Management Discussion and Analysis Report
ECONOMY: REVIEW AND OUTLOOK
The Indian economy has seen a sustained downturn over the last two years with theresult that GDP growth was merely ~5% in FY13 - slowest pace of expansion in nearly adecade. Despite such a sharp slowdown, inflation concerns have persisted with WPIinflation ruling over 7% in FY13and CPI inflation still running close to double-digits. Atthe same time, Current Account Deficit (CAD) as a percentage of GDP has continued to widenin recent years and was at an all time high of ~5% in FY13. Along with this, the fiscaldeficit also continued to present challenges to economy; though the Union Budget 2013-14did try to assure greater level of discipline over fiscal deficit. High CAD and fiscaldeficit together present some of the most serious challenges to bringing Indian economyback on the path of growth. Such a prolonged slowdown has been the result of a confluenceof factors - lingering administrative bottlenecks and associated slowdown in projectclearance, large fiscal spending, tight monetary conditions and weak external demand.
However, during second half of FY13, there was some stability in macro environment,largely as a result of a series of steps undertaken by the government such as liberalisingof FDI regime in certain sectors, rationalisation of retail fuel prices and reining in offiscal spending; although a lot more remains to be done. While the situation appeared tobe improving, some recent developments on political front have once again raised concernsabout Government's ability to carry forward the reform process.
The early signs of macroeconomic stability that we are seeing are:
a) Receding inflation concerns: After a long phase of elevated inflation, pricepressures (particularly with regard to core inflation) are receding in the economy led byweakening demand and recent fall in international commodity prices. In the coming year, inwhich we can expect core inflation to remain contained to around 5-5.5% as indicated byRBI, trend in food inflation will be determined by the ensuing monsoon and quantum of MSPhikes by Government.
b) Signs of a more accommodative Monetary Policy: Amidst a sustained phase ofhigh inflation and expansionary fiscal policy, RBI had to pursue a tight monetary regimeto contain inflation. However in the beginning of FY13, it started to reverse the ratecycle in a cautious manner. As we moved into FY14, RBI once again announced a calibratedreduction in repo rate while adding that further cuts may have to wait. However, themonetary transmission so far has been very poor in the banking industry, though the samehas been significant in the bond markets. Going forward, RBI will have to supportliquidity conditions so that policy rate cuts can be transmitted to wider economy.
c) Attempts to revive business confidence: One of the major reasons forinvestment cycle slowdown is significant erosion in business confidence. Administrativelogjam has intensified over last couple of years, leading to a large number of projectsbeing shelved and businesses holding back fresh capex plans. However, since September,Government has taken a slew of politically difficult measures like diesel price hikes andFDI in retail, etc. to tackle the same. The Finance Minister also assured a stable andequitable tax regime and deferred the implementation of GAAR to boost confidence offoreign investors.
d) Record Current Account Deficit (CAD) amidst considerable fiscal tightening: CurrentAccount Deficit (CAD) in FY13 is the highest ever at ~5% of GDP as gold and oil importsrose sharply, while exports declined on weak external demand. High CAD increases macrovulnerability, as the country has to rely on fickle foreign flows to fund the CAD.However, recent fall in oil and gold prices and restrictions on gold imports shouldcontain CAD. Moreover, improving global economy has also resulted in exports gainingtraction. So overall CAD may have seen its worst and is expected to improve in FY14.
e) Global developments: The external economy has been weak throughout FY13 andthis is reflected in poor performance of India's exports. However, financial risks inglobal economy have subsided substantially with interventions by major central banks,particularly ECB. In late 2012, ECB provided a much-needed lifeline to European troubledsovereigns by announcing Asset Purchase Programme. Meanwhile, economic data particularlyfrom the US, suggests an improving trend including better US housing and labour markets,which have been at the heart of global problems since 2008. Both these developments augurwell for global economy.
However, despite these expected improvements, expected GDP growth for the country inFY14 is likely to be marginally higher at ~6%only.
FY13 bought some respite to investors, after a dismal FY12. The year started on aworrying note, owing to announcement of retrospective taxing of FIIs. However, a change ofguard at Finance Ministry turned things around, with Government announcing a series ofreforms like FDI in retail, diesel price hike and restructuring of SEBs etc. ECB'sannouncement of OMT (Outright Monetary Easing) and Fed's QE3 further added liquidity andsupport to markets. This resulted in India's outperformance among Emerging Markets, withFIIs pumping in ~USD 26 billion of inflows during the year. However, markets corrected inthe last quarter owing to global cues and political uncertainty faced by Government.Within Capital Markets however, fresh capital raising activity continued to suffer themost with capex investment cycle grinding to a near halt. Going forward, FY14 looks like ayear of improving macros, but politics could be an overhang on the markets with nationalelections barely a year away and corporate business confidence being low.
FY13 was a volatile year for Emerging Market equities with markets rallying in Q2 andQ3 of FY13 but declining in the first and last quarters. Improvement in US data, Japan's"Abenomics" and growth not recovering in Emerging Markets resulted in the outperformance of Developed Markets. Among Emerging Markets, Brazil, Russia and South Africawere among the worst performers, while smaller markets namely Turkey, Philippines andMexico outperformed. Main highlights of FY13 were ECB's commitment that it will doanything to save the Euro and Quantitative Easing in US. Going forward in FY14, globalliquidity should continue to remain high. However, growth would be the main attraction offoreign investors to Emerging Market equities.
Commercial Credit Markets
Indian commercial banks' non-food credit grew around 14% in FY13, lower than that ofthe previous year. Though interest rates began their journey southward this year, lack ofinvestment demand on the back of slowing economy resulted in subdued growth, when seen inthe backdrop of 20%+ growth witnessed till about two years ago. Apart from this, banks,especially public sector banks, also had to combat deteriorating asset quality as a directfallout of slowing economy. Credit growth and asset quality of PSU and private banks goingforward, is likely to show divergent trends. While PSU banks' slippages will remain highin the near term, we expect private players to fare well. With a cut in lending rates,coupled with gradual improvement in macro conditions, we expect stress to reduce over themedium term and credit growth to occupy centre stage once again.
While commercial banks continue to remain the dominant source of debt capital in India,NBFC credit also supports credit growth in the country. NBFCs have been growing at ahigher rate than banks due to a smaller base. Non-bank credit growth thus presents a largeand growing opportunity in both Corporate and Retail Finance.
The Government's commitment to rein in fiscal deficit and associated reforms in H2FY13were welcomed by debt markets. These steps have ushered a regime of much needed fiscaldiscipline and averted the spectre of a sovereign rating downgrade. This together withreduction in repo rates resulted in a sharp uptick in appetite for debt market instrumentsin second half of the year compared to a cautious first half.
The efforts of Government and regulatory bodies continue to be directed at deepeningbond markets, especially the Corporate Debt segment, where volumes are yet to pick up.Attracting liquidity to various sub-segments is key to achieving this momentum and it iswith this objective that SEBI has decided to provide a dedicated debt segment on theexchanges. The availability of a screen based trading interface is expected to bring inincreased pricing transparency, thereby widening investor base and ramping up liquidity.This can potentially have a favourable impact on some of currently dormant initiativeslike Corporate Bond Repos and CDS, which are imperative for an integrated debt marketecosystem. With the monetary transmission being more efficient in bond markets, a largenumber of top rated corporates have mobilised significant amount of debt capital in thebeginning of FY14 which augurs well for the bond markets.
Other big-ticket reforms in debt space have been enhancement of FII debt limits andliberalisation of FII debt investment norms. FII appetite for Indian rupee debt was robustdespite weakening currency and net foreign flows into Indian bonds aggregated around USD 5billion in FY13. The Government responded to FII demand by hiking investment limits by USD10 billion in Government long-term debt and USD 5 billion in corporate long-term debt.Overall, investment process was also further simplified and an auction mechanism to securelimits has been replaced by an "on-tap" system in case of corporate debt untillimit utilisation reaches 90%. These reforms coupled with improving macroeconomic outlookwill keep up the pace of FII inflows.
A FULLY DIVERSIFIED FINANCIAL SERVICES GROUP
Edelweiss Financial Services Limited (EFSL), incorporated in 1995, started as a nicheInvestment Banker with a focus on private equity advisory. Over the last 17 years,Edelweiss has successfully followed a strategy of synergistic diversification of itsbusinesses and built a portfolio of cutting-edge high growth businesses in financialservices. It has de-risked and reduced volatility by diversifying across businesses, assetclasses, client segments and geographies. It has created a portfolio of scalable and highgrowth businesses by expanding addressable market segments and client segments. Thisstrategy has well supported operations of Edelweiss across cycles by bringing stability toits performance. As a result, Edelweiss has emerged as a truly diversified leadingfinancial services organisation with a large range of products and services coveringmultiple asset classes and consumer segments and well diversified revenue streams.
The Company's research and analytics driven approach and consistent ability to spot,innovate and capitalise on Emerging Market trends has enabled it to foster strongrelationships across clients spanning sovereign funds, corporates, SME, institutions-foreign and domestic, HNI, mass affluent, retail and low income groupclients.
Edelweiss in its early days focused on being a niche player in private equity undercorporate finance advisory and then diversified into other wholesale and financial marketsbusinesses. Until 2008, Edelweiss was earning about 70% of its revenue from financialmarket related activities and wholesale segment accounted for almost 100% of its revenue.However, in order to diversify and enter into retail businesses which presented largeopportunities, the company followed its objective of building a fully diversified set ofbusinesses in financial services during the period 2008-2012. As a result, after fiveyears, today financial markets related businesses account for only about 20% of theconsolidated revenue of EFSL. The Company is also well on its chosen path of achieving itsobjective of having a healthy mix of revenue from wholesale and retail businesses.
From catering to a few hundred wholesale clients in 2008, Edelweiss Group now has anaccount base of nearly 450,000 clients from retail and wholesale segments acrossbusinesses. In addition, our Depository Participants maintain over 250,000 DP accounts.
While diversifying and continually adding newer businesses to its portfolio, theCompany has also demonstrated a strong track record of growth over the last several yearswith its 10 yearCAGR for Revenue at 71% and PAT at 81% till the end of FY13. The company'sphenomenal growth has been powered by strategic vision, strong belief and adherence to itscore values and guiding principles, its ability to raise capital and deploy itjudiciously, attract and retain talent and a strong focus on technology, corporategovernance and risk management.
