Bajaj Finance Ltd Directors Report.

The directors present their thirtieth Annual Report and the standalone and consolidated audited financial statements for FY2017.

Financial results

The highlights of the standalone financial results are as under:

Particulars FY2017 FY2016 % change over FY2016
Income from operations 9,977.36 7,293.54 37
Other income 25.95 39.84 (35)
Total income 10,003.31 7,333.38 36
Expenses 2,464.69 1,821.40 35
Loan losses and provisions 818.19 542.85 51
Finance costs 3,803.37 2,926.86 30
Depreciation and amortisation 71.16 56.34 26
CSR expenditure 28.38 21.36 33
Total expenditure 7,185.79 5,368.81 34
Profit before tax 2,817.52 1,964.57 43
Tax expense 980.97 686.05 43
Profit for the year 1,836.55 1,278.52 44
Balance brought forward from previous year 2,410.85 1,684.03
Profit available for appropriations 4,247.40 2,962.55
Appropriations
Transfer to Reserve Fund (368.00) (256.00)
Transfer to General Reserve (184.00) (128.00)
Transfer to Infrastructure Reserve (3.50)
Final dividend to Qualified Institutional Buyers (5.89)
Tax on final dividend to Qualified Institutional
Buyers and ESOP Trust (1.28)
Adjustment of dividend to ESOP Trust 0.17 1.57
Interim dividend (96.97)
Dividend tax on interim dividend (19.74)
Proposed dividend (37.71)
Provision for dividend tax on dividend (7.68)
Balance carried to Balance Sheet 3,692.07 2,410.85

A summary of consolidated financial performance for FY2017 consolidating the results of wholly owned subsidiary Bajaj Housing Finance Ltd. (BHFL) along with its subsidiary Bajaj Financial Securities Ltd. (BFinsec) is given below. The operations of the subsidiaries in FY2017 were not significant and hence the consolidated profit of the Company almost equals its standalone profit.

(Rs. In Crore)
Particulars FY2017 FY2016
Total income 10,006.53 7,333.56
Interest and finance charges 3,803.71 2,926.85
Net interest income 6,202.82 4,406.71
Operating expenses 2,567.22 1,899.18
Loan losses and provisions 818.19 542.85
Profit before tax 2,817.41 1,964.68
Profit after tax 1,836.38 1,278.63

Performance and financial position of subsidiaries

During FY2017, there were no major business operations in BHFL and its subsidiary BFinsec. The profit after tax for FY2017 of BHFL was Rs. 1,169,643 as against Rs. 529,939 for FY2016, for BFinsec the same was Rs. 4,825,578 as against Rs. 566,846 for FY2016.

Dividend

The directors recommend for consideration of the members at the ensuing annual general meeting, payment of dividend of Rs. 3.60 per equity share of the face value of Rs. 2 each (180%) for FY2017. The amount of dividend and tax thereon aggregate to Rs. 238.26 crore.

Dividend paid (i.e. interim dividend of 180% and final dividend of 70%) for FY2016 was Rs. 25 per share (250%) on face value of Rs. 10 each. The amount of dividend and tax thereon aggregated to Rs. 162.10 crore.

Increase in authorised share capital

During FY2017, the Company increased its authorised share capital from Rs. 75 crore consisting of 75,000,000 equity shares of face value of Rs. 10 each to Rs. 150 crore consisting of 750,000,000 equity shares of face value of Rs. 2 each.

Share capital

During FY2017, pursuant to the approval of the Board of Directors and members of the Company, the following changes have taken place in the share capital of the Company:

1. Sub division of equity shares

Each equity share of face value of Rs. 10 was sub divided into five equity shares of face value of Rs. 2 each, as a result, the number of equity shares in the authorised share capital, issued share capital and paid–up capital has increased by five times.

2. Allotment of equity shares a) 269,360,950 bonus equity shares were allotted in the ratio of one fully paid bonus equity share of the face value of Rs. 2 each for every one equity share of the face value of Rs. 2 each held as on the record date, as a result the number of equity shares in the issued share capital and paid-up share capital has increased two times.

b) 9,250,000 equity shares (as adjusted for sub division and bonus shares) of the face value of Rs. 2 each were allotted to promotor Bajaj Finserv Ltd. on conversion of warrants and receipt of balance 75% of the issue price amounting to Rs. 306.08 crore.

c) 150 equity shares (as adjusted for sub division and bonus shares) of the face value of Rs. 2 each were allotted in respect of the rights entitlement (in rights issue made in 2013) held in abeyance on 1,000 equity shares (as adjusted for sub division and bonus shares) transferred from the unclaimed suspense account.

d) 1,918,040 equity shares of the face value of Rs. 2 each were allotted to the trustees of BFL Employee Welfare Trust under the Employee Stock Options Scheme, 2009.

