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You can view the entire text of Notes to accounts of the company for the latest year

BSE: 532540ISIN: INE467B01029INDUSTRY: IT Consulting & Software

BSE   ` 2103.80   Open: 2078.00   Today's Range 2052.50
2130.85
+26.90 (+ 1.28 %) Prev Close: 2076.90 52 Week Range 1210.33
2130.85
Year End :2018-03 

1) Research and development expenditure aggregating Rs, 295 crores (March 31, 2017: Rs, 282 crores), including capital expenditure was incurred during the year.

27) During the year, the Company has incurred an amount of Rs, 400 crores (March 31, 2017: Rs, 380 crores) towards Corporate Social Responsibility expenditure.

2) Leases

The Company has taken on lease properties and equipment under operating lease arrangements. Most of the leases include renewal and escalation clauses. Operating lease rent expenses were Rs, 1,431 crores and Rs, 1,213 crores for the year ended March 31, 2018 and March 31, 2017 respectively.

Carrying amounts of cash and cash equivalents, trade receivables, unbilled revenues, loans and trade payables as at March 31, 2018 and March 31, 2017 approximate the fair value. Difference between carrying amounts and fair values of bank deposits, earmarked balances with banks, other financial assets, other financial liabilities and borrowings subsequently measured at amortised cost is not significant in each of the years presented.

Fair value hierarchy

The fair value hierarchy is based on inputs to valuation techniques that are used to measure fair value that are either observable or unobservable and consists of the following three levels:

Level 1 — Inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities.

Level 2 — Inputs are 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 are not based on observable market data (unobservable inputs). Fair values are determined in whole or in part using a valuation model based on assumptions that are neither supported by prices from observable current market transactions in the same instrument nor are they based on available market data.

The financial instruments included in Level 2 of fair value hierarchy have been valued using quotes available for similar assets and liabilities in the active market. The investments included in Level 3 of fair value hierarchy have been valued using the cost approach to arrive at their fair value. The cost of unquoted investments approximate the fair value because there is a range of possible fair value measurements and the cost represents estimate of fair value within that range.

The following table summarises financial assets and liabilities measured at fair value on a recurring basis and financial assets that are not measured at fair value on a recurring basis (but fair value disclosure are required):

(b) Derivative financial instruments and hedging activity

The Company's revenue is denominated in foreign currency predominantly US Dollar, Sterling Pound and Euro. In addition to these currencies, the Company also does business in Australian Dollar, Canadian Dollar, Swiss Franc, Japanese Yen, Norwegian Krone, Swedish Krona, South African Rand, Singapore Dollar, Saudi Arabian Riyal, Danish Kroner and Brazilian Real. Given the nature of the business, a large portion of the costs are denominated in Indian Rupee. This exposes the Company to currency fluctuations.

The Board of Directors of the Company has constituted a Risk Management Committee (RMC) to frame, implement and monitor the risk management plan of the Company which inter-alia covers risks arising out of exposure to foreign currency fluctuations. Under the guidance and framework provided by the RMC, the Company uses various derivative instruments such as foreign exchange forward, currency options contracts and futures contracts in which the counter party is generally a bank.

In addition to the above cash flow hedges, the Company has outstanding foreign exchange forward, currency options and futures contracts with notional amount aggregating Rs, 22,404 crores (March 31, 2017 : Rs, 19,159 crores) whose fair value showed a net loss of Rs, 12 crores as at March 31, 2018 (March 31, 2017 : net gain Rs, 412 crores) respectively. Although these contracts are effective as hedges from an economic perspective, they do not qualify for hedge accounting.

Exchange loss for the year ended March 31, 2018 of Rs, 52 crores (March 31, 2017: Exchange gain of Rs, 1,522 crores) on foreign exchange forward, currency options and futures contracts has been recognized in the statement of profit and loss.

Net foreign exchange gains include loss of Rs, 213 crores (March 31, 2017: Net gain of Rs, 508 crores) transferred from cash flow hedging reserve for the year ended March 31, 2018.

Net loss on derivative instruments of Rs, 71 crores recognized in Hedging Reserve as at March 31, 2018, is expected to be transferred to the statement of profit and loss by March 31, 2019. The maximum period over which the exposure of cash flow variability has been hedged is through calendar year of 2018.

Following table summarizes approximate gain / (loss) on the Company's other comprehensive income on account of appreciation / depreciation of the underlying foreign currencies.

(c) Financial risk management

The Company is exposed primarily to fluctuations in foreign currency exchange rates, credit, liquidity and interest rate risks, which may adversely impact the fair value of its financial instruments. The Company has a risk management policy which covers risks associated with the financial assets and liabilities. The risk management policy is approved by the Board of Directors. The focus of the risk management committee is to assess the unpredictability of the financial environment and to mitigate potential adverse effects on the financial performance of the Company.

