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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 '19

1. 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 of India Limited (“NSE”), the BSE Limited (“BSE”) in India. The Global Depository Receipts (GDRs) (underlying equity shares) of the Company are listed on the Luxembourg Stock Exchange and are also admitted for trading on International Order Book (IOB) of the London Stock Exchange.

Notes:

a. Additions during the year includes borrowing costs capitalised Rs. 41.24 crores (2018 : Rs. 1.56 crores)

b. Buildings include Rs. * crores (2018 : Rs. * crores) being the value of shares in co-operative housing societies.

* denotes amounts less than Rs. 50,000.

(a) Non-Current Loans to Related Parties includes Loan to a Director of Rs. 9.51 crores (2018 : Rs. 9.06 crores).

(b) Other Current and Non-Current Loans mainly includes loans to employees and loans given to other companies.

(c) Loans given to employees as per the Company’s policy are not considered for the purposes of disclosure under Section 186(4) of the Companies Act, 2013.

Other Financial Assets include receivables for oil royalty income, scrap sales, incentive receivables and other recoverable expenses.

Derivative financial assets includes foreign currency forwards, commodity derivatives in the nature of forward contracts, interest rate swaps and options.

(a) The amount of inventories recognised as an expense Rs. 43,906.19 crores (2018 : Rs 39,448.41 crores) including Rs. 42.43 crores (2018 : 40.00 crores) in respect of write-down of inventories to net realisable value, and has been reduced by Rs. 14.84 crores (2018 : Rs. 34.30 crores) in respect of the reversal of such write downs. Reversal in provision is due to sale and/or consumption of inventories provided for in earlier years.

(b) The Company has availed working capital facilities and other non-fund based facilities viz. bank guarantees and letters of credit, some of which are secured by hypothecation of inventories.

(c) Mode of valuation of inventories is stated in Note 2(h).

2. Assets held for sale

(a) During March 2019, the Company tendered 47,00,013 equity shares of Tech Mahindra Limited in the share buy-back scheme at Rs. 950 per equity share.

(b) The Company had on 9th February, 2018, entered into an agreement, subject to requisite approvals, to sell 26,36,401 Equity shares of Rs. 10 each in Mahindra Sanyo Special Steel Private Limited (MSSSPL) aggregating 22% of the paid-up Equity Share Capital of MSSSPL, to Sanyo Special Steel Co. Ltd. for a consideration of Rs. 146.32 crores. The shares had since been transferred and the transaction has been concluded during financial year 2018-2019.

b. The Ordinary (Equity) Shares of the Company rank pari-passu in all respects including voting rights and entitlement to dividend.

c. Details of Ordinary (Equity) Shares held by shareholders holding more than 5% of the aggregate shares in the Company’s Issued, Subscribed and Paid-up:

d. For the period of preceding five years as on the Balance Sheet date, Issued, Subscribed and Paid-up Share Capital includes:

i. Aggregate of 5,03,888 (2018 : 5,03,888) Ordinary (Equity) Shares of Rs. 5 each allotted as fully paid-up pursuant to Scheme of Arrangement without payment being received in cash.

ii. Aggregate of 62,15,96,272 (2018 : 62,15,96,272) Ordinary (Equity) Shares allotted as fully paid up by way of bonus shares.

(b) Term loan 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.

Unsecured Borrowings:

Term loan from banks consists of Rupee packing credit facility under Interest equalisation scheme carrying fixed interest rate ranging from 4.50% p.a. to 5.15% p.a. repayable within a year from the date of availment of loan.

Other loan from bank consists of arrangement of debt factoring with recourse carrying fixed interest rate of 7.90% p.a. repayable within a year from the date of availment of loan.

Other liabilities include salaries and wages payable, capital creditors, brand licenses payable and monies adjusted from share capital and reserves & surplus on account of shares held by ESOP Trust pending transfer to the eligible employees.

Others mainly include government dues, taxes payable, GST payable and salary deductions payable.