As on 31 March 2017, paid–up share capital of the Company stood at Rs. 1,099,780,180 consisting of 549,890,090 equity shares of face value of Rs. 2 each fully paid–up.

Increase in borrowing powers

During FY2017, pursuant to section 180(1)(c) of the Companies Act, 2013, the Company increased the limit on the borrowing powers of the Board of Directors from Rs. 50,000 crore to Rs. 75,000 crore to meet its growing business needs.

Working results

The receivables under financing activity as on 31 March 2017 were Rs. 56,832 crore as compared to Rs. 42,756 crore as on 31 March 2016, an increase of 33% over the previous year.

Total income during FY2017 increased to Rs. 10,003 crore from Rs. 7,333 crore during FY2016, an increase of 36% over the previous year.

The profit before tax for FY2017 was Rs. 2,818 crore, as against Rs. 1,965 crore for FY2016, an increase of 43% over the previous year. The profit after tax for FY2017 was Rs. 1,837 crore as compared to Rs. 1,279 crore for FY2016, an increase of 44% over the previous year. This has been due to the Companys healthy net interest margins, operating efficiencies and prudent risk management.

The Company had an excellent year aided by strong volume growth across all its lines of businesses. During FY2017, the Company launched various new products and variants to strengthen its business model and continue its growth momentum.

The Companys current provisioning standards are more stringent than Reserve Bank of India (RBI) prudential norms. In line with its conservative approach, the Company continues to strengthen its provisioning norms beyond the RBI regulations by accelerating the provisioning to an early stage of delinquencies based on past experience and emerging trends.

The Companys loan loss and provisions increased from Rs. 543 crore in FY2016 to Rs. 818 crore in FY2017 taking into account the increased business. The Company ended FY2017 with a net NPA of 0.44%.

Operations

The operations of the Company are elaborated in the annexed ‘Management Discussion and Analysis Report.

Extract of annual return

An extract of annual return as provided under section 92(3) of the Companies Act, 2013, in the prescribed Form MGT–9 is annexed to this Report.

Number of meetings of the Board

Seven meetings of the Board were held during FY2017, as per details given in the annexed ‘Corporate Governance Report.

Directors responsibility statement

In compliance with section 134(5) of the Companies Act, 2013, the directors state that:

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

• the directors have selected such accounting policies and applied them consistently and made judgments 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 of the Company for that period;

• the directors have taken proper and sufficient care for the maintenance of adequate accounting records in accordance with the provisions of the Companies Act, 2013 for safeguarding the assets of the Company and for preventing and detecting fraud and other irregularities;

• the directors have prepared the annual accounts on a going concern basis;

• the directors have laid down internal financial controls to be followed by the Company and that such internal financial controls are adequate and are operating effectively; and

• the directors have devised proper systems to ensure compliance with the provisions of all applicable laws and that such systems are adequate and are operating effectively.

Declaration by independent directors

The independent directors have submitted the declaration of independence, as required under section 149(7) of the Companies Act, 2013, stating that they meet the criteria of independence as provided in section 149(6) of the Companies Act, 2013.

Policy on directors appointment and remuneration

The policy on directors appointment and remuneration is given in the annexed ‘Corporate Governance Report.

Particulars of loans, guarantees and investments

The Company, being a non-banking finance company registered with the Reserve Bank of India and engaged in the business of giving loans, is exempt from complying with the provisions of section 186 of the Companies Act, 2013, in respect of loans and guarantees. Accordingly, the disclosures of the loans given, as required under the aforesaid section, have not been made in this Report.

Information regarding investments covered under the provisions of section 186 of the said Act are detailed in the financial statements.

Related party transactions

During FY2017, the Company entered into transactions with related parties pursuant to approval of the Audit Committee. The details of such transactions were placed before the Committee for noting/review.