(i) Market risk

Market risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices. Such changes in the values of financial instruments may result from changes in the foreign currency exchange rates, interest rates, credit, liquidity and other market changes. The Company's exposure to market risk is primarily on account of foreign currency exchange rate risk.

(a) Foreign currency exchange rate risk

The fluctuation in foreign currency exchange rates may have potential impact on the statement of profit and loss and other comprehensive income and equity, where any transaction references more than one currency or where assets / liabilities are denominated in a currency other than the functional currency of the Company.

Considering the countries and economic environment in which the Company operates, its operations are subject to risks arising from fluctuations in exchange rates in those countries. The risks primarily relate to fluctuations in US Dollar, Great Britain Pound and Euro against the functional currency of the Company.

The Company, as per its risk management policy, uses derivative instruments primarily to hedge foreign exchange. Further, any movement in the functional currency of the various operations of the Company against major foreign currencies may impact the Company's revenue in international business.

The Company evaluates the impact of foreign exchange rate fluctuations by assessing its exposure to exchange rate risks. It hedges a part of these risks by using derivative financial instruments in line with its risk management policies.

The foreign exchange rate sensitivity is calculated by aggregation of the net foreign exchange rate exposure and a simultaneous parallel foreign exchange rates shift of all the currencies by 10% against the functional currency of the Company.

The following analysis has been worked out based on the net exposures of the Company as of the date of balance sheet which could affect the statements of profit and loss and other comprehensive income and equity. Further the exposure as indicated below is mitigated by some of the derivative contracts entered into by the Company as disclosed in note 29(b).

10% appreciation / depreciation of the respective foreign currencies with respect to functional currency of the Company would result in decrease / increase in the Company's profit before taxes by approximately Rs, 168 crores for the year ended March 31, 2018.

10% appreciation / depreciation of the respective foreign currencies with respect to functional currency of the Company would result in decrease / increase in the Company's profit before taxes by approximately Rs, 112 crores for the year ended March 31, 2017.

*Others include Australian Dollar, Saudi Arabian Riyal, Danish Kroner, Brazilian Real, Mexican Peso, United Arab Emirates Dirham, Swedish Kroner, South African Rand, Swiss Franc, Norwegian Kroner etc.

(b) Interest rate risk

The Company's investments are primarily in fixed rate interest bearing investments. Hence the Company is not significantly exposed to interest rate risk.

(ii) Credit risk

Credit risk is the risk of financial loss arising from counterparty failure to repay or service debt according to the contractual terms or obligations. Credit risk encompasses of both, the direct risk of default and the risk of deterioration of creditworthiness as well as concentration of risks. Credit risk is controlled by analysing credit limits and creditworthiness of customers on a continuous basis to whom the credit has been granted after obtaining necessary approvals for credit.

Financial instruments that are subject to concentrations of credit risk principally consist of trade receivables, unbilled revenue, investments, derivative financial instruments, cash and cash equivalents, bank deposits and other financial assets. Inter-corporate deposits of Rs, 4,000 crores are with a financial institution having a high credit-rating assigned by credit-rating agencies. Bank deposits include an amount of Rs, 2,000 crores held with an Indian bank having high quality credit rating which are individually in excess of 10% or more of the Company's total bank deposits for the year ended March 31, 2018. None of the other financial instruments of the Company result in material concentration of credit risk.

Exposure to credit risk

The carrying amount of financial assets represents the maximum credit exposure. The maximum exposure to credit risk was Rs, 68,711 crores and Rs, 67,749 crores as at March 31, 2018, and March 31, 2017, respectively, being the total of the carrying amount of balances with banks, bank deposits, investments excluding equity and preference investments, trade receivables, unbilled revenue and other financial assets.

The Company's exposure to customers is diversified and no single customer contributes to more than 10% of outstanding trade receivable and unbilled revenue as at March 31, 2018 and March 31, 2017.

Geographical concentration of trade receivables and unbilled revenue is allocated based on the location of the customers.

(iii) Liquidity risk

Liquidity risk refers to the risk that the Company cannot meet its financial obligations. The objective of liquidity risk management is to maintain sufficient liquidity and ensure that funds are available for use as per requirements.

The Company consistently generated sufficient cash flows from operations to meet its financial obligations as and when they fall due.

Indirect tax matters

The Company has ongoing disputes with tax authorities mainly relating to treatment of characterization and classification of certain items. As at March 31, 2018, the Company has demands amounting to Rs, 275 crores (March 31, 2017: Rs, 253 crores) from various indirect tax authorities which are being contested by the Company based on management evaluation and on the advice of tax consultants.

Other claims

As at March 31, 2018, claims aggregating Rs, 2,977 crores (March 31, 2017: Rs, 6,276 crores) against the Company have not been acknowledged as debts.