We are happy to note that Edelweiss Financial Services Limited has been voted"Best Midcap Company" in India by the readers of Hong Kong based Finance Asia,Asia's leading financial publishing house, in its annual poll recently.
Edelweiss has also recently won the award for "Best Corporate Governance, India2013" from the London based Capital Financial International Jury.
At Edelweiss, we have constantly worked towards building our product lines and managingour growth in the last decade. As we pursue more business opportunities, and as theCompany grows and becomes more complex, we have to ensure that we remain efficient andeffective. This requires constant effort towards organisation building, leadership growthand sharpening our backend systems, processes and technologies. Further, as our clientbase gets larger, more diverse and geographically spread, we must find newer ways ofmeeting their expectations in an innovative, customer-centric and consistent manner. Wealso must remain on our toes to identify and control newer risks.
To meet future challenges, we have organised the businesses of Edelweiss around fourbroad business groups - Credit including Housing and SME Finance, Financial Marketsincluding Asset Management, Commodities and Life Insurance. Each of these fourbusiness groups is, in turn, organised around Strategic Business Units (SBUs) catering toa specific vertical within the business group, based on commonality of business drivers,client segments, resources and backend support required. Finally, each SBU comprisesseveral lines or sub-lines of businesses (LoBs) to impart greater focus oncustomer-centricity and performance evaluation of their specific business.
With the designed diversification in nature of businesses from agency-based tocapital-based, the Group also has to increasingly manage its liquidity and liabilities asalso to ensure proper asset liability match. The Treasury & Balance Sheet ManagementUnit (BMU) manages these vital functions.
These four business groups and Treasury & BMU are controlled and supported by acore of Enterprise groups that provide consistent quality and rigour to key processfunctions. These groups focus on improving efficiency and productivity and enhance ourability to deal with increasing complexity. As a part of organisation build out, we havealso invested significantly in our risk management policies, HR processes, people andtechnology so that we are able to build a large efficient organisation and manage itscomplexities well.
Our organisational structure is nimble, supple and evolving. While all the SBUs willdrive synergies as well as address common needs, at an overall Edelweiss level there isoneness on key areas such as core value systems, culture, long-term strategy andallocation of key resources. At the same time, in order to build the SBUs into largeindependent businesses, some of the enterprise functions are being gradually decentralisedso that they resemble, think and function like independent companies. This will align theenterprise functions to specific business requirements of respective SBUs and improvedecision-making process. We have made a beginning in this direction in FY13 and will takeit forward inthenextyear.
The diverse businesses of Edelweiss are conducted through an organisational structureconsisting of 44 subsidiaries. These subsidiaries are regulated by various regulators inthe country depending upon the business being handled by them. We have a presence in 106major cities through 211 offices including three international offices as on March 31,2013. Together with a nearly 4,000 strong network of Authorised Persons and Sub-brokers,Edelweiss footprint covers nearly 545 cities across India including about 280 tier 3 to 5towns. Edelweiss Group employs 3,907 employees, leveraging a strong partnership andownership culture.
Ever since its inception, Edelweiss has successfully followed the strategy ofsynergistic diversification while focusing on people, processes, products and structure.This strategy has stood us in good stead as demonstrated by the resilience of our businessmodel across cycles. Since inception, Edelweiss has recorded significant improvement inits topline by adding newer lines of businesses. In recent past, the diversificationstrategy has resulted in growth in financial and business parameters successively in thepast six quarters on a quarter-on-quarter basis despite the operating environment beingchallenging.
At the core, our broad strategy, which has resulted in our success over the years, hasremained tied to following eight key pillars:
Strong Governance & Compliance Culture
Focuson Risk Management
Strongand Liquid Balance Sheet
Commitment to People and Leadership Development
Leveraging Technology for Strategic Advantage
Quality Customer Centricity
Research & Analytics based decision making
Culture of Social Responsibility
These pillars constitute key strengths of Edelweiss vis-a-vis competition. Theyhave enabled us launch new businesses, scale them up, gain market share and achieve aleadership position over past 17 years. As a result, we have a core leadership team, abroad array of products and services, a strong foundation of large financial capital, abrand that is well recognised and most of all: clients who want to do business with usrepeatedly. At its core, the strategy is governed by the aspiration to become a bridgebetween savers of capital and users of capital, by channelising savings into investmentsefficiently. Following this broad strategy, despite environment in recent past having beentough, we have grown our share in financial services industry in both relative andabsolute terms as well as post perceptible improvement in our financial and businessperformance.
In the post-global financial crisis era, year 2010-11 had witnessed return of growthand higher levels of activity in markets. As a result, most of the corporates had postedslightly better earnings in FY11 compared to previous year. However, improvement inbusiness climate was short-lived as towards the end of FY11, environment had again turnedchallenging on the back of Eurozone sovereign debt crisis and a weak U.S. recovery coupledwith a host of domestic issues. As a result, the next year i.e. FY12 turned out to besignificantly worse. At the same time, we at Edelweiss continued to run the last lap ofthe marathon to diversify our businesses, which we started in 2008-09. This also entailedsignificant investment in building new businesses, which passed through our Profit &Loss account. Tough operating conditions and investment in new businesses, therefore,resulted in our profitability bottoming out in Q2FY12.
However, with investment phase nearing its end and despite no significant improvementin operating conditions, strategy of diversification of businesses started paying outdividend and our financial and business parameters have started improving since Q2FY12. Wehave maintained the trend of recording consistent improvement in our financial andbusiness parameters quarter on quarter in whole of FY13 as well, taking the trend to sixconsecutive quarters by now. As a result, we recorded a YoY growth of 31% in our totalrevenue this year and our profit after tax and minority was higher by 40% over FY 12.
We also devoted FY13 to improving capital and operating efficiencies. With nosignificant improvement expected in environment, we will continue to focus our energiestowards eking out incremental growth and further improving efficiency and productivity inFY14. This should hopefully place us on path to strong growth in the following years.
As mentioned earlier, over last 10 years, our total revenue has grown at a CAGR of 71%and net profit has increased at a CAGR of 81% as at the end of FY13. Thus, our performanceacross market cycles demonstrates our ability to withstand impact of external forces andyet be able to build a robust and agile company that can exploit growth opportunities andturn them into business wheneverthey re-appear.
CONSOLIDATED FINANCIAL HIGHLIGHTS FOR FY13
* Total Revenue of Rs. 21,840 million (Rs. 16,707 million for FY12), up31%
* Profit after Tax of Rs. 1,785 million (Rs. 1,277 million for FY12), up40%
* DilutedEPSof Rs. 2.31 (Rs. 1.66forFY12)(FV Rs. 1)
The Board of Directors has recommended a final dividend of Rs. 0.10 per equity share(on a face value of Rs. 1) for FY13, subject to approval of members of the company at theensuing Annual General Meeting. During the year, the Company had paid interim dividend ofRs. 0.55 per equity share (on a face value of The total dividend for FY13, therefore,works out to Rs. 0.65 per equity share (FVwhich is equalto 65% Dividend Rate.
BUSINESS INCOME HIGHLIGHTS
Of the four business groups of Edelweiss, Credit and Commodities businesses togetherwith Treasury & BMU are capital-based contributing to the revenue by way of interestand other capital-based income. Of the remaining two, Financial Markets business is anagency businesses generating fees & commission and Life Insurance business earnspremium income. Some of the capital businesses also generate fee & commission incomewhile executing client transactions.
Capital Based Revenue
Our capital-based businesses earned interest and treasury related revenue of Rs. 18,122million for FY13 (Rs. 13,387 million for FY12), a significant rise of 35% over theprevious year. Out of this, interest income was Rs. 15,355 million (Rs. 10,660 million forFY12), up44%.
Continuing our efforts since FY11, with scale up of credit book this year, interest onloans emerged as a major revenue stream for us and accounted for nearly one-third (32%) ofour total revenue forFY13.
Agency Fee & Commission
Our agency businesses recorded a fee & commission revenue of Rs. 3,194 million forthe year, similar to FY12 revenue of Rs. 3,213 million. This included Securities BrokingIncome of Rs. 1,394 million (Rs. 1,401 million for FY12) and Advisory & Other Fees ofRs. 1,632 million (Rs. 1,670 million for FY12). Securities Broking income accounted for6.4% of our total revenue for FY13.
The slowdown in capital market activity levels, which began in third quarter of FY11,continued through FY12 and FY13. Corporate Finance and Advisory services were alsolacklustre with new capital raising from the markets at extremely low levels. Hence, theindustry witnessed its revenue pool being static and even lower in some verticals in FY13compared to previous year. Despite this, we have been able to protect our Agency Fee &Commission revenue.
Premium from Life Insurance Business
Our life insurance business was launched in second quarter of FY12 and it recorded atotal premium of Rs. 525 million for the year (Rs. 107 million for FY12) reflecting theplanned scale-up of this business. We expect this revenue stream to grow significantly intheyearsto come.
With growth in income from our capital-based businesses, the concept of Net Revenue(net of interest cost) has become more appropriate to us. This is because interest cost,as with all Banks and large NBFCs, should reflect above the expenses line. On a netrevenue basis, our Agency fee & commission and insurance premium for the year was Rs.3,719 million (Rs. 3,320 million for FY12) and Capital based net revenue - net of interestcost, all the interest cost being for capital revenue - was Rs. 6,988 million (Rs. 5,090million for FY12). Thus the total net revenue for FY13 was Rs. 10,707 million (Rs. 8,410million for FY12), showing a 27% growth. At the net revenue level, Agency & Insurancerevenue and Capital based net revenue contribute a balanced mix of 35% and 65%respectively.
Our total costs this year were Rs. 19,247 million compared to Rs. 14,720 million inFY12, an increaseof31%.
With the scale up of insurance business, amount of change in life insurance policyliability - actuarial passing through the P&L Account is also increasing. This yearonwards we have, therefore, started showing it as a separate expense item. This will alsoenable a more consistent comparison of operating expenses.
Despite economic downturn, we continued to invest in build out of our new and growthbusinesses and carried on hiring for some of the new businesses like Life Insurance andRetail Finance. We also continued to hire selectively in senior positions as part of ourorganisation building process. As a result, we added about 800 employees during the yearcontributing partly to the 34% escalation in our employee costs in FY13.
Our borrowings in FY13 were higher compared to the previous year by Rs. 11.19 billionreflecting the scale up in credit book by Rs. 17.87 billion. However, at the same time ouraverage cost of borrowings for FY13 was 10.1%, higher by about 40 basis points YoY. Boththese factors resulted in our finance cost increasing by 34%inFY13overFY12.
