NOTE 1 CORPORATE INFORMATION
Hindustan Construction Company Limited ("the Company" or "HCC") is a public limited company incorporated and domiciled in India. The Company having CIN L45200MH1926PLC001228, is principally engaged in the business of providing engineering and construction services. Its shares are listed on two recognized stock exchanges in India- the Bombay Stock Exchange and the National Stock Exchange. The registered office of the Company is located at Hincon House, LBS Marg, Vikhroli (West), Mumbai
- 400 083, India.
The standalone financial statements ("the financial statements") of the Company for the year ended 31 March 2018 were authorized for issue in accordance with resolution of the Board of Directors on May 3, 2018.
NOTE 2.1 SIGNIFICANT ACCOUNTING POLICIES
i. Basis of Preparation
The financial statements of the Company have been prepared to comply in all material respects with the Indian Accounting Standards ("Ind AS") notified under the Companies (Accounting Standards) Rules, 2015.
The financial statements have been prepared under the historical cost convention with the exception of certain financial assets and liabilities and share based payments which have been measured at fair value, on an accrual basis of accounting.
The Company's financial statements are reported in Indian Rupees, which is also the Company's functional currency, and all values are rounded to the nearest crores (INR 0,000,000), except when otherwise indicated. Amount presented as "0.00* " are non zero numbers rounded off in crore.
ii. Operating cycle for current and non-current classification:
All the assets and liabilities have been classified as current or non-current, wherever applicable, as per the operating cycle of the Company as per the guidance set out in Schedule III to the Act. Operating cycle for the business activities of the Company covers the duration of the project/ contract/ service including the defect liability period, wherever applicable, and extends up to the realization of receivables (including retention monies) within the credit period normally applicable to the respective project.
iii. Accounting Estimates
The preparation of the financial statements, in conformity with the recognition and measurement principles of Ind AS, requires the management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities as at the date of financial statements and the results of operation during the reported period. Although these estimates are based upon management's best knowledge of current events and actions, actual results could differ from these estimates which are recognized in the period in which they are determined.
iv. Key estimates and assumptions
The key estimates and assumptions concerning the future and other key sources of estimation uncertainty at the reporting date, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year, are described below. The Company based its assumptions and estimates on parameters available when the financial statements were prepared. Existing circumstances and assumptions about future developments, however, may change due to market changes or circumstances arising that are beyond the control of the Company. Such changes are reflected in the financial statements in the period in which changes are made and, if material, their effects are disclosed in the notes to the financial statements.
a) Contract estimates
The Company, being a part of construction industry, prepares budgets in respect of each project to compute project profitability. The two major components of contract estimate are 'claims arising during construction period' (described below) and 'budgeted costs to complete the contract'. While estimating these components various assumptions are considered by the management such as (i) Work will be executed in the manner expected so that the project is completed timely (ii) consumption norms will remain same (iii) Assets will operate at the same level of productivity as determined (iv) Wastage will not exceed the normal % as determined etc. (v) Estimates for contingencies (vi) There will be no change in design and the geological factors will be same as communicated and (vii) price escalations etc. Due to such complexities involved in the budgeting process, contract estimates are highly sensitive to changes in these assumptions. All assumptions are reviewed at each reporting date.
b) Recoverability of claims
The Company has claims in respect of cost over-run arising due to client caused delays, suspension of projects, deviation in design and change in scope of work etc., which are at various stages of negotiation/discussion with the clients or under arbitration. The reliability of these claims are estimated based on contractual terms, historical experience with similar claims as well as legal opinion obtained from internal and external experts, wherever necessary. Changes in facts of the case or the legal framework may impact reliability of these claims.
c) Valuation of investment in/ loans to subsidiaries/joint ventures
The Company has performed valuation for its investments in equity of certain subsidiaries and joint ventures for assessing whether there is any impairment in the fair value.
When the fair value of investments in subsidiaries cannot be measured based on quoted prices in active markets, their fair value is measured using valuation techniques including the discounted cash flow model. Similar assessment is carried for exposure of the nature of loans and interest receivable thereon. The inputs to these models are taken from observable markets where possible, but where this is not feasible, a degree of judgment is required in establishing fair values. Judgments include considerations of inputs such as expected earnings in future years, liquidity risk, credit risk and volatility. Changes in assumptions about these factors could affect the reported fair value of these investments.
d) Deferred tax assets
In assessing the reliability of deferred income tax assets, management considers whether some portion or all of the deferred income tax assets will not be realized. The ultimate realization of deferred income tax assets is dependent upon the generation of future taxable income during the periods in which the temporary differences become deductible. Management considers the scheduled reversals of deferred income tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based on the level of historical taxable income and projections for future taxable income over the periods in which the deferred income tax assets are deductible, management believes that the Company will realize the benefits of those deductible differences. The amount of the deferred income tax assets considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carry forward period are reduced.
e) Defined benefit plans
The cost and present value of the gratuity obligation and compensated absences are determined using actuarial valuations. An actuarial valuation involves making various assumptions that may differ from actual developments in the future. These include the determination of the discount rate, future salary increases, attrition rate and mortality rates. Due to the complexities involved in the valuation and its long-term nature, a defined benefit obligation is highly sensitive to changes in these assumptions. All assumptions are reviewed at each reporting date.
v. Fair value measurement
The Company measures financial instruments, at fair value at each balance sheet date. (Refer Note 38)
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value measurement is based on the presumption that the transaction to sell the asset or transfer the liability takes place either:
- In the principal market for the asset or liability, or
- In the absence of a principal market, In the most advantageous market for the asset or liability.
The principal or the most advantageous market must be accessible by the Company.
The fair value of an asset or a liability is measured using the assumptions that market participants would use when pricing the asset or liability, assuming that market participants act in their economic best interest.
A fair value measurement of a non-financial asset takes into account a market participant's ability to generate economic benefits by using the asset in its highest and best use or by selling it to another market participant that would use the asset in its highest and best use.
The Company uses valuation techniques that are appropriate in the circumstances and for which sufficient data is available to measure fair value, maximizing the use of relevant observable inputs and minimizing the use of unobservable inputs. All assets and liabilities for which fair value is measured or disclosed in the financial statements are categorized within the fair value hierarchy, described as follows, based on the lowest level input that is significant to the fair value measurement as a whole:
Level 1- Quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2 - Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices).
Level 3 - Inputs for the assets or liabilities that are not based on observable market data (unobservable inputs).
For assets and liabilities that are recognized in the financial statements on a recurring basis, the Company determines whether transfers have occurred between levels in the hierarchy by re-assessing categorization (based on the lowest level input that is significant to the fair value measurement as a whole) at the end of each reporting period.
At each reporting date, the Management analyses the movements in the values of assets and liabilities which are required to be premeasured or re-assessed as per the Company's accounting policies. For this analysis, the Management verifies the major inputs applied in the latest valuation by agreeing the information in the valuation computation to contracts and other relevant documents.
The Management also compares the change in the fair value of each asset and liability with relevant external sources to determine whether the change is reasonable.
vi. Property, Plant and Equipment (Tangible Assets)
Property, Plant and Equipment are stated at cost of acquisition including attributable interest and finance costs, if any, till the date of acquisition/ installation of the assets less accumulated depreciation and accumulated impairment losses, if any.
Subsequent expenditure relating to Property, Plant and Equipment is capitalized only when it is probable that future economic benefits associated with the item will flow to
the Company and the cost of the item can be measured reliably. All other repairs and maintenance costs are charged to the Statement of Profit and Loss as incurred. The cost and related accumulated depreciation are eliminated from the financial statements, either on disposal or when retired from active use and the resultant gain or loss are recognized in the Statement of Profit and Loss.
