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Mahindra and Mahindra

BSE: 500520|NSE: M&M|ISIN: INE101A01026|SECTOR: Auto - Cars & Jeeps
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Notes to Accounts Year End : Mar '17

General information

Mahindra & Mahindra Limited (‘the Company’) is a limited company incorporated in India. The addresses of its registered office and principal activities of the Company are disclosed in the introduction to the Annual Report.

The Ordinary (Equity) shares of the Company are listed on the National Stock Exchange (“NSE”), the Bombay Stock Exchange (“BSE”) in India. The Global Depository Receipts (GDRs) (underlying equity shares) of the Company are listed on the Luxembourg Stock Exchange and London Stock Exchange.

1A. Other Equity :

Description of the nature and purpose of Other Equity :

Capital Reserve : Capital Reserve represents receipt of Government Grants from a package of incentive given by Maharashtra Government for setting up/extension of Plants in specified areas.

Securities Premium Account : The Securities Premium is created on issue of shares at a premium.

General Reserve : The general reserve comprises of transfer of profits from retained earnings for appropriation purposes. The reserve can be distributed/utilised by the Company in accordance with the Companies Act, 2013.

Debenture Redemption Reserve : Debenture Redemption Reserve is a Statutory Reserve (as per Companies Act, 2013) created out of profits of the Company available for payment of dividend for the purpose of redemption of Debentures issued by the Company. On completion of redemption, the reserve is transferred to Retained Earnings.

Investment Fluctuation Reserve (IFR) : This reserve has been created pursuant to Schemes of Arrangement/Amalgamation approved by Hon’ble High Courts. The IFR is utilised as approved by the Hon’ble High Courts for the purpose of adjusting impairment on investments. Employee Stock Options Outstanding : The Employee Stock Options Outstanding represents reserve in respect of equity settled share options granted to the Company’s employees in pursuance of the Employee Stock Option Plan.

2. Non-Current Borrowings

(a) Rs. 500 crores Debentures are Senior Redeemable Non-Convertible Debentures carrying an interest rate of 9.55% with a tenure of 50 years, repayable in July, 2063 and Rs. 473.62 crores (Net off unamortised finance charge of Rs. 1.38 crores) Debentures are Redeemable Non-Convertible Debentures carrying an interest rate of 7.57% with a tenure of 10 years, repayable in September, 2026.

(b) Term loans from banks comprise of EURO External Commercial Borrowings carrying an average margin of 95 basis points over three month EURO Libor and are repayable after five years and one day from the date of respective availment of loan.

(c) Other loans comprise deferred sales tax loans which are interest free and repayable in five equal installments after ten years from the year of availment of respective loan.

(a) Miscellaneous Expenses include :

Amounts paid/payable to Auditors (Net of service tax where applicable) :

* denotes amount less than Rs. 50,000.

The above includes amounts paid/payable for professional services rendered by firm in which some of the partners of the statutory auditor’s firm are partners Rs. 0.79 crores (2016: Rs. 0.51 crores).

(b) Other expenses includes expenditure incurred on Corporate Social Responsibility(CSR) under section 135 of the Companies Act, 2013 Rs. 83.57 crores (2016: Rs. 85.90 crores).

(c) Other expenses includes donations given to New Democratic Electoral Trust Rs. 6.03 crores (2016: Rs. Nil crores).

(d) The gain/(loss) on foreign exchange recognised in profit or loss is a gain of Rs. 13.28 crores (2016: loss of Rs. 85.38 crores).

3. Exceptional Items (net) recognised in profit or loss

Exceptional items of Rs. 548.46 crores (2016 : Rs. 68.74 crores) comprise of :

a) profit on sale of certain long term investments Rs. 679.46 crores (2016 : Rs. 68.74 crores).

b) profit on transfer of agri business Rs. 91.00 crores (2016 : Rs. Nil crores).

c) impairment of certain investments as referred to in Note 34 Rs. 222.00 crores (2016 : Rs. Nil crores).

4. Impairment

During the year ended 31st March, 2017, the Company has recognised an aggregate impairment loss of Rs. 222.00 crores, in profit or loss, on certain investments in subsidiaries and joint ventures considering the performance of these companies and their future projections.

