East India Securities Ltd Management Discussions.

Global growth is projected at -4.9 percent in 2020. The COVID-19 pandemic has had a more negative impact on activity in the first half of 2020 than anticipated, and the recovery is projected to be more gradual than previously forecast. In 2021 global growth is projected at 5.4 percent. Overall, this would leave 2021 GDP some 6% percentage points lower than in the pre-COVID-19 projections of January 2020. The adverse impact on low-income households is particularly acute, imperiling the significant progress made in reducing extreme poverty in the world since the 1990s.

FY2020 was a challenging year for Indian market. NDA secured second term in the general elections and announced several economic measures to revive domestic economic growth that has slumped to lowest in decade led by weak auto sales, muted growth in personal and consumer loans and sluggish rural demand. The year saw various domestic events like default of a major housing finance company, removal of Article 370 of the Constitution of India, revival of a major private bank, merger of public sector banks etc. On global front the major events that made headlines include escalation in US China trade tensions and subsequently agreement on phase I of trade deal, sharp rate cuts by US Fed and European Central Bank (ECB) bringing it back to all-time lows, completion of BREXIT, fall in oil prices etc. However, the single biggest event of the year, which happened in last quarter, was origination and spread of corona virus pandemic. The virus that originated in China rapidly covered all major countries, especially in the month of March, 2020. Many economies implemented shutdown - partial or full and consequently economic activity was severely disrupted globally. This also resulted in a fall in most asset classes including equities, commodities and currencies. In India, to check the spread of the virus, government announced lockdown for 21 days till April 14 and later on extended it to May 31. Government first announced an economic stimulus package worth R 1.7 trillion to help millions of low income cope with lockdown and a second package of R 20 lakh crore later on to revive the countrys economy. A host of measures were taken by RBI to help liquidity conditions in the economy which included Repo rate cut by 115 bps to 4%, moratorium of three months of EMIs on all outstanding loans which was later on extended by another three months till August end, auction of targeted long term repo operations worth R 1 crore etc.

Although, International Monetary Fund slashed its FY2021 growth projection for India to 1.9% from 5.8% projected in January, India stands to benefit in this uncertain environment. Disruption in global supply chain has highlighted risk of overdependence on a single country. Many global MNCs are likely to consider diversifying their manufacturing operations from China and India could be a likely beneficiary given the low corporate tax rate, skilled population, relatively low wages and a large domestic market. Thus, once the situation stabilizes, India could see relatively stronger recovery.

Indian Economic Overview:

The year 2019 was a difficult year for the global economy with world output growth estimated to grow at its slowest pace of 2.9 per cent since the global financial crisis of 2009, declining from a subdued 3.6 per cent in 2018 and 3.8 per cent in 2017. Uncertainties, although declining, are still elevated due to protectionist tendencies of China and USA and rising USA-Iran geo-political tensions. Amidst a weak environment for global manufacturing, trade and demand, the Indian economy slowed down with GDP growth moderating to 4.8 per cent in H1 of 2019-20, lower than 6.2 per cent in H2 of 2018-19. A sharp decline in real fixed investment induced by a sluggish growth of real consumption has weighed down GDP growth from H2 of 2018-19 to H1 of 2019-20. Real consumption growth, however, has recovered in Q2 of 2019-20, cushioned by a significant growth in government final consumption. At the same time, Indias external sector gained further stability in H1 of 2019-20, with a narrowing of Current Account Deficit (CAD) as percentage of GDP from 2.1 in 2018-19 to 1.5 in H1 of 2019-20, impressive Foreign Direct Investment (FDI), rebounding of portfolio flows and accretion of foreign exchange reserves. Imports have contracted more sharply than exports in H1 of 2019-20, with easing of crude prices, which has mainly driven the narrowing of CAD. On the supply side, agricultural growth, though weak, is moderately higher in H1 of 2019-20 than in H2 of 2018-19. Headline inflation rose from 3.3 per cent in H1 of 2019-20 to 7.4 per cent in December 2019 on the back of temporary increase in food inflation, which is expected to decline by year end. Rise in CPI-core and WPI inflation in December 2019 suggests building of demand pressure. The deceleration in GDP growth can be understood within the framework of a slowing cycle of growth with the financial sector acting as a drag on the real sector. In an attempt to boost demand, 2019-20 has witnessed significant easing of monetary policy with the repo rate having been cut by RBI by 110 basis points. Having duly recognized the financial stresses built up in the economy, the government has taken significant steps this year towards speeding up the insolvency resolution process under Insolvency and Bankruptcy Code (IBC) and easing of credit, particularly for the stressed real estate and Non-Banking Financial Companies (NBFCs) sectors. At the same time, impact of critical measures taken to boost investment, particularly under the National Infrastructure Pipeline, present green shoots for growth in H2 of 2019-20 and 2020-21. Based on first Advance Estimates of Indias GDP growth for 2019-20 recorded at 5 per cent, an uptick in GDP growth is expected in H2 of 2019-20. The government must use its strong mandate to deliver expeditiously on reforms, which will enable the economy to strongly rebound in 2020-21.