All related party transactions entered into during FY2017 were on an arms length basis and in the ordinary course of business under the companies Act, 2013 and not material under Securities and Exchange Board of India (Listing Obligations and Disclosures Requirements) Regulations, 2015 (the Listing Regulations) and hence did not require members prior approval under the Companies Act, 2013 and the Listing Regulations. During FY2017, there were no related party transactions requiring disclosure under section 134 of the Companies Act, 2013.

A policy on materiality of related party transactions and dealing with related party transactions is placed on the Companys website https://www.bajajfinserv.in/finance/investor-relations/ policies-and-documents.aspx and is also included in the Annual Report.

Material changes and commitments

There have been no material changes and commitments, affecting the financial position of the Company, which have occurred between the end of the financial year of the Company and the date of this Report.

Conservation of energy and technology absorption

The Company, being a non–banking finance company (NBFC), does not have any manufacturing activity. The directors, therefore, have nothing to report on conservation of energy and technology absorption.

Foreign currency

Foreign currency expenditure amounting to Rs. 17.56 crore (FY2016 Rs. 14.83 crore) was incurred during FY2017. The Company did not have any foreign exchange earnings.

Risk management

The Board of Directors has adopted a risk management policy for the Company which provides for identification, assessment and control of risks that in the opinion of the Board may threaten the existence of the Company. The Management identifies and controls risks through a properly defined framework in terms of the aforesaid policy.

Corporate social responsibility

During FY2017, the Company spent Rs. 28.38 crore on corporate social responsibility (CSR). A detailed information report on the CSR policy and the CSR initiatives taken during FY2017 is given in the annexed ‘Annual Report on CSR activities.

Formal annual evaluation

Information on the manner in which formal annual evaluation has been made by the Board of its own performance and that of its Committees and individual directors is given in the annexed ‘Corporate Governance Report.

Directors and Key Managerial Personnel (KMP)

According to the Companies Act, 2013, Madhur Bajaj (DIN 00014593), non-executive director, retires from the Board by rotation this year and, being eligible, has offered his candidature for re–appointment.

Brief details of Madhur Bajaj (DIN 00014593), non-executive director who is seeking re–appointment are given in the notice of annual general meeting.

There was no change in the directors and KMP during FY2017.

Significant and material orders

During FY2017, the Company has received an order from the Commissioner of Service Tax, Pune confirming the demand of service tax of Rs. 644.65 crore on the ‘interest subsidy along with interest of Rs. 303.50 crore and penalty of Rs. 198.95 crore aggregating to Rs. 1,147.10 crore. The Company is in the process of filing an appeal before the Central Excise and Service Tax Tribunal, Mumbai.

The Company had taken opinions in the past from eminent counsels and tax consultants on the taxability of the interest subsidy and they had confirmed that the same is not liable to service tax in the hands of the Company.

Adequacy of internal financial controls

The Company has documented its internal financial controls considering the essential components of various critical processes, physical and operational which include its design, implementation and maintenance along with periodic internal review of operational effectiveness and sustenance.

This ensures orderly and efficient conduct of its business, including adherence to Companys policies, safeguarding of its assets, prevention of errors, accuracy and completeness of the accounting records and the timely preparation of reliable financial information.

The internal financial controls with reference to the financial statements were adequate and operating effectively.

Employee stock option scheme

Disclosures pertaining to the Employee Stock Option Scheme, 2009 of the Company pursuant to the Securities and Exchange Board of India (Share Based Employee Benefits) Regulations, 2014 are placed on the Companys website https://www.bajajfinserv.in/finance/investor- relations/annual-reports.aspx Grant wise details of options vested, exercised and cancelled are provided in the notes to the standalone financial statements.

Deposits

During FY2017, the Company accepted fixed deposits (FDs) of Rs. 2,353.75 crore. FDs outstanding at the year end were Rs. 3,518.97 crore. As on 31 March 2017, there were four FDs amounting to Rs. 0.60 lakh which had matured and remained unclaimed.

Pursuant to the provisions of the Reserve Bank of India Act, 1934, the Company has created a charge on statutory liquid assets amounting to Rs. 557.38 crore in favour of the trustee for FD holders.

During FY2017, the Company accepted Inter Corporate Deposits (ICDs) of Rs. 764.27 crore. ICDs outstanding as on 31 March 2017 were Rs. 609.18 crore.

Overall deposits outstanding as on 31 March 2017 were Rs. 4,128.15 crore.