During the year ended 31st March, 2016, the Company has recognised an aggregate impairment loss of Rs. 126.07 crores, in investment fluctuation reserve, on certain investments in subsidiaries and joint ventures considering the performance of these companies and their future projections. Aggregate amount of reversals of impairment losses on certain investment in subsidiaries was also recognised in investment fluctuation reserve amounting to Rs. 61.48 crores.

5. The Company has allotted 55,24,219 Ordinary (Equity) Shares of Rs. 10 each, 10,00,000 Ordinary (Equity) Shares of Rs. 10 each, 1,73,53,034 Ordinary (Equity) Shares of Rs. 5 each, 19,11,628 Ordinary (Equity) Shares of Rs. 5 each and 52,00,000 Ordinary (Equity) Shares of Rs. 5 each in the years ended 31st March, 2002, 31st March, 2010, 31st March, 2011, 31st March, 2014 and 31st March, 2015 respectively to the Mahindra & Mahindra Employees’ Stock Option Trust set up by the Company. The trust holds these shares for the benefit of the employees and issues them to the eligible employees as per the recommendation of the Compensation Committee.

Options granted under Mahindra & Mahindra Limited Employees Stock Option Scheme - 2000 (“2000 Scheme”) vest in 4 equal installments on the expiry of 12 Months, 24 Months, 36 Months and 48 Months from the date of grant. The options may be exercised on any day over a period of five years from the date of vesting. Number of vested options exercisable is subject to a minimum of 50 or number of options vested whichever is lower.

Options granted under Mahindra & Mahindra Limited Employees Stock Option Scheme - 2010 (“2010 Scheme”) vest in:

i) 5 equal instalments on the expiry of 12 Months, 24 Months, 36 Months, 48 Months and 60 Months from the date of grant OR

ii) 4 instalments bifurcated as 20% on the expiry of 18 Months, 20% on the expiry of 30 Months, 30% on the expiry of 42 Months and 30% on the expiry of 54 Months.

The options may be exercised on any day over a period of 5 years from the date of vesting. Number of vested options exercisable is subject to a minimum of 50 or number of options vested whichever is lower.

The fair values of options granted during the year are as follows:

Grant dated 10th November, 2016 (5 years vesting) Rs. 1,265.51 per option

Grant dated 10th November, 2016 (4 years vesting) Rs. 1,263.31 per option

Grant dated 9th February, 2017 (4 years vesting) Rs. 1,207.36 per option

In respect of Options granted under the Employee Stock Option Plan the accounting is done as per requirements of Ind AS 102. Consequently, salaries, wages, bonus etc. includes Rs. 118.59 crores (2016 : Rs. 84.12 crores) being expenses on account of share based payments, after adjusting for reversals on account of options lapsed. The amount excludes Rs. 9.38 crores (2016 : Rs. 5.02 crores) charged to its subsidiaries for options issued to their employees.

6. Contingent Liability & Commitments

(A) Contingent Liability :

(a) Claims against the Company not acknowledged as debts comprise of :

(i) Excise Duty, Sales Tax and Service Tax claims disputed by the Company relating to issues of applicability and classification aggregating Rs. 3,445.08 crores before tax (2016 : Rs. 2,846.51 crores before tax, 2015 : Rs. 2,003.26 crores before tax).

(ii) Other matters (excluding claims where amounts are not ascertainable) : Rs. 27.69 crores before tax (2016 : Rs. 27.65 crores before tax, 2015 : Rs. 28.53 crores before tax).

(b) Taxation matters :

(i) Demands against the Company not acknowledged as debts and not provided for, relating to issues of deductibility and taxability in respect of which the Company is in appeal and exclusive of the effect of similar matters in respect of assessments remaining to be completed :

— Income-tax : Rs. 627.66 crores (2016 : Rs. 564.56 crores, 2015 : Rs. 526.49 crores).

(ii) Items in respect of which the Company has succeeded in appeal, but the Income-tax Department is pursuing/likely to pursue in appeal/reference and exclusive of the effect of similar matters in respect of assessments remaining to be completed :

— Income-tax matters : Rs. 110.78 crores (2016 : Rs. 112.30 crores, 2015 : Rs. 153.65 crores).

— Surtax matters : Rs. Nil crores (2016 : Rs. 0.13 crores, 2015 : Rs. 0.13 crores).