(Source : Economic Survey 2020)

Equity Markets

Market had a roller coaster ride in FY2020. Both Sensex and Nifty closed at an all-time high of 42,273 and 12,430 respectively in the month of January. Then came corona virus and as the pandemic rampaged across the world, Sensex and Nifty ended the year with large negative returns. With India in midst of a complete lockdown, Sensex and Nifty closed at 29,469 and 8,598 levels respectively in March, 2020.

FIIs sold massively during the month of March, 2020 with net equity outflows of R 620 billion but still ended FY2020 with net inflows of R 65 billion. The size of outflow in March, 2020 was highest ever in one month and was around 0.4% of Indian market capitalization. DIIs also witnessed net inflows of R 1293 billion which was 79% higher than the previous year.

Broking Business

The average daily traded volumes (ADTO) for the equity markets during FY2020 stood at R 14.44 lakh crores, up 45% YoY from R 9.93 lakh crores in FY2019. The overall Cash market ADTO reported growth of 11% YoY at R 39,068 crores in FY2020. Delivery saw growth of 3% YoY to R 9,140 crores v/s 8% de-growth in FY2018-19. Within derivatives, future volumes increased 0.4% YoY to R 87,950 crores while options rose 51% to R 13.17 lakh crores. Amongst cash market participants, retail constitutes 52% of total cash volume, institution constitutes 25% of total cash volume and prop constitutes 23%. The proportion of DII in the cash market was 10.1%. The increase in demat accounts during the year stood at 13% with total number of accounts as on March, 2020 at 4.08 crores. The revival in market sentiments is expected to give push to the primary market activities and overall volumes.

Primary Market:

The total money raised by public and rights issue increased to 73,896 crore in the year 2019-20 (up to December 31, 2019) from 44,355 crore in the corresponding period last year. In the same period in 2018-19, the Primary market resource mobilisation through public and rights issues had declined as compared to 2017-18.

The resource mobilisation through public issue (equity) decreased in April to December 2019 compared to the similar period for previous year, continuing with the declining trend of last year. During April to December 2019, 47 companies mobilized Rs 10,895 crore through public equity issuance compared to 103 companies raising Rs 13,947 crore in April-December 2018, indicating a decrease of 21.9 per cent over the period. On the other hand, resource mobilization through rights issues (equity) during April-December 2019 increased sharply with resource mobilization of Rs 51,255 crore, as compared to Rs 1,843 crore in the corresponding period of last year

Primary Market Resource Mobilisation through Public and Right Issues

(Rs. Crore)

Issue Type

2019-20

2018-19

No of Issues Amount No of Issues Amount
Public Issues (Equity) 47 10895 103 13947
Rights Issues (Equity) 11 51255 6 1843
Public Issues (Debt) 27 11746 15 28565
Total 231 110269 158 54915

Source: SEBI

Mutual Fund :

There was a net inflow of Rs 1.9 lakh crore into the mutual funds industry during April-December 2019 as compared to a net inflow of Rs 0.8 lakh crore for the corresponding period in last year. The net Assets Under Management (AUM) of all mutual funds increased by 18.4 per cent to Rs 26.3 lakh crore at the end of December 31, 2019 from Rs 22.2 lakh crore at the end of December 31, 2018.

Market Resource Mobilisation by Mutual Funds (Rs Lakh Crore)

Financial Year Gross Mobilization Redemption Net Inflow Assets at the end of the period
2018-19 (upto 31.12.2018) 139.30 138.50 0.80 22.20
2019-20 (upto 31.12.2019) 134.30 132.50 1.90 26.60

Source: SEBI

OUTLOOK

Introduction

India has a diversified financial sector undergoing rapid expansion, both in terms of strong growth of existing financial services firms and new entities entering the market. The sector comprises commercial banks, insurance companies, non-banking financial companies, co-operatives, pension funds, mutual funds and other smaller financial entities. The banking regulator has allowed new entities such as payment banks to be created recently, thereby adding to the type of entities operating in the sector. However, financial sector in India is predominantly a banking sector with commercial banks accounting for more than 64 per cent of the total assets held by the financial system.