Capital work-in-progress, representing expenditure incurred in respect of assets under development and not ready for their intended use, are carried at cost. Cost includes related acquisition expenses, construction cost, related borrowing cost and other direct expenditure.
vii. Intangible Assets
Intangible assets are stated at cost, only when it is probable that future economic benefits associated with the item will flow to the Company and the cost of the item can be measured reliably, less accumulated amortisation and accumulated impairment losses, if any.
Intangible assets mainly comprise of license fees and implementation cost for software and other application software acquired / developed for in-house use.
viii. Depreciation and amortisation
Depreciation and amortisation is provided as follows:
a) In respect of buildings and sheds, on the written down value basis considering the useful lives prescribed in Schedule II to the Act.
b) In respect of furniture and fixtures, office equipment, computers, plant and equipment, heavy vehicles, light vehicles and speed boat on straight line basis at rates determined on the basis of useful lives prescribed in Schedule II to the Act, on a pro-rata basis. However, certain class of plant and machinery used in construction projects are depreciated on a straight line basis considering the useful life determined based on the technical evaluation and the management's experience of use of the assets, that is a period of two to twelve years, as against the period of nine to twenty years as prescribed in Schedule II to the Act.
c) In respect of helicopter and aircraft, on straight line basis considering the useful life, that is a period of eighteen years and fourteen years, respectively, determined based on the technical evaluation and the management's experience of use of the assets, as against the period of twenty years as prescribed in Schedule II to the Act.
d) Leasehold improvements are amortized over the useful lives prescribed in Schedule II to the Act or the period of lease, whichever is lower.
e) Software and implementation costs including users license fees and other application software costs are amortized on a straight line basis, from the date they are available for use, over their estimated useful lives that is a period of three to five years.
The useful lives have been determined based on technical evaluation carried out by the management's expert, in order to reflect the actual usage of the assets. The estimated useful life and residual values are reviewed at each financial year end and the effect of any change in the estimates of useful life/residual value is accounted on prospective basis.
An asset's carrying amount is written down immediately to its recoverable amount if the asset's carrying amount is greater than its estimated recoverable amount.
ix. Financial Instruments
A financial instrument is any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity.
a) Financial Assets
i. Initial Recognition
In the case of financial assets, not recorded at fair value through profit or loss (FVPL), financial assets are recognized initially at fair value plus transaction costs that are directly attributable to the acquisition of the financial asset. Purchases or sales of financial assets that require delivery of assets within a time frame established by regulation or convention in the market place (regular way trades) are recognized on the trade date, i.e., the date that the Company commits to purchase or sell the asset.
ii. Subsequent Measurement
For purposes of subsequent measurement, financial assets are classified in following categories:
Financial Assets at Amortized Cost
Financial assets are subsequently measured at amortized cost if these financial assets are held within a business model with an objective to hold these assets in order to collect contractual cash flows and the contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding. Interest income from these financial assets is included in finance income using the effective interest rate ("EIR") method. Impairment gains or losses arising on these assets are recognized in the Statement of Profit and Loss.
Financial Assets Measured at Fair Value
Financial assets are measured at fair value through Other Comprehensive Income ('OCI') if these financial assets are held within a business model with an objective to hold these assets in order to collect contractual cash flows or to sell these financial assets and the contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding. Movements in the carrying amount are taken through OCI, except for the recognition of impairment gains or losses, interest revenue and foreign exchange gains and losses which are recognized in the Statement of Profit and Loss.
In respect of equity investments (other than for investment in subsidiaries and associates) which are not held for trading, the Company has made an irrevocable election to present subsequent changes in the fair value of such instruments in OCI. Such an election is made by the Company on an instrument by instrument basis at the time of transition for existing equity instruments/ initial recognition for new equity instruments.
Financial asset not measured at amortized cost or at fair value through OCI is carried at FVPL.
iii. Impairment of Financial Assets
In accordance with Ind AS 109, the Company applies the expected credit loss ("ECL') model for measurement and recognition of impairment loss on financial assets and credit risk exposures.
The Company follows 'simplified approach' for recognition of impairment loss allowance on trade receivables. Simplified approach does not require the Company to track changes in credit risk. Rather, it recognizes impairment loss allowance based on lifetime ECL at each reporting date, right from its initial recognition.
For recognition of impairment loss on other financial assets and risk exposure, the Company determines that whether there has been a significant increase in the credit risk since initial recognition. If credit risk has not increased significantly, 12-month ECL is used to provide for impairment loss. However, if credit risk has increased significantly, lifetime ECL is used. If, in a subsequent period, credit quality of the instrument improves such that there is no longer a significant increase in credit risk since initial recognition, then the entity reverts to recognizing impairment loss allowance based on 12-month ECL.
ECL is the difference between all contractual cash flows that are due to the group in accordance with the contract and all the cash flows that the entity expects to receive (i.e., all cash shortfalls), discounted at the original EIR. Lifetime ECL are the expected credit losses resulting from all possible default events over the expected life of a financial instrument. The 12-month ECL is a portion of the lifetime ECL which results from default events that are possible within 12 months after the reporting date.
ECL impairment loss allowance (or reversal) recognized during the period is recognized as income/ expense in the Statement of Profit and Loss.
iv. De-recognition of Financial Assets
The Company de-recognizes a financial asset only when the contractual rights to the cash flows from the asset expire, or it transfers the financial asset and substantially all risks and rewards of ownership of the asset to another entity.
If the Company neither transfers nor retains substantially all the risks and rewards of ownership and continues to control the transferred asset, the Company recognizes its retained interest in the assets and an associated liability for amounts it may have to pay.
If the Company retains substantially all the risks and rewards of ownership of a transferred financial asset, the Company continues to recognize the financial asset and also recognizes a collateralized borrowing for the proceeds received.
b) Equity Instruments and Financial Liabilities
Financial liabilities and equity instruments issued by the Company are classified according to the substance of the contractual arrangements entered into and the definitions of a financial liability and an equity instrument.
i. Equity Instruments
An equity instrument is any contract that evidences a residual interest in the assets of the Company after deducting all of its liabilities. Equity instruments which are issued for cash are recorded at the proceeds received, net of direct issue costs. Equity instruments which are issued for consideration other than cash are recorded at fair value of the equity instrument
ii. Financial Liabilities Initial Recognition
Financial liabilities are classified, at initial recognition, as financial liabilities at FVPL, loans and borrowings and payables as appropriate. All financial liabilities are recognized initially at fair value and, in the case of loans and borrowings and payables, net of directly attributable transaction costs.
Subsequent Measurement
The measurement of financial liabilities depends on their classification, as described below
Financial liabilities at FVPL
Financial liabilities at FVPL include financial liabilities held for trading and financial liabilities designated upon initial recognition as at FVPL. Financial liabilities are classified as held for trading if they are incurred for the purpose of repurchasing in the near term. Gains or losses on liabilities held for trading are recognized in the Statement of Profit and Loss.
Financial guarantee contracts issued by the Company are those contracts that require a payment to be made to reimburse the holder for a loss it incurs because the specified debtor fails to make a payment when due in accordance with the terms of a debt instrument. Financial guarantee contracts are recognized initially as a liability at fair value, adjusted for transaction costs that are directly attributable to the issuance of the guarantee. Subsequently, the liability is measured at the higher of the amount of loss allowance determined as per impairment requirements of Ind AS 109 and the amount recognized less cumulative amortisation. Amortisation is recognized as finance income in the Statement of Profit and Loss.
Financial liabilities at amortized cost
After initial recognition, interest-bearing loans and borrowings are subsequently measured at amortized cost using the EIR method. Any difference between the proceeds (net of transaction costs) and the settlement or redemption of borrowings is recognized over the term of the borrowings in the Statement of Profit and Loss.
Amortized cost is calculated by taking into account any discount or premium on acquisition and fees or costs that are an integral part of the EIR. The EIR amortisation is included as finance costs in the Statement of Profit and Loss.
