. However, since this transaction could be construed as being outside the ordinary course of business, the approval of the Members of the Company under section 188 of the Act was sought by way of a Special Resolution. The details of the said transaction are given in Form AOC-2 (Annexure - VII forming part of this report) as required under Section 134 (3)(h) of the Act. All related party transactions entered into during the period under review were on an arm's length basis and were in the ordinary course of business. There were no other materially significant related party transactions made by the Company with Promoters, Directors, Key Managerial Personnel and Body Corporate(s) which had a potential conflict with the interest of the Company at large. Accordingly, the disclosure of these Related Party Transactions as required under Section 134 (3) (h) of the Act in Form AOC 2 is not applicable for the period under review. The Directors draw attention of the Members to Note no. 32 to the Financial Statements which sets out related party disclosures. In line with the requirements of the Act and the SEBI (Listing Obligations & Disclosure Requirements) Regulations, 2015, the Company has formulated a Policy on Related Party Transactions and the same is uploaded on the Company's website: <http://www.nelco.in/_content/investor-relations/Related_Party_Transaction_Policy.pdf>. 21. Deposits The Company has not accepted any deposits from the public during the period under review. 22. Extract of Annual Return Pursuant to Section 92 of the Act and Rule 12 of The Companies (Management and Administration) Rules, 2014, the extract of Annual Return in Form MGT-9, is provided in Annexure-VIII forming part of this report. 23. Directors' Responsibility Statement Based on the framework of internal financial controls and compliance systems established and maintained by the Company, work performed by the internal, statutory, cost auditors, secretarial auditors and external consultants and the reviews performed by Management and the relevant Board Committees, including the Audit Committee, the Board is of the opinion that the Company's internal financial controls were adequate and effective during the period under review. Accordingly, pursuant to Section 134(5) of the Companies Act 2013, the Board of Directors, to the best of their knowledge and ability, confirm that: a) in the preparation of the annual accounts for the period ended 31st March, 2016, the applicable accounting standards had been followed along with proper explanation relating to material departures; b) they have, in the selection of the accounting policies, consulted the Statutory Auditors and have applied them consistently and made judgments and estimates that are reasonable and prudent so as to give a true and fair view of the state of affairs of the Company for the period ended 31st March, 2016 and of the loss of the Company for that period; c) they have taken proper and sufficient care for the maintenance of adequate accounting records in accordance with the provisions of the Companies Act, 2013 for safeguarding the assets of the Company and for preventing and detecting fraud and other irregularities; d) they have prepared the accounts for the period under review on a going concern basis; e) they have laid down internal financial controls to be followed by the Company and that such internal financial controls are adequate and were operating effectively; f) they have devised proper systems to ensure compliance with the provisions of all applicable laws and that such systems were adequate and operating effectively. 24. Acknowledgement On behalf of the Directors of the Company, I would like to place on record our deep appreciation to our Shareholders, Customers, Business Partners, Vendors, Bankers and Financial Institutions. The Directors are thankful to the Government of India and the various Ministries and Regulatory Authorities. We appreciate and value the contributions made by all our employees. On behalf of the Board of Directors, R.R.Bhinge Chairman PLACE : Mumbai, DATE : 31st May, 2016 |