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Moneycontrol.com India | Notes to Account > Finance - Leasing & Hire Purchase > Notes to Account from Mahindra & Mahindra Financial Services - BSE: 532720, NSE: M&MFIN
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Mahindra & Mahindra Financial Services

BSE: 532720|NSE: M&MFIN|ISIN: INE774D01024|SECTOR: Finance - Leasing & Hire Purchase
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Notes to Accounts Year End : Mar '18

1 CORPORATE OVERVIEW

Mahindra & Mahindra Financial Services Limited (‘the Company’), incorporated and headquartered in Mumbai, India is a publicly held Non-Banking Financial Company (‘NBFC’) engaged in providing asset finance through its pan India branch network. The Company is registered as a Systemically Important Deposit Accepting NBFC as defined under Section 45-IA of the Reserve Bank of India (‘RBI’) Act, 1934 with effect from 4 September 1998. The Company is a subsidiary of Mahindra & Mahindra Limited.

a) Terms / rights attached to equity shares :

The Company has only one class of equity shares having a par value of Rs.2/- per share. Each holder of equity shares is entitled to one vote per share. The dividend proposed by the board of directors and approved by the shareholders in the annual general meeting is paid in Indian rupees. In the event of liquidation of the Company, the holders of equity shares will be entitled to receive remaining assets of the Company, after distribution of all preferential amounts. The distribution will be in proportion to the number of equity shares held by the shareholders.

b) Shares issued to ESOS Trust:

The Guidance note issued by The Institute of Chartered Accountants of India on accounting for employee share-based payment requires that shares allotted to a Trust but not transferred to the employees be reduced from Share capital and Reserves. Accordingly, the Company has reduced the Share capital and Securities premium reserve in respect of outstanding equity shares pertaining to Employee Stock Option Scheme 2005 and Employee Stock Option Scheme 2010 held by the Trust, as at the year-end pending allotment of shares to eligible employees as per details provided below.

All secured loans / debentures are secured by paripassu charges on Aurangabad office and exclusive charge on receivables under loan contracts, owned assets and book debts to the extent of 100% of outstanding secured loans / debentures.

The funds raised by the Company during the year by Issue of Secured / Unsecured Non Convertible Debentures / bonds were utilised for the purpose intended, i.e. towards lending, financing, to refinance the existing indebtedness of the Company or for long-term working capital, in compliance with applicable laws.

All secured loans are secured by paripassu charges on Aurangabad office and exclusive charge on receivables under loan contracts, owned assets and book debts to the extent of 100% of outstanding secured loans / debentures.

All secured loans / debentures are secured by paripassu charges on Aurangabad office and exclusive charge on receivables under loan contracts, owned assets and book debts to the extent of 100% of outstanding secured loans / debentures.

The funds raised by the Company during the year by issue of Secured / Unsecured Non Convertible Debentures / bonds were utilised for the purpose intended, i.e. towards lending, financing, to refinance the existing indebtedness of the Company or for long-term working capital, in compliance with applicable laws.

Quoted investments of Rs. 70,251.08 lakhs [31 March 2017: Rs. 70,418.03 lakhs] are in Government Stocks as Statutory Liquid Assets as required under Section 45 IB of The Reserve Bank of India Act,1934 vide a floating charge created in favour of public deposit holders through a “Trust Deed” with an independent trust.

iii) During the year, the Company has made following equity investments -

a) Rs.13,000.00 Lakhs (31 March 2017: Rs. 11,375.00 Lakhs) in Mahindra Rural Housing Finance Ltd., its subsidiary, by subscription to 1,30,00,000 Equity shares of Rs.10/- each for cash at Rs.100.00 per share, including premium of Rs.90.00 per equity share on a rights basis, fully paid up (31 March 2017: 1,69,77,612 Equity shares of Rs.10/- each for cash at Rs.57.00 per share, including premium of Rs.30/- per equity share, fully paid up).

