khandwala securities ltd Management discussions

Review of Global Economy

The global economy continued to manoeuvre through uncertainties in FY23. Uncertainties pertaining to the likely escalation of Russia-Ukraine war, continuous disruption in global supply chain leading to inflation globally due to closing down of China were amongst the major events that provided maximum volatility to the markets. Expectation of an imminent recession got stronger as major central banks continued to tighten monetary conditions. However, on a positive note in mid FY23, notable improvement in supply chains led to easing inflationary pressures and entire commodity prices moderated, Brent crude prices peaked in FY23 and moderated ~35% by year end.

By June 2022, CPI inflation in the US was at 40-yearhigh, and the inflationary pressure in the US and Europe remained acute into the early months of 2023, spreading also to emerging economies. Having signalled until January 2022 that it would not raise its policy rate until2024, the US Fed abruptly began its most aggressive monetary tightening in four decades, and the US 10-yearminus 2-year yield curve remained severely inverted from July 2022 onwards (having first inverted briefly in April2022), clearly signalling a recession in 2023.

The International Monetary Fund (IMF), in its latest World Economic Outlook (released January 30,2023), estimated that world Gross Domestic Product(GDP) grew 3.4% (real, inflation-adjusted) in CY22,decelerating from the post- covid bounce to 6% growth in 2021 and the longer-term average annual growth of3.8%. The enforced tightening of US monetary policy since March 2022, which took the US policy interest rate up by 475 bps within a year (to a range of 4.75-5% as of March 2023 FOMC meeting), and the even more abrupt shift away from ultra-loose monetary policy by the European Central Bank (ECB) from July 2022 onward, led the IMF to forecast a sharp slowdown in growth of the Advanced Economies in 2023 to just 1.2% - with the US growing 1.4%, the Euro area just 0.7% and the UK contracting 0.6%.

Emerging Economies, however, remained relatively unscathed, having kept external debt in check, and been largely circumspect about monetary and fiscal stimulus during the covid crisis. India stood out on both fronts, with external debt having declined to 19% of GDP in June 2022(from 24% in March 2014), and the fiscal returning quickly to a glide path toward 6% of GDP (having never exceeded 9% of GDP even at the height of the covid induced global slump in 2020). The IMF forecasts that emerging economies will accelerate to 4% real GDP growth in 2023 (from 3.9% in 2022), with India again the fastest-growing major economy (6.1% growth in 2023, 6.8% in 2022 and 2024), and China projected to rebound to 5.2% growth in 2023 (from 3% in 2022) but moderating to 4.5% in 2024. With Russia slated to accelerate to2.1% growth in 2024, the IMF projects that Developing Economies will grow 4.2% in 2024, thus ensuring global real GDP growth of 2.9% in 2023 (despite the recession in the Advanced Economies) and 3.1% in 2024.

Review of Indias Economy

After expanding by 8.8% in FY22, based on a broad-based recovery in manufacturing (+11.1% YoY) and services (+8.8% YoY), Indias real GDP decelerated to 7.7% YoY growth in the first3 quarters of FY23, mainly because of a sharp slowdown in manufacturing growth (+0.4% YoY), particularly a contraction in labour-intensive manufacturing output. By contrast, services accelerated to 10.4% YoY growth in April-December 2022 (from 9.4% in April-December 2021) and construction (10% YoY) and agriculture (+3% YoY) expanded at a good clip. From the demand perspective, the deceleration was attributable primarily to stagnation in real government spending anda deterioration in net exports, as robust real exports of goods and services (+14.3% YoY) were outpaced by real imports, which expanded 22.8% YoY in April-December2022. Real fixed investment spending grew a robust 12.6%YoY in April-December 2022, and was 14.4% higher than the pre-covid level (of April-December 2019), while real private consumption expenditure (PCE) grew 9.5% YoY in the first 3 quarters of FY23. Indias services exports first11 grew 30.5% YoY in the months of FY23, easily the fastest growth in over a decade, accelerating from the post-covid bounce of 21.2% YoY growth in FY22, and exceeding the previous decadal high of 18% in FY19. Services imports were up 24.6% YoY, so the services trade surplus for April 2022-February 2023 widened 38.6%YoY to USD 133 Bn. The goods trade deficit widened sharply in April-September 2022 amid elevated crude oil prices, narrowed slightly in Q3FY23, and declined by 2.5% YoY in January-February 2023 as exports and imports declined in response to the slowdown in US and European demand. The services and incomes surpluses are likely to ensure a current account surplus (0.2% of GDP) in Q4FY23, reducing the FY23 current account deficit (CAD) to 2.4% of GDP.

