1. Nature of operations

R Systems International Limited (the ‘Company’) is a leading global provider of IT services and Business Process Outsourcing (BPO) services. The Company is a public company domiciled in India and incorporated under the provisions of the Companies Act, 1956 having its registered office at New Delhi. Its shares are listed on National Stock Exchange of India Limited and BSE Limited. The Company’s primary focus is to provide IT services and solutions, software engineering services, technical support, customer care and other IT enabled services under the umbrella of Knowledge Services. The Company’s services and solutions span over seven major business verticals i.e. Telecom, Media & Entertainment, Retail & E-commerce, Banking & Finance, Manufacturing & Logistics, Technology, and Healthcare & Life Sciences.

(a) Terms/rights attached to equity shares:

The Company has only one class of equity shares having par value of Re. 1 per share. Each holder of equity shares is entitled to one vote per share. The Company declares and pays dividend in Indian Rupee. In the event of liquidation of the Company, the holders of equity shares will be entitled to receive remaining assets of the Company, after distribution of all preferential amounts. The distribution will be in proportion to the number of equity shares held by the shareholders.

(c) Shares held by holding / ultimate holding company and / or their subsidiaries / associates:

The Company does not have any holding / ultimate holding company.

(d) Aggregate number of bonus shares issued, shares issued for consideration other than cash and shares bought back during the period of five years immediately preceding the reporting date:

(e) The Board of Directors of the Company at its meeting held on January 15, 2019 has approved the buyback of upto 3,690,000 fully paid up equity shares of the Company of face value of Re. 1/- each from its existing shareholders as on record date (i.e. February 01, 2019) on a proportionate basis through Tender Offer route in accordance with the provisions contained in the Securities and Exchange Board of India (Buy-Back of Securities) Regulations, 2018 at a price of Rs. 65/- per equity share, payable in cash for a total amount not exceeding Rs. 239.85 million.

As per secretarial records of the Company, including its register of shareholders / members and other declarations received from shareholders regarding beneficial interest, the above shareholding represents both legal and beneficial ownership of shares.

* Including shares allotted pursuant to the Scheme of Amalgamation of GM Solutions Private Limited and R Systems International Limited. (See also Note 35)

# Not having significant influence over the Company.

(g) Shares reserved for issue under options

(i) R Systems International Limited Employees Stock Option Plan - Year 2001 (‘the Plan’ or ‘ESOP Plan 2001’)

Indus Software Private Limited (‘Indus’) had outstanding options aggregating 21,967 equity shares as on March 31, 2002, to be issued to the eligible employees under the R Systems International Limited Employees Stock Option Plan - Year 2001 under various vesting periods as specified in the said Plan, duly approved by the erstwhile shareholders. Indus had established “R Systems Employees Welfare Trust’’ (‘the R Systems Trust’) (formerly known as Indus Software Employees Welfare Trust”) to administer the plan, as approved by the members, for the benefits of the Company’s employees and had provided an interest free loan of Rs. 3.38 million. Consequently, Indus had allotted 21,967 equity shares of Rs. 10 each at a premium of Rs. 144 per equity share to the R Systems Trust to be further issued to the Indus’ eligible employees on the exercise of the underlying options granted to them.

As a result of the merger of Indus with the Company, all employees had surrendered their options in favour of the R Systems Trust to enable them to obtain options for shares in R Systems International Limited after the merger. The Company had issued 206,822 equity shares of Rs. 2 each at a premium of Rs. 113.42 per share to the R Systems Trust in exchange of 21,967 equity shares of Indus, apropos to the agreed swap ratio. During the earlier years out of the said 206,822 shares, 22,079 shares were issued to the employees on exercise of options.

The Company had consolidated each of its five equity shares of Rs. 2 each into one equity share of Rs. 10 each, then issued 1:1 bonus share to each of the then existing shareholder and further sub-divided each of the equity shares of Rs. 10 each into 10 equity shares of Re. 1 each. Consequently, the total number of shares issued are now 738,980 equity shares of Re. 1 each, which are treated as Treasury Shares.

