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Kernex Microsystems (India) Ltd.

BSE: 532686 | NSE: KERNEX |

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Series: BE | ISIN: INE202H01019 | SECTOR: Computers - Software Medium & Small

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Annual Report

For Year :
2018 2016 2015 2014 2013 2012 2011 2010 2009

Director’s Report

DIRECTORS REPORT

To

The Members,

Kernex Microsystems (India) Limited.

The Directors have pleasure in presenting the Twenty Six Annual Report together with the audited statement of accounts of your company for the year ending 31st March, 2018.

Financial Results (Standalone)

Rs in Lakhs

2017-18

2016-17

Sales and Other Income

1.402.41

1,414.94

Profit/Loss before Depreciation, Finance Cost and Tax

(2,042.68)

(3,074.59)

Less:- Finance Cost

319.34

331.14

Less:- Depreciation

224.62

255.72

Less: Exceptional items

-

521.31

Add : Extra ordinary items

-

2,874.98

Profit/Loss after Depreciation, Interest and before tax

(1,498.70)

(134.06)

Taxexpense

(56.41)

216.66

Profit / Loss after Tax

(1,442.29)

(390.77

Add: Balance brought forward from previous year

(960.85)

(610.13)

Less: Adjustments consequent to revision of useful life of certain assets pursuant to Schedule II of Companies Act,2013

Balance carried forward to Balance sheet

(2,403.15)

(960.85)

Profit available for appropriation

Earnings Per Share (Rs.)

- Basic

(11.54)

(2.81)

- Diluted

(11.54)

(2.81)

Appropriations:

Transfer to General Reserve

-

-

Proposed Dividend

-

-

Income Tax on proposed Dividend

-

-

Balance carried to the Balance sheet

(2,403.15)

(960.85))

1. Economy, Industry and the Company’s working during the year

Economy

The GDP of Indian economy though during the year under review decreased marginally over the previous year, continued to be highest among major economies. It was a remarkable achievement that the growth was achieved with lower inflation, improved current account balance and, reduction of fiscal deficit. Besides implementation of GST, resolution of non-performing assets and liberalization of Foreign Direct Investment and other reforms continued. The protectionist policies of major economies, trade war, increase in oil prices, Domestic savings and Investments are a concern

Industry

Your Company‘s main business activity is related to Railways. The Indian Railways is among the world’s largest rail networks with route length spread over 1,15,000 km, with 12,617 passenger trains and 7,421 freight trains each day from 7,349 stations plying 23 million travelers and 3 million tones (MT) of freight daily. The Government of India’s focused area now is to improve infrastructure for freight and high speed trains. The Indian rail projects are attracting not only several domestic but also foreign Companies

Your Company is operating in the Rail Safety equipment manufacturing and supply of Prevention of Rail Collision Devices, Train Protection warning systems, Electronic Inter Locking and providing necessary hard ware and software.

2. Future outlook

The Indian Rail Network is expected to grow at a healthy rate of 10% over the next five years and the Government has a safety first policy of the Railways and is planning to invest considerable amount to adopt European Train Control Systems (ETCS) which is expected in developing infrastructural facilities. The proposed National Rail Plan envisages integration of all rail networks with other modes of transport and provides Rail safety besides eliminating unmanned level crossings, up gradation of rolling stock, accelerating track renewal and most important of all particularly to your Company is implementation of TCAS/TPWS technology across high density network in the coming three years.

It is very encouraging news for your company that railways of many countries in the world are upgrading their infrastructure by deploying or considering to deploy, Train Control / Train Protection Solutions and Level Crossing Protection Systems both of which are the areas of strength for your company.