There are no amounts due and outstanding to be credited to the Investor Education and Protection Fund.

Micro, Small and Medium enterprises have been identified by the Company on the basis of the information available. Total outstanding dues of Micro and Small enterprises, which are outstanding for more than the stipulated period and other disclosures as per the Micro, Small and Medium Enterprises Development Act, 2006 (hereinafter referred to as “the MSMED Act”) are given below:

* The Government of India introduced the Goods and Services Tax (GST) with effect from 1st July 2017. GST is collected on behalf of the Government and no economic benefit flows to the entity and hence Revenue from Operations under GST regime is presented excluding GST as per Ind AS 18 ‘Revenue’. However, Revenue from Operations under pre-GST regime included Excise Duty which is now subsumed in GST. Consequently, the figures for the year ended 31st March, 2019 are not comparable with the previous periods presented in the above table.

Other borrowing costs includes discounting charges and unwinding of discount.

The weighted average capitalisation rate used to determine the amount of borrowing costs eligible for capitalisation is 4.10% p.a. (2018 : 3.90% p.a.)

(b) Expenditure incurred on Corporate Social Responsibility (CSR) under section 135 of the Companies Act, 2013 Rs. 93.50 crores (2018 : Rs. 81.97 crores).

(c) Donations given to New Democratic Electoral Trust Rs. 1.02 crores (2018 : Nil).

(d) The foreign exchange loss recognised in profit or loss is Rs. 4.62 crores (2018 : loss of Rs. 14.86 crores).

3. 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:

Asset Volatility

The plan liabilities are calculated using a discount rate set with references to government bond yields; if plan assets underperform compared to this yield, this will create or increase a deficit. The defined benefit plans may hold equity type assets, which may carry volatility and associated risk.

Changes in bond yields

A decrease in government bond yields will increase plan liabilities, although this is expected to be partially offset by an increase in the value of the plans’ investment in debt instruments.

Inflation risk

The present value of some of the defined benefit plan obligations are calculated with 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. The post retirement medical benefit obligation is sensitive to medical inflation and accordingly, an increase in medical inflation rate would increase the plan’s liability.

Life expectancy

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

4. 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 recommendations 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 or

iii) 3 instalments bifurcated as 33.33% on the expiry of 12 months, 33.33% on the expiry of 24 months and 33.34% on the expiry of 36 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.

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. 89.20 crores (2018 : Rs. 81.93 crores) being expenses on account of share based payments, after adjusting for reversals on account of options forfeited. The amount excludes Rs. 5.31 crores (2018 : Rs. 4.65 crores) charged to subsidiaries, associates or joint ventures for options issued to their employees.

5. Capital management

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.

6. Financial Instruments

Financial Risk Management Framework

In the course of its business, the Company is exposed to certain financial risks namely credit risk, 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.

7. Market Risk Management

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.

(a) Currency Risk

The Company’s exposure to currency risk relates primarily to the Company’s operating activities including anticipated sales, purchases 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.

The carrying amounts of the Company’s foreign currency exposure at the end of the reporting period are as follows:

Hedge Accounting - Forwards

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.

(b) 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.

8. 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.

(a) Financial Guarantees

In addition, the Company is exposed to credit risk in relation to financial guarantees given to banks. The Company’s maximum exposure in this respect is the maximum amount the Company could have to pay if the guarantee is called on. Financial guarantees are accounted as explained in note 2 (k). The amount recognised in Balance Sheet as liabilities is as given below:

(b) Trade Receivables

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.

The Company’s maximum exposure to credit risk in respect of Financial Guarantee contracts are disclosed in Note 34 - 3(a).

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.

9. Liquidity Risk Management

(a) 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.

(b) Maturity profile of derivative financial liabilities

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.

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.

