Arihant Capital Markets Ltd Management Discussions.

FY2019-20: A Glance

Global outlook

The world economy grew by 2.9% in CY2019 compared with the 3.6% in the previous year, the lowest since the global financial crisis, as per the International Monetary Fund (IMF). The US economy grew by 2.3%, while China and India grew by 6.1% and 4.2%, respectively. The slowdown has been more pronounced in emerging economies like China, India and Brazil, among others. Weak business confidence due to rising trade barriers between the US and China, geopolitical tensions in other regions and fears of a no-deal Brexit have been key factors leading to the slow growth in CY2019. Accommodative easing of monetary policy by Central Banks of several countries and reform initiatives by Governments arrested the slowdown to an extent. There has also been increasing concerns over climate change and governments and businesses are being called to act more responsibly. In response to these factors, organizations globally are focusing on being more agile, being closer to consumers and conducting business in a more sustainable and responsible manner.

Indian Economy outlook

According to the IMF, the Indian economy grew by 4.2% in FY 2019-20 due to sharper than expected slowdown in domestic demand and lingering stress in the Non-Banking Financial Company (NBFC) sector. The sluggish demand is attributed to the decline in consumption growth (tightening of credit terms and poor consumer sentiment), investment and exports. The Government of India also announced a number of policy measures to boost investment, such as reduction in Corporate Tax rate from 30% to 22%, which was complemented by the easing of repo rates by the Reserve Bank of India.

Outlook for 2020-21: The path leads to a cautious year ahead:

Global Economy:

The initial outlook for the ensuing year was for stronger growth, especially over the subdued CY 2019 economic performance, buoyed by favourable news on US-China trade negotiations, the UK transitioning to a new economic relationship with Europe by December 2020 and a healthy performance of Emerging Markets. However, CY2020 saw a significantly changed scenario with the outbreak of the COVID-19 pandemic. This was followed by strong actions by the Governments across the world in the form of a global lockdown to stem the rate of spread of the disease. Despite relief measures provided in the form of easing of monetary policy by Central Banks and fiscal packages announced by some Governments, we are expected to see a contraction in Global Economy which is projected to be -4.9% in CY2020 as per IMF. A gradual recovery next year is expected, however, it is marked with uncertainty depending on the ground situation, that is, the duration of lockdown, growth in infection rate with the opening up of economies, timeline for development of vaccine and others.

Indian Economic Highlights:

Similar to the global outlook, the Indian economy was projected to grow at a stronger pace in FY 2020-21 than the previous year, supported by monetary and fiscal stimulus and lower oil prices. However, the unprecedented COVID-19 pandemic, and the subsequent nationwide lockdown by the Government, along with other necessary measures to contain the pandemic, have made experts revise their forecasts significantly. Indian GDP in FY 2020-21 is expected to contract by 4.5% as per IMF. In the short term, the lockdown could also potentially lead to a financial distress, both for consumers and Companies, including disruptions in money supply and general liquidity.

Who we are and what we do

Established as a stock broking company in 1992, we are today one of Indias leading integrated financial services company. Initiated with the idea to make financial products and services easily understandable and accessible to all, the Company along with its wholly owned subsidiaries now offers the entire gamut of financial services through its 900+ investment centres spread across India servicing over 1.65 lac customers that includes retail, high net worth individuals and domestic and foreign financial institutions. Here is a list of products and services offered by your Company:

• Equities and Derivatives • Commodities & Currency
• Mutual Funds • Fixed Income
• Priority Client Group (PCG) • Portfolio Management Services (PMS)
• Insurance (Life& General) • National Pension Scheme (NPS)
• Loan Against Shares (RBI Registered NBFC) • Merchant Banking (Category I)

The Company conducts its operations along with its subsidiaries (together hereinafter referred to as Arihant or the Company).

Review of Operations

The operations function at your Company have been designed to deliver a superior and differentiated customer experience. During the FY your companys consolidated income stood at 90.87 Cr and reported a profit after tax of 17.48 Cr.

During the year under review, your Company secured insurance license from Insurance Regulatory and Development Authority of India (IRDAI) under its subsidiary Arihant Insurance Broking Services Limited and commenced insurance broking business. Further, your Company also acquired Portfolio Management Service (PMS) license from SEBI and set up Arihant Growth and Opportunity Fund. We also introduced an all new mobile application for mutual funds and financial goal planning for our clients, Wealth4Me and upgraded existing Arihant Mobile application with a host of new features, in our attempt to enhance user experience. Digital transformation has been our number one priority since day one and we are working continuously on it to stay ahead of the curve. We strive continuously towards improving our systems and processes and in pursuit of the same, we also acquired ISO 9001:2015 quality management system certification.