During FY2017, there was no default in repayment of deposits or payment of interest thereon.

Credit rating

Despite a tough economic environment, the Company retained or upgraded its credit ratings owing to high capital adequacy, strong promoter support, tightened credit acceptance criteria and robust asset liability management. During FY2017, the Company has been assigned "CARE AAA/Stable" for its long term debt programme from CARE Ratings.

CRISIL and ICRA have reaffirmed the highest rating of "FAAA/Stable" and "MAAA(Stable)" for the fixed deposit programme of the Company. These ratings indicate the highest degree of safety with regard to timely payment of interest and principal. The Company is amongst the few NBFCs in India which enjoys the highest rating for its fixed deposit programme.

The Company also enjoys the highest rating of "CRISIL A1+" from CRISIL and "ICRA A1+" from ICRA for its short term debt programme for Rs. 10,000 crore from each rating agency.

CRISIL has upgraded the Companys long term debt programme from "CRISIL AA+/Positive" to "CRISIL AAA/Stable" in October 2016 with a size of Rs. 10,052.80 crore for the non-convertible debenture (NCD) programme. The Company has also been assigned "CARE AAA/Stable" for its long term debt programme from CARE Ratings with a size of Rs. 2,545 crore and

"IND AAA/Stable" rating by INDIA RATINGS with a size of Rs. 10,000 crore for the NCD programme. ICRA has revised the rating outlook for the long term debt programme from "ICRA AA+(Stable)" to "ICRA AA+(Positive)" in July 2016 for a size of Rs. 8,000 crore for the NCD programme. All of the above ratings indicate a high degree of safety with regard to timely payment of interest and principal.

The Company has also been assigned "IND AAA/Stable" by INDIA RATINGS, "CRISIL AAA/Stable" rating by CRISIL, "CARE AAA/Stable" by CARE Ratings and "[ICRA] AA+/Positive" by ICRA for Rs. 2,000 crore, Rs. 2,700 crore, Rs. 2,455 crore and Rs. 1,700 crore respectively for the subordinated debt programme.

As regards the bank loan ratings for the bank facilities stipulated by RBI, as a part of BASEL II guidelines, INDIA RATINGS has assigned "IND AAA/Stable" and CRISIL has assigned "CRISIL AAA/Stable" rating for the Companys cash credit/working capital demand loan and long-term bank facilities. INDIA RATINGS has assigned "IND A1+" rating and CRISIL has assigned "CRISIL A1+" rating for the short term bank facilities. The cumulative rating for the bank loan programme is Rs. 30,000 crore under INDIA RATINGS and Rs. 21,000 crore under CRISIL Ratings.

RBI guidelines

The Company continues to fulfill all the norms and standards laid down by the RBI pertaining to non–performing assets, capital adequacy, statutory liquidity assets, etc. As against the RBI norm of 15%, the capital adequacy ratio of the Company was 20.30% as on 31 March 2017. In line with the RBI guidelines for asset liability management (ALM) system for NBFCs, the Company has an Asset Liability Committee which meets monthly to review its ALM risks and opportunities.

The Company is also in compliance with the NBFC – Corporate Governance (Reserve Bank) Directions, 2015.

Policy on dividend distribution

The policy on dividend distribution is given in the annexed ‘Corporate Governance Report.

Presentation of financial statements

The financial statements of the Company for the year ended 31 March 2017 have been disclosed as per schedule III to the Companies Act, 2013.

Consolidated financial statements

The directors also present the audited consolidated financial statements, incorporating the duly audited financial statements of the subsidiaries, prepared in compliance with the Accounting Standard – 21.

A separate statement containing the salient features of its subsidiaries in the prescribed Form AOC–1 is attached to the standalone financial statements.

Statutory disclosures

A summary of the key financials of the Companys subsidiaries is included in this Annual Report. A copy of audited financial statements for each of the subsidiary companies will be made available to the members of the Company seeking such information at any point of time.

• The audited financial statements for each of the subsidiary companies will be kept open for inspection by any member of the Company at its registered office during 10.00 a.m. to 12 noon.

• The financial results are placed on the Companys website https://www.bajajfinserv.in/finance/investor-relations/annual-reports.aspx

• Details as required under the provisions of section 197(12) of the Companies Act, 2013 read with rule 5(1) of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014, as amended, are annexed to this Report.