Our Profit after Tax and Minority for FY13 was Rs. 1,785 million compared to Rs. 1,277million for FY 12.
Analysis of Profitability
As mentioned earlier, despite the operating environment being tough, we havedemonstrated consistent improvement in profitability in each of the past six quarters on aQoQ basis because of the diversification strategy that we have actively implemented. Whileour profitability is on an upward trajectory, it was still impacted by the followingfactors:
FY13 was one of the toughest years for Financial Market businesses leading toindustry revenue pool remaining static or even shrinking in some verticals. This reflectedin our Agency Fee & Commission remaining flat in FY13 compared to FY12.
Despite marked slowdown in the industry, we continued to invest in building ournew businesses, namely, Life Insurance and Retail platforms - Housing & SME Finance,Retail Financial Markets and AMC for long-term growth. Investment in all these initiativesby way of build out cost passed through our Profit & Loss Account.
We also continued to invest in organisation building and infrastructure upgrade.In addition, certain investments such as loan to our employee trust, which are currentlynon-yielding but long-term accretive, are causing a dragon our profitability.
Cash burn in our newest business, Life Insurance, while being as per the plan,also impacts our profitability as we currently hold74%equityintheJV.
All these factors, therefore, affected our bottom line and margins for the year. Whilesome of the businesses like Retail Financial Markets and Retail Finance have now brokeneven, the costs associated with planned scale up of insurance business will be somewhathigher going forward. However, excluding the loss in insurance business, our net profitfor FY13 would have been around Rs. 2,430 million. With our Tangible Equity at Rs. 26,550million as on March 31,2013 (excluding good will, deferred tax assets and loan to employeetrust), the return on tangible equity thus comes to around 11% for FY13, which is around4% higher than the reported Return on Equity. Our Cost to Income Ratio excluding insurancehas moved from 71% in FY12 to 67% in FY13. The improving trend is better visible if we seethat this ratio for Q4FY13 is 63%.
Since the Life Insurance business has a long gestation period and the capital structureof our Life Insurance JV leads to cash burn passing through P&L, though its effect atthe balance sheet level is different, we consider it appropriate to analyse ourprofitability ex-insurance. The year FY13 was thus a year of consolidation for us andmarks the point of inflection in our financial performance. At the same time, with theinvestment phase complete, we are currently focusing on improving efficiency andproductivity. Our profitability ex-insurance, therefore, should maintain its upwardtrajectory barring any drastic changes in environment.
Our Profit before Tax margin for the year was 12% and Profit after Tax margin 8%. Sincea larger share of revenue is now coming from capital-based businesses (83%), the profitmargins are aligned with those of the banking and large NBFCs industry.
As a part of our constant efforts to enhance our disclosure levels, we had included ananalysis on profitability and capital efficiency of our main business groups in the AnnualInvestor Presentation for FY12, which was shared with all the stakeholders and isavailable on our website. Continuing this endeavour, the business-wise financial databased on Management's estimates for FY13/as on March 31,2013 is as under:
|(Rs. million) ||Revenue ||Profit before Tax ||Tangible Equity1 ||Tangible Capital Employed1 ||Pre-tax RoE ||Pre-tax RoA |
|Credit ||8,950 ||1,990 ||10,250 ||60,650 ||19% ||3.3% |
|Financial Markets & ||4,570 ||320 ||3,400 ||12,570 ||10% ||2.6% |
|Asset Management || || || || || || |
|Commodities ||4,270 ||880 ||3,950 ||23,470 ||22% ||3.7% |
|Treasury BMU2 ||3,070 ||360 ||2,350 ||29,950 ||15% ||1.2% |
|Corporate & Unallocated3 ||- ||-310 ||2,040 ||10,680 ||N/A ||N/A |
|Total - Ex Insurance ||20,860 ||3,240 ||21,990 ||137,320 ||15% ||2.4% |
|Insurance ||980 ||-650 ||4,560 ||4,560 ||N/A ||N/A |
|Total ||21,840 ||2,590 ||26,550 ||141,880 ||10% ||1.8% |
Notes: Numbers are Management Estimates
Does not include Goodwill, Deferred tax assets and shares owned by employeetrust; capital employed in Financial Markets and Asset Management includes Retail Loansagainst Securities 15,070 million
Treasury and Balance Sheet Management Unit
Investments in office building, Strategic Investments and Advance tax paid
The above table shows that all our existing businesses, except Life Insurance, are noweither already achieving acceptable profitability and capital efficiency parameters or areon the way of doing so in the next one year or so. The Life Insurance business, given itsinherent nature, will take a while before it breaks even.
Edelweiss has a total net worth of Rs. 29.95 billion at the end of FY13, includingminority interest. Amount of debt on the Balance Sheet as on March 31, 2013 was Rs. 115.33billion, a Gearing Ratio of 3.85 times. However, a significant part of our borrowings isbacked by liquid assets like Bank Fixed Deposits and Government Securities. Excluding suchback-to-back borrowings, our adjusted Gearing Ratio stands at 2.80 times as on March 31,2013. Such a comfortable leverage allows us enough headroom to continue to invest inbusinesses.
The pre-tax Return on Assets (ROA) tax for the Group increased from 1.5% in FY12 to1.8% in FY13. The Group registered a pre-tax Return on Equity (ROE) tax of 8.7% in FY13compared to 6.9% in FY12(anincreaseof26%).
The effective Balance Sheet size at the end of FY13 was Rs. 145.28 billion, Rs. 12.39billion or 9% higher than the corresponding number of Rs. 132.89 billion at the end ofFY12. During the same period, Credit book scaled up by Rs. 17.87 billion, thus indicatinga release of assets by treasury operations. More importantly, Net Profit ex-insuranceincreased by 66% in the same period as against an increase of 10% in assets ex-insurance,clearly indicating the non-linear growth that we have achieved evidencing capitalefficiency in FY13. We hope to continue non-linear growth in FY14 as well, though may notbe at the same percentage level.
Our Credit business includes Wholesale Finance SBU and Retail Finance SBU. TheWholesale Finance SBU comprises Corporate Finance and Debt Capital business includingFixed Income Advisory (Syndication and Restructuring). The Retail Finance SBU encompassesLoBs such as Housing Loans, Loan against Property (LAP), Lease Rental Discounting (LRD)and SME Finance. Mid-to-large corporates, HNI, Retail and SME customers constitute keyclientele.
Edelweiss had launched wholesale finance business in 2007 and has successfullydiversified into many different, though interdependent, lines of credit businesses, whichenable us to capture opportunities across entire fixed income domain by harnessingsynergies between the principal and agency sides of this business and providingalternative solutions to clients for meeting their debt requirements. Similarly, theRetail Finance SBU draws synergies across the large retail segments together with othersimilarly grouped lines of businesses.
In the business environment, though commercial credit from banks witnessed subduedgrowth in FY13, NBFCs were still able to grow their books selectively. In addition, withequity capital raising being on the backburner, debt markets presented betteropportunities for scale up of Credit business. The total loans in Edelweiss' Credit booktouched a level of Rs. 65.72 billion as on March 31,2013 compared to Rs. 47.85 billion ason March 31, 2012, a growth of 37%. The book comprised of corporate loans of Rs. 44.37billion and retail loans of Rs. 21.35 billion. Retail loans now constitute 32% of creditbook.
The growth and composition of the Credit Book over the past few quarters has been asunder:
Average collateral cover in our credit book, collateralised with securities, was2.4 times as on March 31, 2013. We continue to enforce prudent risk management policies toensure that our capital is always preserved. As a part of this policy, we also avoid unduesector/industry concentration in our credit book.
Asset quality of our credit book broadly continues to remain satisfactory. However,with the investment climate worsening and markets being volatile, there was some pressureon collateral cover for our loans and in sporadic cases, the delinquencies also went up.Gross non-performing loans thus went up to Rs. 285 million at the end of FY13 compared toRs. 226 million at the end of FY12. However, growth in Gross NPLs was lower in percentageterms than the growth in the overall Credit book leading to a lower Gross NPA ratio of0.43% as on March 31, 2013 compared to 0.47% as on March 31, 2012. Our Net NPA ratio is0.11% as on March 31, 2013 compared to 0.14% as on March 31, 2012 indicating a healthyProvision Coverage Ratio of 74%. We provide general loan loss reserve on standard assetsas per the RBI guidelines. Including this prudential provision, total provision cover onour Gross NPLs stands at 131%.
As a part of our articulated strategy of diversifying into retail segment, Edelweisslaunched Housing Finance as a part of Retail Finance in the third quarter of FY11. It hasnow further diversified into Loans Against Property, Small Ticket Housing Loans and SMEFinance.
The Indian housing finance market continues to grow significantly (year on year basis)on the back of young demographic profile that India enjoys and the fact that it is theaspiration of every Indian to own a home. In addition, migration of working class fromrural to semi-urban and urban cities will also drive demand for housing in these cities.This business, therefore, presents exciting and large opportunity to Edelweiss forlong-term growth together with designed diversification in the revenue streams. Thisbusiness, including Loan against Property, is also an integral part of our strategy todiversify our asset classes and cover a larger retail footprint together with significantopportunities to cross-sell our other products to retail clients. During the year underreview, we forayed into grant of Small Ticket Housing Loans in five cities in Tamil Naduas a part of our strategy to cover all sections of society.
The business is now present in 13 cities across the country. Going forward, operationswill be extended to about seven more Tier 2 and 3 locations during FY14 covering a largepart of the addressable market in the country.
Edelweiss expanded into SME Financing towards the end of FY12 considering thesignificant contribution of Small and Medium Enterprises to the Indian Economy. The SMEbusiness disbursed around X2 billion across 400 SME clients in FY13. The businesscurrently operates in three cities - NCR, Mumbai and Pune - and will add a few morelocations in the next financial year. Given the sizeable contribution of SMEs to theIndian Economy, this business presents a significant opportunity to build a highlyprofitable and scalable business.
By the end of FY13, Edelweiss Retail Finance had built a book of Rs. 16.27 billionachieving a handsome growth of 110% over the FY12 end level of Rs. 7.76 billion. Theretail book included Housing Loans and LAP of Rs. 14.39 billion and SME loans Rs. 1.88billion. In addition, retail loans against securities were Rs. 5.07 billion.
The retail businesses of housing and SME finance follow conservative underwritingstandards and do not have any NPAs as ofMarch31,2013.