The financial statement of the R Systems Trust have been included in the standalone financial statements of the Company as the trust was created for the benefit of the employees and administered by the Company and in substance the R Systems Trust functions as an extension of the Company. Therefore, an amount of Rs. 0.74 million and Rs. 2.28 million has been adjusted against issued, subscribed and paid-up capital and Securities Premium Account, respectively.

The movement in the options (in equivalent number of shares of the Company) held by the R Systems Trust during the year ended December 31, 2018 and the year ended December 31, 2017 is set out below:

The Board of Directors at their meeting held on May 04, 2017 had approved a Scheme of Arrangement between the Company and its Shareholder and Creditors (“Scheme”) for reduction of equity shares held by the R Systems Trust. The Scheme was filed on August 18, 2017 with the National Company Law Tribunal, New Delhi (Tribunal) for necessary directions.

The Board of Directors at its meeting held on December 21, 2018, decided not to implement the Scheme in its current form and considered to modify the current scheme in the light of certain management policies and changes that would have a bearing on the Scheme. The Tribunal has allowed the Company to withdraw the Scheme vide order dated January 03, 2019.

(ii) R Systems International Limited Employee Stock Option Scheme 2007 (‘the Plan’ or ‘ESOP Plan 2007’)

During the year 2007, the Company had instituted the plan for all eligible employees as specified in the rules in pursuance of the special resolution duly approved by the shareholders. The plan provides for the issuance of 650,000 options to eligible employees as recommended by the Compensation Committee constituted for this purpose.

The plan is administered by a Compensation Committee and exercise price in respect of 632,500 options granted on July 11, 2007 is Rs. 120.70 being the latest available closing price, prior to the date of the meeting of the Board of Directors / Compensation Committee, on the stock exchange on which the shares of the Company are listed. Accordingly, the intrinsic value of Employee Stock Option is taken as Rs. Nil. Further, during the year ended December 31, 2014, the Company had sub-divided equity shares of Rs. 10 each into 10 equity shares of Re. 1 each, the exercise price is accordingly adjusted from Rs. 120.70 per share to Rs. 12.07 per share.

On the recommendation of the Compensation Committee and Nomination and Remuneration Committee, the Board of Directors at its meeting held on April 30, 2016, had further granted 150,000 options at an exercise price of Rs. 12.07 /- per option under R Systems International Limited Employee Stock Option Scheme 2007.

The vesting period is 4 years (25% in each year) commencing from the date of grant under the plan. The eligible employees have an option to exercise it over a period of 10 years from the date of grant under the plan. The movement in the options during the year ended December 31, 2018 and year ended December 31, 2017 is set out below:

Options vested during the year 37,500 37,500

For options exercised during the year 2018, the weighted average share price at the exercise date was Rs. 38.78 (Previous year Rs. 50.40).

The weighted average remaining contractual life for the stock options as at December 31, 2018 is 88 months (as at December 31, 2017 : 100 months; as at January 01, 2017: 13 months).

Fair value of share options

The fair value of the options, calculated by an external valuer, was estimated on the date of grant using the Black-Scholes model with the following significant assumptions:

* Originally the price was based on Rs. 10 per share for 21,967 shares. As a result of amalgamation of Indus Software Private Limited into R Systems, the Company had issued 206,822 equity shares of Rs. 2 each pursuant to the swap ratio approved by Hon’ble High Courts of Delhi and Mumbai. The details given above for plan are before making the required adjustments in relation to consolidation of each of the 5 equity shares of Rs. 2 each into 1 equity share of Rs. 10 each as approved by the shareholders in the year ended December 31, 2006 and further sub-division of each of the equity shares of Rs. 10 each into 10 equity shares of Re. 1 each as per record date of February 28, 2014.

# The information is based on Rs.10 per share before sub-division of each of the equity shares of Rs. 10 each into 10 equity shares of Re. 1 each as per record date of February 28, 2014.

Notes:

(1) Term loans for motor vehicles are secured by hypothecation of underlying motor vehicles and carries interest rate ranging from 8.34% to 10.23% per annum. The term loans are repayable in equated monthly instalments ranging from 35 to 60 months from the date of loan.