• Details as required under the provisions of section 197(12) of the Companies Act, 2013 read with rule 5(2) and 5(3) of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014, as amended, which form part of the Directors Report, will be made available to any member on request, as per the provisions of section 136(1) of the said Act.

• The directors responsibility statement as required under section 134(5) of the Companies Act, 2013 appears in a preceding paragraph.

• Pursuant to the provisions of the Companies Act, 2013 no fraud was reported by auditors of the Company to the Audit Committee during FY2017.

• Disclosures as prescribed by Non–Banking Financial (Deposit Accepting or Holding) Companies Prudential Norms (Reserve Bank) Directions, 2007 and other NBFC Regulations have been made in this Annual Report.

• Cash Flow Statement for FY2017 is attached to the Balance Sheet.

• The Company has a policy on prevention of sexual harassment at the workplace. No case of sexual harassment was reported during FY2017.

Best Audit Committee award 2016

The Asian Centre for Corporate Governance and Sustainability has awarded the ‘Best Audit Committee Award 2016 to the Company in recognition of its commitment to the best practices of good governance.

Corporate governance

Pursuant to the Listing Regulations, a separate section titled ‘Corporate Governance has been included in this Annual Report, along with the Reports on ‘Management Discussion and Analysis and ‘General Shareholder Information.

All Board members and Senior Management personnel have affirmed compliance with the code of conduct for FY2017. A declaration to this effect signed by the Managing Director of the Company is included in this Annual Report.

The Managing Director and Chief Financial Officer have certified to the Board with regard to the financial statements and other matters as specified in the Listing Regulations.

A certificate from the auditors of the Company regarding compliance with the conditions of corporate governance is annexed to this Report.

Business responsibility report

Pursuant to the provisions of the Listing Regulations, the Company, being in the top 500 companies by market capitalisation on National Stock Exchange of India Ltd. and BSE Ltd. as on 31 March 2016, is required to give a ‘Business Responsibility Report (the BRR) in the Annual Report.

As a green initiative the BRR for FY2017 has been hosted on the Companys website https://www.bajajfinserv.in/finance/investor-relations/annual-reports.aspxA physical copy of the BRR will be made available to members on request.

Secretarial standards of ICSI

Pursuant to the approval from the Ministry of Corporate Affairs, the Institute of Company Secretaries of India (ICSI) has, on 23 April 2015, notified the Secretarial Standards on Meetings of the Board of Directors (SS–1) and General Meetings (SS–2) effective from 1 July 2015. The Company is compliant with the same.

Auditors

Pursuant to the provisions of section 139 of the Companies Act, 2013, Dalal & Shah LLP, Chartered Accountants, were appointed as statutory auditors of the Company at the 27th annual general meeting (AGM) of the Company for a period from the conclusion of the said AGM till the conclusion of the 30th AGM subject to ratification of their appointment by the members at every AGM held thereafter. The term of the existing auditors expires after the conclusion of the ensuing AGM.

A resolution for appointment of S R B C & CO LLP, Chartered Accountants, as auditors and fixation of their remuneration for the year 2017–18 is proposed in the notice of the ensuing AGM for the approval of the members.

The Company has received from S R B C & CO LLP, a certificate to the effect that their appointment shall be in accordance with the prescribed conditions and that the firm is not disqualified under the Companies Act, 2013.

The Audit Report submitted by Dalal & Shah LLP, for FY2017 does not contain any qualification, reservation or adverse remark or disclaimer.

Secretarial auditor

Pursuant to the provisions of section 204 of the Companies Act, 2013, the Board has re-appointed Shyamprasad D Limaye, company secretary in practice (FCS No. 1587, CP No. 572), to undertake secretarial audit of the Company for FY2018.

A report from the secretarial auditor in the prescribed Form MR-3 is annexed to this Report. The same does not contain any qualification, reservation or adverse remark or disclaimer.

Acknowledgement

The Board of Directors takes this opportunity to express its sincere appreciation for the support and co–operation from its members, Reserve Bank of India and other regulators, banks, financial institutions and the trustees for debenture holders and FD holders.

The Board of Directors also places on record its sincere appreciation of the commitment and hard work put in by the Management and employees of the Company and thanks them for yet another excellent year.

On behalf of the Board of Directors

Rahul Bajaj

Chairman

Pune: 17 May 2017