Debt Capital Business
FY13 began with a 50 bps repo rate cut in the month of April 2012, thereby signallingend of the monetary tightening phase. Although next rate cut had to wait for threequarters and with investment cycle revival still not in sight, debt capital marketactivity received an overall fillip. While number of deals was similar to last year, ahigher deal ticket size resulted in a 35% uptick in quantum of funds mobilised viabonds/NCDs after flattish growth in FY12. FY13 saw about 1,190 bonds/NCD placementsmobilising funds worth Rs. 3,090 billion compared to Rs. 2,195 billion raised via 960deals in FY12. The short-term debt segment too witnessed a similar spike in activity -number of CP issuances rocketed to over 5,000 raising Rs. 3,900 billion versus 4,440 CPissuances totalling Rs. 2,900 billion in FY12. With the RBI announcing a 25 bps rate cutin May 2013, debt markets look set to carryforward the momentum into FY14.
Edelweiss Debt Capital business reinforced its position amongst top private debtarrangers in the country - we were involved in almost 9% of the total market volumeraising ^620 billion over 190 deals. Having achieved a leadership position in wholesaledebt segment earlier, Edelweiss forayed into public debt offering space this year beinglead managers in three of six non-tax free public debt issuances to hit the market inFY13. These three transactions involved raising over Rs. 12 billion for leading NBFCs,namely India Infoline Finance, Shriram City Union Finance and Muthoot Finance via retailbond public issuance. In addition, our origination and distribution capabilities came tothe fore in private placement of debt for a host of leading corporate names including PFC,REC, PGCIL, NHPC, HUDCO, HDFC, Syndicate Bank, Aditya Birla Finance, Tata Capital, TataHousing, L&T Finance, Bajaj Finance, Sundaram Finance and Elecon Engineering,etc.
The sales and broking franchise strengthened its position during the year recordinghigher turnover with 15% share of corporate bond trades on exchanges. Our FII client baseand trading turnover is set to witness sustained growth as we facilitate debt marketinvestments for these investors with the government liberalizing norms for theirinvestment in debt markets.
The Edelweiss Debt Capital business is backed by a comprehensive research and analyticsportfolio providing regular updates on bond markets and analyzing impact of macroeconomicindicators/RBI policy actions on rates.
Edelweiss began its journey in 1996 with focus on Corporate Finance Advisory and laterforayed into Institutional Equities. These two established businesses continue to form thebase of our Financial Markets business group that has now expanded to cover RetailFinancial Markets and Asset Management as well. Under the SBU structure, this businessgroup is divided among four SBUs, namely Wholesale Financial Markets, Retail FinancialMarkets, Alternative Asset Management and Retail Asset Management.
Wholesale Financial Markets
This SBU comprises our oldest and mature lines of business of Corporate FinanceAdvisory and Institutional Equities. We harness natural synergies between these two LoBswhile maintaining appropriate Chinese walls to avoid any conflict of interest betweenthem.
Corporate Finance Advisory
Our Corporate Finance Advisory business includes Equity Capital Markets (ECM) businessand Advisory Services supported by Financial Sponsors Group. Our Financial Sponsors Groupbuilds and strengthens relationships with financial sponsors, corporates and businessgroups. It is a significant part of our strategy to reach a wider range of clients withproducts and services across asset classes. Our client segments range from the Private tothe Public Sector and from Mid-caps to Large caps across industries.
Equity Capital Markets (ECM)
The ECM LoB provides a wide range of services from IPO transaction execution, FPOs,QIPs to Rights Issues. The weak equity capital markets in FY13 witnessed extremely lowlevel of activity with only 39 transactions across IPOs, FPOs, QIPs and Rights raising inaggregate Rs. 261 billion compared to about 61 transactions raising nearly Rs. 146 billionin FY12. The total quantum of capital raised is higher in FY13 because of a few largevalue transactions. The Top 10 transactions in FY13 raised an amount of Rs. 167 billionwhile the rest 29 raised only Rs. 94 billion. FY13, therefore, continued to witness verysubdued activity with corporates not feeling confident to restart capex investment.However, despite this gloomy scenario, our ECM business managed to execute threeIPOs/Rights/QIPs in FY 13 including the prestigious transaction of CARE Ratings for Rs.5.4 billion.
During the year, the IPO for Multi Commodity Exchange (MCX)for Rs. 6.6 billionexecuted by us in March 2012 won the "Best Mid-Cap Equity Deal of 2012" Awardfrom Finance Asia Magazine, HongKong.
Advisory services offer mergers and acquisitions advisory, capital raising advisory,real estate & infrastructure advisory and transaction execution relatingto structuredfinance.
Mergers & Acquisitions Advisory
Our Mergers and Acquisitions (M&A) team provides strategic and financial advice toour clients in relation to mergers, acquisitions, takeovers, tender offers, divestments,spin-offs, restructuring, joint ventures, strategic alliances and de-mergers. Our servicesencompass strategy formulation, identification of buyers or targets, valuation,negotiations and bidding, capital structuring, transaction structuring and execution.
Capital Raising Advisory
Among our Capital Raising Advisory practice, Structured Finance team provides a rangeof innovative structured solutions, including acquisition financing and sponsor financing.Our Private Equity Advisory arranges capital from private equity funds for companiesacross sectors.
Similar to ECM, Advisory transactions were also on a low key in the industry in FY13.Despite tough environment, we were able to close four transactions in FY13 including onePE placement. We have successfully handled private equity placements or strategic exits ofover Rs. 50 billion since May '09 and continue to be one of the leading players in PEspace.
Across ECM and Advisory, therefore, we executed seven transactions in FY13. Takentogether with DCM, we executed 46 transactions in FY13 compared to 40 transactions inFY12.
During the third quarter of FY13, we arranged the second edition of our conference, "Convergence- The Edelweiss Private Companies Conference", which witnessed huge response andserved as a platform for more than 40 unlisted companies to present their vision andgrowth outlook to over 100 private and public markets investors. This, we believe, wasIndia's largest unlisted company conference.
The broking industry continued its structural shift in composition of the markettransactions in favour of Options compared to Cash and Futures. This trend accentuated inFY13 continuing an apparent paradox wherein market volumes grew 17% yet the brokingcommission for industry continued to shrink. The average daily Cash volumes on BSE and NSEwere lower at Rs. 130 billion in FY13 compared to Rs. 140 billion in FY12 resulting insubstantially lower brokerage earnings for industry. The Futures average daily volumes(ADV) were also lower at Rs. 275 billion in FY13 compared to Rs. 315 billion in FY12. OnlyOptions volumes increased to Rs. 1,275 billion in FY13from Rs. 975 billion in FY12accounting for about 76% of total transactions for FY13 compared to 68% in FY12. TheOptions transactions are either proprietary in nature or are happening more and morethrough automated platforms with very low yields and hardly add to the top line.
The structural shift towards options transactions coupled with increasing competitiveintensity in the industry resulted in broking yields continuing to slide for the industry.In such a scenario, the only way for a broker to keep the head above water is to controlcosts and improve efficiency.
Our Institutional Equities business that started in 2001 continues to be a marketleader. We provide equity and equity-derivatives sales and trading services to a large anddiversified base of FIIs and domestic institutional investors. We continued to be amongthe largest Indian Institutional Broking Houses in the country with a market share ofabout 4 to 4.5% by revenue despite challenging environment and increase in competitiveintensity.
Equities Research & Analytics
Edelweiss has been a pioneer in building a well-developed research and analyticsplatform to provide professional insights and perspective on investing ideas andstrategies. Research distinguishes one broker from another providing a sustainablecompetitive edge. In line with this, we have constantly invested in building human capitalin this business segment. The quality and depth of our research has helped ourInstitutional Equities business emerge stronger. We continued to invest in building ourcapabilities in fundamental, thematic and quant research. Our fundamental research covers187 stocks among 20 sectors representing over 70% of total market cap.
To complement the research effort in building a sustainable Institutional Equitiesbusiness, it is essential to provide extensive corporate access to clients. Our clientsdepend on access to management of companies in which they are interested in order to beable to take informed investment decisions. We fulfil this vital need through roadshows toshowcase Indian companies to clients in addition to organising investor trips to meetcompany managements.
In addition, we provide our clients opportunities to interact with a large number ofcorporates through our hosting of annual Indian and International conferences. Ourflagship India Conference in Mumbai in February 2013 met with excellent response withparticipation of over 85 Indian Corporates and over 420 global and Indian investors,facilitating over 2,900 meetings among them.
Retail Financial Markets
This SBU comprises of Retail Broking and Global Wealth Management (GWM) LoBs. RetailBroking includes the organically built online broking format through our internet portalwww.edelweiss.in and the offline broking format through acquisition of Anagram in FY11.
The Retail Broking business was launched about four years ago as a part of ourarticulated strategy of diversification in client segments to include a larger retailfootprint.
It has continued to gain scale and by the end of FY13 we had over 403,900 brokingclients compared to about 372,000 clients at the end of previous year. The online portalemerged as a popular site among investors with 6.37 million unique visitors viewing over93 million pages during 26 million visits since its launch. The Retail Broking businessoffers innovative products along with one of the widest research recommendations forindividual clients.
We continue to build scale in this business with the aspiration to emerge as a leadingretail broking house.
Global Wealth Management (GWM)
Our GWM business offers Wealth Management Advisory and investment services to HNIclients with an emphasis on research and analytics. It offers clients customisedvalue-added services and asset allocation strategies with innovative and structuredsolutions. We continued to be the largest domestic issuers of structured products withoutstandings touching Rs. 10.8 billion by the end of FY13 compared to Rs. 6.3 billion atthe end of FY12. Our Assets Under Advice for GWM increased to Rs. 32 billion by the endofFY13.
GWM offers fee based Financial Planning services for individual clients thatenable a client to prioritise financial needs, goals and aspirations and guides to achievethe same. This is part of conscious strategy to provide value added services to a widerset of clients includingthe mass affluent.
Broking Volumes & Income
Our total clients' broking average daily volumes (ADV) for FY13 (includinginstitutional equities, online & offline retail volumes) was Rs. 29.4 billion in FY13compared to Rs. 25.9 billion in FY12. Our Securities Broking business earned a brokingcommission of Rs. 1.39 billion in FY13, almost flat compared to FY12. Thus, while clients'broking volumes recorded a growth of 13% during FY13, broking income did not register anyincrease due to higher Options volumes and higher competitive intensity as discussedearlier. Our Securities Broking income accounts for 6.4% of our total revenue for FY13compared to 8.4%in FY12.