Inflation as measured by the Consumer Price Index (CPI) edged above the Reserve Bank of Indias (RBI) preferred target range (2-6% YoY) between January and October2022, but moderated to 5.7% YoY by December 2022.The renewed surge in fuel prices triggered by the Russia-Ukraine war was a major factor keeping inflation high, which obliged the RBI to steadily hike its policy repo rate from 4% in April 2022 to 6.5% by February 2023 monetary policy committee (MPC) meeting. A renewed uptick in food grain prices (+16.3% YoY in February 2023) led to CPI inflation rising well above the RBIs target range in February 2023, raising the spectre of more rate hikes from a hawkish MPC. The big reported increase in wheat and rice prices was mainly a statistical quirk, arising from the fact that free food grain was distributed to over 800 Mn Indians from January 2023 onwards: any item obtained free is not included in measuringtheCPI, from increased so non-PDS food grains influence on the CPI was being exaggerated. Nonetheless, the headline CPI inflation was likely to oblige the RBI to raise interest rates further, unless non-PDS food grain could be distributed better.

The external sector has continued to remain resilient amidst the global uncertainties and expectations of the spill over effects due to an imminent slowdown in the developed market economies. Indias exports reached an all-time high of USD 750 Bn in FY23 from USD 672 Bn in FY22. The growth in merchandise exports on a FYTD basis (Apr-Feb23) moderated to 7% vs 47% earlier, while imports growth moderated to 19% vs 59% earlier, trade deficit widened to USD 251 Bn vs USD173 Bn earlier. However, robust services balance (USD 125 Bn vs USD 93 Bn earlier) helped cushion the Current Account Deficit (CAD) in FY23. Software exports constitutes majority of Indias services exports and the consistent growth in this category is not reflecting the spill over effect of growth slowdown in DM economies (~ 90% of Indias software exports is concentrated in US and Europe). Indias forex reserves fell USD 39 Bn during FY23, but remained at comfortable levels of USD 579 Bn which comes to an import cover ratio of 9.5 times.

Outlook of Global and Indian Economy

We expect world real GDP growth to slow to 2.2% in 2023, slower than the IMFs January 2023 forecast of 2.9% real GDP growth, as central banks in the developed economies continue to sharply scale back their aggressive monetary expansion in the face of virulent inflation that remains near 4-decade highs. The abrupt shift in monetary stance over the past year has already caused some disarray in the US and European financial system, with victims including Switzerlands second-largest bank and the 15th largest US bank (and a couple of smaller ones). With inflation still very far from central bank targets (more than double the US target, triple the ECBs and BoEs targets at the end of March 2023), central banks will have to prioritise the fight against inflation, even if it causes further ructions in the financial markets. While bank-specific liquidity support will continue, aggregate money supply will continue to be reined in, causing the supply of credit to tighten, weakening the economy further. Our global growth estimate is predicated on zero growth for developed economies in 2023 (slower than the IMFs January 2022 forecast of 1.4%), and 4.2% growth for emerging economies (primarily because we expect India to grow faster than the IMFs 6.1% growth forecast for 2023).

With many major supply-side reforms over the past 2 years, e.g. the lowest corporate tax rates in Asia (especially for new manufacturing units), a more flexible labour market with the simplification of labour codes, and production-linked incentives (PLI) spurring new investments in export-oriented manufacturing, India is poised to experience a steady further acceleration in investment-led growth. Exports of services are ironically benefitting immigration controls in the US (especially) and Europe, resulting in enhanced off-shoring of shared services, while

Indian software companies increasingly become more sophisticated in whole-business consultancy and broaden their offering of research-and process-outsourcing. With the rupees real effective exchange rate depreciating 5% since mid-November 2022, Indias merchandise exports too are likely to receive a boost to their competitiveness, especially once export duties (imposed since May 2022 to fight inflation) are eliminated. With lower crude oil prices helping to both lower Indias headline inflation rate and lower the CAD to 1.5% of GDP in FY24, we expect Indias real GDP to grow 7% despite the recession in advanced economies (other than Japan) in CY23.

INDUSTRY REVIEW

Indian Capital Markets

For an Indian investor, FY23 turned out to be highly volatile for equities given the global events. From a cross asset class perspective, investors betting on gold (+16%), USD (+8.4%), real estate (5%-6%) and bonds (3.8%) earned positive returns in FY23 while those betting on stocks were provided flat returns.

FY23 turned out to be a year in which there was massive pressure of rising ‘equity risk premium and ‘risk-free rate on equity valuations along with unprecedented uncertainty on income growth for corporates. First half of FY23 began with the unprecedented nuclear brink manship caused by the Russia-Ukraine conflict which fuelled a commodity shock thereby resulting in surge in prices as well as shipping costs.