Your company is pursuing opportunities for providing protection at railway level crossings from India and also many countries around the world like Egypt, Sri Lanka, South Africa, Botswana etc., and expects to win a few projects in this year

Train control/protection systems, the area of focus of your company, was under full gaze at the highest level in India - the Ministry of Railways of the Government of India. That this topic is taking the top priority is evident from the fact that the Minister of Railways himself has been reviewing plans and options for implementation of train protection systems in Indian Railways in a big way in the next few years. After initially studying a few foreign solutions for implementation, the Minister reviewed Train Collision Avoidance System (TCAS) also with the industry and the Railway body and gave a favorable view of TCAS. The Minister has even suggested some new features for TCAS so that the product becomes truly world class.

Operations during the year

International

RBCT, RYCAS - South Africa

Your company has completed the project including warranty maintenance to the satisfaction of the customer and is presently discussing with customer for maintenance contract for one or two years. Your company is also exploring more business opportunities with the customer

Egyptian National Railways (ENR), Cairo

Having supplied all the 136 gates earlier, your company has completed installation of 105 gates and handed over 102 gates to the customer. An order for supply of spares was received and this has been executed by your company

Domestic

During the year 17-18 your company has closed in further on completing the Train Control Avoidance System project. Completion of the project was delayed due to certain changes at the Independent Safety Assessor’s end. Significant progress has been achieved with the ISA subsequently and your company has advanced to the final acceptance testing by RDSO and commencement of passenger trials. With very few tasks now pending, your company expects to receive the approval by end Sep’ 2018 and also receive a contract for deployment of TCAS over a 500-Km area by March 2019.

Research & Development and Addition of New

Products

Development activity has commenced on the Universal Brake Interface Unit and the Driver Machine Interface Unit. These are advanced versions and allow us to address a larger chunk of the TCAS project.

Your company is in discussions with a Spanish company (Ingenieria Y Control Ferroviario -ICF in short) specializing in railway products to market their products and solutions in India and neighboring markets on exclusive basis. Since some of these products have immense potential in Indian Railways, your company plans to get these products approved by Indian Railways so that we are in a position to sell them in the year 2019-2020 onwards.

3. Subsidiary Details with consolidated financial statement

Your Company has one 100% wholly owned subsidiary Avant Garde Infosystems Inc, In USA and there were no joint ventures or associate Companies as of 31st March 2018. There has been no change in the nature of business of subsidiary, during the year under review. 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 regulations of the stock exchanges which forms part of the Annual Report for laying before the Annual General Meeting.

A report on the information about the subsidiary is annexed as Annexure-A to this report

4. Material changes and commitments affecting the financial position of the company

There have been no material changes and commitments affecting the financial position of your Company which have occurred between the end of the financial year of the Company to which the financial statements relate and the date of the Report.

5. Share Capital

There is no change in Share Capital of your Company during the year.

The Company has obtained the shareholders’ approval for preferential issue of 18,70,057 equity shares of Rs. 10/- each at a premium calculated in terms of SEBI ICDR Regulations and obtained the in principle approval of the National Stock Exchange. The BSE approval is required to be sought. The promoters and others to whom an offer of preferential issue of equity shares was made after seeking an approval of the shareholders on 16th February, 2018, have conveyed their unwillingness to subscribe the shares of the company.

6. Dividend and Reserves

Your company in the absence of distributable profits has not declared any dividend during the year. And no amount was transferred to reserves also.

7. Directors and Key Managerial Personnel

In accordance with the provisions of Section 152 of the Companies Act, 2013 Mr. Anji Raju Manthena and Mr. Vinta Janardhan Reddy, Directors of the company retires by rotation and being eligible offer themselves for reappointment.

Mr. K Krishnam Raju, Director has vacated office effective 29th September’2017. Mr. M Gopalakrishna, Independent director resigned from the Board effective 10th February’2018.

The Board on 20th November’2017 has appointed Mr. K Krishnam Raju as Chief Executive Officer, Ms. Sree Lakshmi Manthena and Mr. Badari Narayana Raju Manthena as additional Directors. Further, the Board of Directors of the Company has appointed Mr. Badari Narayana Raju Manthena as a whole Time Director on the same day by changing his designation.