b) Rs.2,900.00 Lakhs (31 March 2017: Rs. 3,045.00 Lakhs) in Mahindra Asset Management Company Private Limited, its wholly owned subsidiary, by subscription to 2,90,00,000 (31 March 2017: 3,04,50,000) Equity shares of Face Value of Rs.10/- each at par for cash fully paid up on a rights basis.

c) Rs.1,662.44 Lakhs (31 March 2017: Rs. 3,111.84 Lakhs) being additional equity infusion in Mahindra Finance USA LLC, a 49% joint venture company formed jointly with De Lage Landen Financial Services Inc. in United States.

d) During the previous year, the Company had made an additional investment of Rs.0.95 Lakh in New Democratic Electoral Trust, a Trust approved by the Central Board of Direct Taxes under Electoral Trust Scheme, 2013, by subscription to 9,500 Equity shares, including 7,000 additional Equity shares offered, of Face Value of Rs.10/- each at par for cash fully paid up on a rights basis. During the current year, there were no further investment made in New Democratic Electoral Trust.

e) Rs.700.00 lakhs in Orizonte Business Solution Limited (formerly known as “Mega One Stop Farm Services Limited”), engaged in business of operating a Business to Business (B2B) platform “Smart shift”, a online logistic marketplace which connects cargo owners and transporters in India, by subscribing to preferential issue of 35,00,000 equity shares of Rs.10/- each, for cash, at a premium of Rs.10/- per share.

iv) During the year, the Company has sold 1,28,866 equity shares of face value of Rs.10/- each representing 5% of holding in subsidiary company, Mahindra Insurance Brokers Ltd., at Rs.5,044.00 per share for a consideration aggregating to Rs.6,500.00 lakhs. Consequent to the said sale transaction, the shareholding percentage of the Company stands reduced from 85% to 80%. This transaction has resulted in profit of Rs.6,497.18 lakhs on a standalone basis and the same has been shown as an Exceptional items in the Statement of profit and loss.

2 EMPLOYEE STOCK OPTION PLAN

a] The Company had allotted 134,32,750 equity shares [face value of Rs.2/- each] under Employee Stock Option Scheme 2005 at a premium of Rs.8.20 per share on December 06, 2005 and 48,45,025 Equity shares [face value of Rs.2/- each] under Employee Stock Option Scheme 2010 at par on February 03, 2011, to Mahindra and Mahindra Financial Services Limited 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. The Trust had issued 1,49,89,782 equity shares to employees up to 31 March 2018 [31 March 2017: 1,45,54,477 equity shares], of which 4,35,305 equity shares [31 March 2017: 4,40,284 equity shares] were issued during the current year. All the equity shares issued to employees during the current year are out of Employee Stock Option Scheme 2010.

f) Method used for accounting for share based payment plan

The Company has elected to use intrinsic value method to account for the compensation cost of stock options to employees of the Company. Intrinsic value is the amount by which the quoted market price of the underlying share exceeds the exercise price of the option. Employee stock compensation cost is amortized over the vesting period.

g) Fair value of options

The fair value of options have been calculated using Black Scholes Options Pricing Model and the significant assumptions made in this regards are as follows :

h] Earnings Per Share

Earnings Per Share as required by Accounting Standard 20 read with the Guidance Note on “Accounting for Employee Share-based Payments” is as follows:

3 FRESH ISSUE OF EQUITY SHARE CAPITAL

The Board of Directors of the Company, at its meeting held on 1 November 2017, and special resolution passed by the members at the Extraordinary General Meeting held on 29 November 2017 had approved the infusion of share capital.

Pursuant to the passing of the above resolutions and in accordance with Chapter VIII of Securities & Exchange Board of India [Issue of Capital & Disclosure requirements] Regulations, 2009, as amended, the Company has raised funds amounting to Rs. 2,11,100.00 lakhs through allotment of fresh equity shares as per details provided below :

a] Preferential allotment of 2,50,00,000 equity shares of face value of Rs.2.00 each, at a price of Rs.422.00 each, for cash, including a premium of Rs.420.00 per equity share, aggregating to Rs.1,05,500.00 lakhs, to Mahindra & Mahindra Limited, the Holding Company;

b] Qualified Institutional Placement [QIP] of 2,40,00,000 equity shares of face value of Rs.2.00 each, at a price of Rs.440.00 each, for cash, including a premium of Rs.438.00 per equity share, aggregating to Rs. 1,05,600.00 lakhs, to Qualified Institutional Buyers [QIB’s]. The Company has utilized the entire proceeds [net of issue related expenses] from issue of equity shares through QIP for the purposes as stated in its ‘Placement Document’.

