DIRECTORS' REPORT TO THE MEMBERS KERNEX MICROSYSTEMS (INDIA) LIMITED Your Directors present herewith, the Twenty third Annual Report together with the audited accounts of the company for the year ending 31 March 2015 Year in Retrospect The year 2014-2015 was a difficult year and company has incurred a loss of Rs 9.39 crores. The main reason is the slow progress of the ENR project 136LX gates due to difficult working conditions, innumerable technical problems, gate accidents that diverted man power. The dropping of 75 gate contract by ENR, local law and order problems in Egypt, slow decision making and shortage of adequate working capital, etc., compounded our difficulties and drastically curtailed the earnings expected from Egypt. In the domestic area Kernex could not obtain any new projects and all projects are either that of Railways or Defence which have long gestation period and need heavy Investment Kernex is required to complete the TCAS project along with other competitors, which requires a lot of working capital. In the absence of any bank credit, company has to spend on R&D work from their revenue. Owing to lack of orders, switch over from ACD to TCAS, a number of properties of Kernex could not be put to use. However, the depreciation cost has to be provided for. Despite best efforts, Kernex could not obtain a large amount of pending receivables from KRCL. The matter Arbitration and the Arbitration award is awaited. In view of the adverse circumstances, the overall earnings decreased from Rs 33.00 crores to Rs 23.00 crores this year. The expenditure could not be reduced, as it would have severely affected our working in Egypt, NFR Railways and TCAS Projects. In order to raise funds to meet the urgent requirements of capital for pursuing running projects, your Board of Directors have taken a decision to dispose of the non essential assets not generating viable revenues to meet the capital and operational requirements and complete the work on ENR and TCAS. The Company's Business and Operational Results 1. With the dropping of ACD project by KRCL/Indian Railways, The Train Collision Avoidance System which was awarded in April' 2013 for development was continued in the modular development mode during 2014-2015 and has now reached a level of design and functional capability demonstration. Design has been approved and type test have been successfully completed. Production was taken up by your company in November'2014 and continued upto 31st March' 2015. Onsite work including erection of towers and wiring is in progress and is likely to be completed shortly. The breaking Interface unit, including test bench work was completed and Type and user testing is likely to be completed by the end September'2015. 2. New Certification agency as approved by RDSO, Lucknow for Safety Integrity Independent Level by an Independent Safety Assessment Agency (ISA) is being appointed in place of the earlier agency who has expressed its inability to continue. New ISA is likely to be finalized shortly out of the RDSO's panel.. 3. The User trials are scheduled for September -October'2015 and on successful trials, TCAS may be used by Railways for deployment in Indian Railway Network. 4. The Annual Maintenance Contract and OMC of ACD System in N F Railways has been successfully carried out during the year and continued in the current year. The extension of the same up to 31st March'2016 is awaited. 5. Your company has entered into an MoU with M/s MRT Signals Limited, Kolkata, to jointly bid for the TCAS Project in Indian Railways. This will help to synergize the resources and capabilities of both companies to mutual advantage. International Operations Egypt 6. The progress of installation of 136 Gates of ENR Project has been affected due to accidents caused by uncontrolled traffic in Egypt and difficult working conditions, 80 gates have been installed so far and work on the remaining gates is continuing. Due to delayed payments and lack of additional working capital, the project completion date is now revised from December'2015 to June 2016. Other remaining works of the contract is in progress like Internal and External Training, supply of over 400 new booms, supply of spare parts for 2 years, PHO and warranty maintenance works, etc. The proposal of ENR for a contract for further 75 gates has been dropped. 7. MNC Enquiries: In Egypt a number of MNCS like M/s Thales, M/s Alstom, etc., who are working there have shown interest in using Kernex LXS in their signaling contract for interlocked gates. Kernex is pursuing the matter. 