Where the Company issues optionally convertible debenture, the fair value of the liability portion of such debentures is determined using a market interest rate for an equivalent non-convertible debenture. This value is recorded as a liability on an amortized cost basis until extinguished on conversion or redemption of the debentures. The remainder of the proceeds is attributable to the equity portion of the instrument. This is recognized and included in shareholders' equity (net of income tax) and are not subsequently re-measured.
Where the terms of a financial liability is re-negotiated and the Company issues equity instruments to a creditor to extinguish all or part of the liability (debt for equity swap), a gain or loss is recognized in the Statement of Profit and Loss; measured as a difference between the carrying amount of the financial liability and the fair value of equity instrument issued.
De-recognition of Financial Liabilities
Financial liabilities are de-recognized when the obligation specified in the contract is discharged, cancelled or expired. When an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as de-recognition of the original liability and recognition of a new liability. The difference in the respective carrying amounts is recognized in the Statement of Profit and Loss.
c) Offsetting Financial Instruments
Financial assets and financial liabilities are offset and the net amount is reported in the Balance Sheet if there is a currently enforceable legal right to offset the recognized amounts and there is an intention to settle on a net basis to realize the assets and settle the liabilities simultaneously.
x. Employee Benefits
a) Defined Contribution Plan
Contributions to defined contribution schemes such as provident fund, employees' state insurance, labour welfare fund and superannuation scheme are charged as an expense based on the amount of contribution required to be made as and when services are rendered by the employees. Company's provident fund contribution, in respect of certain employees, is made to a government administered fund and charged as an expense to the Statement of Profit and Loss. The above benefits are classified as Defined Contribution Schemes as the Company has no further obligations beyond the monthly contributions.
b) Defined Benefit Plan
In respect of certain employees, provident fund contributions are made to a trust administered by the Company. The interest rate payable to the members of the trust shall not be lower than the statutory rate of interest declared by the Central Government under the Employees Provident Funds and Miscellaneous Provisions Act, 1952 and shortfall, if any, shall be made good by the Company. Accordingly, the contribution paid or payable and the interest shortfall, if any, is recognized as an expense in the period in which services are rendered by the employee.
The Company also provides for gratuity which is a defined benefit plan the liabilities of which is determined based on valuations, as at the balance sheet date, made by an independent actuary using the projected unit credit method. Re-measurement, comprising of actuarial gains and losses, in respect of gratuity are recognized in the OCI, in the period in which they occur and is not eligible to be reclassified to the Statement of Profit and Loss in subsequent periods. Past service cost is recognized in the Statement of Profit and Loss in the year of plan amendment or curtailment. The classification of the Company's obligation into current and non-current is as per the actuarial valuation report.
c) Leave entitlement and compensated absences
Accumulated leave which is expected to be utilised within next twelve months, is treated as short-term employee benefit. Leave entitlement, other than short term compensated absences, are provided based on a actuarial valuation, similar to that of gratuity benefit. Remeasurement, comprising of actuarial gains and losses, in respect of leave entitlement are recognized in the Statement of Profit and Loss in the period in which they occur.
d) Short-term Benefits
Short-term employee benefits such as salaries, wages, performance incentives etc. are recognized as expenses at the undiscounted amounts in the Statement of Profit and Loss of the period in which the related service is rendered. Expenses on non-accumulating compensated absences is recognized in the period in which the absences occur.
xi. Inventories
The stock of construction materials, stores, spares and embedded goods and fuel is valued at cost or net realizable value, whichever is lower. Cost is determined on weighted average basis and includes all applicable cost of bringing the goods to their present location and condition. Net realizable value is estimated selling price in ordinary course of business less the estimated cost necessary to make the sale.
xii. Cash and Cash Equivalents
Cash and cash equivalents in the Balance Sheet comprises of cash at banks and on hand and short-term deposits with an original maturity of three month or less, which are subject to an insignificant risk of changes in value.
xiii. Segment Reporting
Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision maker. The chief operating decision maker regularly monitors and reviews the operating result of the whole Company as one segment of "Engineering and Construction. Thus, as defined in Ind AS 108 "Operating Segments',' the Company's entire business falls under this one operational segment and hence the necessary information has already been disclosed in the Balance Sheet and the Statement of Profit and Loss.
xiv. Borrowing Costs
Borrowing costs consist of interest and other costs that the Company incurs in connection with the borrowing of funds. Also, the EIR amortisation is included in finance costs.
Borrowing costs relating to acquisition, construction or production of a qualifying asset which takes substantial period of time to get ready for its intended use are added to the cost of such asset to the extent they relate to the period till such assets are ready to be put to use. All other borrowing costs are expensed in the Statement of Profit and Loss in the period in which they occur.
xv. Foreign Exchange Translation of Foreign Projects and Accounting of Foreign Exchange Transaction
a) Initial Recognition
Foreign currency transactions are initially recorded in the reporting currency, by applying to the foreign currency amount the exchange rate between the reporting currency and the foreign currency at the date of the transaction. However, for practical reasons, the Company uses a monthly average rate if the average rate approximate the actual rate at the date of the transactions.
b) Conversion
Monetary assets and liabilities denominated in foreign currencies are reported using the closing rate at the reporting date. Non-monetary items which are carried in terms of historical cost denominated in a foreign currency are reported using the exchange rate at the date of the transaction.
c) Treatment of Exchange Difference
Exchange differences arising on settlement/ restatement of short-term foreign currency monetary assets and liabilities of the Company are recognized as income or expense in the Statement of Profit and Loss.
Exchange differences arising on long-term foreign currency monetary items related to acquisition of a fixed asset are capitalized and depreciated over the remaining useful life of the asset and exchange differences arising on other long-term foreign currency monetary items are accumulated in the "Foreign Currency Monetary Translation Reserve" and amortized over the remaining life of the concerned monetary item.
xvi. Revenue Recognition Revenue from operations
a) Revevnue from Construction Contracts
The Company follows the percentage completion method, based on the stage of completion at the Balance Sheet date, taking into account the contractual price and revision thereto by estimating total revenue including claims/variations as per Ind AS 11, Construction Contracts, and total cost till completion of the contract and the profit so determined proportionate to the percentage of the actual work done.
Revenue is recognized as follows:
- In case of item rate contracts on the basis of physical measurement of work actually completed, at the Balance Sheet date.
- In case of Lump sum contracts, revenue is recognized on the completion of milestones as specified in the contract or as identified by the management. Foreseeable losses are accounted for as and when they are determined except to the extent they are expected to be recovered through claims presented or to be presented to the customer or in arbitration.
Advance payments received from contracted for which no services are rendered are presented as 'Advance from contracted'.
b) Accounting of Supply Contracts-Sale of Goods
Revenue from supply contract is recognized when the substantial risk and rewards of ownership is transferred to the buyer, which is generally on dispatch, and the collectability is reasonably measured. Revenue from product sales are shown as net of all applicable taxes and discounts.
c) Accounting for Claims
Claims are accounted as income in the period of receipt of arbitration award or acceptance by client or evidence of acceptance received. Interest awarded, being in the nature of additional compensation under the terms of
the contract, is accounted as other operating revenue on receipt of favorable arbitration award.
Other Income a) Interest Income
Interest income is accrued on a time proportion basis, by reference to the principal outstanding and the applicable Effective Interest Rate (EIR).
b) Dividend Income
Dividend is recognized when the right to receive the payment is established, which is generally when shareholders approve the dividend.
c) Other Income
Other items of income are accounted as and when the right to receive such income arises and it is probable that the economic benefits will flow to the Company and the amount of income can be measured reliably.
xvii. Interest in Joint Arrangements
As per Ind AS 111 - Joint Arrangements, investment in Joint Arrangement is classified as either Joint Operation or Joint Venture. The classification depends on the contractual rights and obligations of each investor rather than legal structure of the Joint Arrangement. The Company classifies its Joint Arrangements as Joint Operations.