The share issue expenses of Rs.1,310.13 lakhs has been adjusted against securities premium reserve as per the accounting policy. These equity shares were allotted on 7 December 2017.

The fresh allotment of equity shares through preferential allotment and QIP as stated above have resulted in an increase of equity share capital by Rs. 980.00 lakhs and securities premium reserve by Rs. 210120.00 lakhs.

4 PUBLIC ISSUANCE OF UNSECURED SUBORDINATED REDEEMABLE NONCONVERTIBLE DEBENTURES (NCD’S)

During the year, the Company has raised an amount of Rs. 1,15,053.13 lakhs by way of Public Issuance of Unsecured Subordinated Redeemable Non-Convertible Debentures [NCD’s] of the face value of Rs.1,000.00 each. The NCD’s were allotted on 24 July 2017 and listed on BSE Limited on 26 July 2017. The entire amount of proceeds of the issue were used for the purposes as stated in its ‘Placement Document’ and there is no unutilised amount pertaining to this issuance. The NCD’s issue expenses of Rs. 1215.07 lakhs [net of taxes] has been adjusted against securities premium reserve as per the accounting policy. The total amount of NCDs outstanding as at 31 March 2018 were Rs. 2,15,053.13 lakhs, including the amount of fresh issuance during the year.

In terms of the requirements as per Section 71 (4) of the Companies Act, 2013 read with The Companies (Share capital and Debentures) Rules 2014, Rule no.18 (7) and applicable SEBI Issue and Listing of Debt Securities) Regulations, 2008, the Company has transferred Rs. 5,053.12 Lakhs (31 March 2017: Rs.2,649.86 lakhs) to Debenture Redemption Reserve (DRR) on a prorata basis on total NCDs outstanding as at 31 March 2018, including the amount of fresh issuance during the year to create adequate DRR over the tenor of the debentures.

5 LOAN PROVISIONS

a) The Company has made adequate provision for the Non-performing assets identified, in accordance with the guidelines issued by The Reserve Bank of India. As per the practice consistently followed, the Company has also made accelerated provision on a prudential basis.

The RBI vide it’s notification no. DNBR. 011/ CGM (CDS)-2015 dated March 27, 2015 has revised the asset classification norms for NPAs and substandard assets under its prudential norms applicable to NBFCs in a phased manner commencing from financial year ended 31st March, 2016, upto the financial year ended 31st March, 2018 and these revised guidelines have been followed during the current year while making provisions for NPAs and Standard assets.

The cumulative accelerated provision made by the Company as on 31 March 2018 is Rs.69,970.22 Lakhs (31 March 2017: Rs.68,623.98 Lakhs).

The Company, during the year ended 31 March 2017, had started considering the estimated realisable value of underlying security (which conforms to the RBI norms) for loan assets to determine 100% provisioning for assets which were 24 months overdue which had resulted in lower provision of Rs.8,336.91 Lakhs for the year ended 31 March 2017 with a consequent impact on the profit before tax. However, during the current year, the Company has reviewed the basis of estimating provision for non-performing assets and made additional provision of Rs. 8,336.91 Lakhs against the above mentioned 100% provision cases.

b) (i) I n accordance with the Master direction DNBR.PD.008/03.10.119/2016-17 dated September 01, 2016 issued by The Reserve Bank of India (RBI) vide its directions to all NBFC’s, the Company has made Standard assets of provision of Rs.3208.00 Lakhs (31 March 2017: Rs. 2180.00 Lakhs) during the current year

(ii) The total amount of provision on Standard assets as at 31 March 2018 stood at Rs. 19,423.00 Lakhs (31 March 2017: Rs. 16,215.00 Lakhs, including additional provision of Rs.2,034.00 lakhs).

