icici venture funds management company ltd Directors report


Directors

to the members

Your Directors are pleased to present the Twenty Sixth Annual Report of ICICI Venture Funds Management Company Limited with the Statement of Accounts for the year ended March 31, 2014.

1. FINANCIAL HIGHLIGHTS:

( Rs. in million)

Fiscal 2013

Fiscal 2014
Profit before taxation

293.2

382.6
Profit after taxation

197.9

329.8
Appropriations :
General Reserve

19.8

33.0
Interim Dividend

15.0

10.0
Corporate tax on Dividend

2.4

1.7
Balance carried forward to next year

1202.2

1487.3

The Company earned profit after tax of Rs. 329.8 million for the year. After taking into account profit of Rs. 1,202.2 million brought forward, the Company’s disposable profit stands at Rs. 1,532.0 million. During fiscal 2014, your Company transferred Rs. 33 million to General Reserve and paid interim dividend of Rs. 10.0 per share.

Analysis of Financial Performance:

During the year, your Company earned a total income of Rs. 1,363.4 million as compared to Rs. 1,303.9 million in the previous year. Of the total income, income from investments in venture capital funds was Rs. 165.7 million during the year, as compared to the previous year’s income of Rs. 27.2 million. Fee income from funds under management (including newly established funds) was Rs. 825.1 million during the year, as compared to the previous year’s income of Rs. 1,104.8 million. This decline was mainly due to the significant number of exits concluded by your Company during the year. Operating expenses were at Rs. 869.6 million as compared to Rs. 897.5 million in the previous year.

Your Company‘s profit before tax for the year under review was Rs. 382.6 million as compared to the previous year’s profit before tax of Rs. 293.2 million. After providing for tax, including deferred tax, for the current year, profit after tax was Rs. 329.8 million as compared to the previous year’s profit after tax of Rs. 197.9 million. The Earnings per Share of your Company was Rs. 329.8 per share during fiscal 2014 as compared to Rs. 197.9 per share during the previous year.

2. OPERATIONAL REVIEW:

Year in Retrospect:

The global economy started to recover during the year exhibiting slow but steady growth. Growth in emerging economies has slowed over the past year as new growth concerns and a modest flight of capital have pressured investments. During the year, India experienced its own macroeconomic challenges, with fiscal & current account deficit, high inflation and currency depreciation. While measures were taken to address the current account deficit, encourage foreign fund inflows and stabilize the currency, economic growth continued to moderate.

The Indian stock market remained flat through much of the year but has witnessed an increase in the last quarter of the fiscal. The rupee has stabilized on account of the macroeconomic measures taken by the Government of India. The Reserve Bank of India lowered rates in the first half of the year to give a boost to slowing economic growth, while increasing inflation was countered by increasing rates in the latter half.

In fiscal 2014, an estimated USD 8.4 billion was invested by private equity players in the country across around 390 reported transactions. Total investment value was marginally higher than the previous year, while the total number of investment transactions was lower. The average size of PE deals increased, driven by a shift to larger deal sizes including a few large investments in publicly listed companies. (Source: Industry Reports).

The Indian PE market continues to be dominated by minority investments, but there has been an increase in the number of buyouts by PE funds. The overall level of competition for deals remains high primarily due to limited good-quality deals thereby increasing the importance of proprietary sourcing of deals.

Portfolio and Fund Strategy:

As on March 31, 2014, your Company had seven funds under active management in four asset classes - Private Equity, Real Estate, Infrastructure and Special Situations.

(A) Private Equity:

India Advantage Fund Series 1 (IAF Series 1)

IAF Series 1 has been largely wound down with only one residual investment pending to be exited. The Fund has achieved a realized gross Internal Rate of Return (IRR) of approximately 48% and a Multiple of Capital Employed (MoC) of 3.3 times based on exits till date.

India Advantage Fund Series 2 (IAF Series 2)

During fiscal 2014, your Company concluded full exits from three portfolio companies and partial exits from four portfolio companies of IAF Series 2 which resulted in aggregate realizations of over Rs. 4.00 billion to the Fund. The Fund is currently focused on concluding exits from the residual portfolio companies. The extended term of the Fund comes to an end in October 2014 following which the Fund has a 12 month period ending in October 2015 for resolution of the assets held by the Fund.

