1. Nature of principal activities

Kwality Limited (“the Company”) a public company limited by shares was incorporated under the provisions of the Companies Act, 1956 on 21 August 1992 and domiciled in India. The Company is engaged in manufacturing/processing and sale of milk, milk products and dairy products. The Company is listed both on Bombay Stock Exchange and National Stock Exchange. The Company has manufacturing facilities at Uttar Pradesh, Haryana and Rajasthan. The Company operates both in domestic and international markets. The registered office of the Company is situated at KDIL House, F-82, Shivaji Place, Rajouri Garden, New Delhi 110027, India.

2. General information and statement of compliance with Ind AS

The financial statements of the Company have been prepared in accordance with the Indian Accounting Standards as notified under section 133 of the Companies Act 2013 read with the Companies (Indian Accounting Standards) Rules 2015 as amended from time to time. The Company has uniformly applied the accounting policies during the periods presented.

The standalone financial statements are presented in Indian rupees (‘INR’) and all values are rounded to two decimal places of lakhs, except when otherwise indicated.

The financial statements for the year ended 31 March 2018 were authorized and approved for issue by the Board of Directors on 28 May 2018.

3. Basis of accounting

The financial statements have been prepared on going concern basis under the historical cost basis except for the following -

- Certain financial assets and financial liabilities which are measured at fair value; and

- Share based payments which are measured at fair value of the options;

4. Standards issued but not yet effective and have not been adopted early by the Company

Information on new standards, amendments and interpretations that are expected to be relevant to the financial statements is provided below.

Ind AS 115 ‘Revenue from Contracts with Customers’ (Ind AS 115)

The new standard on revenue recognition overhauls the existing revenue recognition standards and will replace Ind AS 18 - Revenue and Ind AS 11 - Construction contracts. The new standard provides a control-based revenue recognition model and provides a five steps application principle to be followed for revenue recognition:

^Identification of the contracts with the customer

ii. Identification of the performance obligations in the contract

iii. Determination of the transaction price

iv. Allocation of transaction price to the performance obligations in the contract (as identified in step ii)

v. Recognition of revenue when the Company satisfies a performance obligation.

Appendix B to Ind AS 21, Foreign currency transactions and advance consideration:

On March 28, 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 April 1, 2018.

The effective date of the new standards has been notified by the MCA as 1 April 2018. The management is yet to assess the impact of these new standards on the Company’s financial statements.

In the previous year the allottees at Sr.no.1 & 2 exercised their right to convert the Convertible Warrants into equity shares after paying the balance amount and accordingly 51,81,347 equity shares each were issued to Mr Sidhant Gupta and Sidhant and Sons HUF for an aggregate consideration of INR 2,500 each.

During the year the allottees at Sr.no.3 exercised their right to convert the Convertible Warrants into equity shares after paying the balance amount and accordingly 21,69,762 equity shares were issued to Bennett, Coleman and Company Limited for an aggregate consideration of INR 2500.

Utilisation of proceeds of Convertible Warrants converted: The balance amount of INR 1875 received during the year against Convertible Warrants has been utilised towards advertisement in print & non-print media.

(i) Nature and purpose of other reserves

Securities premium reserve

Securities premium reserve is used to record the premium on issue of shares. The reserve is utilised in accordance with provisions of the Companies Act, 2013.

Share application money pending allotment

Share application money pending allotment represents amount received from employees for issue of shares under employee stock option plan.

Other comprehensive income

Remeasurements gains/losses on post employment benefits are recorded in the other comprehensive income.

Employee’s stock option reserve

The reserve is used to recognise the grant date fair value of the options issued to employees under Company’s employee stock option plan.

Debenture Redemption Reserve

The reserve is created out of profits for the purpose of redemption of debenture as per requirement under Company ActRs. 2013.

Note - 36 Capital management

(a) Risk management

The Company’s objectives when managing capital are to:

- Safeguard their ability to continue as a going concern, so that they can continue to provide returns for shareholders and benefits for other stakeholders, and

- Maintain an optimal capital structure to reduce the cost of capital.

In order to maintain or adjust the capital structure, the Company may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares or sell assets to reduce debt. Consistent with others in the industry, the Company monitors capital on the basis of the following gearing ratio.

(i) Loan covenants

Under the terms of the major borrowing facilities, the group is required to comply with following financial covenants:

- the gearing ratio must be not more than 50% and

- the ratio of net finance cost to EBITDA coverage must be not less than 2 times considering Company capitalisation phase.

The Company has complied with these covenants throughout the reporting period. As at 31 March 18 the ratio of net finance cost to EBITDA was 2.16 ( 31 March 17- 2.50)

These assumptions were developed by management with the assistance of independent actuarial appraisers. Discount factors are determined close to each year-end by reference to government bonds of relevant economic markets and that have terms to maturity approximating to the terms of the related obligation. Other assumptions are based on management’s historical experience.