The Board also appointed CA TVSN Raju as Independent Director effective from 10th February’2018 and Sri. Ashok Gopal Rao Kalmankar as Independent Director from 12th August’2018.

The brief profile of the Directors who are to be appointed/re-appointed have been furnished in the notice convening AGM.

8. 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.

9. 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.

10. Board Evaluation

Pursuant to the provisions contained in the Companies Act 2013 and listing regulations, the Board has carried out annual performance evaluation of its own members, The chairman of the Board, 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

11. Number of Meetings of the Board of Directors

During the financial year 2017-18 the Board of Directors of the Company met 6 times on 09/05/2017, 10/08/2017, 08/09/2017, 20/11/2017, 17/01/2018 & 10/02/2018. A separate meeting of the Independent Directors of the Company could not be held during the year as required under Section 149 (8) Schedule IV (VII) of the Companies Act 2013 and clause 25 (3) of Securities Exchange Board of India (Listing obligations and disclosure requirements) Regulations 2015. as the Company is in the process of identifying and inducting further number of them so as to meet the requirements stipulated.

12. Public Deposits

During the year, your Company has not accepted any deposits, within the meaning of Section 73 of the Companies Act, 2013 read with Companies (Acceptance of Deposits) Rules, 2014. No amount on account of principal or interest on deposits from public was outstanding as on Balance Sheet date.

13.Regulatory / Court Orders

No significant and material orders were passed by the regulators or courts or tribunals impacting the going concern status of the Company and its future operations.

14. Disclosure under the sexual harassment of women at workplace (prevention, prohibition and redressal) Act, 2013

Your Company has put in place a Policy for prevention of Sexual Harassment of Women at the Workplace in line with the requirements of the Sexual Harassment of Women at the Workplace (Prevention, Prohibition & Redressal) Act, 2013. Internal Complaints Committee (ICC) of the Company has been constituted to redress complaints regarding sexual harassment.

15. 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 loss 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

16. 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, safeguarding of its assets, prevention and detection of frauds and errors, accuracy and completeness of the accounting records, and timely preparation of reliable financial information. An independent audit committee

of the Board reviews the adequacy of internal controls

17.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 are given in notes forming part of the financial statements.

18. Committees of the Board

The Board of Directors has the following Committees:

1. Audit Committee

2. Nomination and Remuneration Committee

3. Stakeholders’ Relationship Committee

4. Risk Management Committee

The details of the Committees along with their composition, number of meetings and attendance at the meetings are provided in the Corporate Governance section of this Report.

19. 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

20. Related Party Transactions

All the related party transactions by the Company during the year 2017-18 were on an arm’s 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. The details of the related party transactions entered by the company during the year under the provisions of section 188 of the Companies Act, 2013 in Form AOC-2 is annexed as Annexure-B to this report.

21. Vigil Mechanism

Your Company in compliance with the provisions of Section 177(9) of the Companies Act, 2013 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.

22.Familiarization Programmes for Independent Directors

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, SEBI (LODR) Regulations, 2015 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 Whole time Director/ CEO 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.

23. Extract of Annual Return

The extract of the Annual Return in Form No MGT-9 as required under section 92 of the companies Act, 2013 for the financial year ending March 31, 2018 is annexed hereto as Annexure -C and forms part of the this report.

24. Risk Management

Your Company has in place a mechanism to identify, assess, monitor and mitigate various risks to key business objectives. Major risks identified by the businesses and functions are systematically addressed through mitigating actions on a continuing basis. These are also discussed at the meetings of the Audit Committee and the Board, Your 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

25.Transfer of unclaimed dividend

There is no unclaimed dividend for the financial year 2009-10 to be transferred to IEPF (Investor Education and Protection Fund) and the sum for the financial year 2010-11 is due for transfer.

26. Auditors Statutory Auditors

M/s PRSV & Co., LLP, Chartered Accountants, are the statutory auditors of your Company and they hold office until the conclusion of the thirtieth AGM to be held in the year 2022.