Our Asset Management business includes Alternative and Retail Asset Management SBUs.
Alternative Asset Management
The Alternative Asset Management business was launched in 2007 and focuses onmobilising subscriptions from offshore and domestic institutions and HNIs through fundsstructures to invest in alternative asset classes in India. It also includes our AssetReconstruction Company (ARC) and related businesses. Our approach in creating this SBU hasbeen to offer innovative and differentiated products to institutional and HNI investors.We achieve this by combining Edelweiss platform with investment capabilities to create asuperior investment performance.
Our product portfolio at the end of FY13 comprised of EW Special Opportunities fund, aReal Estate domestic fund, an Asset Reconstruction fund, EWSBIH Crossover fund in jointsponsorship with SBI Holdings, Inc. of Japan and EWI Special Assets fund. The ARC managesassets of Rs. 2.9 billion and the asset reconstruction LoB has recently launched anEdelweiss Stressed & Troubled Assets Reconstruction fund (E-STAR). At the same time,scaling up the size of these funds has proved to be challenging given the lack ofenthusiasm of offshore investors to commit funds to India for medium-term in view ofdeclining GDP and depreciating currency.
The AUMs/AUAs of this business now stand at about $685 million equivalent as on March31, 2013 including Structured Products. This business represents a growth opportunity forEdelweiss and we continue to invest in building this business.
Retail Asset Management
The Indian mutual fund industry continues to struggle in the wake of regulatory changeseffected in the last 3-4 years and lack of retail participation in equity markets. Theskewed distribution of AUMs in favour of debt funds continues with equity schemesaccounting for around 30% of the total AUMs. Excessive reliance on institutional funds forAUMs also continues. However, given lowIndian penetration of MFAUMs, which arejustaround10%of bank deposits in India, we are confident that the mutual fund industry has thepotential of a sustainable long-term growth.
Our domestic mutual fund, launched in September 2008, manages 10 funds across Equityand Debt Schemes, with average AUMs of Rs. 2.6 billion during the fourth quarter of FY13.We now have an active base of over 9,000 investors compared to about 6,000 investors atthe beginning of this year. The distribution network comprises a force of over 3,100distributors. The focus of this business continues to be on developing a variety ofproducts and building investment track record. We will continue to nurture our domesticasset management business, an integral part of our overall retail strategy, and be readyto capture growth when the industry fortunes changeforthe better.
Edelweiss Group set up its commodities business about five years ago in order todiversify across adjacent asset classes. It has emerged as a strategically importantbusiness and a relevant asset class. We are building the commodities business across twolarge verticals - agri commodities and precious metals.
Agri Commodities - Edelweiss Approach:
Agriculture remains a key sector of the Indian economy and continues to play a pivotalrole in driving economic growth. After decades of under-investments in agri relatedinfrastructure, irrigation, logistics, warehousing and food processing, we have come along way in moving towards self-reliance. Along with this, agri business industry in Indiais entering a critical phase in its development and we are seeing increasingfinancialisation of this business. New markets are opening up as leading players in theindustry globalise in order to broaden their portfolios and reach new consumers. Byexpanding operations and sales into these markets, agri business companies can fuel newgrowth in this sector.
Agri business presents a significantly large and untapped opportunity in India.Essentially, we are looking at this from three value-creation perspectives - sourcing ofcommodities through our infrastructure and intermediary network, making credit availableto participants in the value chain and better distribution. We believe that what would bevisible in the foreground is sourcing and distribution strength; however, the backbone ofthis business is a deep understanding of the value chain from an operations and riskperspective.
We had taken our first steps in this space a little over three years ago. We are nowbuilding our infrastructure, people strategy, technologies, risk and operations processesaround the above three vectors of growth and are in the process of investing to build asolid and robust backbone. Our business model includes flow business and dealing inphysical agri commodities. The flow book aims at running a market neutral book at alltimes with extremely rigid risk controls and limits. We have access through our ownlicences in large mandis and have our network of brokers and clients for most largecommodities such as chana, jeera, mustard, pulses, etc. In addition, we have extensivetie-ups with large warehousing service providers. We have taken adequate measures tomitigate any risk arising out of damage or diminution to goods stored in warehousesthrough our own insurance cover. Necessary controls are in place to manage other risksincluding credit, market and operational risk.
While this business is in a nascent stage at present, we believe that our long-termedge is through better sourcing and warehousing/logistics tie-ups in the short term, andbuilding our own expertise and experience in sourcing and warehousing over the long term.Access to all key commodities exchanges gives us risk management and hedging platform, akey requirement for this business. All this coupled with Edelweiss Group's financialstrength, credit worthiness and reputation will help us build a large and sustainablebusiness.
India imports many commodities in large quantity - oil seeds, pulses, chana, etc. Whilethere are risks associated with narrow or local commodities, we have chosen to be presentin large, globally relevant commodities with significant consumption in India. We alsobelieve that exploring international markets for sourcing and trading could be a nextlarge opportunity for Indian agri industry. We thus see a large opportunity in agricommodities space.
Precious Metals: Edelweiss Approach
India has seen a very robust demand for precious metals in all forms-jewellery,medallion, investments. We are now seeing the impact exchange-traded mutual funds arecreating in a small but meaningful manner to allow investors to access the asset classwith same convenience as equities with an option to convert into physical metal. Thus,sourcing and distribution of precious metals present a large business opportunity.
We are in the business of procuring/importing of precious metals (gold and silver) anddistributing it to our clients who are precious metals end-users (jewellers, manufacturesor traders). A company in our group is an associate member of London Bullion & MetalsAssociation (LBMA), the premier global industry organisation for precious metals business.We have become entitled to a direct import license to import gold into India, which hasadded efficiency to our business model.
Our USP is to ensure door delivery of precious metal requirement at a time and place ofour clients' choice along-with ensuring continuous availability of material. In addition,we service our clients beyond the traditional banking hours giving clients moreflexibility. As a result, clients get to trade with us until the close of trading oninternational exchanges since price discovery activity extends beyond normal banking hoursin India. We distribute precious metals at 13 centres to over 400 active customers. Wehave access to key international and domestic commodities exchanges for our hedging andrisk management needs. The business is run on conservative lines and robust risk practicesare in place to guard against price movements or counterparty defaults and other risks.
Over the period of last few months, worried over the large Current Account Deficit,Government of India and RBI have imposed various restrictions on import of gold. Theserestrictions have the potential to reduce the quantum of gold imports into India and alsoto increase the cost of transaction.
Life insurance business offers exciting opportunities in India given the current lowlevel of penetration where India ranks 136th in the world. However, given thedemographics in India, it is expected to emerge as one of the top three markets in theworld by the end of current decade. Rising life expectancy and absence of state socialsecurity will also propel demand for insurance products.
Edelweiss Tokio Life Insurance (ETLI), our joint venture with Tokio Marine HoldingsInc. of Japan, one of the oldest and biggest Insurance companies globally, was launched toparticipate in this opportunity. ETLI was launched with a capital of Rs. 5.5 billion-among the highest start-up capital for any Indian life insurer, signifying our commitmentto building a long-term sustainable business. The Insurance business will also diversifyour revenue streams and significantly expand our retail footprint. Currently, Edelweissholds 74% equity in this JV with Tokio Marine holding the rest.
ETLI commenced operations in second quarter ofFY12 and offers diverse products to meetthe basic needs of customers on education funding, wealth accumulation & enhancement,income replacement, retirementfundingand livingwith impaired health. Currently ETLI offersa bouquet of 18 products comprising of 15 individual products and three group products. Ithas scaled up its presence to 45 branches in 38 cities by opening 16 new branches indifferent regions of India during FY13. The number of Personal Financial Advisors (PFAs)comprising the Agency channel has grown to about 3,400. ETLI now has a strength of about1,275 employees compared to 659 in the previous year. ETLI has also entered into aBancassurance tie-up with The Catholic Syrian Bank Limited.
ETLI's distribution strategy is based on "Need based Sales" philosophyand the key message in its communication, "Insurance se badhkar hai aapkizaroorat", continues to emphasise the core value of customer centricity.
Within a short period of about 21 months, it has already written over 29,000 policies.Its premium income for FY13 was Rs. 525 million compared to Rs. 107 million in FY12. Thebusiness had a net loss of Rs. 647 million in FY13, which is in line with the plan. ItsSolvency Ratio as on March 31, 2013 is 196% compared to minimumregulatoryrequirementof150%.
Tokio Marine Group, Joint Venture partner in ETLI, has actively contributed in variousfacets of building the insurance business such as actuarial risk management, productdevelopment and asset liability management.
TREASURY & BALANCE SHEET MANAGEMENT UNIT
For a large diversified financial services group like ours where we require sizeableworking capital in various businesses, such as Credit, Commodities or InstitutionalEquities business, day-to-day liquidity management becomes a critical function. Inaddition, as our Housing book scales up, the asset side duration lengthens requiringgreater attention to management of liabilities. Our Treasury & BMU, therefore, managesour Group's liquidity in a way similar to a commercial bank, while also managing thebalance sheet and ensuring that maturing liabilities are repaid smoothly. It also manageskey components of balance sheet, monitors interest rate sensitivity in our portfolio andtakes preemptive steps to mitigate any potential liquidity and interest rate risks.
Our treasury assets as at the end of FY13 were Rs. 29.95 billion, which mainly includefixed income securities and bank fixed deposits, compared to Rs. 48.70 billion as at theend of the previous year. Thus, as other Capital businesses have grown, Treasuryoperations have released assets to fund their growth. Treasury assets form about 21% ofour effective Balance Sheet size as on March 31, 2013. Treasury assets are structured tomaintain sufficient liquidity to address capital needs of our businesses as also to manageinterest rate risk. As a result, we ensure that a large part of our book can be liquidatedwithin a short period with minimal impact costs. Our strong focus on enterprise wide riskmanagement ensures optimum returns in this business while preserving our capital.
In addition to Treasury & BMU, the Asset Liability Management Committee activelyreviews any asset liability mis-match effectively plugging possible mis-matches.