The Company recognizes its direct right to assets, liabilities, revenue and expenses of Joint Operations and its share of any jointly held or incurred assets, liabilities, revenues and expenses. These have been incorporated in the financial statements under the appropriate headings.
xviii. Income Tax
Income tax comprises of current and deferred income tax. Income tax is recognized as an expense or income in the Statement of Profit and Loss, except to the extent it relates to items directly recognized in equity or in OCI.
a) Current Income Tax
Current income tax is recognized based on the estimated tax liability computed after taking credit for allowances and exemptions in accordance with the Income Tax Act, 1961. Current income tax assets and liabilities are measured at the amount expected to be recovered from or paid to the taxation authorities. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted, at the reporting date.
b) Deferred Income Tax
Deferred tax is determined by applying the Balance Sheet approach. Deferred tax assets and liabilities are recognized for all deductible temporary differences between the financial statements' carrying amount of existing assets and liabilities and their respective tax base. Deferred tax assets and liabilities are measured using the enacted tax rates or tax rates that are substantively enacted at the Balance Sheet date. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period that includes the enactment date. Deferred tax assets are only recognized to the extent that it is probable that future taxable profits will be available against which the temporary differences can be utilized. Such assets are reviewed at each Balance Sheet date to reassess realization.
Deferred tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets and liabilities. Current tax assets and tax liabilities are offset where the entity has a legally enforceable right to offset and intends either to settle on a net basis, or to realize the asset and settle the liability simultaneously.
Minimum Alternative Tax ("MAT") credit is recognized as an asset only when and to the extent it is probable that the Company will pay normal income tax during the specified period.
xix. Leases
Leases, where the less or effectively retains substantially all the risks and benefits of ownership over the leased term, are classified as operating leases. Operating lease payments are recognized as an expense in the Statement of Profit and Loss on a straight-line basis over the lease term except where the lease payments are structured to increase in line with expected general inflation. Assets acquired on finance lease are capitalized at fair value or present value of minimum lease payment at the inception of the lease, whichever is lower.
xx. Impairment of Non-Financial Assets
As at each Balance Sheet date, the Company assesses whether there is an indication that a non-financial asset may be impaired and also whether there is an indication of reversal of impairment loss recognized in the previous periods. If any indication exists, or when annual impairment testing for an asset is required, the Company determines the recoverable amount and impairment loss is recognized when the carrying amount of an asset exceeds its recoverable amount.
Recoverable amount is determined:
- In case of an individual asset, at the higher of the assets' fair value less cost to sell and value in use; and
- In case of cash generating unit (a group of assets that generates identified, independent cash flows), at the higher of cash generating unit's fair value less cost to sell and value in use.
In assessing value in use, the estimated future cash flows are discounted to their present value using pre-tax discount rate that reflects current market assessments of the time value of money and risk specified to the asset.
In determining fair value less cost to sell, recent market transaction are taken into account. If no such transaction can be identified, an appropriate valuation model is used.
Impairment losses of continuing operations, including impairment on inventories, are recognized in the Statement of Profit and Loss, except for properties previously revalued with the revaluation taken to OCI. For such properties, the impairment is recognized in OCI up to the amount of any previous revaluation.
When the Company considers that there are no realistic prospects of recovery of the asset, the relevant amounts are written off. If the amount of impairment loss subsequently decreases and the decrease can be related objectively to an event occurring after the impairment was recognized, then the previously recognized impairment loss is reversed through the Statement of Profit and Loss.
xxi. Trade receivables
A receivable is classified as a 'trade receivable' if it is in respect of the amount due on account of goods sold or services rendered in the normal course of business.
Trade receivables are recognized initially at fair value and subsequently measured at amortised cost using the EIR method, less provision for impairment.
xxii. Trade payables
A payable is classified as a 'trade payable' if it is in respect of the amount due on account of goods purchased or services received in the normal course of business. These amounts represent liabilities for goods and services provided to the Company prior to the end of the financial year which are unpaid. These amounts are unsecured and are usually settled as per the payment terms stated in the contract. Trade and other payables are presented as current liabilities unless payment is not due within 12 months after the reporting period. They are recognized initially at their fair value and subsequently measured at amortized cost using the EIR method.
xxiii. Earnings Per Share
Basic earnings per share is computed by dividing the net profit or loss for the period attributable to the equity shareholders of the Company by the weighted average number of equity shares outstanding during the period. The weighted average number of equity shares outstanding during the period and for all periods presented is adjusted for events, such as bonus shares, other than the conversion of potential equity shares, that have changed the number of equity shares outstanding, without a corresponding change in resources.
Diluted earnings per share is computed by dividing the net profit or loss for the period attributable to the equity shareholders of the Company and weighted average number of equity shares considered for deriving basic earnings per equity share and also the weighted average number of equity shares that could have been issued upon conversion of all dilutive potential equity shares. The dilutive potential equity shares are adjusted for the proceeds receivable had the equity shares been actually issued at fair value (i.e. the average market value of the outstanding equity shares).
xxiv. Provisions, Contingent Liabilities and Contingent Assets
A provision is recognized when the Company has a present obligation (legal or constructive) as a result of past events and it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation, in respect of which a reliable estimate can be made of the amount of obligation. Provisions (excluding gratuity and compensated absences) are determined based on management's estimate required to settle the obligation at the Balance Sheet date. In case the time value of money is material, provisions are discounted using a current pre-tax rate that reflects the risks specific to the liability. When discounting is used, the increase in the provision due to the passage of time is recognized as a finance cost. These are reviewed at each Balance Sheet date and adjusted to reflect the current management estimates.
Contingent liabilities are disclosed in respect of possible obligations that arise from past events, whose existence would be confirmed by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the Company. A contingent liability also arises, in rare cases, where a liability cannot be recognized because it cannot be measured reliably.
Contingent assets are disclosed where an inflow of economic benefits is probable.
xxv. Share Issue Expenses
Share issue expenses are charged off against available balance in the Securities premium reserve.
xxvi. Share Based Payments
Certain employees of the Company are entitled to remuneration in the form of equity settled instruments, for rendering services over a defined vesting period. Equity instruments granted are measured by reference to the fair value of the instrument at the date of grant. The fair value determined at the grant date is expensed over the vesting period of the respective tranches of such grants.
The stock compensation expense is determined based on the Company's estimate of equity instruments that will eventually vest using fair value in accordance with Ind-AS 102, Share based payment.
xxvii. Exceptional Items
When items of income and expense within profit or loss from ordinary activities are of such size, nature or incidence that their disclosure is relevant to explain the performance of the enterprise for the period, the nature and amount of such material items are disclosed separately as exceptional items.
NOTE 2.2 RECENT ACCOUNTING PRONOUNCEMENTS
1. Appendix B to Ind AS 21, Foreign currency transactions and advance consideration:
Appendix B to Ind AS 21, Foreign currency transactions and advance consideration: On 28 March 2018, Ministry of Corporate Affairs ("MCA") has notified the Companies (Indian Accounting Standards) Amendment Rules, 2018 containing Appendix B to Ind AS 21, Foreign currency transactions and advance consideration which clarifies the date of the transaction for the purpose of determining the exchange rate to use on initial recognition of the related asset, expense or income, when an entity has received or paid advance consideration in a foreign currency.
The amendment will come into force from 1 April 2018. The Company is evaluating the requirement of the amendment and the impact on the financial statements. The effect on adoption of Ind AS 21 is expected to be insignificant.
2. Ind AS 115, Revenue from Contract with Customers:
In March 2018, the Ministry of Corporate Affairs has notified the Companies (Indian Accounting Standards) Amended Rules, 2018 ("amended rules"). As per the amended rules, Ind AS 115 "Revenue from contracts with customers" supersedes Ind AS 11, "Construction contracts" and Ind AS 18, "Revenue" and is applicable for all accounting periods commencing on or after 1 April 2018.
