Muthoot Capital Services Ltd.
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ISIN No INE296G01013 52Wk High (Rs.) 1300 BV (Rs.) 289.62 FV (Rs.) 10.00
Bookclosure 13/06/2017 52Wk Low (Rs.) 703 EPS (Rs.) 50.11 P/E (X) 15.31
Mkt Cap. (Rs. Cr.) 1,261.53 P/BV (X) 2.65 Div Yield (%) 0.00 Mkt Lot 1
2018-03

NOTES TO FINANCIAL STATEMENTS FOR THE YEAR ENDED 31st MARCH, 2018

CORPORATE INFORMATION

Muthoot Capital Services Limited (‘the Company’) is a public company domiciled in India,governed by the Companies Act 2013 and is a Systemically Important Deposit Accepting Non-Banking Financial Company (“NBFC”) registered with Reserve Bank of India. The shares of the Company are listed on the Bombay Stock Exchange and the National Stock Exchange. During the year, the Company was primarily engaged in the business of financing for purchase of automobiles, mainly two wheelers against hypothecation of the vehicles and granting of personal/business loans etc.

1. SIGNIFICANT ACCOUNTING POLICIES 1.1 Basis for preparation of financial statements

i. The financial statements have been prepared and presented under historical cost convention on accrual basis of accounting in accordance with the Generally Accepted Accounting Principles in India (“Indian GAAP”) in compliance with the provisions of the Companies Act, 2013, Accounting Standards specified under section 133 of the Companies Act, 2013, read together with paragraph 7 of the Companies (Accounts) Rules, 2014 and the applicable directions issued by Reserve Bank of India for Non-Banking Financial Companies. The accounting policies have been consistently applied by the Company and are consistent with those used in the previous year, except wherever stated.

ii. All assets and liabilities have been classified as current and non-current as per the Company’s normal operating cycle and other criteria set out in the Schedule III of the Companies Act, 2013. Based on the nature of financial services provided and their realization in cash and cash equivalents, the Company has reassessed its operating cycle as 12 months (from 36 months adopted earlier) for the purpose of classification of its assets and liabilities into current and non-current as per the requirements of Schedule III of the Companies Act, 2013 with appropriate modifications to reflect such change in classification during the current and corresponding previous year.

1.2 Use of Estimates

The preparation of the financial statements requires the use of estimates and assumptions that affect the reported amount of assets and liabilities as at the Balance Sheet date, reported amounts of revenues and expenses during the period and disclosure of contingent liabilities as at that date. The estimates and assumptions used in these financial statements are based upon the management’s evaluation of the relevant facts and circumstances as on the date of financial statements. Although these estimates are based upon management’s best knowledge of current events and actions, actual results could differ from these estimates. Any revisions to the accounting estimates are recognized prospectively in the current and future years.

1.3 Revenue recognition

Revenue is recognized to the extent that it is probable that the economic benefits will flow to the Company and the revenue can be reliably measured:

- Income from Financial Services

i. Interest Income in respect of hypothecation loans are recognized on accrual basis with reference to contractual terms, applying the Internal Rate of Return method. Overdue charges on belated hypothecation loan installments are accounted as and when received by the company.

ii. Interest on loans and advances, including Loan Buyout and Other business loans, is recognized on accrual basis at the contract rate wherever feasible. Overdue charges for belated payments are accounted as and when received.

iii. Income in respect of Non-performing assets is recognized as and when received as per The Master Direction – Non Banking Financial Company - Systemically Important Non-Deposit taking Company and Deposit taking Company (Reserve Bank) Directions, 2016.

iv. Interest Income on SLR Investments/ Bank Deposits including collateral deposits is recognized on accrual basis.

v. Income from securitization transactions, being interest spread under par structure of securitization loan receivables, is recognized as income on realization of dues in cash from Special purpose vehicle.

vi. Income on retained interest in the assigned asset , if any, is accounted on accrual basis.

vii. Income from financing activities and services is recognized on accrual basis.

- Income from Investments

Dividend on investments is recognized as income, when right to receive payment is established by the date of Balance Sheet. The profit/loss on Capital Market Operations is recognized at the time of actual sale/redemption of investments.