The Government of India has introduced several reforms to liberalise, regulate and enhance this industry. The Government and Reserve Bank of India (RBI) have taken various measures to facilitate easy access to finance for Micro, Small and Medium Enterprises (MSMEs). These measures include launching Credit Guarantee Fu nd Scheme for MSMEs, issuing guideline to banks regarding collateral requirements and setting up a Micro Units Development and Refinance Agency (MUDRA). With a combined push by Government and private sector, India is undoubtedly one of the worlds most vibrant capital markets. In 2017, a new portal named Udyami Mitra was launched by Small Industries Development Bank of India (SIDBI) with an aim to improve credit availability to MSMEs in the country. India has scored a perfect 10 in protecting shareholders rights on the back of reforms implemented by Securities and Exchange Board of India (SEBI).

Market Size

Mutual Fund industrys AUM grew from Rs 10.96 trillion (US$ 156.82 billion) in October 2014 to Rs 23.93 trillion (US$ 339.55 billion) in April 2020. Inflow in Indias mutual fund schemes via the Systematic Investment Plan (SIP) route reached Rs 82,453 crore (US$ 11.70 billion) in 2019. Equity mutual funds registered a net inflow of Rs 8.04 trillion (US$ 114.06 billion) by end of December 2019.

Another crucial component of Indias financial industry is the insurance industry. Insurance industry has been expanding at a fast pace. The total first year premium of life insurance companies reached Rs 2.59 lakh crore (US$ 36.73 billion) in FY20.

Along with the secondary market, the market for Initial Public Offers (IPOs) has also witnessed rapid expansion. In 2019, US$ 2.5 billion was raised across 17 IPOs.

Furthermore, Indias leading bourse, Bombay Stock Exchange (BSE), will set up a joint venture with Ebix In c to build a robust insurance distribution network in the country through a new distribution exchange platform.

Investments/Developments

• Value of Unified Payments Interface (UPI) transactions was valued at Rs 2.06 lakh crore (US$ 29.22 billion) in March 2020, recording 1.25 billion transactions.

• In March 2020, ClearTax, an online tax filing platform, acquired GST software and services business of Karvy Data Management Services for an undisclosed amount.

• In April 2020, Axis Bank acquired an additional 29 per cent stake in Max Life Insurance.

• Turnover from derivatives segment reached Rs 3,453.9 lakh crore (US$ 49.41 trillion) in FY20 and stood at US$ 5.09 trillion in FY21 (till May 2020).

• In 2019, FPI investment in Indian equities touched a five-year high of Rs 101,122 crore (US$ 14.47 billion).

• Merger and Acquisition (M&A) worth US$ 25.162 billion was recorded in the first ten months of 2019.

• Total value of private equity (PE)/venture capital (VC) investment grew 44 per cent over past three years in value terms to reach US$ 48 billion in 2019.

• In October 2019, ICICI Lombard General Insurance Company acquired Unbox Technologies for an aggregate cash consideration of Rs 225 crore (US$ 32.19 million).

• There were 9,659 non-banking financial companies (NBFCs) registered with the Reserve Bank as on March 31, 2019.

Government Initiatives

• In November 2019, Government allocated Rs 10,000 crore to set up AIFs for revival of stalled housing projects.

• Under the Interest Subvention Scheme for MSMEs, Rs 350 crore (US$ 50.07 million) was allocated under Union Budget 2019-20 for 2 per cent interest subvention for all GST registered MSMEs on fresh or incremental loans.

• In December 2018, Securities and Exchange Board of India (SEBI) proposed direct overseas listing of Indian companies and other regulatory changes.

• Bombay Stock Exchange (BSE) introduced weekly futures and options contracts on Sensex 50 index from October 26, 2018.

• In September 2018, SEBI asked for recommendations to strengthen rules which will enhance the overall governance standards for issuers, intermediaries or infrastructure providers in the financial market.

• The Government of India launched India Post Payments Bank (IPPB) to provide every district with one branch, which will help increase rural penetration. As of August 2018, two branches out of 650 branches were already operational.

Road Ahead

• India is expected to be the fourth largest private wealth market globally by 2028.

• India is today one of the most vibrant global economies on the back of robust banking and insurance sectors. The relaxation of foreign investment rules has received a positive response from the insurance sector, with many companies announcing plans to increase their stakes in joint ventures with Indian companies. Over the coming quarters, there could be a series of joint venture deals between global insurance giants and local players.