Central banks were caught by surprise due to the steep rise in inflation thereby triggering one of the sharpest rate hike cycles by the US Federal Reserve in decades. Towards the end of FY23, the narrative is changing from further aggressive Quantitative tightening (QT) to prospects of an end to QT cycle in the near term and probable Quantitative easing (QE) in 2024.The above change in stance is driven largely due to the banking crisis in US and Europe caused by aggressive rate hikes taken by the US Fed which has the potential to trigger a recession in the developed world. Within equities, high-beta, capital-intensive and value stocks outperformed low-volatility stocks during FY23. Large-caps outperformed small-caps. Amongst large caps, sectors which outperformed were PSU stocks, FMCG, auto and financials.

PAT/GDP is likely to improve in FY24 after dipping marginally in FY23 due to the contraction in profit pool of commodity companies. Indias domestic capex cycle and credit cycle are at a nascent stage of recovery coinciding with the decadal bottom of the NPA cycle along with pro-growth union budget which focused on enhancing capex spend on infrastructure (FY24 capex outlay stands at INR 10 Tn).

Foreign Portfolio Investors (FPI) selling during FY23 relatively slowed down as compared to FY22 outflows with second half having inflows from FPIs. Further, DIIs continued their strong momentum of inflows in FY23. Secondary market witnessed the outflow of Foreign Portfolio Investors (FPIs) of USD 25.3 Bn. However, including the primary market inflows, the selling was much lower at USD 6 Bn in FY23. FPIs were net sellers in the 1^st half of FY23 totalling USD 9 Bn outflowsal though the trend reversed in the 2^nd half of FY23 with FPI becoming net buyer resulting in inflows of USD3 Bn. Consequently, aggregate FPI equity asset stood at INR 44.6 Tn as of March 31, 2023. During FY23, sectors which saw massive outflows were IT, energy financials and consumer durables whereas capital goods, FMCG, Healthcare services, consumer services and autossaw massive inflows. Indian debt market which witnessed continuous outflow over the past few years (except FY22) by Foreign Portfolio Investors (FPIs) saw outflow of USD 1.1 Bn in FY23.

In contrast, the Indian capital markets saw consistent buying by domestic investors in the face of continued unprecedented selling by FPIs during rare and extreme fear-inducing events seen over the past year (QE reversal, US Federal reserve aggressive interest rate hike, high inflation across globe and global brinkmanship due to the Russia-Ukraine conflict).DII were net buyers across FY23 totalling USD 32.2Bn (highest ever) and absorbed selling pressure of FPIs. SIPs continued to remain resilient despite the market volatility with cumulative SIP flows of Bn in FY23 vis-a-vis INR 1,246 Bn in FY22 signifying rise of retail investors. Further, domestic equity Assets Under Management (AUM) has increased by 17% to INR 16.9Tn (March 2023) from INR 14.42 Tn (March 2022).

Indian Broking Industry

The Indian broking industry is very diverse with many intermediaries forming a part of the market infrastructure. Over the years, more efficient players have grown considerably in size, thus gaining healthy market share across parameters. With rising demat accounts and growing volumes, the broking industry generated an estimated revenue in excess of INR 380 billion in FY23. Digitisation has been a key driver for the financial services industry. With internet penetration on the rise, 5G services and digital payments, customers now have easy access to the market. Modern investment apps have evolved to provide more options to retail investors. They provide education as well as a platform for ease of fund/product selection, investment and more efficient tracking of portfolios. Buying and selling stocks through mobile apps has become popular, leading to majority stock brokers launching their mobile app.

Further, internet and smart phone penetration beyond the for theurban centres has unlocked significant financial services industry.

The Indian broking industry is consolidating towards digital brokers. Digital brokers provide a superior experience starting right from the time the client is acquired, to their first interaction with the platform post on-boarding, to order execution and eventually their post trade journey. This seamless experience from on boarding to engagement and execution has given digital brokers a huge lead over their traditional peers. The technological prowess of digital brokers enables them to provide services to clients at competitive fees and charges. This ease of transacting, along with superior client experience, attracts a large number of investors onto their platform, which has led to multi-fold growth in their client base over the last couple of years.

Clients are looking for better investment opportunities, driving the equity space. The number of active demat accounts in India has grown by nearly four times over the past 5 years to reach almost 32.7 million as of March 2023. Sharein ownership of NSE listed companies by retail investors has been improving from 8.4% in March 2020 to 9.2% as of December 2022.