Ind AS 115 introduces a new framework of five step model for the analysis of revenue transactions. The model specifies
that revenue should be recognized when (or as) an entity transfer control of goods or services to a customer at the amount to which the entity expects to be entitled. Further the new standard requires enhanced disclosures about the nature, amount, timing and uncertainty of revenue and cash flows arising from the entity's contracts with customers.
The new revenue standard is applicable to the Company from 1 April 2018.
The standard permits two possible methods of transition:
i. Retrospective approach - Under this approach the standard will be applied retrospectively to each prior reporting period presented in accordance with Ind AS 8
- Accounting Policies, Changes in Accounting Estimates and Errors
ii. Retrospectively with cumulative effect of initially applying the standard recognized at the date of initial application (cumulative catch - up approach)
The Company is evaluating the requirement of the amendment and the impact on the financial statements.
The effect on adoption of Ind AS 115 is expected to be insignificant.
A Net off advance received against work bill / claims ' 200.02 crore (31 March 2017: ' 68.14 crore)
AA Net off advance received against work bill Rs, 1,509.30 crore (31 March 2017: Rs, 375.58 crore) aaa Net off advance received against work bill Rs, 439.85 crore (31 March 2017: Rs, 460.98 crore)
Note 3 Non-current trade receivables, current trade receivables and other financial assets as at 31 March 2018 include Rs, 1,375.13 crore, Rs, 1,431.49 crore (net of advances Rs,1,709.31 crore) and Rs, Nil respectively [31 March 2017 : Rs, 1,429.09 crore, Rs, 1,439.38 crore (net of advances Rs, 443.64crore) and Rs, 79.85 crore] representing claims awarded in arbitration in favour of the Company and which have been challenged by the customers in High Courts/ Supreme Court. Current trade receivables include Rs,221.51 crore of claims awarded in arbitration which are unchallenged as at 31 March 2018.
As decided by the Cabinet Committee on Economic Affairs (CCEA) (Government of India) during the previous year, in respect of claims where arbitration awards have been decided in favour of the Company but further challenged by clients, the clients shall pay 75% of the arbitral award amount to the Company, in an escrow account, against a bank guarantee (BG). As at 31 March 2018, the Company has received letters from its customers conveying release of 75% of the arbitral award amount resulting in a payout aggregating Rs, 2,046.03 crore (31 March 2017: Rs, 1,882 crore), of which the Company has realised Rs, 1,416.10 crore (31 March 2017:
Rs, 148.39 crore). The balance amount is presently pending on account of completion of certain formalities by the Company. The Company is also pursuing with customers for issuance of similar payout letters for the balance amounts.
Note 4 There are no trade receivables due from any director or any officer of the Company, either severally or jointly with any other person, or from any firms or private companies in which any director is a partner, a director or a member.
Note 5 Trade receivables, except receivables on account of claims awarded in arbitration in favour of the Company, are non-interest bearing and are generally on terms of 30 to 90 days.
NOTE 6 EQUITY SHARE CAPITAL...contd.
i. Options granted
a) The Company offered 4,458,800 Stock Options on 25 April 2008 (each option carrying entitlement for one equity share of the face value of Rs, 1 each) at a price of Rs,132.50 per equity share.
In accordance with the approval of the board of directors and shareholders of the Company, the ESOP Compensation Committee at its meeting held on 20 July 2009 repriced 4,131,600 options at Rs, 104.05 per equity share.
b) The ESOP Compensation Committee of the Company at its Meeting held on 12 August 2010 decided to double the number of employee stock options (vested and unvested), not exercised and in-force, as on the Record Date i.e.
11 August 2010 and halved the exercise price on account of issuance and allotment of Bonus Equity Shares in the proportion of 1:1.
Accordingly, 3,553,760 employee stock options in-force granted by the Company on 25 April 2008 were doubled i.e. 7,107,520 and the exercise price in respect of the same was reduced from Rs,104.05 to Rs, 52.03 per equity share and none of the options are outstanding as at 31 March 2018.
c) The ESOP Compensation Committee of the Company at its Meeting held on 20 March 2018 has approved a grant of
300,000 options, in accordance with the terms and conditions contained in the existing HCC Employee Stock Option Scheme of the Company ('Scheme') (each option carrying entitlement for one equity share of the face value of ' 1 each) at an exercise price of ' 31.15 per equity share, subject to approval of the shareholders for amendment of the existing Scheme, in line with the Securities and Exchange Board of India (Share Based Employee Benefits) Regulations, 2014 ("SEBI Regulations").
ii. Settlement Through Equity Shares
iii. Options vested Nil options (31 March 2017: Nil) remain vested and outstanding as at 31 March 2018
f. Bonus shares/ buy back/shares for consideration other than cash issued during past five years:
(i) Aggregate number and class of shares allotted as fully paid up pursuant to contracts without payment being received in cash - Nil
(ii) Aggregate number and class of shares allotted as fully paid up by way of bonus shares- Nil
(iii) Aggregate number and class of shares bought back - Nil
g. Pursuant to the approval of the shareholders at the Extra Ordinary General Meeting held on 5 January 2017, the allotment committee of the Board of Directors at its meetings held on 6 January 2017 and 19 January 2017 alloted collectively to the lenders 231,544,729 equity shares of face value of Rs, 1 each at a premium of Rs, 33.92 per share aggregating Rs, 808.55 crore and 14,414,874 optionally convertible debentures (OCDs) of face value of Rs, 1,000 each at par (carrying coupon rate of 0.01% p.a.) aggregating Rs, 1,441.49 crore. Further, pursuant to the approval of the shareholders at the Annual General Meeting held on 6 July 2017, the allotment committee of the Board of Directors at its meeting held on 17 July 2017 allotted to a lender 4,759,291 equity shares of face value of Rs, 1 each at a premium of Rs, 40.61 per share aggregating Rs, 19.80 crore and 256,716 OCDs of face value of Rs, 1,000 each at par (carrying coupon rate of 0.01% p.a.) aggregating Rs, 25.67 crore on preferential basis as part of the Scheme for Sustainable Structuring of Stressed Assets (S4A Scheme). The implementation of the S4A Scheme and the consequent allotment of equity shares/ OCDs have been made in respect of all the lenders except for few lenders who will be alloted equity shares and OCDs once they exercise their option. Number of equity shares/OCDs to be alloted will be determined based on the share price prevailing at the time of such allotment. (Also refer Note 16.1)
Restructuring of borrowings under Corporate Debt Restructuring Scheme (CDR Scheme) and Scheme for Sustainable Structuring of Stressed Assets (S4A Scheme):
The Company received Letter of Approval (LOA) on 29 June 2012 issued by the Corporate Debt Restructuring Empowered Group (CDREG) approving the CDR Scheme. The CDR related documents had been executed and creation of security was completed. During the previous year, the Company has implemented the S4A Scheme. The Joint Lender's Forum (JLF) adopted the S4A Scheme with reference date as 12 July 2016. The S4A Scheme was duly approved by the Reserve Bank of India's mandated Overseeing Committee (OC) on 4 November 2016. Under the S4A Scheme, the Company's total debts amounting to ' 5,107 crores as at 1 October 2016 have been bifurcated into sustainable debt, to be serviced as per existing terms and conditions of those debts, and remainder debts (to the extent of 47.5% of the fund based exposure of the Company) have been converted into fully paid up equity shares in favour of the lenders by following principle of proportionate loss and balance in OCDs collectively in favour of the lenders. [Also refer note 15 (g)]
Note 8 Details of security and terms of repayment I. Secured
(A) Non-convertible debentures
i) Axis
These debentures are classified as RTL-1. These debentures carry an interest yield of 11.50% p.a. and are repayable in 31 quarterly installments commencing 15 April 2014 and ending on 15 October 2021. These are secured by way of registered mortgage over 231.66 acres of Lavasa land situated in 5 villages namely Village Admal, Bhode, Gadle, Padalghar and Ugavali in taluka Mulshi, District Pune, Maharashtra.
ii) LIC
These debentures are classified as RTL-1. These debentures carry an interest yield of 11.50% p.a. and are repayable in 31 quarterly installments commencing 15 April 2014 and ending on 15 October 2021. Refer note 16.2.1 for security details.