1.4 Receivables from Financing Activities

The Company has followed the Master Directions issued by the Reserve Bank of India for Non-Banking Financial Companies in respect of Prudential Norms for Income Recognition, Asset Classification, Accounting Standards, Provisioning / writing off for bad and doubtful debts, Capital Adequacy and Concentration of credit / investments.

- Hypothecation Loans

i. Hypothecation loans are stated at the amounts advanced including Interest and other finance charges accrued and due, as reduced by amounts received and loans securitized.

ii. Advance installments received against Hypothecation loans are shown as Current Liabilities.

iii. Repossessed assets are valued at lower of book value and estimated realizable value.

- Securitization transactions: -

i. Securitized receivables are de-recognized in the Balance Sheet when they are sold i.e. if they fully meet the true sale criteria as per the Master Direction issued by the Reserve Bank of India.

ii. Company’s contractual rights to receive the share of the future interest (i.e. interest spread) in respect of the transferred asset from the SPV is capitalized at the present value as Interest Only (I/O) Strip(Interest Strip Retained on Securitization of Receivables) with the corresponding liability created for Unrealized Gains on Loan Transfer Transactions.

1.5 Tangible Assets (Property, Plant and Equipment)

Property, Plant and Equipment are stated at historical cost, net of accumulated depreciation and accumulated impairment losses, if any. The cost comprises of purchase price, borrowing costs, if capitalization criteria are met, and directly attributable cost of bringing the asset to its working condition for the intended use. Any trade discount and rebate are deducted in arriving at the purchase price.

Subsequent expenditure related to an item of fixed asset is added to its book value, only if it increases the future benefit of the existing asset beyond its previously assessed standard of performance. All other expenses on existing Property, Plant and Equipment, including day-to-day repairs and maintenance expenditure and cost of replacing parts, are charged to the Statement of Profit and Loss for the period during which such expenses are incurred.

Gains or losses arising from de-recognition of Property, Plant and Equipment are measured as the difference between the net disposal proceeds and the carrying amount of the asset and are recognized in the Statement of Profit and Loss when the asset is de-recognized.

1.6 Intangible Assets

Intangible assets are recorded at the cost incurred for developing such assets and are carried at cost less accumulated amortization and impairment, if any.

1.7 Depreciation / Amortization of Tangible and Intangible assets.

i. Depreciation on assets held for own use of the Company is provided on written down value method as per the useful years of life of the assets and in the manner prescribed under Schedule II of the Companies Act, 2013 and in accordance with revised Accounting Standard-10 “Property, Plant and Equipment”.

ii. Intangible assets are amortized over a period of three years.

1.8 Impairment of Tangible and Intangible Assets

i. The carrying amounts of assets are reviewed at each Balance Sheet date to ascertain impairment based on internal / external factors. An impairment loss is recognized wherever the carrying amount of an asset exceeds its recoverable amount. An asset’s recoverable amount is the higher of an asset’s net selling price and its value in use.

ii. An assessment is made at each reporting date as to whether there is any indication that previously recognized impairment losses may no longer exist or may have decreased. If such indication exists, the Company estimates the asset’s recoverable amount. A previously recognized impairment loss is increased or reversed depending on changes in circumstances. However, the carrying value, after reversal is not increased beyond the carrying value that would have prevailed by charging usual depreciation, if there was no impairment.

1.9 Leases

Leases, where the lessor effectively retains substantially all the risks and benefits of ownership of the leased item, are classified as operating leases. Operating lease payments are recognized as an expense in the Statement of Profit and Loss on straight line basis over the lease term.

1.10 Investments

i. Investment in Government Securities

a. Non - Current Investments are stated at cost and provision for diminution in value, other than temporary, is considered wherever necessary.

b. Current Investments are valued at lower of cost and market value / net asset value.

ii. Investments - Others

a. Investments, which are readily realizable and intended to be held for not more than one year from the date on which such investments are made, are classified as Current Investments. All other investments are classified as Non-Current Investments.

On initial recognition, all investments are measured at cost. The cost comprises of purchase price and directly attributable acquisition charges such as brokerage, fees and duties. Current investments are carried in the financial statements at lower of cost and fair value determined on an individual investment basis. Non-Current Investments are carried at cost. However, provision for diminution in value is made to recognize a decline other than temporary in the value of the investments.