The average daily traded volumes (ADTO) for the equity markets during FY23 stood at INR 153.9 lakh Cr, up 121% YoY from INR 69.5 lakh Cr in FY22. The overall Cash market ADTO declined by 21% YoY at INR 57,564 Cr in FY23. Within derivatives, options volume rose 125% YoY to INR 152.2 lakh Cr, while futures volume declined by 4% YoY to INR 1.1 lakh Cr. Amongst cash market participants, retail constituted 47% of total cash volume, institution 25% and 1,560 proprietary (prop) 28%. The proportion of DII in the cash market was 10%.In FY23, 2.5 Cr new demat accounts were opened as against 3.5 Cr in FY22. This drop is attributed to various factors like volatile market conditions, tepid IPO markets etc. CDSL, the largest depository in India in terms of number of demat clients, crossed 8 Cr mark. The total number of demat accounts, across CDSL and NSDL, stood at 11.45 Cr as of 31st March 2023, registering a growth of 28% YoY.

Indias regulatory environment has been continuously evolving and rightly so to protect the interest of the smallest retail investor in the country. By doing so, the regulator has made the investing environment far more secure today, which gives a major boost to retail investors‘ confidence In FY21, SEBI introduced the pledge mechanism and instated the new peak margin norms. Both these regulations were directed to protect the interest of retail investor. While there was only a transient impact, restricted to the period of implementation, India witnessed healthy growth not only in demat accounts, but also market volumes, thereafter. Following these developments, in May 2022, SEBI introduced a new regulation regarding the segregation of margin, in the form of cash and collateral, at client level, which was earlier being done at the broker level. By doing so, the regulator has further re-emphasised their empathy towards retail investors. This regulation built new guardrails to secure client funds and eliminate any chance of misappropriation of client money. The said circular proposed clients to bring in at least 50% of their margins in the form of cash while the balance can be in the form of collateral. The circular, also allows brokers to apportion a part of their proprietary funds towards fulfilling the 50% cash margin requirement at client level.

Another major regulation announced in FY23, was flushing out all client funds on the first Friday following either the monthly or quarterly settlement as opted by the client. This regulation was implemented from October 2022, when the industry geared up rapidly and flushed out all funds back to their clients. Post this, the market volumes continued to grow.

In order to further insulate clients funds, SEBI in its recently concluded board meeting approved two proposals:

Introduction of Application Supported by Blocked Amount (ASBA) like facility for secondary market

Upstreaming of clients funds by stock brokers/clearing members to clearing corporations

While ASBA framework is optional for both the client and stock broker to offer, it would be implemented in a phased manner. Upstreaming of clients funds will be implemented in two phases starting from 1^stJuly 2 023. Under the approved framework, funds shall be upstreamed only in the form of cash, lien on Fixed Deposit Receipts (subject to certain conditions) or pledge of units of Mutual Fund Overnight Schemes. This is yet another step taken by the regulator in the direction of insulating the retail investor from any risk of losing their capital due to inefficiencies in the system. Regulations have a long-term positive impact on the growth of the industry, as they make the environment more secure. While there may be a transient impact, efficient intermediaries will always stand to benefit in the long term.

Investment Banking

IPO markets remain subdued in FY23, after having an exceptional year in FY22 on account of volatile market scenario and moderate listing performance. FY23 witnessed 37 main board IPOs as compared to 53 in FY22. The amount of funds raised through main board IPOs was INR 52,116 Cr compared to all-time high of INR 1,11,547 Cr in FY22. The year recorded Indias largest IPO- LIC at INR 20,557 Cr. Other major listing in the exchanges included Delhi very (INR 5,235 Cr), Global Health (INR 2,206 Cr) and Five Star Business Finance (INR 1,593 Cr). Most of the IPOs (25 out of 37) came in just 3 months (May, November and December) which clearly depicted volatile market conditions prevailed through major part of the year. The average number of applications from retail dropped to 5.6 lakhs in comparison to 13.3 lakhs in FY22.

Asset Management

Overall mutual fund industry AUM was INR 39.4 lakh Cr in FY23, a jump of 5% YoY. On the front of equity mutual fund (excluding arbitrage), AUM stood at INR 19.3 lakh Cr, registering a growth of 10% YoY and contributing 49% of the total AUM. Equity category witnessed net inflows of INR 1.6 lakh Cr in FY23, a reduction of 29% YoY. Around 2.5 crores of new SIPs were registered in FY23 as compared to 2.7 Cr in FY22. SIP monthly contribution touched an all-time high of INR 14,276 Cr in March 2023. SIP flows for FY23 stood at INR 1,55,972 Cr vs INR 1,24,566 Cr in FY22. FY23 started with the deadline for SEBIs regulation banning the use of brokers pool accounts for mutual fund transactions extended to July 1, 2022. Subsequently, the regulator barred mutual funds from launching fresh schemes for the first three months of FY23 until the industry complied with the new rules. SEBI also included asset management companies in the stringent SEBI Prohibition of Insider Trading regulations and specified a list of people who will be considered insiders. Further, fund houses are also required to publish MF holdings of their fund managers and designated people on stock exchanges. Long-term capital gains (LTCG) tax benefit on debt mutual funds, ETFs, international funds, gold funds, and certain categories of hybrid funds (that invest less than 35% in Indian equities) were removed. In effect, they will be treated as short-term capital gain (STCG), in much the same way as bank FDs. On PMS front, SEBI introduced performance benchmarking and categorization for the PMS industry, akin to the current norms in mutual funds. The move will help investors assess and compare the performance of service providers and came into effect from April 1, 2023. Moving to bring parity between multiple modes of investment and reduce mis-selling and high commission charges, SEBI introduced direct plan for AIF investors and removed upfront commission model. These rules will become effective from May 1, 2023.

