BOARD'S REPORT Your directors have pleasure in presenting the thirty eighth annual report together with the audited accounts of the company for the year ended 31 March, 2016. SHARE CAPITAL During the year, as per the terms of issue, the company converted the compulsorily convertible preference shares (CCPS) held by M/s. Dynasty Acquisition (FDI) Ltd and allotted 12,285,012 equity shares of Rs. 10/- each at a conversion price of Rs. 407/- (including a premium of Rs. 397/-) per equity share on 2 September, 2015. OPERATIONS During the year, your company achieved a 32% growth in PBT and 17% growth in total AUM. Taking advantage of the pick-up in heavy commercial vehicles (HCV) and used vehicles demand, a growth of 28% in disbursements was achieved as compared to the previous year. At a division level, the recovery signals in the commercial vehicles (CV) market reflected in an increase in disbursements in the vehicle finance (VF) business to the tune of 32%. The division recorded a growth of 14% in closing managed assets and a PBT growth of 60%. The home equity (HE) business recorded healthy growth rates across all parameters: Closing managed assets growth of 22%, disbursement growth of 14% and PBT growth of 9%. VF division was able to improve portfolio quality during the year while HE division faced pressure on account of macroeconomic factors adversely affecting the small and medium enterprises (SME) segment. The company has started reckoning assets 4 months overdue as gross non-performing assets (GNPA). Hence, the overall GNPA level seems to be higher than the previous year. However, it is lower when both the years are compared at 5 months overdue. Disbursements in VF for the year were at Rs. 12,383 crores as against Rs. 9,363 crores in the previous year. The HE business recorded a disbursement of Rs. 3,476 crores as against Rs. 3,043 crores in the previous year. Disbursements in home loans (HL) were at Rs. 175 crores as against Rs. 89 crores in the previous year and micro, small and medium enterprise (MSME) were at Rs. 325 crores as against Rs. 249 crores in the previous year. The rural financing vertical disbursed Rs. 21 crores during the year. The business assets under management (net of provisions) of the company as at 31 March, 2016 increased to Rs. 29,650 crores from Rs. 25,452 crores in the previous year, recording a growth of 16%. As in the previous year, your company has early adopted the revised asset classification norms by recognising NPAs at 4 months overdue, one year ahead of the mandatory requirement. Also, standard assets provision has been made at 0.40% during the year which is mandatory only in March 2018. In the current year, your company has created an additional provision on standard assets on a prudent basis to cover the revised asset classification norms (3 months overdue), to the extent, to be complied by March 2018. The PBT for the year was at Rs. 870.77 crores as against Rs. 657.22 crores in the previous year, recording a growth of 32%. PAT grew by 31% and was at Rs. 568.45 crores for the year as compared to Rs. 435.16 crores in the previous year. DIVIDEND The company paid a pro rata preferential dividend on 50,000,000, 1% CCPS of Rs. 100 each till the date of conversion of CCPS into equity shares as approved by the board on 2 September, 2015 and an interim dividend on the equity shares at the rate of 25% (Rs. 2.50 per equity share) as approved by the board on 29 January, 2016 for the year ended 31 March, 2016. Your directors are pleased to recommend a final dividend of 20% (Rs. 2 per equity share) on the equity shares of the company. With this, the total dividend will be 45% (Rs. 4.50 per equity share) for the year ended 31 March, 2016. TRANSFER TO RESERVES Your company has transferred a sum of Rs. 120 crores to statutory reserve as required under the Reserve Bank of India Act, 1934 and Rs. 300 crores to general reserves. The company continues to focus and grow its two main business lines - vehicle finance and home equity while seeding new business lines like home loans, corporate finance and rural finance. FIXED DEPOSITS The company is a Systemically Important Non-Deposit Accepting Non-Banking Finance Company (SI - ND - NBFC). It ceased taking deposits from the public effective 1 November, 2006. At the time of conversion, the outstanding unmatured deposits were transferred to an escrow account together with the future interest payable thereon till the date of maturity and were repaid on maturity. Accordingly, there have been no fresh deposits accepted during FY 16. As at 31 March, 2016, there were 6 depositors whose deposits had matured but had not claimed the maturity amount aggregating to Rs. 1.08 lakhs (along with interest accrued). As a process, the company sends periodical reminders to these depositors before transferring the sums due to the investor education and protection fund (IEPF) under section 125 of the Companies Act, 2013 (the Act). During the year, the company remitted a sum of Rs. 7.12 lakhs to IEPF under this head representing unclaimed public deposits and interest thereon beyond seven years ASSET FINANCE COMPANY During the year, the company retained its categorisation as an Asset Finance Company (AFC) under the RBI Regulations. CAPITAL ADEQUACY The company's capital adequacy ratio was at 19.68% as on 31 March, 2016 as against the statutory minimum capital adequacy of 15% prescribed by RBI. EMPLOYEE STOCK OPTION SCHEME Pursuant to the approval accorded by the shareholders at the twenty ninth annual general meeting of the company held on 30 July, 2007, the nomination and remuneration committee had formulated the employee stock option scheme 2007 (ESOP 2007). During the year under review, there has been no changes in the scheme