(c) The Customs, Excise and Service Tax Appellate Tribunal (CESTAT) by its order dated 7th December, 2009 has rejected the Company’s appeal against the order dated 30th March, 2005 passed by the Commissioner of Central Excise (Adjudication), Navi Mumbai confirming the demand made on the Company for payment of differential excise duty (including penalty) of Rs. 304.10 crores in connection with the classification of Company’s Commander range of vehicles, during the years 1991 to 1996. Whilst the Company had classified the Commander range of vehicles as 10-seater attracting a lower rate of excise duty, the Commissioner of Central Excise (Adjudication), Navi Mumbai, has held that these vehicles could not be classified as 10-seater as they did not fulfil the requirement of 10-seater vehicles, as provided under the Motor Vehicles Act, 1988 (MVA) read with Maharashtra Motor Vehicles Rules, 1989 (MMVR) and as such attracted a higher rate of excise duty. The Company has challenged the CESTAT order in the Supreme Court.

In earlier collateral proceedings on this issue, the CESTAT had, by an order dated 19th July, 2005 settled the controversy in the Company’s favour. The CESTAT had accepted the Company’s submission that MVA and MMVR could not be referred to for determining the classification for the purpose of levy of excise duty and rejected the Department’s appeal against the order of the Collector, Central Excise classifying the Commander range of vehicles as 10-seater. The Department had challenged the CESTAT order in the Supreme Court.

Without prejudice to the grounds raised in this appeal, the Company has paid an amount of Rs. 40.00 crores in January, 2010. The Supreme Court has admitted the Company’s appeal and has stayed the recovery of the balance amount till further orders.

Both these orders of the Tribunals were heard and disposed off by the Honorable Supreme Court, in August 2014. Since contrary views were expressed by the Tribunals in two parallel proceedings, the Honorable Supreme Court directed that a larger bench of the Tribunal be constituted to hear the appeals without expressing any opinion on the issues. The Larger Bench of the CESTAT heard the matter in February, 2015 and by an order dated 27th February, 2015, remanded the matter to the Commissioner of Central Excise for consideration of the case afresh keeping all issues open. The company strongly believes, based on legal advice it has received, that it has a good case on merits so as to ultimately succeed in the matter.

In another case relating to Armada range of vehicles manufactured during the years 1992 to 1996, by the Company at its Nashik facility, the Commissioner of Central Excise, Nashik passed an order dated 20th March, 2006 confirming a demand of Rs. 24.75 crores, on the same grounds as adopted for Commander range of vehicles. The CESTAT has given an unconditional stay against this order. The matter was heard by the Hon’ble Tribunal on 18th May, 2017. After hearing the matter, the Hon’ble Tribunal pronounced an Order setting aside the Order in original, and allowing the Company’s appeal. The Order is awaited.

As such, the Company does not expect any liability on this account. However, in view of the CESTAT orders and subsequent proceedings, pending their final outcome, the Company has reflected the above amount aggregating Rs. 328.85 crores (2016 : Rs. 328.85 crores, 2015: Rs. 328.85 crores) and the interest of Rs. 407.73 crores (2016 : Rs. 377.64 crores, 2015 : Rs. 341.44 crores) accrued on the same upto 31st March, 2017, under Note (a)(i) above.

(d) In respect of (a) & (b) above, it is not practicable for the Company to estimate the closure of these issues and the consequential timings of cash flows, if any.

(B) Commitments :

(a) Uncalled liability on equity shares partly paid Rs. Nil crores (2016 : Rs. Nil crores, 2015 : Rs. 10.50 crores).

(b) The estimated amount of contracts remaining to be executed on capital account and not provided for as at 31st March, 2017 is Rs. 963.35 crores (2016 : Rs. 924.74 crores, 2015 : Rs. 745.08 crores) and other commitment as at 31st March, 2017 is Rs. 7.50 crores (2016: Rs. 8.50 crores, 2015 : Rs. Nil crores)

7. Research and Development expenditure

(a) In recognised Research and Development units :

(i) Debited to Profit or Loss, including certain expenditure based on allocations made by the Company, aggregate Rs. 804.56 crores (2016 : Rs. 730.93 crores) [excluding depreciation and amortisation of Rs. 474.88 crores (2016 : Rs. 287.02 crores)].

(ii) Development expenditure incurred during the year Rs. 716.42 crores (2016 : Rs. 905.41 crores).