(B) Rupee Term Loans (RTL-A)
RTL-A carries interest rate of 11.75% p.a. (Individual Bank's Base Rate Applicable Spread), payable monthly, to be reset annually with a two years moratorium and repayment terms of five years starting from financial year 2017-18. The said facility is having same security as RTL-1 lenders under the CDR Scheme.
(C) Rupee Term Loans 1 (RTL-1) and Rupee Term Loans 2 (RTL-2)
RTL - 1 and RTL- 2 carry an interest yield of 11.50% p.a. and are repayable in 31 quarterly installments commencing 15 April 2014 and ending on 15 October 2021. Refer note 16.2.1 for security details.
(D) Working Capital Term Loan (WCTL-1)
Working Capital Term Loan (WCTL-1) carries an interest rate ranging from 11.10% p.a. to 11.75% p.a. (floating) linked to Monitoring Institution's base rate. These are repayable in 16 quarterly installments commencing 15 April 2014 and ending on 15 January 2018. Refer note 16.2.1 for security details.
(E) Working Capital Term Loan (WCTL-2)
Working Capital Term Loan (WCTL-2) carries an interest rate ranging from 11.10% p.a. to 11.75% p.a. (floating) linked to Monitoring Institution's base rate. These are repayable in 31 quarterly installments commencing 15 April 2014 and ending on 15 October 2021. Refer note 16.2.1 for security details.
(F) Foreign Currency Term Loan from banks
i) Standard Chartered Bank - External Commercial Borrowings (ECB) USD 13.36 million
As at 31 March 2018, the ECB loan from Standard Chartered Bank carries an interest rate of 5.81% p.a. (3 month LIBOR plus 350 basis points). This loan is repayable in 17 quarterly installments commencing 15 April 2014 and ending on 15 March 2018. The facility is secured by first charge by way of hypothecation of plant and machinery acquired under the facility described in the first schedule to the memorandum of hypothecation executed on 10 November 2009.
ii) Development Bank of Singapore - ECB USD 10.18 million
As at 31 March 2018, the ECB loan from Development Bank of Singapore carries an interest rate of 6.16% p.a. (3 month LIBOR plus 385 basis points). This loan is repayable in 17 quarterly installments commencing 5 October 2014 and ending on
5 October 2018. The facility is secured by first charge by way of hypothecation of plant and machinery and heavy vehicles acquired under the facility described in the schedule I (2) to the deed of hypothecation executed on 29 April 2010.
iii) Export Import Bank of United States - ECB USD 9.36 million
As at 31 March 2018, the ECB loan from Export Import Bank of United Sates carries an interest rate of 3.51% (3 month LIBOR plus 120 basis points). This loan is repayable in 35 equal quarterly installments commencing 16 March 2011 and ending on 16 September 2019. The facility is secured by first priority mortgage and security interest to and in favour of Wilmington Trust Company (the security trustee) on one Hawker model 4000 airframe bearing manufacture's serial number RC-26 together with two installed model PW208 engines more particularly described under Clause 2.1 as per the Aircraft Charge Agreement executed on 6 January 2011.
(G) Optionally Convertible Debentures (OCDs)
OCDs have been issued to the lenders as part of the S4A Scheme with a tenor of 10 years and a coupon of 0.01% with an interest yield of 11.50% p.a. in yield equalization compounded on a quarterly basis. After the expiry of eighteen months from the date of issuance, the OCDs will be converted into non-convertible debentures in case of non occurrence of event of default as per the guidelines of the S4A Scheme. The repayment of the OCD commences from the 6th anniversary of the allotment date. Details of maturity have been provided below. Also refer note 16.2.2 for security details.
Note 9 RTL-1, RTL-2, WCTL-1 and WCTL-2 are secured in the form of:
1. The parcel of land (immovable non-residential property) admeasuring 22 acres and 24 gunthas at Tara Village, Panvel Taluka described as the First Mortgaged Properties.
2. All the present and future movable assets of the Borrower (excluding 'Current Assets' and 'Specified Assets') as the Second Mortgaged Properties.
3. All current assets of the Borrower (other than those forming part of Additional Assets') as the Third Mortgaged Properties.
4. All of the Additional Assets' collectively referred to as the Fourth Mortgaged Properties.
5. All of the 'Specified Assets' collectively referred to as the Fifth Mortgaged Properties.
The terms 'Current Assets', 'Specified Assets' and Additional Assets' have been defined in the Master Restructuring Agreement
(MRA).
The above security having ranking in respect to RTL1, WCTL1 and RTL-A are as below:
1. A first ranking and pari passu security interest by way of legal mortgage over the First Mortgaged Properties and Second Mortgaged Properties.
2. A second ranking and pari passu security interest by way of legal mortgage over the Third Mortgaged Properties, Fourth Mortgaged Properties and the Fifth Mortgaged Properties.
The above security having ranking in respect to RTL2 and WCTL2 are as below:
A second ranking and pari passu security interest by way of legal mortgage over all the Mortgaged Properties.
Collateral security pari-passu with lenders defined in MRA:
1. Corporate guarantee of HCC Real Estate Limited (HREL) for ' 9,477.60 crore, against which HRELs outstanding amount is ' 7,616.59 crore (31 March 2017: ' 8,496.48 crore).
2. First pari-passu charge on 154,151,669 shares of the Company and second charge on 85,767,617 equity shares of the Company held by Hincon Holdings Limited and Hincon Finance Limited.
3. Personal guarantee of the Chairman and Managing Director of the Company.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND OTHER EXPLANATORY INFORMATION AS AT AND FOR THE YEAR ENDED MARCH 31, 2018
Note 10 Optionally Convertible Debentures (OCDs) are secured in the form of:
1. First ranking pari passu charge on all of the Company's Property, plant and equipment (immovable and movable) [excluding the Specified Assets and Excluded Assets]; and
2. Second ranking and pari passu security interest by way of a legal mortgage over the First, Second and the Fifth Mortgaged Properties as specified in the mortgage deed.
Collateral security pari-passu with all S4A lenders:
1. Corporate guarantee of HCC Real Estate Limited (HREL) for ' 9,477.60 crore, against which HRELs outstanding amount is ' 7,616.59 crore (31 March 2017: ' 8,496.48 crore).
2. First pari-passu charge on Pledge of 85,767,617 equity shares of the Company and second charge on 154,151,669 equity shares of the Company held by Hincon Holdings Limited and Hincon Finance Limited.
3. Personal guarantee of the Chairman and Managing Director of the Company
Note 11 As at 31 March 2018, in relation to Term Loans, contractual loan principal amounting to Rs, 90.15 crore (31 March 2017: Rs, 70.12 crore) and contractual interest amounting to Rs, 6.16 crore (31 March 2017: Rs, 66.77 crore) are due and outstanding pertaining to the period 1 April 2017 to 31 March 2018. Subsequent to the year end, the Company has paid Rs, Nil (31 March 2017: Rs, 234.55 crore) to various lenders which is pending appropriation between principal and interest.
Note 12 Master Restructuring Agreement (MRA) as well as the provisions of the Master Circular on Corporate Debt Restructuring issued by the Reserve Bank of India, provide a right to the CDR lenders to get a recompense of their waiver and sacrifices made as part of the CDR proposal. The recompense payable by the Company depends on various factors including improved performance of the Company and other conditions. In view of subsequent implementation of S4A scheme, wherein total debts of the Company as of
1 October 2016 have been bifurcated into sustainable debt, to be serviced as per existing terms and conditions of those debts, and remainder converted into fully paid up equity shares and OCDs, the aggregate present value of the recompense amount payable to erstwhile CDR lenders as per the MRA is likely to undergo major changes and would be ascertained post completion of discussions with the Monitoring Institution.