Private Equity

2022 witnessed start-up attention beginning to wear off as macroeconomic factors slowed consumer spending. PE-VC firms invested USD 35 Bn in Indian companies across 1,530 deals as compared to USD 48 Bn across 1,624 deals in 2021. The start-up sector attracted the most investment with USD 7.4 Bn worth of investment across 991 deals. The startup sector was followed by e-commerce, BFSI and education sector. The year witnessed 12 deals worth USD 500 Mn or more, led by Bodhi Tree Systems USD 1.8 Bn investment in Viacom18 Media. Bengaluru which is the "Silicon Valley of India" tops the charts in terms of volumes as it is home to a majority of companies. Mumbai topped the charts in terms of values and accounted for 27% of total values.

The Indian economy continues to be a favourable spot for PE players given the robust credit cycle, improving capex cycle, rising incomes leading to higher consumption and supportive government policies. Indian economys tremendous performance in 2022 and the positive outlook for growth in the coming decade make India one of the best investment destinations for both foreign and domestic investors across multiple sectors. Further, expectations of peaking interest rates and an uptick in IPOs and other investment exits improve the prospects.

Wealth Management

As per Knight Franks latest edition of The Wealth Report 2023, the number of ultra-high net worth individuals (UHNWIs) has globally declined by 3.8% in 2022 after a rise of 9.3% in 2021 as the wealth and the investment portfolio were impacted by economic slowdowns, frequent rate hikes and rising geopolitical uncertainties. On the other hand, number of high net worth individuals (HNWIs), those with USD 1 Mn or more in net assets expanded by 3%. In India, the number of UHNWIs fell by 7.5% YoY in 2022, however the HNI population continued to remain on a growth path registering a YoY growth of 4.5% and Indias billionaire population rose by 11% YoY in 2022. Indias UHNWI with net worth over USD 30 Mn is expected to rise by 58.4% in the next five years. Three out of the top ten highest growth spots across the world were currently held by Asian markets in the ultra-wealthy population. By 2027, it is projected that Asia will surpass Europe in terms of UNHWI count and will stand second to the Americas.

AN OVERVIEW OF KHANDWALA SECURITIES LIMITED

Khandwala Securities Limiteds equity shares are listed on Bombay Stock Exchange (BSE) and National Stock Exchange (NSE). The way to understand the activities of the Company is to analyse the business it carries out. It may be noted that the Company is focused on financial services as its core business area. Various businesses in the Company are divided in four segments. These are:

Investment banking business comprising Capital Raising,

M&A Advisory, Domestic IPOs, Private Equity placements, Corporate finance advisory, Restructuring, FCCBs and GDRs; Institutional Equities business comprising institutional equity sales, execution, research; Broking and Distribution business comprising non-institutional equity sales, trading, research, broking and distribution, depository participant ship; Investment Advisory business comprising private and corporate wealth management, portfolio management. Various operating businesses are carried out by having independent teams and regulatory licenses. Our Company wide clients include public and private sector corporations, multinational corporations, financial institutions, institutional investors -both domestic and global, high net-worth individuals and retail investors as well as market intermediaries. base of

Financial Highlights:

The salient features of the Companys performance:-Total Revenues of INR 648.63 Lakhs

Net Profit of INR 44.42 Lakhs Earnings Per Share (EPS) of INR 0.29

Segment Highlights – FY23 over FY22 & FY21:

(INR In Lakhs)

Segment	FY23	FY22	FY21
Brokerage	304.47	448.58	292.27
Corporate Advisory Services	317.92	148.06	1.00
Income from Capital Market	4.06	13.20	66.36
Operations
Others	22.19	25.30	17.73
Total Income	648.63	635.14	377.35

Broking Business:

The Brokerage services of your Company include equity and debt broking and are supported by a strong research platform.

Income received for brokerage services had accounted for approximately 46.94% of our total revenues at INR 648.63 Lakhs for the year ended March 31, 2023.

Private Client Broking business:

Our private client broking services are targeted at High Net worth Individuals (HNIs) who actively invest and trade in equity markets and seek priority service with Bloomberg research and advisory support. Our approach is to provide advisory-based brokerage services with a strong emphasis on research, and to offer our clients value-added services usually reserved for institutional clients.