On disposal of investments, the difference between its carrying amount and net disposal proceeds is charged or credited to the Statement of Profit and Loss.

1.11 Income Tax

Tax expense comprises of Current and Deferred Tax. Current Income Tax is measured at the amount expected to be paid to the tax authorities in accordance with the Income Tax Act, 1961 enacted in India. The tax rates and tax laws used to compute the amount are those that are enacted or substantially enacted, at the reporting date.

Deferred income taxes reflect the impact of timing differences between taxable income and accounting income originating during the current year and the reversal of timing differences of the earlier years.

Deferred Tax Liabilities are recognized for all taxable timing differences. Deferred Tax Assets are recognized for deductible timing differences only to the extent that there is a reasonable certainty that sufficient future taxable income will be available against which such Deferred Tax Assets can be realized.

The carrying amount of Deferred Tax Assets are reviewed at each reporting date. The company writes down the carrying amount of deferred tax asset to the extent that it is no longer reasonably certain or virtually certain, as the case may be, that sufficient future taxable income will be available against which Deferred Tax Asset can be realized. Any such write down is reversed to the extent that it becomes reasonably certain or virtually certain, as the case may be, that sufficient future taxable income will be available.

Deferred Tax Assets and Deferred Tax Liabilities are offset, if a legally enforceable right exists to set off current tax asset against current tax liabilities and the deferred tax assets and deferred tax liabilities relate to the same taxation authority.

1.12 Retirement and Other Employee Benefits

i. Defined Contribution Plan

(i) Provident Fund

Retirement benefit in the form of provident fund is a defined contribution scheme. The contributions to the provident fund are charged to the Statement of Profit and Loss for the year when the contributions are due in accordance with the fund rules. The Company has no obligation, other than the contribution payable to the provident fund.

(ii) Employees State Insurance

The Company also contributes to Employees State Insurance Corporation on behalf of its employees.

ii. Defined Benefit Plan - Gratuity

Payment of gratuity to employees is covered by the Gratuity Trust Scheme based on the Group Gratuity Cum Assurance Scheme of the LIC of India which is a defined benefit scheme. The yearly contribution/premium paid/ payable is determined on actuarial valuation done by an independent valuer. Actuarial gain and loss for defined benefit plan is recognized in full in the period in which they occur in the Statement of Profit and Loss.

1.13 Segment Reporting

The Company’s business activity primarily falls within a single reportable business segment which constitutes Financing Activities (Advancing of hypothecation loans, term loans, buying loan portfolio of other NBFCs/ Micro Finance Companies and loan against demand promissory notes etc.). Hence additional disclosures are not required under Accounting Standard -17 “Segment Reporting”.

The Company operates only in India; hence there is no other significant geographical segment that requires the disclosure.

1.14 Related Party Disclosures

Disclosures are made as per the requirements of the Accounting Standard- 18 “Related Party Disclosures”.

1.15 Earnings per Share

The Company reports basic earnings per share in accordance with Accounting Standard-20 “Earnings per Share”. Basic earnings per share has been computed by dividing net profit after tax by the weighted average number of equity shares outstanding for the year.

1.16 Material Events

Material Events occurring after the Balance Sheet date are taken into cognizance.

1.17 Provisions other than that for Non-Performing Assets

A provision is recognized when the Company has a present legal or constructive obligation as a result of past event, for which it is probable that an out flow of resources embodying economic benefits will be required to settle the obligation and reliable estimate can be made for the amount of the obligation. Provisions are not discounted to their present value and are determined based on the best estimate required to settle the obligation at the reporting date. These estimates are reviewed at each reporting date and adjusted to reflect the current best estimates.

1.18 Contingent Liabilities

A Contingent Liability is a possible obligation that arises from past events whose existence will be confirmed by the occurrence or non-occurrence of one or more uncertain future events beyond the control of the Company or a present obligation that is not recognized because it is not probable that an outflow of resources will be required to settle the obligation. A Contingent Liability also arises, in extremely rare cases, where there is a liability that cannot be recognized because it cannot be measured reliably. The company does not recognize a Contingent Liability, but discloses its existence, if it exists, in the financial statements.