With our ongoing strategy to build a full-service model to support a diverse revenue mix over time, we are clear that all our efforts must converge into real value creation for all our stakeholders in the coming times.

Risk factors relating to our business operations

Every Company is prone to internal and external risks, including risks around compliance, operational, strategic and many others. Many of these risks are inherent in the enterprise structure of any organization and may interfere with an organizations operations and objectives. The Company takes responsibility to proactively identify and address risks and opportunities to protect and create value for its stakeholders.

Some of the crucial risks impacting the Companys overall governance are detailed below: l Economic risk: The major sources of our revenues are derived from equity brokerage business. Hence, like other players in the market, our business is highly sensitive to economic and political conditions prevalent in the country and across the globe. Any sustained down turn in general economic conditions or Indian equity markets and severe market fluctuations would likely result in reduced client trading volumes and net revenues, and hence, will have a material adverse effect on our profitability.

• Technological risk plays a significant role in our industry: The substantial amount of costs involved in deployment of technology is a critical factor. Obsolesce is another major concern as upgradation of technology is an ongoing exercise. Any significant changes in technology would pose pressure on our profitability.

• Market risk: The Company aims to mitigate market risks by using investment policies, Investment committees, and requirement of investment justifications and regular monitoring of performance.

• Reputation Risk: Over the years, the company pays special attention to issues that may create a reputational risk. Events that can negatively impact the organisation position are handled cautiously ensuring utmost compliance with relevant laws.

• Credit Risk: We provide exposure limits to clients, based on the collaterals of securities that we receive from them, in connection with our brokerage business. Sharp change in market value of securities and the failure by parties to honour their commitments on a timely basis could have a material adverse effect on the profitability of our operations.

• Competition Risk: The competitive landscape in financial services sector is becoming increasingly crowded. Disruptive business models by the new age fintech companies like discount broking, robo-advisory and entry of payment bank companies in this field is leading to evolution of the business model and the Companys growth will depend on its ability to compete effectively.

• Compliance Risk: Compliance is defined as the outcome for adhering to a rule. Compliance risks result from violations or non-compliance with Laws and Regulations, Code of Business Conduct and Contractual Compliance having material impact on the Companys financial, organizational and reputational standings. The Company has strong compliance management framework, supported by adequate tools and IT systems, to identify, assign and monitor compliance with applicable Rules and Regulations. In addition, an independent internal auditor reviews compliance management framework and submits their findings to the Audit Committee.

• Conflict of Interest: There is a risk that there will be situations when interests of the Management Company (or persons related to it) and the Company or shareholders will differ or interests of individual shareholders will differ, i.e. there will be a conflict of interest. The Management Company has to implement appropriate measures for avoiding conflicts of interest, which enable to perform the activities of managing the risk of conflicts of interest and managing conflicts of interest independently, in order to avoid/reduce the risk of conflicts of interest or properly manage a conflict of interest when it occurs.

Human Resources

The Company believes that the employees are the most valuable asset and the key to our success and hence focuses on building a competent team and provide a conducive environment under which the employees can work to their potential and grow professionally as well as personally.

During the year, the Company organised training programs in different areas such as technical skills, business excellence, general management, customer orientation, safety, values and code of conduct. Moreover, in line with the Companys staff certification policy, employees are mandatorily required to take relevant industry standard certifications such as National Institute of Securities Markets (NISM), Association of Mutual Funds of India (AMFI), Chartered Financial Analyst (CFA) and Chartered Financial Planner (CFP). Most of the Companys employees are qualified professionals (CA, CS, MBAs) or have obtained such certifications.

Corporate Social Responsibility (CSR)

At Arihant, we are aware of how our operations impact our stakeholders, especially the communities where we operate. We are reliable and responsible company that operates in a socially and environmentally sustainable manner. We primarily focus on health, education, environment and rural development by promoting social welfare programmes and community participation near our facilities and offices.

The CSR Policy may be accessed on the Company Website at the link: http://www.arihantcapital.com

The key philosophy of the Company CSR initiatives is to promote development through social and economic transformation. The Company has, interalia, identified following areas in which it may engage for its CSR activities.

• Addressing identified needs of the underprivileged through initiative directed towards promoting education including preventive health care.