(iii) Capitalisation of assets Rs. 120.12 crores (2016 : Rs. 104.65 crores).

(b) In other units :

(i) Debited to Profit or Loss, including certain expenditure based on allocations made by the Company, aggregate Rs. 69.48 crores (2016 : Rs. 68.27 crores) [excluding depreciation and amortisation of Rs. 14.66 crores (2016 : Rs. 9.78 crores)].

(ii) Development expenditure incurred during the year Rs. 97.91 crores (2016 : Rs. 106.22 crores).

(iii) Capitalisation of assets Rs. 28.22 crores (2016 : Rs. 22.38 crores).

8. Employee Benefits

General description of defined benefit plans :

Gratuity

The Company operates a gratuity plan covering qualifying employees. The benefit payable is the greater of the amount calculated as per the Payment of Gratuity Act or the Company scheme applicable to the employee. The benefit vests upon completion of five years of continuous service and once vested it is payable to employees on retirement or on termination of employment. In case of death while in service, the gratuity is payable irrespective of vesting. The Company makes annual contribution to the group gratuity scheme administered by the Life Insurance Corporation of India through its Gratuity Trust Fund.

Post retirement medical

The Company provides post retirement medical cover to select grade of employees to cover the retiring employee and their spouse upto a specified age through mediclaim policy on which the premiums are paid by the Company. The eligibility of the employee for the benefit as well as the amount of medical cover purchased is determined by the grade of the employee at the time of retirement.

Post retirement housing allowance

The Company operates a post retirement benefit scheme for a certain grade of employees in which a monthly allowance determined on the basis of the last drawn basic salary at the time of retirement, is paid to the retiring employee in lieu of housing.

Through its defined benefit plans the Company is exposed to a number of risks, the most significant of which are detailed below:

Investment risk

The present value of the defined benefit plan liability (denominated in Indian Rupee) is calculated using a discount rate which is determined by reference to market yields at the end of the reporting period on government bonds.

Interest risk

A decrease in the bond interest rate will increase the plan liability; however, this will be partially offset by an increase in the return on the plan’s debt investments.

Longevity risk

The present value of defined benefit plan liability is calculated by reference to the best estimate of the mortality of plan participants both during and after their employment. An increase in the life expectancy of the plan participants will increase the plan’s liability.

Salary risk

The present value of the defined benefit plan liability is calculated by reference to the future salaries of plan participants. As such, an increase in the salary of the plan participants will increase the plan’s liability.

Reconciliations between Ind AS and previous GAAP for equity and profit or loss are given below

* Other adjustments mainly include those arising from

(1) recognizing financial assets and liabilities (carried at cost in Previous GAAP) at Fair Value through Profit or Loss (FVTPL) or amortised cost,

(2) measuring certain current investments (carried at lower of cost or fair value in Previous GAAP) at FVTPL and investments in subsidiaries, associates and joint venture continue to be recognized at their cost less diminution other than temporary (deemed cost) and other equity instruments at Fair Value through Other Comprehensive Income and

(3) recognizing the impact of the cost of Employee Stock Option Schemes (recognized at intrinsic value in Previous GAAP) at fair value.

The Company’s capital management strategy is to effectively determine, raise and deploy capital so as to create value for its shareholders. The same is done through a mix of either equity and/or preference and/or convertible and/or combination of short term /long term debt as may be appropriate.

The Company determines the amount of capital required on the basis of its product, capital expenditure, operations and strategic investment plans. The same is funded through a combination of capital sources be it either equity and/or preference and/or convertible and/or combination of short term/long term debt as may be appropriate.

The capital structure is monitored on the basis of net debt to equity and maturity profile of overall debt portfolio of the Company.

9. Financial Risk Management Framework

In the course of its business, the Company is exposed to certain financial risks namely interest risk, currency risk & liquidity risk. The Company’s primary focus is to achieve better predictability of financial markets and seek to minimize potential adverse effects on its financial performance.

The financial risks are managed in accordance with the Company’s risk management policy which has been approved by its Board of Directors. Market Risk

Market risk is the risk that changes in market prices such as foreign exchange rates, interest rates etc. could affect the Company’s income or the value of its holdings of financial instruments including cash flow. The objective of market risk management is to manage and control market risk exposures within acceptable parameters, while maximising the return.