KSL with its concentrated efforts in equity broking business, and as future strategy to build high volumes and revenues could successfully add a good number of Trading Accounts for various segments (Cash, Whole-sale Debt Market, Future & Option) during 1st April 2022 to 31st March 2023.

Institutional Equities business:

Equity and derivatives brokerage business of the Company contributed 46.94% of the consolidated revenue during this financial year. The Companys revenue of Rs. 648.63 lakhs for the year showed a increase of 2.12% over the previous year corresponding to a comparable increase in volume. However it is encouraging to note that we marginally increased our market share. The number of clients who traded and the number of transactions were also good.

The institutional equities business comprises institutional equity sales, sales- trading and research. We differentiate ourselves based on our cutting-edge research focus, which aids our execution capabilities across our sales and trading platforms. We provide equity and derivatives sales and trading services to a large and diversified investors, including FIIs and domestic institutional investors. At present, we have over 15 institutional investors actively transacting with us on a continuous basis.

The category wise contribution from the Institutional Dealing Desk to our revenues has been mentioned in the table below which shows a decrease of 30.48% during the FY 2023 over previous FY 2022.

Category	Brokerage Revenue during FY 22-23	Brokerage Revenue during FY 21-22	Brokerage Revenue during FY 20-21
MF	-	-	-
INS	2,33,765	10,66,490	8,36,097
BANKS	1,75,185	5,39,113	1,99,310
CORP	30,61,492	41,28,367	14,72,000
(Including FPI)
Total	34,70,442	57,33,970	25,07,407

Investment banking business:

The equity capital markets team focuses on structuring and executing diverse equity capital raising transactions in the public and private markets for our clients. Products in this segment include IPOs, follow-on offerings, rights offerings, private placement, ADR offerings, GDR offerings, QIP transactions and convertible offerings, etc. for both listed and unlisted entities.

As an Investment Banking firm, it has always been our endeavor to structure and put together transaction structures that build long term, sustainable value for both the borrower and lender of funds in the equity markets. This approach, though having proved its importance during the stages of market tightness, has been somewhat considered as a weakness by industry participants, resulting in us not being able to successfully convince Bloomberg on its benefits. This has led to situations wherein KSL has had to either withdraw from certain mandates or had to face resistance from Indian Corporates in awarding their fund raising mandates to us from the secondary markets. This is despite the management of these corporate houses acknowledging the deep knowledge and understanding of the micro and macro economy factors including the future growth prospects in specific industry, and the sustainable long term valuation parameters.

We always believe that in order for market to value and reward its participants, it is important for both the Promoter Groups and the Merchant Bankers to design appropriate and sustainable valuation models such that it remains consistent with the overall corporate performance and at the same point in time is able to ride both the good and the bad times.

Investment Baking and Advisory Group is putting their best endeavors on reviving some of the lost or delayed transactions, and are confident that in improved market sentiment same can be executed efficiently.

Portfolio Management Services:

The Portfolio Management Segment is bound to grow and offer services. The NRI community is the key market segment. Successful NRI business owners and professionals are of great interest to Portfolio management institutions. KSL has identified this rapidly growing segments need for specific products and services and has created practice models and advisory teams that specialize in servicing NRIs. Our service offerings include providing HNIs with investment advisory, planning and asset deployment advice, asset allocation and the distribution of a wide range of products. Our primary focus is on understanding each clients financial profile, including tolerance for risk, capital growth expectations, and current financial position and income requirements in order to create comprehensive and tailored investment strategies. Our Portfolio Management services have increased our clients access to and use of our financial products and services

Your Company is confident of garnering much larger assets under management through the PMS division compared to last year and would be able to clearly demonstrate its core expertise to maximize the value under PMS, even during adverse market situation.

Market Research:

Our institutional equities business is supported by an experienced and dedicated team of analysts in fundamental, technical and alternative investment research. Our research initiatives are driven by committed professionals, management graduates, Chartered Accountants and

Engineers having combined experience of several decades. Besides conventional tools, including quantitative analytical techniques and models to identify short and medium-term investment opportunities; Our research team maintains an updated database on, and tracks regularly, various factors impacting economy, industry and companies. The trends are analyzed using data both on macro and micro level. Various research products such as Market Today, Market Weekly, Market Technicals, India Strategy, Model Portfolio, Eco Update, In Sight, Company/Sector reports/updates and others are sent to esteemed clients on a regular basis. These reports are supplemented by day-to-day market information by way of market alerts and impact analysis. Strength of our research capability lies in our ability to identify emerging investment themes and spot winners ahead of time. Our research reports, widely acknowledged by domestic and international print and electronic media, are rated among the leading domestic brokerage houses and have earned royalties from international data services providers in foreign exchange.