1.19 Classification and Provisioning of receivables from Financing Activity

i. As per the guidelines given in the Master Directions issued by the Reserve Bank of India for Non-Banking Financial Companies in respect of Prudential Norms for Income Recognition, Asset Classification, Accounting Standards, Provisioning / Writing off for bad and doubtful debts, Capital Adequacy and Concentration of credit / investments, the company makes adequate provisions against Receivables from financing activities in the following manner;

a. Standard Assets:

Provision against Standard Assets is made at the rate prescribed by The Master Direction - Non-Banking Financial Company - Systemically Important Non-Deposit taking Company and Deposit taking Company (Reserve Bank) Directions, 2016.

b. Non-Performing assets : Sub-standard, Doubtful and loss assets:

Provision as required under The Master Direction - Non-Banking Financial Company - Systemically Important Non-Deposit taking Company and Deposit taking Company (Reserve Bank) Directions, 2016 is made. Further incremental provision over and above the minimum levels specified is made as considered appropriate by the management.

ii. Loss on Sale of Repossessed Assets represents shortfall in realization of outstanding loan receivable balances on disposal of the underlying hypothecated assets and includes provisions created in the earlier years in respect of such loan balances.

The Company has only one class of shares referred to as equity shares having a par value of Rs, 10. Each holder of equity share is entitled to one vote per share.

In the event of liquidation of the Company, the holders of the equity shares will be entitled to receive any of the remaining assets of the Company, after distribution of all preferential amounts. However, no such preferential amounts exist currently. The distribution will be in proportion to the number of equity shares held by the shareholders.

During the year ,the Company (on 14th June 2017) allotted 12 47 258 equity shares of Rs,10/- each as bonus shares in proportion of one equity share for every ten equity shares held. Also, on 13th November 2017 ,the company has made allotment of 27 27 700 equity shares to Qualified Institutional Buyers at an issue price of Rs,605/- per equity share including a premium of Rs,595/- per share.

As per the records of the Company, including its register of shareholders/members and other declarations received from shareholders regarding beneficial interest, the above shareholding represents both legal and beneficial ownerships of shares.

Terms of Repayment of Bank Loans:

Security and Rate of Interest of Term Loans from Banks

The term loans from banks are secured by creating a first charge by way of hypothecation of entire current assets including hypothecation loans and all other loan and other current assets of the company.

Rate of interest varies from 9.40% to 10.30% as on the Balance Sheet date.

These loans are repayable in equal monthly/ quarterly installments spread over 10 months to 33 months.

2.3.2 Debentures:

The Company has issued Redeemable Non-Convertible Debentures on Private Placement basis in various series. The debentures issued under each series have a repayment period depending on the scheme it falls under. The debentures are repayable within a period of 1 to 6 years, depending on the schemes. The schemes range from Monthly, Annual and Maturity Interest payment. The rate of interest of the Unmatured debentures is 10.92% per annum and the rate of interest of matured debentures ranges from 9.5% to 14.19% per annum.

The issued debentures are secured by a pari-passu First charge with the banks against the loans, including cash credit, demand loans and term loans, taken from them, on all movable assets, book debts and receivables created by undertaking the business of Hypothecation Loan and all other types of Loans, both present and future, created by the company.

2.3.3 Subordinated Term Loans/Debts (Sub Debts):

A. Northern Arc Capital Limited (Formerly known as IFMR Capital Finance Private Limited) -

The Company has taken two Subordinated Unsecured Term Loans from IFMR Capital Finance Private Limited of Rs, 15 00 00 thousand each on 29th June, 2016 and 30th March, 2017 respectively, with interest rates being 12.5% and

11.95%. The loans will be repaid only on maturity i.e. after 66 months from the date of availing the loan.

B. The Company has also accepted subordinated debts from public under three schemes, namely Monthly, Annual and Maturity interest payment with interest rates ranging from 9.06% to 13.4%. The maturity period of the loan ranges from 60 months to 96 months. The subordinated debts issued under each scheme will be repaid only on maturity.

The Unsecured Term loans / Subordinated Debts of the Company qualify as Tier II Capital under Master Directions – Non Banking Financial Companies Acceptance of Public Deposits (Reserve Bank) Directions, 2016 issued by Reserve Bank of India.