Balance Sheet Management
For any financial services firm, its capital is the bedrock on which the entire edificeis constructed. From its earliest days, Edelweiss has recognised this and has alwaysfocused its energies in creating a strong and liquid balance sheet. This enables us todeploy capital for launching and scaling up new businesses, which are integral to our corestrategy of risk-mitigation by diversification. A strong balance sheet also enables useasier access to market borrowings on the back of a strong credit rating. A liquid balancesheet simultaneously permits Edelweiss to redeploy capital efficiently towards businessopportunities that appear at short notice. It also helps in confidence building exercisewith our lenders. At the same time, a growing balance sheet like ours requires Managementto be constantly on their toes to identify and manage newer risks and adopt newerstrategies.
In order to manage Balance Sheet actively, we prepare a daily balance sheet for realtime monitoring and adopt a process of projecting a balance sheet rolling monthly, for endof the quarter and year-end, which eliminates any surprises. Any abrupt change in assetsor liabilities is examined and situation rectified in time.
In order to manage liquidity, we employ a Liquidity Scenario Model to monitorenvironmental liquidity conditions based on various market indicators. We also quantifyour consolidated liquidity position, which gives us a broad idea of our liquidity scenariofor the next 90 days. We take care to ensure an adequate liquidity cushion is maintainedby way of unencumbered assets and undrawn bank lines to take care of immediaterequirements of next seven days. Thus, pro-active balance sheet and liquidity managementcovers various possible scenarios in the short-term and medium-term with a back-upplan.
The Company has not only continued to maintain a liquid balance sheet, but over thelast two years has embarked on a strategy of reducing its short term liabilities as apercentage of total liabilities as a part of prudent risk management. This has been afocus area for us in the past year and we have successfully brought down dependence onshort term borrowings to within acceptable limits by contracting stable bank lines offunding and increasing liabilities in the six months to three years bucket. As a result,our borrowings falling due for maturity within next three months (excluding asset-backedborrowings) constitute only 16% of our total liabilities as on March 31, 2013 compared to26% a year ago and 38% two years ago.
Asset Liability Management Committee (ALCO)
Edelweiss ALCO primarily oversees implementation of an effective process for managingthe Company's interest rate, liquidity, capital and similar market risks relatingto the balance sheet and associated activities, including adoption of policies, risklimits and capital levels from time to time. Some of the major functions of ALCO are asunder:
Monitoring of various macro-economic indicators and using them to take decisionsregarding liquidity situation, borrowing plans and deployment strategies.
Monitoring of liquidity GAP and recommending appropriate financing and assetdeployment strategies, depending on whether the GAP is a Net Asset position or a NetLiability position respectively.
Monitoring interest rate GAP and recommending re-pricing options for asset andliability portfolios.
Reviewing various "what-if" scenarios and preparing contingency plans.
Approving liquidity risk and interest rate risk tolerance levels by reviewinghow these risks may adversely affect the Company's earnings and capital.
Monitoring capital management of the Company to ensure that capital levels aremaintained in accordance with regulatory requirements and Company's policy.
Considering product pricing for advances, desired maturity profile and mix ofincremental assets and liabilities taking into account all available data.
Deciding source and mix of liabilities or sale of assets, by developing a viewon future direction of interest rate movements.
Deciding on funding mixes between fixed vs. floating rate funds, wholesale vs.retail funding, money market vs. capital market funding, etc.
The year FY13 started on a note of optimism. However, stubborn inflation, high fiscaland Current Account Deficit, slow pace of reforms, sluggish recovery of US economy andcontinued Eurozone crisis soon led to the sliding of Indian GDP growth to around 5%.Renewed political uncertainly at the centre currently is continuing to cast its shadow onthe return of growth. However, with inflation falling and RBI cutting rates in March 2013and May 2013, Indian macro-economic indicators appear to have bottomed out. At the sametime, RBI has indicated that scope for further rate cuts is limited as headline inflationis still above its comfort zone. It has pegged the outlook for inflation at 5.5% and GDPgrowth at 5.7% for FY14. Given that FY14 is likely to be a second consecutive year ofsub-6% growth, the operating environment in FY14 may not be significantly different fromthat of FY13, as macro-headwinds will take some time to abate.
Given this none-too-rosy scenario for FY14, the mantra for this year will be improvingoperating efficiency. As for Edelweiss, we have completed the articulated diversificationphase. While established businesses of Credit, Commodities and Wholesale Financial Marketshave reached a mature level, Retail Financial Markets and Retail Finance businesses havebroken even in FY13 leaving only the Life Insurance business to break even (which, giventhe long gestation period required by insurance companies, will take sometime).
While we were diversifying our businesses, it had its effect of impacting ourprofitability in the short-term. Given our focus on long-term growth of the company, weopted to suffer short-term profitability pains. With the investment in most of newbusinesses complete, we are now focusing on improving operating and capital efficiency. Weexpect to achieve these efficiencies including significant improvement in our Cost toIncome ratio excluding Insurance in FY14, though we need to still push this vector for thenext couple of years to be best in class. Even as the visibility on when the environmentmight improve continues to be poor, our new businesses along with the mature businesseswill continue to improve our overall business and financial performance in the comingyears.
At the same time, some of our other organisational priorities for FY14 include rigorousbalance sheet management, continue non-linear growth in assets and profitability, instilcustomer centricity, gradual decentralisation to other organisational structurestrengthening, institutionalisation of culture and strengthening our strategic planningand review processes.
Our Vision of Edelweiss for future is to be a group of cutting-edge businesses infinancial services. Our core is in identifying new exciting long term opportunities infinancial services and building great and differentiated businesses in these areas.
With the long-term India growth story intact and given the diversified model ofEdelweiss, we are confident of capturing our share of growth and build Edelweiss as perthe Vision that we have.
We firmly believe that Indian economic growth and hence growth of financial servicessector presents us exciting opportunities as under:
India's long-term growth story remains intact notwithstanding declining growthin the past year or two. This presents exciting and large opportunities for us to grow ourvarious businesses in the medium to long term, though short-term pain remains apossibility. Broadly, financial services markets are expected to grow four to five foldsby 2020 as per our path-breaking India 2020 Research Report.
With nearly 70% of Indian household financial savings currently flowing tobanks, scope for channelising savings to other modes like mutual funds or insurance andthrough diversification in other asset classes like equities, bonds and commodities isenormous.
Our retail businesses are scaling up well and we are strategically placed togarner our share of growth in this client segment.
Increasing use of internet or mobile-based technologies for financialtransactions presents vast opportunities for tech-savvy companies to offer convenientsolutions to customers. Our online options in Life Insurance and online & mobileoptions in retail broking aim to capture this opportunity.
We believe the policy liberalisation and forward-looking regulatory changes willhelp markets grow in size, thus making available newer opportunities for all participantsin financial services.
At the same time, we perceive following threats for growth of financial servicessector:
Macroeconomic environment including inflation above the threshold of RBI,limited scope to further reduce interest rates, liquidity issues, high fiscal and CurrentAccount Deficit, political uncertainty that refuses to go away and Eurozone developmentscan derail the return of growth. While monsoon is predicted to be normal this year, itremains an indeterminate factor.
With the Indian growth declining in the past year or two, corporates are notfeeling confident of their expansion plans with the result that investment activity is atone of its lowest. Lack of determined action from Government to jump-start investmentcycle and carry on the reforms may continue to affect the financial services sector.
The four business groups of Edelweiss and Treasury & BMU are controlled andsupported by a core of Enterprise Groups that provide consistent quality and rigour to keyprocess functions. Following discussion highlights some of the initiatives taken by us toimprove efficacy of Enterprise functions.
For the growth of a services oriented company, the raison d'etre is the customer.Decades ago, Mahatma Gandhi had said "Customer is the King" and hence we toorequire a special focus on customer centricity. While most companies would believe thatthey are customer oriented, the degree of focus on customers' experience and thecentricity that customers enjoyed in their approach varies.
As Edelweiss re-orients its businesses and goes more and more retail, we believe thatcustomer centricity is going to be THE key driver of our business. The fact is that allour businesses are heavily regulated -- Financial Markets, Credit or Insurance. The scopefor innovation either in terms of products or marketing is limited. Even if any innovationis introduced, India being such a hyper-competitive market, it would be copied, bluntingthe competitive edge in no time.
The only way, therefore, we can build a competitive advantage is by being customercentric. Customer centricity actually goes far beyond just great customer service. It goesto the heart of how we think and manage our businesses. It is about how we design ourproducts, how we build our internal systems and processes, how we sell and finally how weservice our customers.
We feel that in Edelweiss we truly differentiate on this parameter. CustomerCentricity potentially provides us with the single biggest competitive advantage. Greatcustomer service transcends experience and becomes a memory, which we associate with abrand. If we are able to provide each customer of Edelweiss a unique experience thattranslates into a happy memory, we have the potential to turn customers into brandambassadors.
Three big insights that have helped us in enhancing customer centricityare:
Customer experience is not only about Retail businesses!
While retail businesses need a higher level of customer experience, wholesalebusinesses have similar challenges; customer feedback is usually immediate and thetendency of wholesale customers to walk away at the slightest instance is high if we arenot focused on their needs.
Customer centricity starts with enterprise groups within a company asthey have internal 'customers'. They too need to provide great customer experience byaligning their internal systems and support mechanism to this.
Customer centricity goes beyond customer service. Customer centricity is away of life. It is core to everything we do internally and externally.
Keeping this critical need in mind, we have launched a new strategic initiative onCustomer Centricity. We have engaged the services of an internationally renowned expert inthis field and his team has conducted a series of training programmes to train thetrainers who are now evangelising this concept across Edelweiss. So far, almost 700employees have been trained in this programme.
We have set up a central LoB to focus on Customer Centricity, which is already workingwith various SBUs on specific projects to measure and enhance the customer experience. Asystem of measuring customer feedback - internal as well as external customers - has beendeveloped using the Net Promoter Score (NPS) Methodology and going forward upping thescores based on this feedback will be an integral part of the KRAs of each LoB. We arealso putting in place a suitable system of Reward and Recognition for this.
We have now articulated a simple Customer Service promise: Customer Vision Statement:
"Edelweiss Customers will have a unique experience"
We realise that while a lot is being done on this front, we still have a long way togo. We are confident that the renewed focus on Customer Centricity with the help of theseinitiatives will make Edelweiss one of the most respected and unique financial servicesorganisations.
At Edelweiss, we believe that our human capital is one of our most important strengthsand is the driver of growth, efficiency and productivity. Year on year we have deepenedour philosophy by investing in developing our talent and leadership through variousinitiatives.