Currency Risk

The Company’s exposure to currency risk relates primarily to the Company’s operating activities including anticipated sales & purchase and borrowings where the transactions are denominated in a currency other than the Company’s functional currency.

The Company’s foreign currency exposures are managed in accordance with its Foreign Exchange Risk Management Policy which has been approved by its Board of Directors. The Company hedges its foreign currency risk mainly by way of Forward Covers. Other derivative instruments may be used if deemed appropriate.

Contracts that meet the requirements for hedge accounting are accounted as per the hedge accounting requirements of Ind AS 109 -Financial Instruments, while other contracts are accounted as derivatives measured through profit or loss.

10. Interest Rate Risk

The Company uses a mix of cash and borrowings to manage the liquidity & fund requirements of its day-to-day operations. Further, certain interest bearing liabilities carry variable interest rates.

Interest Rate risk on variable rate borrowings is managed by way of interest rate swaps.

Hedge Accounting : Interest Rate Swaps

Interest Rate Swaps entered into by the Company meet the requirements for hedge accounting under Ind AS 109 - Financial Instruments, and thus are accounted as such.

11. Credit Risk Management

Credit Risk refers to the risk that a counterparty will default on its contractual obligations resulting in financial loss to the Company. The Company has adopted a policy of only dealing with creditworthy counterparties and obtaining sufficient collateral, where appropriate, as a means of mitigating the risk of financial loss from defaults. The Company’s exposure are continuously monitored.

12. Financial Guarantees

In addition, the Company is exposed to credit risk in relation to financial guarantees given to banks provided by the Company. The Company’s maximum exposure in this respect is the maximum amount the Company could have to pay if the guarantee is called on. Accordingly the amount recognised in Balance Sheet as liabilities :

The Company applies the simplified approach to providing for expected credit losses prescribed by Ind AS 109, which permits the use of the lifetime expected loss provision for all trade receivables. The Company has computed expected credit losses based on a provision matrix which uses historical credit loss experience of the Company. Forward-looking information (including macroeconomic information) has been incorporated into the determination of expected credit losses. The Company has taken dealer deposits, bank guarantees etc. which are considered as collateral and these are considered in determination of expected credit losses, where applicable. Amounts pertaining to these collaterals are as given below:

13. The Company’s maximum exposure to credit risk in respect of Financial Guarantee contracts are disclosed in Note 49. In respect of other financial assets, the maximum exposure to credit risk at the end of the reporting period is the carrying amount of each class of financial assets.

14. LIQUIDITY RISK

(i) Liquidity risk management

Maturity profile of financial liabilities

The following tables detail the Company’s remaining contractual maturity for its non-derivative financial liabilities with agreed repayment periods. The tables have been drawn up based on the undiscounted cash flows of financial liabilities based on the earliest date on which the Company can be required to pay. The tables include both interest and principal cash flows.

The amounts included above for financial guarantee contracts are the maximum amounts the Company could be forced to settle under the arrangement for the full guaranteed amount if that amount is claimed by the counterparty to the guarantee. Based on expectations at the end of the reporting period, the Company considers that it is more likely than not that such an amount will not be payable under the arrangement.

The following table details the Company’s liquidity analysis for its derivative financial instruments. When the amount payable or receivable is not fixed, the amount disclosed has been determined by reference to the projected interest rates as illustrated by the yield curves at the end of the reporting period.

15. Sensitivity Analysis

Foreign Currency Sensitivity

The following tables demonstrate the sensitivity to a reasonably possible change in exchange rates, with all other variables held constant.

If the change in rates decline by a similar percentage, there will be opposite impact of similar amount on Profit Before Tax and Pre-tax Equity Effect.

The sensitivity analysis is unrepresentative of the inherent foreign exchange risk because the exposure at the end of the reporting period does not reflect the exposure during the year.

Interest Rate sensitivity

The sensitivity analyses below have been determined based on exposure to interest rate for both derivative and non-derivative instruments at the end of reporting period. For floating rate liabilities, analysis is prepared assuming the amount of liability outstanding at the end of the reporting period was outstanding for the whole year.

The following table demonstrates the sensitivity to a reasonably possible change in interest rates on that portion of loans and borrowings affected, after the impact of hedge accounting. With all other variables held constant, the Company’s profit before tax is affected through the impact on floating rate borrowings, as follows:

16. Offsetting of balances

The Company has not offset financial assets and financial liabilities.