In October 2014, Epic Systems Corporation (referred to as Epic) filed a legal claim against the Company in the Court of Western District Madison, Wisconsin for alleged infringement of Epic's proprietary information. In April 2016, the Company received an unfavorable jury verdict awarding damages totaling Rs, 6,114 crores (US $ 940 million) to Epic. In September 2017, the Company received a Court order reducing the damages from Rs, 6,114 crores (US $ 940 million) to Rs, 2,732 crores (US $ 420 million) to Epic. The Company has received legal advice to the effect that the order and the reduced damages awarded are not supported by evidence presented during the trial and a strong appeal can be made to superior Court to fully set aside the Order. Pursuant to US Court procedures, a Letter of Credit has been made available to Epic for Rs, 2,862 crores (US $ 440 million) as financial security in order to stay execution of the judgment pending post-judgment proceedings and appeal. Accordingly, an amount of Rs, 2,862 crores (US $ 440 million) is disclosed as Contingent Liability as included in the claims not acknowledged as debts by the Company.

Bank guarantees and letters of comfort

The Company has given letter of comfort to bank for credit facilities availed by its subsidiary Tata America International Corporation. As per the terms of letter of comfort, the Company undertakes not to divest its ownership interest directly or indirectly in the subsidiaries and provide such managerial, technical and financial assistance to ensure continued successful operations of the subsidiary.

The Company has provided guarantees to third parties on behalf of its subsidiaries aggregating Rs, 4,343 crores (March 31, 2017: Rs, 2,127 crores). The Company does not expect any outflow of resources in respect of the above.

The amounts assessed as Contingent liability do not include interest that could be claimed by counter parties.

*Represents value less than Rs, 0.50 crore.

Dues to Micro and Small Enterprises have been determined to the extent such parties have been identified on the basis of information collected by the Management.

3) Related party transactions

The Company's principal related parties consist of its holding company Tata Sons Limited and its subsidiaries, its own subsidiaries, affiliates and key managerial personnel. The Company's material related party transactions and outstanding balances are with related parties with whom the Company routinely enter into transactions in the ordinary course of business.

The remuneration of directors and key executives is determined by the remuneration committee having regard to the performance of individuals and market trends.

The above figures do not include provisions for encashable leave, gratuity and premium paid for group health insurance, as separate actuarial valuation / premium paid are not available.

4) Subsequent events

Dividends

Dividends paid during the year ended March 31, 2018 include an amount of ' 27.50 per equity share towards final dividend for the year ended March 31, 2017 and an amount of ' 21 per equity share towards interim dividend for the year ended March 31, 2018. Dividends paid during the year ended March 31, 2017 include an amount of ' 27 per equity share towards final dividend for the year ended March 31, 2016 and an amount of ' 19.50 per equity share towards interim dividend for the year ended March 31, 2017.

Dividends declared by the Company are based on the profit available for distribution. Distribution of dividend out of general reserve and Retained earnings is subject to applicable dividend distribution tax. On April 19, 2018, the Board of Directors of the Company have proposed a final dividend of Rs, 29 per share in respect of the year ended March 31, 2018 subject to the approval of shareholders at the Annual General Meeting.

Bonus issue

The Board of Directors at its meeting held on April 19, 2018, approved a bonus issue of equity shares, subject to the approval of the shareholders, in the ratio of one equity share of Rs, 1 each for every one equity share of the Company held by the shareholders as on a record date to be fixed later for this purpose.

1. Indian rupee equivalents of the figures given in foreign currencies in the accounts of the subsidiary companies, are based on the exchange rates as on March 31, 2018

2. Proposed Dividend includes dividend proposed during the year but not paid

3. Alti S.A. was renamed as Tata Consultancy Services France SA

4. Alti HR S.A.S. was merged with Tata Consultancy Services France SA (Formerly Alti S.A.) w.e.f. April 1, 2017

5. Tescom (France) Software Systems Testing S.A.R.L. was merged with Tata Consultancy Services France SA (Formerly Alti S.A.) w.e.f. April 1, 2017

6. Alti Switzerland S.A. was merged with Tata Consultancy Services Switzerland Ltd. w.e.f. October 1, 2017

7. Alti Infrastructures Systemes & Reseaux S.A.S. was merged with Tata Consultancy Services France SA (Formerly Alti S.A.) w.e.f. April 1, 2017

8. Alti NV was merged with Tata Consultancy Services Belgium S.A. w.e.f. October 1, 2017

9. Teamlink was liquidated w.e.f. January 31, 2018

10. Planaxis Technologies Inc. was liquidated w.e.f. March 31, 2018

11. Tata Consultancy Services France S.A.S. was merged with Tata Consultancy Services France SA (Formerly Alti S.A.) w.e.f. April 1, 2017

12. Tata Consultancy Services Belgium S.A. was renamed as Tata Consultancy Services Belgium