and the scheme is in compliance with Securities and Exchange Board of India (Share Based Employee Benefits) Regulations, 2014 (SEBI Regulations) and the Act. The details of the scheme as on 31 March, 2016 are provided and disclosed on the website of the company (web link: <http://www.cholamandalam/esop.aspx>). The certificate from the statutory auditors as required under the SEBI Regulations, confirming that the company's ESOP Scheme, 2007 has been implemented in accordance with the SEBI Regulations and shareholders resolution, will be placed before the shareholders at the ensuing annual general meeting. DIRECTORS The term of office of Mr. Indresh Narain, independent director of the company expired at the 37th AGM held on 31 July, 2015 and accordingly ceased to be a director. The board places on record its deep appreciation for the contributions made by Mr. Narain as a chairman of the audit committee and member of the Board and various committees during his tenure in office. Mr. M.M. Murugappan, director, retires by rotation at the ensuing annual general meeting and being eligible, has offered himself for re-appointment. The term of office of Mr. Vellayan Subbiah, managing director of the company expired on 18 August, 2015 and being eligible, the board at its meeting held on 31 July, 2015 re-appointed Mr. Subbiah as the managing director of the company for a further period of 2 years with effect from 19 August, 2015 subject to the approval of the members at the ensuing general meeting of the company. DECLARATION FROM INDEPENDENT DIRECTORS The independent directors (IDs) have submitted a declaration of independence, as required pursuant to section 149(7) of the Act, stating that they meet the criteria of independence as provided in section 149(6) of the Act. In the opinion of the board, these IDs fulfill the conditions specified in the Act and the rules made thereunder for appointment as IDs and confirm that they are independent of the management. KEY MANAGERIAL PERSONNEL Pursuant to the provisions of section 203 of the Act read with the rules made thereunder, the following employees are the whole-time key managerial personnel of the company: 1. Mr. Vellayan Subbiah, Managing Director 2. Mr. D. Arul Selvan, Chief Financial Officer and 3. Ms. P. Sujatha, Company Secretary DIRECTORS' RESPONSIBILITY STATEMENT The directors' responsibility statement as required under section 134(5) of the Act, reporting the compliance with accounting standards, is attached and forms part of the board's report. SIGNIFICANT AND MATERIAL ORDERS PASSED BY THE REGULATORS There are no significant and material orders passed by the regulators or courts or tribunals which would impact the going concern status of the company and its future operations. MANAGEMENT DISCUSSION AND ANALYSIS The management discussion and analysis report, highlighting the business-wise details is attached and forms part of this report. The report also contains the details of the risk management framework of the company including the development and implementation of risk management policy and the key risks faced by the company. CORPORATE GOVERNANCE REPORT A report on corporate governance as per the Listing Regulations is attached and forms part of this report. The report also contains the details as required to be provided on the number of meetings of the board, composition of the various committees including the audit committee and corporate social responsibility committee, annual board evaluation, remuneration policy, criteria for board nomination and senior management appointment, whistle blower policy / vigil mechanism, etc. The managing director and the chief financial officer have submitted a certificate to the board regarding the financial statements and other matters as required under regulation 17(8) of the Listing Regulations. CONSOLIDATED FINANCIAL STATEMENTS The consolidated financial statements prepared in accordance with the Act and the relevant accounting standards form part of this annual report AUDITORS Pursuant to the provisions of section 139 of the Act and the rules framed thereunder, M/s. Deloitte Haskins & Sells, chartered accountants, were appointed as statutory auditors of the company in the thirty sixth annual general meeting held on 31 July, 2014 for a period of 3 years commencing from the conclusion of the thirty sixth annual general meeting till the conclusion of the thirty ninth annual general meeting subject to ratification by members at every AGM. Accordingly, your directors recommend the ratification of the appointment of M/s. Deloitte Haskins & Sells, as statutory auditors of the company from the conclusion of the thirty eighth annual general meeting till the conclusion of the thirty ninth annual general meeting of the company. The statutory auditors have confirmed their eligibility for appointment. SECRETARIAL AUDIT Pursuant to the provisions of the Act and the rules framed thereunder, the company appointed M/s. R. Sridharan & Associates, company secretaries to undertake the secretarial audit of the company for FY 16. The audit report is attached and forms part of this report and does not contain any qualification. EXTRACT OF ANNUAL RETURN In accordance with section 134(3)(a) of the Act, the extract of the annual return in form MGT-9 is attached and forms part of this report. CORPORATE SOCIAL RESPONSIBILITY The murugappa group is known for its tradition of philanthropy and community service. The group's philosophy is to reach out to the community by establishing service-oriented philanthropic institutions in the field of education and healthcare as the core focus areas. The company upholds the group's tradition by earmarking a part of its income for carrying out its social responsibilities. The