17. Collaterals

The Company has availed working capital facilities and other non-fund based facilities viz. bank guarantees and letters of credit, which are secured by hypothecation of book debts, receivables, outstanding monies and all other current assets.

18. Segment information Operating Segments

The reportable segments of the Company are Automotive and Farm Equipment. The segments are largely organised and managed separately according to the organisation structure that is designed based on the nature of products and services and profile of customers. Operating segments are reported in a manner consistent with the internal reporting provided to the Executive Chairman and Managing Director jointly regarded as the Chief Operating Decision Maker (“CODM”). Description of each of the reportable segments for all periods presented, is as under.

(a) Automotive Segment comprises of sale of automobiles, spare parts and related services;

(b) Farm Equipment Segment comprises of sale of tractors, spare parts and related services;

(c) Others comprise of Agri, Construction Equipment, Powerol, and Spares Business Unit.

The CODM evaluates the Company’s performance and allocates resources based on an analysis of various performance indicators by operating segments. The CODM reviews revenue and gross profit as the performance indicator for all of the operating segments.

The measurement of each segment’s revenues, expenses and assets is consistent with the accounting policies that are used in preparation of the financial statements. Segment profit represents the profit before interest and tax.

Revenue from type of products and services

The operating segments are primarily based on nature of products and services and hence the Revenue from external customers of each segment is representative of revenue based on products and services.

Domestic Segment includes sales to customers located in India and service income accrued in India.

Overseas Segment includes sales and services rendered to customers located outside India.

Information about major customers

During the year ended 31st March, 2017 and 2016 respectively, revenues from transactions with a single external customer did not amount to 10 per cent or more of the Company’s revenues from external customers.

19. Recent accounting pronouncements Standards issued but not yet effective

I n March 2017, the Ministry of Corporate Affairs issued the Companies (Indian Accounting Standards) (Amendments) Rules, 2017, notifying amendments to Ind AS 7, ‘Statement of cash flows’ and Ind AS 102, ‘Share-based payment.’ These amendments are in accordance with the recent amendments made by International Accounting Standards Board (IASB) to IAS 7, ‘Statement of cash flows’ and IFRS 2, ‘Share-based payment,’ respectively. The amendments are applicable to the Company from 1st April, 2017.

Amendment to Ind AS 7

The amendment to Ind AS 7 requires the entities to provide disclosures that enable users of financial statements to evaluate changes in liabilities arising from financing activities, including both changes arising from cash flows and non-cash changes, suggesting inclusion of a reconciliation between the opening and closing balances in the balance sheet for liabilities arising from financing activities, to meet the disclosure requirement. The Company is evaluating both the requirements of the amendment and it’s effect on the financial statements.

Amendment to Ind AS 102

The amendment to Ind AS 102 provides specific guidance to measurement of cash-settled awards, modification of cash-settled awards and awards that include a net settlement feature in respect of withholding taxes. It clarifies that the fair value of cash-settled awards is determined on a basis consistent with that used for equity-settled awards. Market-based performance conditions and non-vesting conditions are reflected in the ‘fair values’, but non-market performance conditions and service vesting conditions are reflected in the estimate of the number of awards expected to vest. Also, the amendment clarifies that if the terms and conditions of a cash-settled share-based payment transaction is modified with the result that it becomes an equity-settled share-based payment transaction, the transaction is accounted for as such from the date of the modification. Further, the amendment requires the award that include a net settlement feature in respect of withholding taxes to be treated as equity-settled in its entirety. The cash payment to the tax authority is treated as if it was part of an equity settlement. The company is evaluating both the requirements of the amendment and it’s impact on the financial statements.

20. The Board of Directors of the Company at its meeting held on 3rd December, 2016, has approved the Scheme of Arrangement between Mahindra Two-Wheelers Limited (MTWL), a step-down subsidiary of the Company, and the Company and their respective Shareholders and Creditors, which inter-alia, envisages demerger of the Two-Wheeler Undertaking of MTWL (which consists of manufacturing and selling of Two-Wheelers) and transfer and vesting thereof as a going concern into the Company. The Appointed Date of the Scheme would be 1st October, 2016 or such other date as may be approved. The Scheme will be given effect to on receipt of requisite approvals / consent.

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