Through FY13, defined structures of Wholesale and Retail clusters were furtherstrengthened and each SBU under them further scaled up to create a New and ImprovedEdelweiss. The year has seen us grow in size and reach. The Group strength at the end ofthe year stands at 3,907 employees with around 800 new hires and attrition levels amongseniors remaining stable around 13%. Continuing our focus on training and developing ourpeople, we launched several initiatives aimed at strengthening the ability of our managersto bring together people, strategies, and execution to drive business results. The focusis to enhance their skills of planning, execution and effectively managing their teams. Wealso strengthened the Edelweiss Leadership Program with the objective of massivelymultiply leadership capability, growing internal leaders and providing for seamlessexecution of organisation's growth target over the next 8-10 years. The three-tieredEdelweiss Leadership Pool (ELP), consisting of ~8% of the organisation employee base,comprises of Senior Leaders (SL), Advancing Leaders (AL) and Emerging Leaders (EL), eachof whom undergo a structured Engagement, Communication and Development (ECD) programme inthe span oftheir membership period.
'Fountainhead', our Leadership Centre at Alibaug was used extensively during the yearto build employee connect and team work. 496 training sessions were conducted acrossvarious levels in the organisation covering base of 2,616 unique employees (7,235participant man-days). The three-tiered ELP and Learning & Development programmes helpinculcate and strengthen the partnership and ownership culture across Edelweiss besidesinstitutionalising eight key business pillars discussed earlier.
Rewards and Recognition platforms were also launched at the SBU levels to enhanceemployee motivation and engagement. We regularly measure employee engagement scores, whichhave improved from 64% last year to 68% placing the organisation in High Performance Zoneas per established standards.
We continue to enhance efficiencies through the support of technology and automation ofsystems; thus strengthening the processes for 360-degree Appraisal, KRA, EmployeeEngagement, Performance & Compensation Management, while making them lesspeople-dependant.
Edelweiss has always believed in leveraging technology to give it a strategiccompetitive advantage, improve productivity and performance, enable new ways of managingand organising and develop new businesses and give customers a better experience. Over theyears, Edelweiss has constantly invested in building and upgrading its technologicalinfrastructure. The company has a 100-member technology team with relevant BFSI domainexpertise that helps in providing contemporary, robust and flexible technology solutions.As Edelweiss diversified its financial services offering, it has leveraged technologyeffectively to enable growth, build robust risk management and provide enhanced customerexperience for its Credit, Financial Markets, CommoditiesandLifeInsurancebusinesses.
Edelweiss' current technology capabilities include:
Tier 3+ Energy efficient Green Datacenter Data centre facility at EdelweissHouse that is built for 99.99+% availability
Secondary Tier 2 Business Continuity Plan (BCP) data centre that offersinfrastructure for continuous data replication and operations encompassing availability,reliability and scalability
Fully Functional BCP seating Site setup leveraging virtualisation andcloudtechnology
Highly resilient 3 Tier state-of-the-art and low latency network infrastructureand connectivity
Mission critical trading infrastructure Trading set-up with connectivity to allmajor stock exchanges - NSE, BSE, MCX, MCX-SX, NSDEX, NSELand USE
ISO 27001 certified Infrastructure and processes
Edelweiss technology infrastructure supports a network of about 4,200 trading terminalsacross over 130 locations. On an average, this infrastructure handles approximately300,000 transactions a day and can scale up to handle over a million transactions a day.
We have developed modular technology set-up models that can help quick rollout todistant locations. This can help in reaching out to remote locations with agility. Thecompany can use these effectively for financial inclusion initiatives.
Edelweiss is the only company in financial services to have been given permission bystock exchanges for setting up a multi broker multi-asset class ASP (Application ServiceProvider) set-up so far. This set-up can support 4,000 concurrent users with multiplelevels of redundancies and provides multiple channels available for client transactionssuch as Web, Mobile-WAP, Mobile application for windows, iPhones/Android phones.
Thus, at Edelweiss Information Technology has emerged from being computationalintensive powering tasks and transactions alone to being collaboration intensive, poweringinter-organisational processes and relationships giving us the required cuttingedge.
Edelweiss has instituted Risk Management techniques and market safeguards to ensurethat every risk we take has been thoroughly assessed, and that identified risks arecommensurate withthepotential return.
With an endeavour to assessing the perception of risk across the organisation,Edelweiss engaged Tower Watson, a global risk-consulting firm, to conduct a detailed risksurvey across the organisation. The results have helped us reinforce our risk philosophyat all levels of organisation.
Edelweiss is active in various markets and in its course of doing business with variouscounterparties the organisation is exposed to various risks. These risks can be broadlyclassified as market risk, credit risk and operational risk. It is an endeavour of therisk teams at Edelweiss to evaluate these risks prior to entering into a transaction andto put necessary mitigation measures in place so that in extreme scenarios, the responsetime is minimum.
Edelweiss actively participates in various asset classes such as equity, fixed incomesecurities, commodities and foreign exchange markets. These asset classes experiencevolatility from time to time due to economic growth levels, inflation, prices, interestrates, foreign exchange rates, and other macroeconomic factors. A detailed framework ofmonitoring daily positions, durations and value at risk helps in managing market risk.Limits on concentration, liquidity mismatches between assets and liability and limits onmargin utilisations ensure that market risk is monitored and mitigated in a timely manner.Care is taken at all times to maintain enough liquidity cushion overnight and in the shortterm to meet any unforeseen requirement or maturing liabilities. Sources of borrowings arealso adequately diversified to avoid over dependence on any single source. For a moredetailed discussion on risks involved in managing our Balance Sheet please refer to theBalance Sheet and BMU section appearing earlier in this report.
Edelweiss, as a financial organisation, deals with multiple clients. As a part of ourcredit risk framework, we assess credit worthiness of counterparties comprehensivelybefore taking any exposure on them. Limits assigned to clients based on credit evaluationand monitoring mechanism ensure that our exposure to a single client does not cross thelaid down threshold limit. Apart from limits,
Edelweiss follows a multi-tiered Risk Management and Oversight Structure:
Oversight by Board Risk Committee
Edelweiss also collects collateral from clients to adequately cover its exposure.Client profiling based on credit risk is carried out to ensure timely mitigation.
Edelweiss faces operational risks arising from people, systems and processes throughwhich it operates. Operational risk broadly encapsulates other categories of risk alsosuch as reputation risk, fraud risk, legal riskand environmental risk among others.
Edelweiss has well-defined processes and systems to check and balance operational riskat key points. A platform for exception reporting has been adopted to record and escalateviolations in processes. These exceptions are reviewed regularly and summarised toidentify areas of operational risk. Adequate emphasis is placed on compliance relatedissues to keep reputation risk at bay.
Edelweiss has state-of-the-art Data Centre at Edelweiss House to ensure uninterruptedand reliable service to our clients and businesses. We continue to have a comprehensiveBusiness Continuity Plan that is periodically tested.
Know Your Client Process
Edelweiss group provides diversified financial services to a wide cross section ofclients. The individuals/entities desiring to become clients of Edelweiss Group open anaccount to carry out those specific activities. The clients are registered separately forseparate activities. These individuals/clients are required to complete the Know YourClient (KYC) process including the KYC compliant application form and submission ofrequired proof of identity & address and other documentary requirement before openingtheir account. In-Person Verification (IPV) of these clients is carried out byEdelweiss to verify the actual identity of the client. IPV process is aligned to theregulatory requirements.
Politically Exposed Persons (PEPs) are also identified at the time of account openingand monitored subsequently. A more rigorous checking process is carried out foridentification of clients coming under this category. Additionally, the clients are alsoscanned through (1) List of SEBI debarred clients and (2) Financial Action Task Force(FATF) list issued by RBI. If the client name appears in any of these lists, furtherscrutiny is carried out before taking a call to register them as per the instructions ofthe regulators/Government. In the event of the clients being registered for availingcredit services, these clients are also scanned through various lists such as CIBIL list,Watch-out Investor list and other data available in public domain to ascertain theircredit worthiness.
The KYC details of clients are also uploaded to KYC Registration Agency (KRA), whichhas a centralised database to avoid hassles of clients going through same KYCregistrations again.
To sum up, Edelweiss group of entities follow very stringent client registrationprocess with zero tolerance before any individual/ entity is accepted as a client by anyof Edelweiss Group ofentities.
Prevention of Money Laundering
The Prevention of Money Laundering Act, 2002 (PMLA) has imposed certainresponsibilities on various financial institutions and intermediaries with regard topreventing terrorist financing and money laundering. The financial institutions andintermediaries are advised by SEBI/RBI/Exchanges to ensure that a proper policy frameworkon anti-money laundering measures is put into place.
Edelweiss has put in place required internal controls for preventing and impeding moneylaundering and terrorist financing as follows:
As required under PMLA Rules, Edelweiss has appointed a senior officer of theorganization as Principal Officer to facilitate onward reporting of suspicioustransactions and for playing an active role in identification and assessment ofpotentially suspicious transactions.
Client identification, IPV and acceptance are done rigorously as per the KYCProcess enumerated above.
In line with the PMLA guidelines, a risk based approach is adopted at the timeof establishing business relationship with a client. The client is categorised based onthe information available in 'Know your Client' (KYC) forms at the time of registering theclient/opening of his account. Further, in case the client falls in Special Categories,the client is invariably classified as High Risk client.
On an ongoing basis, appropriate due diligence, monitoring and scrutiny isconducted to ensure that the transactions being conducted are consistent with theknowledge level of the customer.
Suspicious transactions are reported to FIU India through the FINnet gateway asper the PMLA Rules.
Employees of group entities undergo proper training on PMLA provisions in orderto equip them to meet requirements of the Guidelines. The business entities also assesskey roles within the organisation with regard to risk of money laundering and terroristfinancing to ensure that employees taking up such key roles are suitable and competent toperform their duties.
Internal Control Systems
Edelweiss has adequate internal audit and control systems across all businesses. Theseare responsible for independently evaluating the adequacy of all internal controls andensuring that operations and business units adhere to internal processes and procedures aswell as to regulatory and legal requirements. Our Internal Audit and Control team definesand reviews scope, coordinates and conducts Risk based Internal Audits acrossEdelweiss through external audit firms as well as an in-house team. All operationalactivities are also subject to concurrent internal audits periodically. Existing audit andinspection procedures are reviewed frequently to enhance effectiveness, usefulness andtimeliness. The Internal Control Procedures include segregation of roles andresponsibilities, third party confirmations, physical verification, checks and balancesand preventive checks on Compliance Risk and Balance Sheet Management,etc.