• The Association of Mutual Funds in India (AMFI) is targeting nearly five-fold growth in AUM to Rs 95 lakh crore (US$ 1.47 trillion) and more than three times growth in investor accounts to 130 million by 2025.

• Indias mobile wallet industry is estimated to grow at a Compound Annual Growth Rate (CAGR) of 150 per cent to reach US$ 4.4 billion by 2022, while mobile wallet transactions will touch Rs 32 trillion (USD $ 492.6 billion) during the same period.

Note: Conversion rate used in April 2020, Rs 1 = US$ 0.013123

Source: https://www.ibef.org/industry/finandal-services-india.aspx

RISKS AND CONCERNS

1. Product Risk: Such risk are due to products on offer in the market. EISL is a well diversified financial services provided and uses various products to mitigate such Risks.

2. Market & Regulatory Risk: Such risks are unavoidable and biggest threat to the business. Any untoward incident in the market may lead to high losses. Any change in the policy of market regulator may have negative impact on the business.

EISL uses robust risk management policy to avoid any significant risk arising out of adverse change in market. EISL keeps its portfolio diversified so that its assets are not concentrated in one particular segment. Further EISL employs highly qualified employees to mitigate the risk due to changes in policies of market regulator.

3. Operation Risk:

This risk relates to internal risk arising out of fraud by employees or theft of important data.

The company has stringent internal control measures. The Audit committee also monitors compliance with all aspects. Regular training and screening of employees is also done.

4. Technological Risk:

The Company heavily depends on technology which is provided by third parties and vendors. In the event of failure of technology and connectivity company may incur significant losses.

The company gets its system audit regularly done. The company also have disaster recovery plan to cope up with sudden break down at one particular location.

5. Financial Risk-

Such risk are mainly due to inability of debtors to pay their dues and losses due to trading. Company has policy to take proper margin from its clients before allowing them to trade. The company also keeps a regular follow ups with clients to pay their dues. Trading losses are minimized by allocation of funds to diversified strategies and portfolios.

6. Strategy Risk- Risk arising out of failure of particular strategy

EISL keeps on devising different strategies to remain ahead of its competitors. All such strategies are triggered keeping the business safeguarded.

SEGMENT WISE PERFORMANCE OF THE COMPANY

Below table shows performance of the company on the basis of turnover on different exchange segments:

Amount in Rs (Crore)
EXCHANGE AND SEGMENT TURNOVER (2019-20) TURNOVER (2018-19)
BSE CASH 2173.93 1988.04
BSE EQUITY DERIVATIVE 3188.80 0.18
BSE CURRENCY DERIVATIVE 66364.60 106753.61
BSE DEBT 2254.52 4778.30
NSECASH 45044.13 33812.81
NSE EQUITY DERIVATIVE 173568.74 202099.64
NSECURRENCY 261790.59 385280.10

INTERNAL CONTROL SYSTEM AND THEIR ADEQUACY

The Company has an adequate system of internal controls to ensure accuracy of accounting records, compliance with all laws & regulations and compliance with all rules, procedures & guidelines prescribed by the management.

The Company has set up an Internal Control Committee to oversee all the internal control functions and report the observations to the Audit Committee on a periodic basis. The Company has in place an effective internal audit department which plans and executes a variety of audits with own staff as well as external professionals. Post audit reviews are also carried out to ensure follow up. The Audit Committee of the Board reviews the scope and observations of the internal audit on a regular basis.

HUMAN RESOURCES

Our promoters, Mr. Lakshmendra Kumar Agarwal and Mr. Vivek Agarwal, with their knowledge and experience are well-assisted by our Key Managerial Persons who have helped us retain entrenched relations with existing customers and also helped us engage new customers. We believe that our experience, knowledge and human resources will enable us to drive the business in a successful and profitable manner.

Our Company is committed towards creating an organization that nurtures talent. We have employed a prudent mix of the experienced staff and youth which gives us the dual advantage.

Our company also conducts regular training programs which is aimed towards strengthening skills, enhancing productivity and building sense of ownership among its employees.

CAUTIONARY STATEMENT

All forward looking statements are subject to risks, uncertainties and assumptions about us that could cause actual results to differ materially from those contemplated by the relevant forward-looking statement. Forward- looking statements reflect our current views with respect to future events and are not a guarantee of future performance. These statements are based on our managements beliefs and assumptions, which in turn are based on currently available information. Although we believe the assumptions upon which these forward-looking statements are based are reasonable, any of these assumptions could prove to be inaccurate, and the forward- looking statements based on these assumptions could be incorrect.