6 The Company is engaged primarily in the business of financing and accordingly there are no separate reportable segments as per Accounting Standard 17 dealing with Segment Reporting.

7 LEASES

In the cases where assets are given on operating lease (as lessor) -

The total future minimum lease rentals receivable for the non-cancellable lease period as at the Balance sheet date is as under:

8 DISCLOSURE ON DERIVATIVES

The Company has outstanding foreign currency non-repatriable loans of US - 1,648.41 Lakhs (31 March 2017: US - 1,535.23 Lakhs). The said loan has been hedged to INR liability using a cross currency and interest swap. There is no un-hedged foreign currency exposure as on 31 March 2018.

During the year 2016-17, the Company has changed its accounting policy for derivative transactions to align to the Guidance Note on Accounting for Derivative Transactions issued by the Institute of Chartered Accountants of India applicable with effect from 1 April 2016. Consequently, mark to market loss of Rs.514.68 Lakhs (net of deferred tax of Rs.272.38 Lakhs) is charged to opening retained earnings as transitional charge in respect of derivative transactions outstanding as at 1April 2016. Loss of Rs. 2,182.88 lakhs (31 March 2017: Rs. 2,365.54 Lakhs) is charged to Statement of profit and loss for the year ended 31 March 2018.

9 SECURITISATION / ASSIGNMENT TRANSACTIONS

a] During the year, the Company has without recourse securitised on “at par” basis vide PTC route loan receivables of 22694 contracts [31 March 2017: 11,489 contracts] amounting to Rs.55,160.71 Lakhs [31 March 2017: Rs. 33,772.18 Lakhs] for a consideration of Rs 55,160.71 Lakhs [31 March 2017: Rs. 33,772.18 Lakhs] and de-recognised the assets from the books.

b] In terms of the accounting policy stated in 2.4 [a], securitisation income is recognized as per RBI Guidelines dated 21st August, 2012. Accordingly, interest only strip representing present value of interest spread receivable has been recognized and reflected under loans and advances.

c] Excess interest spread received during the year by the Special Purpose Vehicle Trust [SPV Trust] has been recognised as income and included in Income from assignment / securitisation transactions amounting to Rs.14,032.87 Lakhs [31 March 2017: Rs.11,500.70 Lakhs]

10 FRAUDS REPORTED DURING THE YEAR

There were 143 cases [31 March 2017: 176 cases] of frauds amounting to Rs.230.08 Lakhs [31 March 2017: Rs 397.06 Lakhs] reported during the year. The Company has recovered an amount of Rs.77.60 Lakhs [31 March 2017: Rs 125.98 Lakhs] and has initiated appropriate legal actions against the individuals involved. The claims for the un-recovered losses have been lodged with the insurance companies.

11 The gold loans outstanding as at 31 March 2018 was Rs. 1.67 lakhs [31 March 2017: Rs.2.17 lakhs] and these were fully provided for.

12 CORPORATE SOCIAL RESPONSIBILITY (CSR)

During the year, the Company has incurred an expenditure of Rs.2,557.55 Lakhs [31 March 2017 : Rs. 2,905.66 Lakhs] towards CSR activities which includes contribution / donations made to the trusts which are engaged in activities prescribed under section 135 of the Companies Act, 2013 read with Schedule VII to the said Act and expense of Rs.145.99 Lakhs [31 March 2017 : Rs. 141.87 Lakhs] towards the CSR activities undertaken by the Company [refer note no. 28].

Detail of amount spent towards CSR activities :

a] Gross amount required to be spent by the Company during the year is Rs. 2,706.75 lakhs [Previous year: Rs. 3,047.53 lakhs].

b) Amount spent by the Company during the year :

In addition to amount spent as per point (b) above, the Company has also spent Rs.12.25 lakhs as salary cost in respect of certain employees who have been exclusively engaged in CSR administrative activities which qualifies as CSR expenditure under section 135 of the Companies Act, 2013 and considering this salary cost, the total amount spent by the Company during the year stood at Rs.2,715.79 lakhs.