Statutory and Standard Auditing Practices employed include, among others, compliance toaccounting and auditing standards, consideration of Laws and Regulations in an audit ofFinancial Statements - Tax, Governance and Compliance to ensure compliances, riskassessment and internal control, system audit, control over assets of the Company,analytical procedures and review of related party transactions and reporting them to theAudit Committee, etc.
Edelweiss has institutionalised a strong compliance culture across the Grouprecognising that transparency and trust amongst all its stakeholders can be achieved onlythrough this. We have a centralised Compliance Department that ensures compliance with allthe applicable laws.
Edelweiss believes in conduct of its affairs in a fair and transparent manner byadopting highest standards of professionalism, honesty, integrity and ethical behaviour.To this end, Edelweiss has put in place a strong Whistleblower Policy that not onlyencourages employees to report wrongdoing within the organisation, but also ensures thattheir identity is protected so that they do not face any adverse repercussions. Edelweisswas one of the first Indian financial services companies to sign up for CorporateWhistleblower Initiative (CWI), via a portal (www.cwiportal.com) that facilitated completeanonymity of whistleblower and aimed at encouraging and protecting whistleblowers in thecorporate sector.
Edelweiss Financial Services Limited (EFSL) and five subsidiaries, namely EdelweissSecurities Limited (ESL), ECL Finance Limited (ECLF), Edelweiss Housing Finance Limited(EHFL), Edelweiss Commodities Services Limited (ECSL) and Edelweiss Finance andInvestments Limited (EFIL) enjoy the highest short-term credit rating of "CrisilA1+" from Crisil. ECLF has a long-term debt and bank facilities rating of"Crisil AA-/Crisil AA-r" from Crisil. EHFL has a long-term debt and bankfacilities rating of "Crisil AA-" from Crisil. ESLand ECSLhavea long-term bankfacilities rating of "Crisil AA-" from Crisil. EFSL and ECLF also enjoy along-term debt rating of "AA-" from ICRA. All the long-term ratings from Crisiland ICRA have a Stable outlook. All ratings are current as at the end of FY13.
We continue to view Stakeholder Relations as an important link between Edelweiss andstakeholders facilitated by an open and transparent channel of communication with them.Our Stakeholder Relations efforts include frequent interaction with institutionalinvestors, analysts and other stakeholders through one-on-one meetings and attendance atinvestor conferences. These are complemented by the quarterly earnings conference call,dissemination of quarterly performance updates via Press Release and Investor Presentationand constant and immediate updating of information useful to stakeholders on our corporatewebsite. The transcripts from all our earlier Earnings Calls are available on our website.Investors and other stakeholders can subscribe to receive quarterly updates automaticallyat www.edelweissfin.com. During the year, we held more than 200 interactions with ourstakeholders.
With growing complexities in their operations, companies are facing increasing demandsfor information from a diverse range of stakeholders. How we prioritise them and reconciletheir needs with the need to protect certain information to maintain competitive edge inthe market place is a constant issue for the Stakeholder Relations function. Balancingthese conflicting needs, we have been constantly enhancing our disclosures to the maximumpossible extent. We are focusing on a much more comprehensive discussion of our individualbusinesses and the balance sheet and the investor relations material put out by us duringFY13 is a testimony to our commitment to this end. We hope this would enable stakeholdersto understand and appreciate our diverse businesses and our long-term strategy in a trueperspective.
We will continue to implement best-in-class practices that promote steady communicationwith investors, analysts and other stakeholders so that we are perceived as an open,responsible and transparent organisation.
EFSL (formerly Edelweiss Capital Limited) commenced operations in 1996 as a SEBIregistered Category I Merchant Banker governed by SEBI (Merchant Banking) Regulations,1992. Over the next 17 years, the company has diversified into a number of financialservices businesses run by separate subsidiaries and a JV, which are regulated bydifferent regulators.
Edelweiss conducts its business of stock broking mainly through subsidiaries EdelweissSecurities Limited (ESL), Edelweiss Broking Limited (EBL) and Edelweiss Financial AdvisorsLimited (EFAL), governed by SEBI (Stock Brokers and Sub Brokers) Regulations, 1992. WhileESL is a SEBI registered Depository Participant with CDSL, EBL is SEBI registeredparticipantwith NSDL.
The business of commodities broking and trading is mainly carried out throughsubsidiaries Edelweiss Commodities Services Limited, EC Commodity Limited and EdelweissComtrade Limited, governed by Forward Contracts (Regulation) Act, 1952 under theoversightofFMC.
The mutual fund business is conducted through subsidiary Edelweiss Asset ManagementLimited, registered with SEBI.
The non-banking financing activities are mainly conducted through subsidiaries ECLFinance Limited, Edelweiss Finance & Investments Limited and Edel Finance CompanyLimited. These entities are registered with RBI as Non-Banking Financial Companies notaccepting public deposits. Housing finance business is conducted through subsidiaryEdelweiss Housing Finance Limited, registered with National Housing Bank as a non-depositaccepting housingfinance company.
Edelweiss Tokio Life Insurance Company Limited, the life insurance Joint Venture withTokio Marine Holdings, is regulated by IRDA. Insurance advisory business is conductedthrough subsidiary Edelweiss Insurance Brokers Limited, which is also regulatedbyIRDA.
REGULATORY CHANGES POSING CHALLENGES AND OPPORTUNITIES
We are constantly aware of regulatory changes and related challenges and opportunitiesthat affect our business environment. We are also proactive in aligning ourselves in termsof adherence to compliance requirements and to make the most of opportunities that arisefrom regulatory changes.
Some of the key regulatory changes introduced during FY13 are narrated below:
|Regulation/Act ||Changes ||Implication |
|Listing Agreement || Reduction of timeline for transfer of equity shares from one month to 15 days. || It is in the interest of investors and shall expedite transfer process. |
| || It is now mandatory for listed companies to provide e-voting facility to shareholders, for businesses, which are transacted through postal ballot. || This would enable increased participation of shareholders. |
|Reserve Bank of India || RBI issued new guidelines regarding securitisation of standard assets and direct assignment of loan. || This brings clarity about securitisation and assignment of loans. |
| || RBI Revised guidelines on Fair Practice Code requiring NBFCs to display prominently details of grievance redressal officer belonging to NBFC as also that of the local office of RBI. || This step is aimed at improving customer grievance redressal mechanism. |
| || Based on Smt. Usha Thorat Committee report, RBI issued draft guidelines for public comments relating to NBFCs. Final guidelines are yet to be issued. || The guidelines are welcome as they aim at bringing more regulatory control on NBFCs. |
| || New guidelines/framework for issuing license to new private banks. || This provides an opportunity for NBFCs to apply for banking licenses and opening up of banking sector. |
|The Union Budget 2012-13 Direct Taxes || Increase in Surcharge on Income for Companies having Income above ` 100 million || Increase in tax outflow |
| || Increase in DDT || Increase in tax outflow |
| || GAAR implementation postponed to 2016 || Increase in confidence in Indian Economy as policies are stable for next few years |
| || Reduction in STT || Tax cost on each transaction will reduce |
| || Commodities Transaction Tax || Tax cost on each transaction will increase |
|The Union Budget 2012-13 Indirect Taxes || Negative List introduced for Service Tax || Now virtually all transactions, which are not sale of goods, attract Service Tax unless specifically exempt. |
|Foreign Account Tax Compliance Act (FATCA) - US || A new compliance from US Internal Revenue Department requires registration of entities for FATCA compliance. || Withholding @ 30% from US sourced income if the entity is non Compliant. Additional compliance cost. |
| || Periodical submission of Data on income earned by US Citizens/Assets || May be a deterrent for US investors. |
|SEBI ||SEBI has notified general criteria subject to which draft offer documents filed for issue of securities, may be rejected. ||This will ensure that only reasonably credible issuers with adequate disclosures documents are allowed to access the public issuances route. |
|SEBI ||SEBI has introduced additional mechanism for investors relating to public issues in electronic form and use of nationwide broker network for submitting application forms. ||This will facilitate greater investor participation in public issues. |
|SEBI/Exchanges ||Existing clients' KYC details to be uploaded in the KYC Registration Agency (KRA) system by intermediaries. ||The KRA agency database will help clients and intermediaries with simplified process for registration. |
|SEBI/Exchanges ||SEBI has prescribed a framework of dynamic trade based price checks to prevent aberrant orders or uncontrolled trades. ||This will require intermediaries to ensure Value/Quantity Limit per order. New checks and balances are required to be put in place by brokers. This will minimise risk at systemic level. |
|SEBI/Exchanges ||Rajiv Gandhi Equity Savings Scheme, 2012 announced in the Union Budget 2012-13. ||This scheme will help small investors to channelise savings into financial instruments and improve the depth of domestic capital market. |
|SEBI/Exchanges ||Guidelines for dedicated Debt Segment on Stock Exchanges issued. ||This step will streamline trading in Debt segment in line with other segments. |
|SEBI/Depositories ||SEBI has decided that all depository participants (DPs) should make available a "Basic Services Demat Account" (BSDA) with limited services to retail clients. ||This will encourage small retail investors to open Demat accounts and invest in capital market and is a welcome step. |
|IRDA ||New Regulations on Life Insurance products have brought material changes on product offering and designing of linked and non-linked life insurance products. ||The products to be now offered must have high cover through defined floor for sum assured. This may impact offerings of products to aged customers. |
|IRDA ||New Regulation issued on "Need Based Sales" approach by designing Standard Proposal Form for individual policies. ||This is a welcome step in the direction of customer centricity to promote insurance sales based on need-based analysis of customer's profile. |
Statements made in this Management Discussion and Analysis contain certain forwardlooking statements based on various assumptions on the Edelweiss Group's present andfuture business strategies and the environment in which it operates. Actual results maydiffer substantially or materially from those expressed or implied due to risk anduncertainties. These risks and uncertainties include the effect of economic and politicalconditions in India and abroad, volatility in interest rates and in the securities market,new regulations and Government policies that may impact the company's businesses as wellas the ability to implement its strategies. The information contained herein is as of thedate referenced and Edelweiss does not undertake any obligation to update thesestatements. Edelweiss has obtained all market data and other information from sourcesbelieved to be reliable or its internal estimates, although its accuracy or completenesscannot be guaranteed. The discussion relating to financial performance ofvariousbusinesses ofEdelweiss contains some data, which may be based on Management estimates orinternal Management Information System.