India Advantage Fund Series 3 (IAF Series 3)

Your Company successfully concluded two investments from IAF Series 3 in fiscal 2014. The first investment was in a payments systems company focusing on owning, operating and managing ATMs and Point of Sales terminals in India. The company has recently received a license from the RBI to operate White Label ATMs in India. The second investment was in a company in the business of owning and operating entertainment theme park projects in India. With these two investments, the Fund has made a total of seven investments and drawn down over 60% of committed capital. The Fund is actively evaluating a number of potential new investment opportunities across various sectors.

(B) Real Estate:

India Advantage Fund III and IV (IAF III and IAF IV, and together referred to as Real Estate Series 1)

During the year, your Company continued to focus on project progress and exits from the Funds’ investments. IAF III is in an advanced stage of exit from three of its investments, while IAF IV is in an advanced stage of exit from one investment.

The extended terms of IAF III and IAF IV end on June 05, 2014 and September 25, 2014 respectively, after which the Funds would enter their 12 month resolution of assets periods ending June 05, 2015 and September 25, 2015 respectively. Your Company is currently working on a proposal envisaging extension of the life of IAF III and IAF IV and in conjunction with this, a structured liquidity option for the investors in these funds.

India Advantage Fund Real Estate Series 2 (IAF RE S2)

During the year, your Company has concluded two more investments from this Fund thus cumulatively concluding five investments from this Fund. Your Company has also concluded one exit from this Fund with an IRR of 24.0%. The Fund has invested approximately 64.7% (Rs. 1660 million) of its Corpus till March 31, 2014 and has distributed approximately 26% (Rs. 514.6 million) of the Capital Called to its investors out of monies realized by the Fund.

(C) Mezzanine:

Indian Infrastructure Advantage Fund (IIAF)

In fiscal 2014, the Indian Infrastructure Advantage Fund VII had a first close. The Fund shall focus primarily on rapidly growing opportunities for private sector investment in India’s infrastructure.

(D) Special Situations Fund:

AION PE Fund ("AION") is the Special Situations Fund where your company is a Strategic Advisor along with Apollo Global Management, one of the world’s largest alternative asset managers with an AUM of US$ 160 billion. AION is one of the largest India focused PE funds raised in recent years and has received commitments from a number of highly reputed international investors.

AION has successfully concluded two investments from the AION Fund in this year. The first investment is in one of the country’s top 3 electricity transmission tower design and manufacturing company. The company has facilities in India, UAE and the US and has a successful track record of over 30 years. The investment is predominantly structured in US dollars with strong downside protection and uncapped upside potential.

The second investment is with one of the largest Business Groups based in North India. The investment is a special credit with high quality collateral to protect the downside and upside linked to the performance of the company. The underlying company has over 8,000 employees in 9 countries and is a dominant player in all its businesses ranging from electrical consumer goods to providing large scale electrical solutions to industry.

While both the investments are early in the investment life cycle, these investments look promising and are currently performing well. The Fund has a strong pipeline of deals is actively evaluating a number of potential new investment opportunities across various sectors.

Fund Raising:

During the year, your Company concluded closings in its Special Situations and Infrastructure Funds.

Special Situations Fund: AION is a Special Situations Fund where your company is a Strategic Advisor along with Apollo Global Management, one of the world’s largest alternative asset managers with an AUM of USD 160 billion. AION has conducted an interim fund closing based on commitments raised from international LPs and concluded two investments during the year.

Infrastructure: Your Company is currently raising the Indian Infrastructure

Advantage Fund (IIAF) which seeks to make investments in India’s infrastructure sector. IIAF concluded a first closing during the year. Demand for infrastructure equity funding from both private and public sources is growing rapidly in light of the large infrastructure investments envisaged in the current plan and funds such as IIAF are expected to bridge the demand supply gap for private equity funding.