Note 19.1 Security for Cash Credit Facilities, Working Capital Demand Loan and Buyer's Credit:
1. The parcel of land (immovable non-residential property) admeasuring 22 acres and 24 gunthas at Tara Village, Panvel Taluka described as the First Mortgaged Properties.
2. All the present and future movable assets of the Borrower (excluding 'Current Assets' and 'Specified Assets') as the Second Mortgaged Properties.
3. All current assets of the Borrower (other than those forming part of Additional Assets') as the Third Mortgaged Properties.
4. All of the Additional Assets' collectively referred to as the Fourth Mortgaged Properties.
5. All of the 'Specified Assets' collectively referred to as the Fifth Mortgaged Properties.
The terms 'Current Assets', 'Specified Assets' and Additional Assets' have been defined in the MRA.
The above security having ranking as below:
1. A first ranking and pari passu security interest by way of legal mortgage over the Third and Fourth Mortgaged Properties.
2. In the form of a second ranking and pari passu security interest by way of a legal mortgage over the First, Second and the Fifth Mortgaged Properties.
Collateral security pari-passu with lenders defined in MRA are same as indicated in note 16.2.1.
The Company has provided first charge over specific property, plant and equipment (having WDV of Rs, 50 crore) of the Company for the loan extended by Export Import Bank of India (EXIM Bank) to HCC Mauritius Enterprise Limited through Loan Agreement dated 27 September 2010. The same security has also been extended for the loan of USD 25 million given by EXIM Bank to HCC Mauritius Investment Limited.
YES Bank, the lender of HCC Infrastructure Company Limited, a subsidiary company, is having subservient charge on identified receivables of the Company. YES Bank issued No Objection Certificate (NOC) on 4 September 2012 for ceding first charge in favour of working capital lenders and second charge in favour of term lenders.
The securities towards working capital facilities also extend to guarantees given by the banks on behalf of the Company.
It is not practicable for the Company to estimate the timings of cash outflows, if any, in respect of the above pending resolution of the respective proceedings. The Company does not expect any reimbursements in respect of the above contingent liabilities except in respect of matter stated in (iv) above. Future cash outflows in respect of the above are determinable only on receipt of judgments/ decisions pending with various forums/ authorities. The Company does not expect any outflow of economic resources in respect of the above and therefore no provision is made in respect thereof.
NOTE 13
(a) The Company, as at 31 March 2018, has (i) a non-current investment amounting to Rs, 612.40 crore (31 March 2017: Rs, 612.40 crore), non-current loans amounting to Rs, 428.19 crore (31 March 2017: Rs, 380.86 crore) and other non-current financial assets amounting to Rs, 24.35 crore (31 March 2017: Rs, 21.72 crore) in HREL, a subsidiary, which is holding 68.70% share in Lavasa Corporation Limited (LCL), a step down subsidiary, and (ii) a non-current investment amounting to Rs, 18.43 crore (31 March 2017: Rs, 18.43 crore), non-current loans amounting to Rs, 152.56 crore (31 March 2017: Rs, 131.56 crore), other non-current financial assets amounting to Rs, 19.07 crore (31 March 2017: Rs, 16.45 crore) and other current financial assets amounting to Rs, 6.63 crore (31 March 2017: Rs, 4.77 crore) in LCL. While such entities have incurred losses during their initial years and consolidated net-worth of both entities as at 31 March 2018 has been fully eroded, the underlying projects in such entities are in the early stages of development and are expected to achieve adequate profitability on substantial completion and/ or have current market values
of certain properties which are in excess of the carrying values. The net-worth of these subsidiaries does not represent their true market value as the value of the underlying investments/ assets, based on valuation report of an independent valuer, is substantially higher. Therefore, based on certain estimates like future business plans, growth prospects and other factors, the management believes that the realizable amount of these subsidiaries is substantially higher than the carrying value of the investments, non-current loans, other non-current financial assets and other current financial assets due to which these are considered as good and recoverable.
(b) The Company, as at 31 March 2018, has a non-current investment amounting to Rs, 2.24 crore (31 March 2017: Rs, 2.24 crore), non-current loans amounting to Rs, 1,281.40 crore (31 March 2017: Rs, 1,124.36 crore) and other non-current financial assets amounting to Rs, 158.18 crore (31 March 2017: Rs, 141.14 crore) in its subsidiary HCC Infrastructure Company Limited (HIL) which is holding 85.45% in HCC Concessions Limited (HCL) having various Build, Operate and Transfer (BOT) SPVs under its fold. While HCL has incurred losses during its initial years and consolidated net-worth as at 31 March 2018 has been fully eroded, the underlying projects are expected to achieve adequate profitability on substantial completion. The net-worth of this subsidiary does not represent its true market value as the value of the underlying investments / assets, based on valuation report of an
NOTE 14contd.
independent valuer, is higher. Therefore, based on certain estimates like future business plans, growth prospects and other factors, the management believes that the realizable amount of the subsidiary is higher than the carrying value of the noncurrent investments, non-current loans and other non-current financial assets due to which these are considered as good and recoverable.
NOTE 15
'Unbilled work-in-progress (Other current financial assets)Rs,, 'Non-current trade receivables' and 'current trade receivables' include ' 686.24 crore (31 March 2017: Rs, 911.80 crore), Rs, 123.39 crore (31 March 2017: Rs, 123.39 crore) and Rs, 214.38 crore (31 March 2017:
Rs, 90.30 crore), respectively, outstanding as at 31 March 2018 which represent various claims raised earlier, based on the terms and conditions implicit in the contracts and other receivables in respect of closed/suspended projects. These claims are mainly in respect of cost over-run arising due to client caused delays, suspension of projects, deviation in design and change in scope of work; for which Company is at various stages of negotiation/discussion with the clients or under arbitration/ litigation. Non-current trade receivables also include arbitration awards received in favour of the Company, which have been subsequently set aside by District Court/ High Courts against which the Company has preferred appeals at High Courts/ Supreme Court and has been legally advised that it has good case on merits. Considering the contractual tenability, progress of negotiations/ discussions/ arbitration/ litigations, the management is confident of recovery of these receivables.
NOTE 16 INTERESTS IN OTHER ENTITIES...contd.
i) Classification of joint arrangements
The joint venture agreements in relation to the above mentioned joint operations require unanimous consent from all the parties for all relevant activities. All co-venturers have direct rights to the assets of the joint venture and are also jointly and severally liable for the liabilities incurred by the joint venture. These joint ventures are therefore classified as a joint operation and the Company recognises its direct right to the jointly held assets, liabilities, revenue and expenses. In respect of these contracts (assessed as AOP under the Income tax laws), the services rendered to the joint ventures are accounted as income on accrual basis.
b) Joint operations on work sharing basis
Contracts executed in joint venture under work sharing arrangement (consortium) is set out below. The principal place of business of all these joint operations is in India and they are engaged in construction business.
i) HCC Van Oord ACZ Joint Venture xiii) HCC- Halcrow Joint Venture
ii) Samsung- HCC Joint Venture xiv) HCC-Laing-Sadbhav
iii) L & T- HCC Joint Venture xv) HCC-MEIL-NCC - WPIL Joint Venture
iv) HCC - KBL Joint Venture xvi) HCC-DSD -VNR Joint Venture
v) HCC - NCC Joint Venture xvii) MEIL-IVRCL-HCC - WPIL Joint Venture
vi) HCC - CEC Joint Venture xviii) Alstom Hydro France - HCC Joint Venture
vii) HCC - NOVA Joint Venture xix) HCC - MMS (MMRCL) Joint Venture
viii) HCC - CPL Joint Venture xx) HCC - LCESPL (Bistan Lift) Joint venture
ix) HCC - MEIL - CBE Joint Venture xxi) HCC - HSEPL Joint Venture
x) HCC - MEIL- BHEL Joint Venture xxii) HCC - AL FARA'A Joint Venture
xi) HCC -MEIL -SEW -AAG Joint Venture xxiii) HCC - URCC Joint Venture
xii) HCC - MEIL-SEW Joint Venture Classification of work executed on sharing basis
Contracts executed in joint venture under work sharing arrangement (consortium) is accounted to the extent work executed by the Company as that of an independent contract.
c) Jointly controlled entity (joint venture)
The Company's joint venture as at 31 March 2018 is set out below. It has share capital consisting solely of equity shares and the proportion of ownership interests held equals the voting rights held by the Company. The principal place of business of this joint venture is in India and is engaged in tolling operations.