Our Intelligent Research Reports are accessible on globally acknowledged and marquee websites such as Bloomberg. net, thomsonreuters.com, 1call.com, money control.com, securities.com, valuenotes.com, capitaliq.com.

Our research reports are highly recognized by international investors community including leading Foreign Institutional Investors, global central banks, multi- lateral development agencies and independent multi-strategy funds. Some of the research reports, apart from being widely acclaimed, have been ranked among the best by international financial information providers such as Thomson- Reuters and Bloomberg.

OPPORTUNITIES AND THREATS

The following factors present specific opportunities across our businesses:

Expected GDP growth coupled with reforms push by the government relating to project approvals, land acquisition, mining, and infrastructure will lead to huge investments by both the public and private sector companies. There will be large capital requirement to fund these investments which will present opportunities for investment banking and advisory business;

• Fall in global commodity prices will reinvigorate private consumption demand and lead to capacity expansion by the industry;

Corporates are looking at expanding in domestic as well as overseas markets through mergers & acquisitions which offer opportunities for the corporate advisory business.

Growing mid-size segment of corporates where the need for customized solutions is particularly high will present opportunities for our advisory businesses;

With increase in the income levels, change in attitude from wealth protection to wealth creation and risk taking abilities of the youth, there is also a huge market opportunity for wealth management service providers.

• Improved sentiments in the secondary markets will also enhance the participation of investors across segments thereby helping the prospects of equity brokerage business. We expect economic activity to pick up from grass root levels presenting opportunities in both lending and asset reconstruction business.

Despite the above opportunities, our performance could be affected by following perceived threats to our businesses:

Impact of abnormal monsoon, rising fiscal deficit, sustained high interest rates and high inflation;

Geopolitical tensions across the globe;

• Regulatory changes impacting the landscape of business;

• Increased intensity of competition from players across the segment/ industry;

• Attrition of employees caused by strong demand from ever increasing number of market participants;

• Continuous downward pressure on the fees, commissions and brokerages caused by heightened competition and willingness of most players to deliver services at very low fees;

Entry of corporate heavy weights and global players in the lending business. Given their capital strength as well as access to cheaper source of capital will increase pressure on us to remain competitive and impact margins.

INTERNAL CONTROL SYSTEMS AND THEIR ADEQUACY

Our research reports are highly recognized by international investors community including leading foreign institutional investors, global central banks, multi- lateral development agencies and independent multi-strategy funds. Some of the research reports, apart from being widely acclaimed, have been ranked among the best by international financial information providers such as Thomson- Reuters and Bloomberg.

We maintain adequate internal control systems commensurate with the nature of business, size and complexity of its operations. We have well-established processes, guidelines and procedures to augment the internal controls. This, coupled with adequate internal information systems ensures proper information flow for the decision-making process. Adherence to these processes is ensured through frequent internal audits. The internal control system is designed to ensure maintenance of proper accounting controls, monitoring of operations, protection and conservation of assets and compliances with applicable laws and regulations.

These controls ensure that financial and other records are reliable for preparing financial statements and other information. An extensive programme of internal audit is conducted by an independent firm and reviewed by the Audit Committee. Internal audit also evaluates and suggests improvement in effectiveness of risk management, control and governance process. All our operating subsidiaries are subject to internal audits to assess and improve the effectiveness of risk management, control and governance process. These procedures ensure that all transactions are properly reported and classified in the financial records. The Audit Committee of Board provides necessary oversight and directions to the internal audit function and periodically review the findings and ensures corrective measures are taken keeping in mind the organizations requirements, growth prospects and ever evolving business environment. This system enables us to capture a precise reflectionof the organizations position at all times and also facilitates timely detection and plugging of anomalies by various business groups. We also address any issues identified by regulatory inspection teams very diligently and report the same to the Board of Directors and the regulators.

RISK CONCERNS AND RISK MANAGEMENT

The Risk Management Function is overseen by the Audit Committee. Risk Management Policies are designed after discussion with various constituents and experts. In a business where prices and realities change every instant, it is imperative for KSL to operate within a broadly de-risked business model that protects stakeholder interests on the one hand and facilitates growth on the other. Therefore, the concept of real-time risk mitigation management is integrated within the Companys existing business strategy. It is integrated into the Companys strategic and operational decision making process; it is ingrained in the organizational mindset; it pervades all organizational tiers, roles and functions.

KSLs effective risk management is guided by an understanding of the various parameters that can have a bearing on its business and profitability:

External: These comprise risks that the Company faces but cannot control industry slowdown, competition, regulatory changes, brand perception etc.