13 During the previous year, the Company had made a contribution of Rs.160.00 lakhs to New Democratic Electoral Trust, a Trust approved by the Central Board of Direct Taxes under Electoral Trust Scheme, 2013 to enable Electoral Trust to make contributions to political party/parties duly registered with the Election Commission, in such manner and at such times as it may decide from time to time. This contribution was as per the provisions of section 182 of the Companies Act, 2013. However, there were no such contribution made during the current year.

14 The Company has a process whereby periodically all long term contracts (including derivative contracts) are assessed for material foreseeable losses. At the year end, the Company has reviewed and ensured that adequate provision as required under any law / accounting standards for material foreseeable losses on such long term contracts (including derivative contracts) has been made in the books of accounts.

The Company’s pending litigations comprise of claims against the Company primarily by the customers and proceedings pending with Income Tax, sales tax/VAT and other authorities. The Company has reviewed all its pending litigations and proceedings and has adequately provided for where provisions are required and disclosed the contingent liabilities where applicable, in its financial statements. The amount of provisions / contingent liabilities is based on management’s estimate, and no significant liability is expected to arise out of the same.

15 MICRO AND SMALL ENTERPRISES :

Based on and to the extent of the information received by the Company from the suppliers during the year regarding their status under the Micro, Small and Medium Enterprises Development Act, 2006 (MSMED Act) and relied upon by the auditors, there are no amounts due to MSME as at 31 March 2018.

16 Schedule to the Balance Sheet of a Non-Banking Financial Company as required under Master Direction -Non-Banking Financial Company - Systemically Important Non-Deposit taking Company and Deposit taking Company [Reserve Bank] Directions, 2016

17 Balance Sheet Disclosures as required under Master Direction - Non-Banking Financial Company - Systemically Important Non-Deposit taking Company and Deposit taking Company (Reserve Bank) Directions, 2016

Exchange Traded Interest Rate (IR) Derivative

The Company has not entered into any exchange traded derivative.

b) Exchange Traded Interest Rate (IR) Derivatives

The Company is not carrying out any activity of providing Derivative cover to third parties

c) Disclosures on Risk Exposure in Derivatives

Qualitative Disclosures -

i) The Company undertakes the derivatives transaction to prudently hedge the risk in context of a particular borrowing or to diversify sources of borrowing and to maintain fixed and floating borrowing mix. The Company does not indulge into any derivative trading transactions. The Company reviews, the proposed transaction and outline any considerations associated with the transaction, including identification of the benefits and potential risks (worst case scenarios); an independent analysis of potential savings from the proposed transaction. The Company evaluates all the risks inherent in the transaction viz., counter party risk, Market Risk, Operational Risk, basis risk etc.

ii) Credit risk is controlled by restricting the counterparties that the Company deals with, to those who either have banking relationship with the Company or are internationally renowned or can provide sufficient information. Market/Price risk arising from the fluctuations of interest rates and foreign exchange rates or from other factors shall be closely monitored and controlled. Normally transaction entered for hedging, will run till its life, irrespective of profit or loss. However in case of exceptions it has to be un-winded only with prior approval of M.D/CFO/Treasurer Liquidity risk is controlled by restricting counterparties to those who have adequate facility, sufficient information, and sizable trading capacity and capability to enter into transactions in any markets around the world.

iii) The respective functions of trading, confirmation and settlement should be performed by different personnel. The front office and back-office role is well defined and segregated. All the derivatives transactions is quarterly monitored and reviewed by CFO and Treasurer. All the derivative transactions have to be reported to the board of directors on every quarterly board meetings including their financial positions.

IV) Disclosures relating to Securitisation

a) Disclosures in the notes to the accounts in respect of securitisation transactions as required under revised guidelines on securitization transactions issued by RBI vide circular no.DNBS. PD.No.301/3.10.01/2012-13 dated August 21, 2012.

b) Details of Financial Assets sold to Securitisation / Reconstruction Company for Asset Reconstruction

During the current year and the previous year, the Company has not sold any financial assets to Securitisation /Reconstruction Company for asset reconstruction.

d) Details of non-performing financial assets purchased / sold

i) Details of non-performing financial assets purchased:

During the current year and the previous year the Company has not purchased any non -performing financial assets.

ii) Details of Non-performing Financial Assets sold:

During the current year and the previous year the Company has not sold any non -performing financial assets.