• Addressing the cause of environmental sustainability by creating awareness on minimizing the use of plastic, promoting eco-friendly products and other measures to save the planet

• Any other activity falling within the scope of schedule VII to the Act.

During the year, the Company has spent more than Rs 58.03 Lacs on CSR activities.

The details of CSR activities area part of Board Report.

Internal Control System

The Companys internal audit system has been continuously monitored and updated to ensure that assets are safeguarded, established regulations are complied with and pending issues are addressed promptly. The audit committee reviews reports presented by the internal auditors on a routine basis. The committee makes note of the audit observations and takes corrective actions, if necessary. It maintains constant dialogue with statutory and internal auditors to ensure that internal control systems are operating effectively

Risk management

Your company has a risk management framework, appropriate to the size of the company and environment under which it operates. The risk management process covers risk identification, assessment, analysis and mitigations and policies are framed appropriate for various risk categories namely Credit risk, Market risk, Operational risk and Regulatory risk. The Audit Committee reviews these policies and processes regularly and is periodically informed about the risk assessment, impact of risk on the business and mitigation plans.

The Environment

At Arihant, we understand the importance of eco-friendly and environmentally conscious development. We also encourage our clients to go paperless by signing up for electronic trade confirmations (e-contract notes), account statements and bills. Not only is this good for the environment, but it enables clients to receive important information electronically even if theyre away from home.

We believe in driving successful performance in tandem with ethical behaviour with an unwavering commitment to reducing environmental impact.

Commitment to doing what is right

Our Top Management Team and Board of Directors are Resolved to Do What, We Believe, Is Best For Our Associates, Clients And Shareholders.

Opportunities and Threats

Opportunities

• Commitment to superior quality and process execution.

• Increasing financial services industrys share of wallet for disposable income.

• Leadership in sophisticated solutions that enable our clients to optimize the efficiency of their business.

• Leveraging technology to enable best practices and processes.

• Corporates looking at consolidation / acquisitions / restructuring opens out opportunities for the corporate advisory business.

Threats

• Execution risk

• Regulatory changes

• Slowdown in global liquidity flows

• Increased intensity of competition from local and global players

• Market trends making other assets relatively attractive as investment avenues

Strength

Arihant Capital Markets Limited is a trusted brand in financial services space in India. People look upto Arihant for trust-worthy and ethical services and honest and fair opinion for investing their hard earned money. Arihant has an experienced top management teamwith a successful track record. It has established leadership in franchisee business that is spread across the length and breadth of the nation. Arihant has multiple business partner models in franchising and is strongly committed to enhance growth and profitability of each of its franchisee. It believes that its understanding of equity as an class asset and business fundamental drives the quality of research and differentiates from its competitors. Company is having well experienced and competent team which successfully contributes towards business expansion.

Strategy

We intend to capitalize on the growth and consolidation of the brokerage industry and leverage our infrastructure to grow our market share and profitability. To achieve these goals, we seek to keep ourselves in sync with the growing dynamics of the industry on technology front, expand our network particularly in markets where the competition is not intense and potential is high. We seek to further strengthen our position by increasing our relevance to clients by being able to understand their investment requirement and offer them a solution that best meet their needs (client centric approach).

Our strategic objective is to build a sustainable organization that remains relevant to the agenda of our clients, while creating growth opportunities for our employees and generating profitable returns for our investors.

Statutory Compliance

The Company has a well-structured, documented and demonstrable compliance framework that helps the management monitor and report compliance risk and exposure to the Board. The Chief Compliance officer makes a declaration at each Board Meeting regarding compliance with provisions of various statutes after obtaining confirmation from all the operating departments across all subsidiary companies within India.

Outlook and challenges

The continual growth in the Finance sector is expected to give the necessary support to the Finance industry. The Company is making all efforts to accelerate growth of its business. It expects to improve its position in the market by focusing on technologically advanced and more profitable products/market segments. Howeve, the challenges remain on being able to leverage these initiatives to carve out a space in the competitive broking industry and be able to take Company to the masses efficiently and at optimal cost.

Cautionary Statement

The management discussion and analysis report containing your Companys objectives, projections, estimates and expectation may constitute certain statements, which are forward looking within the meaning of applicable laws and regulations. The statements in this management discussion and analysis report could differ materially from those expressed or implied. Important factors that could make a difference to the Companys operation changes in the governmental regulations, tax regimes, forex markets, economic developments within India and the countries with which the Company conducts business and other incidental factors.