Gratuity

The Company provides for gratuity for employees in India as per the Payment of Gratuity Act, 1972, as amended. Employees who are in continuous service for a period of 5 years are eligible for gratuity. The amount of gratuity payable on retirement/termination is the employee’s last drawn basic salary per month computed proportionately for 15 days salary multiplied for the number of years of service. Gratuity plan is a non-funded plan.

These assumptions were developed by management with the assistance of independent actuarial appraisers. Discount factors are determined close to each year-end by reference to government bonds of relevant economic markets and that have terms to maturity approximating to the terms of the related obligation. Other assumptions are based on management’s historical experience.

The estimates of future salary increases, inflation, seniority, promotion and other relevant factors, considered in actuarial valuation such as supply and demand in the employment market. The rate used to discount post employment benefit obligations (both funded and unfunded) should be determined by reference to market yields at the balance sheet date on government bonds. The currency and term of the government bonds should be consistent with the currency and estimated term of the post employment benefit obligations.

Note 5

Share based payments

Company has reserved issuance of 1,00,00,000 (Previous Year: 1,00,00,000) Equity Shares of INR 1 each for offering to the eligible employees of the Company and its subsidiaries under Employees Stock Option Plan 2014 (ESOP 2014). During the year the Company has granted 27,36,000 (Grant IV) Options at a price of INR 50 and 5,00,000 Options (Grant V) at a price of INR 10 per option (Previous Year 43,000 option at a price of INR 38 per option) plus all applicable taxes. The options would vest over a period of 1 year. Once vested, the options remains exercisable for a period of 5 years. The other disclosure in respect of the ESOP Scheme are as under:

The Company’s risk management is carried out by a central treasury department (of the group) under policies approved by the board of directors. The board of directors provides written principles for overall risk management, as well as policies covering specific areas, such as foreign exchange risk, interest rate risk, credit risk and investment of excess liquidity.

A Credit Risk

Credit risk is the risk that counter party will not meet it’s obligation under a financial instrument or customer contract, leading to a financial loss. Credit risk arises from cash and cash equivalents, trade receivables, investments carried at amortised cost and deposits with banks and financial institutions.

Credit risk management

The finance function of the Company assesses and manages credit risk based on internal credit rating system. Internal credit rating is performed for each class of financial instruments with different characteristics. The Company assigns the following credit ratings to each class of financial assets based on the assumptions, inputs and factors specific to the class of financial assets.

A: Secured, negligible B: Partly secured C: Unsecured D: Doubtful

The risk parameters are same for all financial assets for all period presented. The Company considers the probability of default upon initial recognition of asset and whether there has been a significant increase in credit risk on an on-going basis throughout each reporting period. In general, it is presumed that credit risk has significantly increased since initial recognition if the payments are more than 30 days past due. A default on a financial asset is when the counterparty fails to make contractual payments when they fall due. This definition of default is determined by considering the business environment in which entity operates and other macro-economic factors.

Credit risk exposure

Provision for expected credit losses

The Company provides for expected credit loss based on lifetime expected credit loss mechanism for loans, deposits and other investments —

B Liquidity risk

Prudent liquidity risk management implies maintaining sufficient cash and marketable securities and the availability of funding through an adequate amount of committed credit facilities to meet obligations when due. Due to the nature of the business, the Company maintains flexibility in funding by maintaining availability under committed facilities. Management monitors rolling forecasts of the Company’s liquidity position and cash and cash equivalents on the basis of expected cash flows. The Company takes into account the liquidity of the market in which the entity operates. In addition, the Company’s liquidity management policy involves projecting cash flows in major currencies and considering the level of liquid assets necessary to meet these, monitoring balance sheet liquidity ratios against internal and external regulatory requirements and maintaining debt financing plans.

Maturities of financial liabilities

The tables below analyse the Company’s financial liabilities into relevant maturity groupings based on their contractual maturities for all non-derivative financial liabilities. The amounts disclosed in the table are the contractual undiscounted cash flows. Balances due within 12 months equal their carrying balances as the impact of discounting is insignificant.

C Market risk

Market risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate because of change in market price. Market risk comprises three type of risk: Interest rate risk, foreign currency risk and price risk.

Foreign exchange risk

The Company operates internationally and is exposed to foreign exchange risk arising from foreign currency transactions (imports of materials), primarily with respect to the US Dollar, Euro etc. Foreign exchange risk arises from future commercial transactions and recognised assets and liabilities denominated in a currency that is not the company’s functional currency. The Company does not hedge its foreign exchange receivables/payables.