2.3.4 Public Deposits:

The Company has accepted Public Deposits under three schemes, namely Monthly, Annual and Maturity interest payment. The deposits issued under each scheme will be repaid only on maturity, unless claimed by the depositor earlier and, if permissible, to be repaid as per the regulations issued in this regard by the Reserve Bank of India. The rate of interest on these deposits ranges from 7.0 % to 12.5% per annum. The repayment period ranges from 12 months to 60 months

2.5.1 Loans from Banks - Working Capital Demand Loans and Cash Credits Guaranteed Loans

The Working Capital Demand Loans, Cash Credits and Term Loans obtained from Banks have been personally guaranteed by the Promoter Directors of the Company, namely, Mr. Thomas John Muthoot, Mr. Thomas George Muthoot and Mr. Thomas Muthoot.

Security and Rate of Interest of Working Capital Demand Loans and Cash Credits from Banks

The Cash Credits and Working Capital Demand Loan facilities have been obtained from the banks by creating First Charge by way of hypothecation of the entire current assets, including business loans, hypothecation loans and all other loan receivables, ranking pari-passu with other banks and Debenture Holders.

Interest on these loans varies between 8.5% to 11.35% per annum as on the Balance Sheet date.

These loans are repayable within a period upto 12 months from the date of sanction.

2.5.2. Loans and Advances from Related Parties

The Company has entered into transactions with Promoter Directors of the Company. The Company pays interest @ 12% p.a in respect of interest bearing loans(Balance outstanding as at 31st March, 2018 was Rs, 3 05 00 thousand (Rs, 10 91 00 thousand)). The total balance outstanding (interest and non-interest bearing loan) as at 31st March 2018 is Rs, 5 78 06 thousand (Rs,13 64 06 thousand)

2.5.3. Inter Corporate Deposits

The Company has taken an Inter Corporate Deposit from Adtech Systems Ltd. This is repayable after a period of 3 months with an effective rate of interest of 9% per annum. The balance Outstanding as on 31st March, 2018: Rs, 1 49 95 thousand (Rs, 1 52 61 thousand).

2.5.4.Commercial Paper

The Company has made three Commercial Paper issuances during the year. One commercial paper was redeemed during the year itself. Total value of issuance during the year is Rs, 225 00 00 thousand. The balance of Discounted Value Outstanding as at 31st March, 2018: Rs, 145 23 09 thousand (Nil).

Trade Payables includes amounts payable to related parties amounting to Rs, 2 47 26 thousand (Rs, 2 13 20 thousand)

2.6.1 Amount Payable to Micro, Small And Medium Enterprises

There are no Micro, Small and Medium Enterprises as defined in the Micro, Small and Medium Enterprises Development Act, 2006 to whom the Company owes dues on account of Principal amount together with interest and accordingly no additional disclosures have been made.

The above information regarding Micro, Small and Medium Enterprises has been determined to the extent such parties have been identified on the basis of information available with the Company. This has been relied upon by the auditors.

2.10.1 Investment in PMS represents the following-

(a) 7 750 (7 075) shares of '2/- each in Manappuram Finance Ltd -'7 64 thousand ('7 06 thousand)

(b) 10 526 (5 456) shares of '10/- each in Muthoot Finance Ltd-'48 57 thousand ('19 30 thousand)

(c ) Balance with PMS '4 thousand('23 59 thousand)

2.10.2 Aggregrate amount of quoted investment is '14 81 15 ('14 51 30) and market value is '15 60 91 ('15 83 68), aggregate amount of unquoted investment is '3 05 04 ('23 59). Aggregate provision for diminution in value of investment is Nil.

2.10.3 In accordance with the guidelines given in the Master Direction - Non-Banking Financial Companies Acceptance of Public Deposits (Reserve Bank) Directions, 2016 issued by Reserve Bank of India the Company has created floating charge on the statutory liquid assets comprising of Investment in Government Securities of face value of Rs,14 88 00 thousand (Cost- Rs,14 24 94 thousand) and bank deposits of Rs,4 81 25 thousand in favor of trustees representing the deposit holders of the Company.