Reply to the Comments made in the Audit Report

1. Non Re-conciliation, confirmation of receivables and provisions.

The Company’s major customers are Indian Railways and Egyptian National Railways, which r

recognize the invoices on payment basis. The company could not obtain the confirmation and reconciliation of balance from both the parties. The company intends to file arbitration proceedings against KRCL for Rs.5.18 crores, hence no provision was made in the books of accounts.

2. Non-provision for slow and nonmoving stock.

The slow and non-moving stocks significantly constitute electronic components which can be used by the company in future expected domestic and international orders, hence provision was not made.

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 2017-18 and their report is annexed as Annexure-D to this report

Reply to the Comments made in the Secretarial Audit Report

Belatedly filing of Annual returns and forms

The company was facing severe financial constraints since some time due to which Key Managerial Personnel could not be put in position to look after the compliances under various applicable legislations from time to time. As such there was delay in submission of returns and forms.

Penalties imposed by BSE/NSE for delay in compliance under SEBI (Listing Obligations and disclosure requirements) Regulations 2015

These penalties are pertaining to earlier years. There were no major penalties imposed during the year 2017-18.

The Company is required to authorize one or more KMP in terms of Regulation 30(5) of LODR Regulations 2015.

The Company Secretary and Chief Financial Officer is designated under Regulation 30(5) of SEBI (LODR) Regulations 2015 for identifying material events and necessary disclosures.

No Independent directors meeting was held during the year

The Company is in the process of identifying and inducting further Independent directors so as to comply with Regulation 17 of SEBI (Listing obligations and disclosure requirements) Regulations 2015

Updating of Website

The company has appointed a qualified Company Secretary for adhering to all the compliances including updating of Company’s website.

Delay in payments of Statutory Dues

The company was facing severe financial constraints since some time, as such there was delay in submission of returns and payment of statutory dues.

INTERNAL AUDITORS:

The Board of Directors based on the recommendation of the Audit Committee has re-appointed M/s. SRH & Co., Chartered Accountants, Hyderabad, as the Internal Auditors of your Company. The Internal Auditors are submitting their reports on quarterly basis.

27. 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 and annexed as Annexure-E to this report

28.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 separately and annexed as

Annexure-F to this report.

In terms of Rule 5(2) of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014, the Company does not have any employee who is employed throughout the financial year and in receipt of remuneration of Rs.102 Lakhs or more, or employees who are employed for part of the year and in receipt of Rs. 8.50 Lakhs or more per month.

The Company does not have any employee who is employed throughout financial year or part thereof, who was in receipt of remuneration in financial year under review which in aggregate, or as the case may be, at a rate which in the aggregate is in excess of that drawn by the Managing Director or Whole time director and holds by himself or along with his spouse and dependent children not less than 2% of the equity shares of the Company.

29.Other General Disclosures

No disclosure or reporting is required of the following as:-

a. No equity shares with differential rights as to dividend, voting or otherwise were issued

b. No sweat equity shares were issued

c. No remuneration or commission was received by the Managing Director/Whole time Director of the Company from subsidiary Company.

d. 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.

30. Corporate Governance Report

Your Company is committed to adhere to the corporate governance requirements. The report on Corporate Governance as stipulated under Schedule V of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 is given separately and annexed as Annexure-G to this report.

The requisite certificate from the Practicing Company Secretary confirming compliance with the conditions of corporate governance is attached.

31. Management Discussion & Analysis (MDA)

Management’s Discussion and Analysis Report for the year under review, as stipulated under Regulation 34(2) (e) of the Listing Regulations is presented in a separate section forming part of the this report and annexed as Annexure-H.

32. 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, State Bank of India, 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

Manthena Badari Narayana Raju Raju Narasa Mantena

Whole-Time Director Chairman & Director

(DIN:07993925) (DIN 02666074)

Palce : Hyderabad

Date : 12th August, 2018

Director’s Report