(b) 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:

10. Offsetting of balances: The Company has not offset financial assets and financial liabilities.

10.1. Collaterals

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

Note : a) Inter corporate deposits given and repaid during the year amounting to Rs. 435.00 crores (2018 : Rs. 344.55 crores) were given to Mahindra & Mahindra Financial Services Limited (subsidiary), NBS International Limited (subsidiary), Mahindra First Choice Services Limited (subsidiary), Mahindra EPC Irrigation Limited (subsidiary), Mahindra Rural Housing Finance Limited (subsidiary), Mahindra Agri Solutions Limited (subsidiary), Mahindra World City (Jaipur) Limited (joint venture)

b) Above inter corporate deposits and loans have been given for general business purposes (including investment purposes) and guarantees have been given against their borrowing obligation which have been taken for general corporate purpose.

c) Refer note 6 for investments.

11. 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 This segment comprises of sale of automobiles, spares, mobility solutions. Construction Equipment and related services;

(b) Farm Equipment This segment comprises of sale of tractors, implements, spares and related services;

(c) Others This segment comprise of Powerol, Two Wheelers 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 includes sales to customers located in India and service income accrued in India.

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

Information about major customers

During the years ended 31st March, 2019 and 31st March, 2018 revenues from transactions with a single external customer did not amount to 10% or more of the Company’s revenues from external customers.

12. 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. 2,006.90 crores (2018 : Rs. 2,240.66 crores) before tax.

(ii) Other matters (excluding claims where amounts are not ascertainable) : Rs. 27.46 crores (2018 : Rs. 27.38 crores) before tax.

(b) Taxation matters :

(i) Demands against the Company not acknowledged as debts and not provided for, 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. 1,128.52 crores (2018 : Rs. 904.43 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. 80.39 crores (2018 : Rs. 64.17 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 matter is presently pending before the Honorable Commissioner. The Company strongly believes, based on legal advice it has received, that it has a good case on merits and would eventually succeed in the matter. As regards Commander case the matter is still pending adjudication before the Commissioner. However, pending the final outcome, basis the earlier adjudication order, the Company has reflected the above amount aggregating Rs. 304.10 crores (duty penalty) and the interest of Rs. 417.13 crores accrued on the same upto 31st March, 2019, under Note (a)(i) above.

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. This matter was heard by the Honorable Tribunal at Mumbai, which allowed the Company’s appeal.

(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 :

The estimated amount of contracts remaining to be executed on capital account and not provided for as at 31st March, 2019 is Rs. 1,587.42 crores (2018 : Rs. 888.09 crores) and other commitment as at 31st March, 2019 is Rs. 5.46 crores (2018 : Rs. 7.50 crores).

(C) In February 2019, the Honorable Supreme Court of India in its judgement opined on the applicability of allowances that should be considered to measure obligations under Employees Provident Fund Act, 1952. The Company has been legally advised that there are interpretative challenges on the application of judgement retrospectively and therefore has currently not considered any probable obligations for past periods.

13. Research and Development expenditure

(a) In recognised Research and Development units :

(i) Expensed to Profit or Loss, including certain expenditure based on allocations made by the Company, aggregate Rs. 812.27 crores (2018 : Rs. 822.00 crores) [excluding depreciation and amortisation of Rs. 833.10 crores (2018 : Rs. 564.24 crores)].

(ii) Development expenditure incurred during the year Rs. 1,299.35 crores (2018 : Rs. 830.39 crores).

(iii) Capitalisation of assets Rs. 165.10 crores (2018 : Rs. 163.97 crores).

(b) In other units :

(i) Expensed to Profit or Loss, including certain expenditure based on allocations made by the Company, aggregate Rs. 97.50 crores (2018 : Rs. 75.05 crores) [excluding depreciation and amortisation of Rs. 34.53 crores (2018 : Rs. 25.88 crores)].

(ii) Development expenditure incurred during the year Rs. 189.56 crores (2018 : Rs. 154.64 crores).

(iii) Capitalisation of assets Rs. 126.52 crores (2018 : Rs. 9.34 crores).

14. Previous year’s figures have been regrouped/reclassified wherever necessary.

Source : Dion Global Solutions Limited
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