8. Defenses Production Department, Government of Egypt is seeking technical collaboration with your company for supply of ECM module, Digital Axle Counter, Sensors, Mechanical Locks etc to be supplied in knock down condition to be assembled in Egypt. Negotiations are in progress on the scope and scale of the work. Future Prospects International - South Africa 1. Your company has submitted a bid to Richard Bay, Coal Terminal of Johannesburg for Supply of Collision Avoidance System to coal unloading terminal yard with tippler assemblies costing over1.28 million US $. The order for Phase - I has been received. New Areas of business in India 2. Kernex is working at a fast pace to complete the development of TCAS and also secure Certification for SIL, so that it is ready for sale. 3. We have given an offer to KRCL and NFR to provide new breaking Interface for EMD. Loco's that are being run in NF Railway routes. 4. Your company proposes to take part in Defence projects covering Microwave, RF Radar Technologies and take up out sourced manufacturing of Electronic components from Defence vendors for DRDO, DRDL, BDL, HAL Etc. or directly from them Research and development Your company has been working, in the focused areas like R&D, especially for Railways and Defence, design and supply of collision avoidance system for coal unloading yards, 'Fog Pass' for helping locos to move in poor visibility, unmanned gate warning system, universal loco break Interface unit, Balises and Balises transmission, indigenous radio modem in UHF frequency, RFID tags and readers , development of online data and operational display units etc. Progress achieved on the IPO and company expansion projects As part of IPO related work, acquiring of some land and approaches to the main road are in progress. This work will be completed shortly. The balance proceeds of Rs.160 lakhs is deposited with the monitoring agency State Bank of Hyderabad. Overseas Subsidiary and consolidated financial statement The Company has one 100% wholly owned subsidiary Avant Garde Infosystems Inc, USA and there were no joint ventures or associate Companies as at 31st March 2015. In accordance with section 129(3) of the Companies Act, 2013 the Company has prepared Consolidated financial statement of the Company and the subsidiary in the form and manner as that of its own in compliance with the accounting standards and the listing agreement with the stock exchanges which forms part of the Annual Report for laying before the Annual General Meeting. A report on the performance and financial position of the subsidiary forms part of the consolidated statement in Form AOC-I. Dividend and Reserves The company has incurred losses in the financial year, as the expected dues were not received, work progress on ENR was tardy and new orders did not materialize. As such, your directors regret their inability to declare any dividend on the paid up capital of the company. Material changes and commitments No material changes and commitments affecting the financial position of the Company occurred between the end of the financial year to which the financial statements relate and the date of this report. There was no change in the nature of business of the Company during the financial year ended 31st March 2015 Directors and Key Managerial Personnel In accordance with the provisions of Section 152 of the Companies Act, 2013 Ms Jyoti Raju and Mr Raju Narasa Mantena, Directors retire by rotation and being eligible offer themselves for re-appointment. Col L.V.Raju is proposed for re-appointment as Managing Director of the Company The brief profile of the Directors who are to be appointed/re-appointed forming part of the notes and explanatory statement to the notice of the Annual General Meeting is furnished. Mr K.Subash and Mr K.Suman Kumar were appointed as Company Secretary and Chief Financial officers during the year. The CS and CFO resigned during the current year and the company is looking for suitable persons for appointment. Declaration by Independent Directors All the Independent Directors have submitted their disclosures to the Board that they fulfill all the requirements as stipulated in Section 149 (6) of the Companies Act 2013 so as to qualify themselves to be appointed as Independent Directors under the provisions of the Companies Act, 2013 and the rules framed there under Nomination and Remuneration Policy of Directors, Key Managerial Personnel and other Employees In terms of section 178 (1) of the Companies Act 2013 the Board on the recommendation of the Nomination and remuneration committee approved the criteria and policy for selection and appointment of directors, key managerial persons and their remuneration. The remuneration policy forms part of the report on corporate governance. Board Evaluation Pursuant to the provisions contained in the Companies Act 2013 and clause 49 of the listing agreement the Board has carried out annual performance evaluation of its own performance, The chairman of the Board ,the individual directors as well as the evaluation of the working of the Audit, Nomination and Remuneration committee and other committees. The evaluation was based on the attendance, contribution, independence of judgment and preparedness for the meetings Number of Meetings of the Board of Directors During the financial year 2014-15 the Board of Directors of the Company met 10 