Total commitments received across the Special Situations Fund and the Infrastructure Fund amounted to close to US$ 1 billion including co-invested capital in case of the Special Situations Fund.

Outlook:

Your Company has emerged as one of India’s most diversified alternative asset managers with presence across private equity, real estate, infrastructure and special situations. Your Company is well positioned to participate in the increasing equity investment opportunities that would arise as capital formation and economic growth pick up in the year ahead.

3. PUBLIC DEPOSITS:

During the year under review, your Company has not accepted any deposit under Section 58A of the Companies Act, 1956.

4. DIRECTORS:

The Board has re-appointed Vishakha Mulye as the Managing Director & CEO of the Company w.e.f. April 21, 2014 for a term of 5 years. Ms. Mulye will be liable to retire by rotation.

As per Section 152 of the Companies Act, 2013, Rakesh Jha retires by rotation and, being eligible, offers himself for re-appointment.

5. AUDITORS:

Deloitte, Haskins & Sells, Chartered Accountants (Firm Registration No. 008072S) were appointed as statutory auditors of the Company for the year 2013-2014 to hold office till the conclusion of the ensuing Annual General Meeting of the Company. The Board of Directors recommend your approval for re-appointment of Deloitte, Haskins & Sells, Chartered Accountants, as statutory auditors of the Company for the year 2014-2015.

6. FOREIGN EXCHANGE EARNING AND EXPENDITURE:

The foreign exchange earnings during the year amounted toRs. 21.1 million. Expenditure in foreign currency amounted to Rs. 39.2 million.

7. PERSONNEL AND OTHER MATTERS:

Information required to be disclosed in accordance with Section 217(2A) of the Companies Act, 1956, read with the Companies (Particulars of Employees) Rules, 1975, as amended, forming part of the Directors’ Report for the year ended March 31, 2014 is enclosed as an Annexure to this Report.

Since your Company does not own any manufacturing facility, the disclosure of information on other matters required to be disclosed in terms of Section 217(1)(e) of the Companies Act, 1956 read with the Companies (Disclosure of Particulars in the Report of Board of Directors) Rules, 1988, are not applicable and hence have not been given.

8. AUDIT COMMITTEE:

Your Company has constituted an Audit Committee, though not mandatory, under the provisions of the Companies Act, 1956. The Audit Committee comprises of K. N. Memani as Chairman and S. Mukherji and H. N. Sinor as Members of the Committee.

9. CORPORATE SOCIAL RESPONSIBILITY COMMITTEE:

As per Section 135 of the Companies Act, 2013, the Board has constituted a Corporate Social Responsibility Committee consisting of Sridar Iyengar as Chairperson, Lalita D. Gupte, Member, K. N. Memani, Member and H. N. Sinor, Member.

10. NUMBER OF MEETINGS OF THE BOARD:

During fiscal 2014, the Board of your Company meet 11 (eleven) times.

11. DIRECTORS RESPONSIBILITY STATEMENT: The Directors confirm that:

1. in the preparation of the annual accounts, the applicable accounting standards have been followed along with proper explanation relating to material departures, if any;

2. they have selected such accounting policies and applied them consistently and made judgements and estimates that are reasonable and prudent so as to give a true and fair view of the state of affairs of the Company at the end of the financial year and of the profit or loss of the Company for that period;

3. they have taken proper and sufficient care for the maintenance of adequate accounting records in accordance with the provisions of the Companies Act, 1956 for safeguarding the assets of the Company and for preventing and detecting fraud and other irregularities; and

4. they have prepared the annual accounts on a going concern basis.

12. ACKNOWLEDGEMENTS:

The Board of Directors of your Company wishes to acknowledge and place on record its sense of appreciation for the commitment, dedication and professionalism of the employees of the Company. The Board also wishes to thank ICICI Bank, its parent company, regulatory authorities and the Government for their co-operation and support. The Board is also grateful to the investors of the Funds managed and advised by the Company for their continued trust and support.

For and on behalf of the Board of Directors
Lalita D. Gupte
Mumbai, April 16, 2014 Chairperson