V) Exposures

a) Exposure to Real Estate Sector

During the current year and the previous the Company has no Exposure to Real estate sector.

c) Details of financing of parent company products

Of the total financing activity undertaken by the Company during the financial year 2017-18, 43% [31 March 2017: 47%] of the financing was towards parent company products.

d) Details of Single Borrower Limit (SGL) / Group Borrower Limit (GBL) exceeded by the NBFC

During the current year and the previous year, the Company has not exceeded the prudential exposure limits.

e) Unsecured Advances

As at 31 March 2018, the amount of unsecured advances stood at Rs. 2,42,125.35 Lakhs [31 March 2017: Rs.1,72,370.24 Lakhs].

VI) Miscellaneous

a) Registration obtained from other financial sector regulators

During the current year and the previous year, the Company has not obtained any registration from other financial sector regulators.

b) Disclosure of Penalties imposed by RBI and other regulators

During the current year and the previous year, there are no penalties imposed by RBI and other regulators

c) Related Party Transactions

[refer note 45]

d) Rating assigned by credit rating agencies and migration of ratings during the year

During the current year and the previous year, the Company has not exceeded the prudential exposure limits.

Credit Rating -

During the year under review, CRISIL Limited [CRISIL], has reaffirmed the rating to the Company’s Long-term Debt Instruments and Bank Facilities as ‘CRISIL AA / Stable’ and the Company’s Fixed Deposit Programme as ‘FAAA/ Stable’, respectively. The ‘AA /Stable’ rating indicates a high degree of safety with regard to timely payment of financial obligations. The rating on the Company’s Short-term Bank Loans and Cash Credit facility has been reaffirmed at ‘CRISIL A1 ’ which is the highest level of rating.

During the year under review, India Ratings & Research Private Limited [IND], which is part of Fitch Group, reaffirmed the rating of Company’s Long-term instrument and Subordinated Debt programme to ‘IND AAA/Stable’. The Company’s Short Term Commercial Paper has been rated at IND A1 .

During the year under review, Credit Analysis & Research Limited [CARE], also reaffirmed the ‘CARE AAA/ Stable’ rating to Company’s Longterm debt instrument and Subordinated Debt programme.

During the year under review, Brickwork Ratings India Private Limited [BWR] has, reaffirmed the ‘BWR AAA/stable’ rating of the Company’s Longterm Subordinated Debt Issue.

The ‘AAA’ ratings denote the highest degree of safety regarding timely servicing of financial obligations. Such instruments carry lowest credit risk.

VII) Net Profit of Loss for the period ,prior period items and change in accounting policies

There are no such material items which require disclosures in the notes to Account in terms of the relevant Accounting Standard.

VIII) Revenue Recognition

[Refer note no. 2.3 under Summary of Significant Accounting Policies]

IX) Accounting Standard 21- Consolidated Financial Statements (CFS)

All the subsidiaries of the Company have been consolidated as per Accounting Standard 21. Refer consolidated financial statements [CFS]

Additional Disclosures :

All the subsidiaries of the Company have been consolidated as per Accounting Standard 21. Refer consolidated financial statements [CFS]

Draw Down from Reserves Year ended March 31, 2018 : Nil Year ended March 31, 2017 : Nil

18 The disclosures regarding details of Specified Bank Notes (SBNs) held and transacted during 8 November 2016 to 30 December 2016 has not been made since the requirement does not pertain to financial year ended 31 March 2018. Corresponding disclosure as required under notification No. G.S.R. 308 (E) dated March 30, 2017 issued by the Ministry of Corporate Affairs as appearing in the audited Standalone financial statements for the year ended 31 March 2017 have been reproduced here below:

19 Previous year figures have been regrouped / reclassified, wherever found necessary, to conform to current year classification.

Source : Dion Global Solutions Limited
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