times on 24.05.2014, 11.08.2014, 20.08.2014, 09.09.2014, 25.10.2014, 10.01.2014, 14.11.2014, 07.02.2015, 10.03.2015 and 24.03.2015. A separate meeting of the Independent Directors of the Company was also held on 20.08.2014 to discuss items enumerated under Schedule IV to the Companies Act 2013 and clause 49 of the listing agreement Directors' Responsibility Statement Pursuant to section 134 (3) (c) of the Companies Act, 2013 the Directors to the best of their knowledge hereby state and confirm that a) in the preparation of the annual accounts, the applicable accounting standards had been followed along with proper explanation relating to material departures b) the Directors had selected such accounting policies and 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 at the end of the financial year and of the profit of the Company for that period c) the Directors had taken proper and sufficient care for the maintenance of adequate accounting records in accordance with the provisions of the Act for safeguarding the assets of the Company and for preventing and detecting fraud and other irregularities d) the Directors had prepared the annual accounts on a going concern basis and e) the internal financial controls to be followed by the Company were laid down and such financial controls were adequate and were operating effectively f) the Directors had devised proper systems to ensure compliance with the provisions of all applicable laws and that such systems were adequate and were operating effectively Internal Financial Controls The Company has laid down policies and procedures to be adopted for ensuring the orderly and efficient conduct of its business, including adherence to company's policies, the safeguarding of its assets, the prevention and detection of frauds and errors, the accuracy and completeness of the accounting records, and the timely preparation of reliable financial information. An independent audit committee of the Board reviews the adequacy of internal controls Particulars of Loans, Guarantees and Investments. The details of Loans, Guarantees and Investments covered under the provisions of Section 186 of the Companies Act, 2013 forms part of the financial statements Audit Committee of Board: The Audit Committee of the company comprises four (4) Directors including three (3) independent Directors and One (1) Managing Director and the Chairman of the Audit Committee was present at the Board Meeting where Annual accounts have been approved. Corporate Social Responsibility (CSR) The Company having regard to the net profit/turnover/ net worth is not covered under the provisions of Section 135 of the Companies Act 2013 to constitute a committee and spend the amount towards CSR activities Related Party Transactions All the related party transactions by the Company during the year 2014-15 were on an arms length basis and were in the ordinary course of business and as such the provisions of section 188 are not attracted. There are no materially significant Related Party Transactions with Promoters, Directors, Key Managerial Persons or other designated persons during the year. Vigil Mechanism The Company in compliance with the provisions of Section 177(9) of the Companies Act, 2013 and clause 49 of the listing agreement framed a whistle Blower Policy/Vigil Mechanism for reporting illegal or unethical behavior. The employees are free to report violations of applicable laws and regulations and the Code of Conduct. The Audit Committee reviews reports received from the employees who may also report to the Chairman of the Audit Committee. During the year under review, no employee was denied access to the Audit Committee. The Directors and senior management staff are to maintain confidentiality of the reporting and ensure that the whistle blowers are not subjected to any kind of discrimination. The whistle blower policy is also posted on the Company's website. Familiarization Programme for Independent Directors, In terms of clause 49(II)(B)(7) of the Listing Agreement with the Stock Exchanges the Company familiarizes all the independent directors about their roles, rights and responsibilities in the Company, nature of Industry, Risk Management, Board evaluation process and procedures, financial controls and management, Board effectiveness, strategic direction etc., The Directors also were explained in detail the compliances required from them under the Companies Act, Clause 49 of the Listing Agreement and other relevant regulations and their affirmation taken with respect to the same. With a view to familiarize with the Company's operations, the Directors also were given detailed presentations giving the organizational set up of the Company, the functioning of various divisions / departments, the Company's market share and the markets in which it operates, governance and internal control processes and other relevant information pertaining to the Company's business. The Managing Director also has personal