company has been carrying out corporate social responsibility (CSR) activities for many years now even before it was mandated under the Act. With the enactment of the CSR provisions in the Act, the company has put in place a CSR policy incorporating the requirements therein which is available on the company's website, www.cholamandalam.com As per the provisions of the Act, the company is required to spend at least 2% of the average net profits of the company made during the three immediately preceding financial years. This amount aggregated to Rs. 1,105 lakhs and the company entered into commitments with various NGOs to spend the entire amount. Out of the committed amount, the company spent Rs. 930 lakhs towards CSR activities during FY 16, the details of which are annexed to and form part of this report. In addition to this CSR spend, the company contributed Rs. 200 lakhs to Chief Minister's Public Relief Fund towards flood relief activity in Tamil Nadu which does not qualify as a CSR spend under schedule VII of the Act. The company would be meeting its CSR obligations for FY 16 including the said sum. INTERNAL FINANCIAL CONTROLS Internal control framework including clear delegation of authority and standard operating procedures are established and laid out across all businesses and functions. These are reviewed periodically at all levels. The company adopts a co-sourced model of internal audit. The risk and control matrices are reviewed on a quarterly basis and control measures are tested and documented. These measures have helped in ensuring the adequacy of internal financial controls commensurate with the scale of operations of the company. RELATED PARTY TRANSACTIONS The company has in place a policy on related party transactions as approved by the board and the same is available on the website of the company. All related party transactions that were entered into during the financial year were on an arm's length basis and were in the ordinary course of business. There are no materially significant related party transactions made by the company with promoters, directors, key managerial personnel or other designated persons which may have a potential conflict with the interest of the company at large. All proposed related party transactions were placed before the audit committee for approval at the beginning of the financial year. The transactions entered into pursuant to the approval so granted were placed before the audit committee for its review and ratification for modifications, if any, on a quarterly basis. None of the directors has any pecuniary relationship or transaction vis-a-vis the company. INFORMATION AS PER SECTION 134(3)(m) OF THE ACT The company has no activity relating to consumption of energy or technology absorption. Foreign currency expenditure amounting to Rs. 1.15 crores was incurred during the year under review. Foreign currency remittances during the year was Rs. 5.19 crores towards preference and equity dividend and Rs. 2.24 crores towards purchase of fixed assets. The company does not have any foreign exchange earnings. PARTICULARS OF EMPLOYEES In accordance with section 136 of the Act, the report and accounts is being sent to the members and others entitled thereto, excluding the statement prescribed under rule 5(2) and (3) of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014. The aforesaid information is available for information at the registered office of the company during the business hours on working days of the company. If any member is interested in obtaining a copy, such member may write to the company secretary in this regard. DISCLOSURE OF REMUNERATION The disclosure with respect to remuneration as required under section 197 of the Act read with rule 5 of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014 is attached and forms part of this report. SUBSIDIARIES CHOLAMANDALAM SECURITIES LIMITED (CSEC) CSEC recorded a gross income of Rs. 12.83 crores for the year ended 31 March, 2016 and made a PBT of Rs. 1.74 crores as against a PBT of Rs. 3.42 crores in the previous year. CHOLAMANDALAM DISTRIBUTION SERVICES LIMITED (CDSL) CDSL recorded a gross income of Rs. 12.62 crores for the year ended 31 March, 2016 and made a PBT of Rs. 7.01 crores as against a PBT of Rs. 5.58 crores in the previous year. During the year, CDSL was given an "in principle" approval by RBI to convert the company into a payments bank under the Guidelines for Licensing of Payments Bank. However, considering the challenges in the project and the changing landscape, leading to substantially higher investment over and above the regulatory capital requirement of Rs. 100 crores, longer gestation period to reach profitable operations, the board decided not to proceed with the payments bank proposal. Accordingly, the "in principle" approval was surrendered to RBI in March 2016. WHITE DATA SYSTEMS INDIA PRIVATE LIMITED (WDSI) During the year, your company invested a sum of Rs. 8 crores in 1,275,917 equity shares of WDSI. Further to this, WDSI became a subsidiary of the company with effect from 16 March, 2016 with the aggregate equity holding of the company in WDSI constituting 63%. WDSI had commenced operations in April 2015 and recorded a gross income of Rs. 0.04 crores for the period ended 31 March, 2016 with a loss before tax of Rs. 0.52 crores. The directors wish to thank the company's customers, vehicle manufacturers, vehicle dealers, channel partners, banks, mutual funds, rating agencies and shareholders for their continued support. The directors also thank the employees of the company for their contribution to the company's operations during the year under review. On behalf of the board M.B.N. Rao Chairman Place : Chennai Date : 29 April, 2016 |