Internal: These comprise risks that the Company can directly control through prudent strategy costs, liquidity, technology, operations, people etc.

KSL controls client risk through a prudent categorization of clients as per their financial depth. This helps circumscribe their trading limits, leading to effective risk management. . KSL monitors a clients trading pattern in addition to keeping a continuous vigil on positions, balances and margins. This provides an understanding of a clients trading pattern in terms of nature of transactions, trading, investments,

F&O types of scrips, etc. to detect any undesirable or prohibited practices. Based on this, remedial actions are initiated whenever required. This ensures strict regulatory compliance.

Industry Risk

KSL is primarily engaged in the business of financial services. Any slowdown in the countrys economy or financial sector as well as any changes in interest rates, political climate or regulatory changes could affect the Companys prospects. Further the capital market is always exposed to the cyclical risk of upswing and downturns, which in turn depend on the overall economical growth of the country.

Management Perception

KSLs presence in multiple product segments also serves as a natural hedge against a downturn in any particular sector. For instance, the Companys presence in the relatively volatile equity segment is balanced by its presence in the relatively stable insurance, mutual funds and fixed interest- bearing debt instruments. Your Company has broadly three major revenue generation department viz. Broking division, Corporate Advisory Division and Capital Market Operation.

The total revenue generated by the company during the year shows the overall performance of all the departments jointly and doesnt depend on any single segment of revenue.

Liquidity Risk

In the event of clients not honoring their financial commitments following an unexpected market movement, the Companys cashflow affected . could be significantly KSL has exercised prudence in client selection and credit extension. For instance, the Companys internal audit team ascertains client credentials before they are permitted to trade.

Management Perception

As a corporate policy, it is endeavor to constantly monitor the margin payments and settlements of our customers on a continuous basis. Our ability to understand the financial track record of each of our customers provides us with a judgment and direction on the margin calls to be issued as also calling for pre- payments if need be in cases of exigencies. This approach we believe gives the Company the required flexibility in managing the liquidity risk across multiple categories and types of customer profiles. This assumes that at KSL we follow an independent and customer centric risk management exercise thereby ensuring timely interventions to significantly reduce potential liquidity risks

Economic Risk

A slowdown in economic growth in India could cause suffer While the Indian the business of the Company to economy has shown sustained growth over the last several years, the growth in industrial production has been variable.

Any slowdown in the Indian economy, and in particular in the demand for housing and infrastructure, could adversely affect the Companys business. Similarly, any sustained volatility in global commodity prices, including a significant increase in the prices of oil and petroleum products, could once again spark off a new inflationary cycle, thereby curtailing the purchasing power of the consumers.

Management Perception

The Company manages these risks by maintaining a conservative financial profile and following prudent business and risk management practices.

Human Resource Risk

Human Resources represent the companys principal asset in a knowledge-led business, where any attrition or skill obsolescence could lead to a weaker industry position.

Management Perception

Your Company has consciously made the transition from a family based organization into a professionally managed one, accompanied by delegation of responsibilities for intellectual growth. Over the years, your company has invested in the human resource by providing timely training, various seminars on personal development etc. The free work environment provided by the Company has also resulted in to low attrition of man power. KYC process

Client Risk

In the financial industry the company depends on a few bigger corporate and institutional clients from where majority of the revenue is generated.

Regulatory Risk

The Companys presence in a variety of financial segments warrants an ongoing compliance with the evolving requirements of their various regulators. Any violation or transgression could invite censure, affecting the Companys brand.

Management Perception

Your Company enjoys strong long term relationship with its clients. However, as a good Risk Management practice, the company has never relied upon particular client base and hence not exposed to such risk. During the year under review company has added new institutional client from where regular business is generated. It is your companys constant endeavor to search for new area of business and clients.

KSL takes its compliance commitment seriously, recognizing that the business must not only serve the interest of the customer but also function well within the established guidelines of the various regulatory authorities for responsible and profitable growth. At KSL, the compliance discipline extends across the entire transaction cycle, client execution, identification, transaction settlement involving securities and funds transfer. The compliance requirements across the various service points have been communicated comprehensively to branch through compliance manuals, leading to uniformity, quality, priority and discipline

Human Resources

Your company considers its human resource as the most valuable asset and, recognizing this, devotes a considerable development of its employees in various traits, apart from job related skills:

• Employee satisfaction survey was carried out along with various seminars by the HR department of the Company to understand the employees and help them to perform in the most efficient manner. Feedbacks were received during such sessions and corrective actions have been initiated;

• Communication meeting is being organized once in a quarter to apprise all the employees on the major development on various fronts such as market, deals stroked etc

;• Your company had recruited Management Trainees during the year and they were given specific job assignments in the research department. This has helped your company to establish goodwill with local management schools and prepare future prospects for employment.