discussions from time to time with the Independent Directors. The above initiatives help the Directors to understand the Company, its business and the regulatory framework in which the Company operates and equips them to effectively fulfill their role as Independent Directors of the Company. Extract of Annual Return The extract of the Annual Return in Form No MGT-9 forms part of the Director's Report and is annexed as Annexure-A Risk Management During the year under review the Audit Committee of Directors was entrusted with the responsibility of identification, assessment and addressing of various risks which may threaten the existence of the Company and to assist the Board in Overseeing and approving the risk management framework and to manage, monitor and report on the principal risks and uncertainties that can impact its ability to achieve its strategic objectives. The Company has put in place internal control systems and processes to optimize the risk mitigation measures for review by the audit Committee and approval by the Board. The executive management is guided from time to time by the Board to improve the risk mitigation measures and initiate timely action Transfer of unclaimed dividend The unclaimed dividend for financial year 2006-07 was transferred to Investor Education and Protection Fund and the sum for the financial year 2007-08 is due for transfer Auditors Statutory Auditors M/s GMK Associates, Chartered Accountants, Hyderabad were appointed as statutory auditors at 22nd AGM of the Company held on 27th September 2014 for a period of three years subject to ratification at every AGM They have confirmed their eligibility to the effect that their re-appointment, if made, would be within the prescribed limits under the Act and that they are not disqualified for re-appointment Secretarial Audit In terms of section 204 of the Companies Act2013 and the Companies (Appointment and Remuneration of Managerial Personnel ) Rules 2014 the Company has appointed M/s A.J.Sharma & Associates, Company Secretaries to conduct Secretarial Audit for the year 2014-15 and their report is annexed as Annexure-D to this report Conservation of Energy, Technology Absorption and Foreign Exchange Earnings and outgo: The information pertaining to conservation of energy, technology absorption, foreign exchange earnings and outgo as required under section 134 (3) (m) of the Companies Act 2013 read with Rule 8 (3) of the Companies (Accounts) Rules 2014 is furnished in Annexure-B and forms part of this report Particulars Relating to Remuneration of Directors/Key Managerial Personnel and Employees. Disclosures pertaining to remuneration and other details as required under Section 197(12) of the Act read with Rule 5(1) of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014 are provided in the Annual Report as Annexure C. There were no employees drawing remuneration in excess of the limits contained in Rules 5(2) of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014, General No disclosure or reporting is required of the following 1. The Company has not accepted any deposits covered under Chapter V of the Act. 2. No equity shares with differential rights as to dividend, voting or otherwise were issued 3. No sweat equity shares were issued 4. No remuneration or commission was received by the Managing Director/ Whole-time Director of the Company from subsidiary Company. 5. No significant or material orders were passed by the Regulators or Courts or Tribunals which impact the going concern status and Company's operations in future. 6. No cases filed pursuant to the Sexual Harassment of Women at Workplace (Prevention, Prohibition and Redressal) Act, 2013. Corporate Governance Report The Company is committed to adhere to the corporate governance requirements set out by SEBI. The report on Corporate Governance as stipulated under the Listing Agreement forms an integral part of this Report. The requisite certificate from the Auditors of the Company confirming compliance with the conditions of corporate governance is attached as Annexure-E to the report on Corporate Governance. Management Discussion & Analysis (MDA) Management's Discussion and Analysis Report for the year under review, as stipulated under Clause 49 of the Listing Agreement with the Stock Exchanges in India, is presented in a separate section forming part of the Annual Report. Acknowledgements: Your Directors would like to express their sincere appreciation for the guidance, assistance and co-operation received from the Indian Railways, RDSO, Egyptian Railways, Konkan Railway Corporation Ltd., State Bank of Hyderabad, Government authorities and members during the year under review. Your Directors also wish to place on record their deep sense of appreciation for the commendable and dedicated contribution of all employees. By order of the Board For Kernex Microsystems (India) Limited Col. L.V.Raju (Retd) Managing Director (DIN.00052102) Date: 10-08-2015 Place: Hyderabad |