NOTE 17 FINANCIAL INSTRUMENTS
The fair value of the financial assets are included at amounts at which the instruments could be exchanged in a current transaction between willing parties other than in a forced or liquidation sale.
The following methods and assumptions were used to estimate the fair value:
(a) Fair value of cash and short term deposits, trade and other short term receivables, trade payables, other current liabilities, approximate their carrying amounts largely due to the short-term maturities of these instruments.
(b) Financial instruments with fixed and variable interest rates are evaluated by the Company based on parameters such as interest rates and individual credit worthiness of the counterparty. Based on this evaluation, allowances are taken to account for the expected losses of these receivables.
NOTE 18 FINANCIAL INSTRUMENTS...contd.
B Fair value hierarchy
Level 1- Quoted prices (unadjusted) in active markets for identical assets or liabilities
Level 2 - Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices)
Level 3 - Inputs for the assets or liabilities that are not based on observable market data (unobservable inputs)
The following table presents fair value hierarchy of assets and liabilities measured at fair value on a recurring basis as of March 31, 2018:
d) Other Related Parties Relationship
Gulabchand Foundation (formed under section 25 Other related party of the Companies Act, 1956)
Hincon Holdings Limited Other related party
Hincon Finance Limited Other related party
HCC Employee's Provident Fund (refer note below) Post-employment contribution plan
Note: Refer note 37B(a) for information on transaction related to post-employment contribution plan
B. Key Management Personnel and Relative of Key Management Personnel
Mr. Ajit Gulabchand Chairman and Managing Director
Mr. Arjun Dhawan Relative of Key Management Personnel
Group Chief Executive Officer and Whole Time Director w.e.f. 1 April 2017
Mr. Rajgopal Nogja Group Chief Operating Officer and Whole Time Director (upto 2 May 2016)
and Group Chief Executive Officer (w.e.f 3 May 2016 to 31 March 2017)
Ms. Shalaka Gulabchand Dhawan Whole Time Director
Mr. Rajas R. Doshi Independent Director
Mr. Ram P Gandhi Independent Director
NOTE 19 DISCLOSURE IN ACCORDANCE WITH IND-AS 24 RELATED PARTY TRANSACTIONS...contd.
Mr. Sharad M. Kulkarni Independent Director
Mr. Anil C. Singhvi Independent Director
Dr. Omkar Goswami Independent Director
Mr. N. R. Acharyulu Non Executive Director
Mr. Praveen Sood Group Chief Financial Officer
Mr. Arun V. Karambelkar President and Chief Executive Officer - E&C (upto 31 January 2018)
Mr. Amit Uplenchwar Chief Executive Officer- E&C (w.e.f. 31 January 2018)
Mr. Sangameshwar Iyer Company Secretary (upto 8 May 2017)
Mr. Venkatesan Arunachalam Company Secretary (w.e.f. 9 May 2017)
Notes
(i) The above figure does not include provisional gratuity liability valued by an actuary, as separate figures are not available.
(ii) Refer notes 16.2 and 19.1 for personal guarantee provided by CMD, shares pledged and other security created in respect of borrowing by the Company or the related parties.
(iii) Refer notes 5.2, 5.3 and 12.2 for pledge of shares for facilities taken by joint venture.
NOTE 20 FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES
The Company's activities expose it to a variety of financial risks: market risk, credit risk and liquidity risk. The Company's focus is to foresee the unpredictability of financial markets and seek to minimize potential adverse effects on its financial performance.
i Market risk
Market risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate because of changes in market prices. Market risk comprises three types of risk: interest rate risk, currency risk and other price risk, such as equity price risk. Major financial instruments affected by market risk includes loans and borrowings.
a Interest rate risk
Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates. The Company's exposure to the risk of changes in market interest rates relates primarily to the Company's total debt obligations with floating interest rates.
NOTE 40 FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES...contd.
Sensitivity analysis
The Company's exposure in foreign currency is not material and hence the impact of any significant fluctuation in the exchange rates is not expected to have a material impact of the operating profits of the Company.
c Equity price risk
The Company's listed and non-listed equity securities are susceptible to market price risk arising from uncertainties about future values of the investment securities. The Company manages the equity price risk through diversification and by placing limits on individual and total equity instruments. Reports on the equity portfolio are submitted to the Company's senior management on a regular basis. The Company's Board of Directors reviews and approves all equity investment decisions.
Sensitivity analysis
As at 31 March 2018, the exposure to listed equity securities at fair value was Rs, 3.26 crore. A decrease of 10% on the NSE market index could have an impact of approximately Rs, 0.33 crore on the OCI or equity attributable to the Company. An increase of 10% in the value of the listed securities would also impact OCI and equity. These changes would not have a material effect on the profit or loss of the Company.
ii Credit risk
Credit risk refers to the risk of default on its obligation by the counterparty resulting in a financial loss. The maximum exposure of the financial assets are contributed by trade receivables, unbilled work-in-progress, cash and cash equivalents and receivable from group companies.
a Credit risk on trade receivables and unbilled work-in-progress is limited as the customers of the Company mainly consists of the government promoted entities having a strong credit worthiness. For other customers, the Company uses a provision matrix to compute the expected credit loss allowance for trade receivables and unbilled work-in-progress. The provision matrix takes into account available external and internal credit risk factors such as credit ratings from credit rating agencies, financial condition, ageing of accounts receivable and the Company's historical experience for customers.
For the year ended 31 March 2018, one (31 March 2017: four) customers, individually, accounted for more than 10% of the revenue.
The movement of the allowance for lifetime expected credit loss is stated below: a
Balance at the beginning of the year — —
Balance at the end of the year — —
b Credit risk on cash and cash equivalents is limited as the Company generally invest in deposits with banks and financial institutions with high credit ratings.
NOTE 21 FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES...contd.
iii Liquidity risk
Liquidity is defined as the risk that the Company will not be able to settle or meet its obligations on time or at a reasonable price. The Company's treasury department is responsible for liquidity, funding as well as settlement management. In addition, processes and policies related to such risks are overseen by senior management. Management monitors the Company's net liquidity position through rolling forecasts on the basis of expected cash flows.
NOTE 22 CAPITAL MANAGEMENT
For the purpose of the Company's capital management, capital includes issued equity capital and all other equity reserves attributable to the equity holders of the Company. The Company strives to safeguard its ability to continue as a going concern so that they can maximize returns for the shareholders and benefits for other stake holders. The aim to maintain an optimal capital structure and minimize cost of capital.
The Company manages its capital structure and makes adjustments in light of changes in economic conditions and the requirements of the financial covenants. To maintain or adjust the capital structure, the Company may return capital to shareholders, issue new shares or adjust the dividend payment to shareholders (if permitted). Consistent with others in the industry, the Company monitors its capital using the gearing ratio which is total debt divided by total capital (equity).
In the long run, the Company's strategy is to maintain a gearing ratio of less than 1.25.
In order to achieve this overall objective, the Company's capital management, amongst other things, aims to ensure that it meets financial covenants attached to the borrowings that define the capital structure requirements. Breaches in meeting the financial covenants would permit the lenders to immediately call loans and borrowings. Subsequent to restructuring of the borrowings as stated in note 16, there have been no communications from the banks in this regard which might have a negative impact on the gearing ratio.
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