Interest rate risk

The Company’s fixed rate borrowings are carried at amortised cost. They are therefore not subject to interest rate risk as defined in Ind AS 107, since neither the carrying amount nor the future cash flows will fluctuate because of a change in market interest rates.

The Company’s variable rate borrowing is subject to interest rate. Below is the overall exposure of the borrowing:

Under the company risk management policy, the management closely monitor the viable options and accordingly currently discontinued the interest rate SWAP agreement as it became loss scenario.

Price risk

The Company does not have any price risk as it does not hold any material investment.

Note - 6

Fair value measurements

(i) Fair value hierarchy

Financial assets and financial liabilities measured at fair value in the statement of financial position are grouped into three Levels of a fair value hierarchy. The three Levels are defined based on the observability of significant inputs to the measurement, as follows:

Level 1: quoted prices (unadjusted) in active markets for financial instruments.

Level 2: The fair value of financial instruments that are not traded in an active market is determined using valuation techniques which maximise the use of observable market data rely as little as possible on entity specific estimates.

Level 3: If one or more of the significant inputs is not based on observable market data, the instrument is included in level 3.

(ii) Financial assets and financial liabilities measured at fair value — recurring fair value measurements

(iii) Financial instruments measured at amortised cost

- The carrying amounts of trade receivables, trade payables, capital creditors and cash and cash equivalents are considered to be the same as their fair values, due to their short-term nature.

- The fair value of security deposits were calculated based on cash flows discounted using current lending rate which is not materially different from the rates at which they were initially measured. Therefore the carrying value is considered to be fair value of the security deposits.

- The fair value of non-current borrowings are based on discounted cash flows using current borrowing rate which is not materially different from the rates at which they were initially measured. Therefore the carrying value is considered to be fair value of the non-current borrowings.

(iv)Valuation process and technique used to determine fair value

Specific valuation techniques used to value financial instruments include:

(a)The use of quoted market prices or dealer quotes for similar instruments

(b)The fair value of the remaining financial instruments is determined based on adjusted net assets method.

-Risk adjustments specific to the counterparties (including assumptions about credit default rates) are derived from credit risk grading determined by the Company’s internal credit risk management group.

All of the resulting fair value estimates are included in level 2.

Note 1 :

The fair value of derivative financial instrument pertains to upside interest payable to lenders of the Company has been certified by a practicing chartered accountant. The fair value of derivative financial instruments is based on quoted prices and inputs that are directly or indirectly observable in the marketplace.

Note - 7

The Company is primarily engaged in the business of processing, manufacturing and trading of milk, milk products & dairy products, which as per Indian Accounting Standard — 108 on ‘Operating Segments’ is considered to be the only reportable business segment.

B The Company does not have revenue transactions with a single external customer amounting to 10 percent or more of Company’s reported revenues.

C The total of non-current assets other than financial instruments, investments accounted for using equity method and deferred tax assets, broken down by location of the assets, is shown below:

Note - 8

The matter between Hindustan Unilevel Limited (HUL) and Company regarding entry into each others business areas under the brand name involving the word ‘ Kwality’ is sub judice in Kolkata High Court. The subject matter took place after the Balance Sheet date.

Note - 9

The Company has in past couple of years invested in development of new manufacturing facility for production of ‘Value Added Products’ at Softa (Palwal).

In view of the said expansion and to part fund the working capital requirements there has been a delay in payment of Income Tax and interest thereon.

Note - 10

Trade payables includes foreign currency balances INR 2,54,86,696 outstanding for a more than six months from the date of goods receipt note (GRN).

Similarly Trade receivables includes foreign currency balances INR 87,81,77,366 which is pending for collection more than nine months from the date of the invoices. The Company believes that there will be no significant penalty on account of foreign exchange payable and receivable delay.

Note - 11

Income Tax search u/s 132 of Income Tax Act, 1961 was conducted on 22 August 2017. Subsequently, Company has received notices u/s 148 and 153A. Further the proceedings in this matter are yet to start. At this point of time it is not possible to predict the outcome or ascertain the demand of Tax, if any from the Income Tax Department accordingly no adjustments have been recorded in the financial statements. In addition to above notices, Company has also received two notices under section 276 (2) and 277 of Income tax Act,1961 for Assessment year 2016-17 and 2017-18 dated 12 March 2018 and 27 March 2018 for penalty on non- payment of taxes for aforesaid assessment years. However, at this stage no penalty has been imposed by department, therefore, it is not possible to predict the outcome in near future.

Note - 12

Having regard to enhanced production facility and planned funding, management is confident of meeting all its liabilities accordingly the financial statements have been prepared on a ‘going concern’ basis.

Note - 13

The figures for the previous year have been regrouped/ rearranged wherever necessary