(2) Finance lease obligation is unsecured. The interest rate implicit in aforesaid lease is 11.9% per annum. The lease obligation are repayable in 180 months from the date of lease.

Gratuity

The Company has funded defined benefit gratuity plan. Every employee who has completed five years or more of service gets a gratuity on separation equal to 15 days salary (last drawn salary) for each completed year of continuous service or part thereof in excess of six months subject to a maximum of Rs. 2 million (previous year Rs. 1 million).

The Company has a unit at Greater Noida registered as Special Economic Zone (SEZ) unit which is entitled to a tax holiday under Section 10AA of the Income Tax Act, 1961.

A significant portion of the profits of the Company’s operations are exempt from income taxes being profits attributable to export operations from undertakings situated in Special Economic Zone (SEZ). Under the Special Economic Zone Act, 2005 scheme, units in designated Special Economic Zones providing service on or after April 1, 2005 will be eligible for a deduction of 100 percent of profits or gains derived from the export of services for the first five years from commencement of provision of services and 50 percent of such profits and gains for a further five years. Certain tax benefits are also available for a further period of five years subject to the unit meeting defined conditions.

2. Earnings per share

Reconciliation of number of equity shares used in the computation of basic and diluted earnings per share is set out below:

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.

There have been no transfers among Level 1, Level 2 and Level 3 during the year.

3. Financial risk management

Financial risk factors and risk management objectives

The Company’s activities expose it to foreign currency risk, credit risk and liquidity risk. The Company’s primary focus is to foresee the unpredictability of financial markets and seek to minimize potential adverse effects on its financial performance. The primary market risk to the Company is foreign exchange risk. The Company uses derivative financial instruments to mitigate foreign exchange related risk exposures. All derivative activities for risk management purposes are carried out by team that has the appropriate skills, experience and supervision. It is the Company’s policy that no trading in derivative for speculative purposes may be undertaken.

The Board of Directors reviews and agrees policies for managing each of these risks, which are summarised below:

Foreign currency risk

The Company’s exchange risk arises from its foreign currency revenues (primarily in U.S. Dollars and Euros). A significant portion of the Company’s revenues are in these foreign currencies, while a significant portion of its costs are in Indian Rupees. As a result, if the value of the Indian Rupee appreciates relative to these foreign currencies, the Company’s revenues measured in Rupees may decrease.

Derivative financial instruments

The Company holds derivative foreign currency forward contracts to mitigate the risk of changes in exchange rates on foreign currency exposures. These derivative financial instruments are valued based on quoted prices for similar assets in active markets or inputs that are directly or indirectly observable in the marketplace. The Company has recognised mark-to-market gain of Rs. 22.59 million (Previous year gain of Rs. 16.33 million) relating to such derivative financial instruments in the statement of profit and loss for the year ended December 31, 2018.

The following table gives details in respect of outstanding foreign currency forward contracts:

Foreign currency sensitivity analysis

For the year ended December 31, 2018 and December 31, 2017, every percentage point depreciation / appreciation in the exchange rate between the Indian rupee and foreign currencies, would decrease / increase Company’s profit before tax margin (PBT) by approximately 1.80% and 0.78%, respectively.

Credit risk

Credit risk is the risk of financial loss to the Company if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises principally from the Company’s receivables from customers and investment securities. Credit risk arises from deposits held with banks, investments with financial institutions, as well as credit exposure to clients, including outstanding accounts receivable. The maximum exposure to credit risk is equal to the carrying value of the financial assets. The objective of managing counterparty credit risk is to prevent losses in financial assets. The Company assesses the credit quality of the counterparties, taking into account their financial position, past experience and other factors.

Trade receivables

The Company’s exposure to credit risk is influenced mainly by the individual characteristics of each customer. The demographics of the customer, including the default risk of the industry and country in which the customer operates, also has an influence on credit risk assessment.

One customer accounted for more than 10% of the revenue for the year ended December 31, 2018 and December 31, 2017.

Investments

Credit risk on cash and cash equivalent is limited as the Company generally invests in deposits with banks. Investments primarily includes investment in liquid mutual funds having good rating and debentures. The Company does not expect any losses from non-performance by the counterparties.

Liquidity risk

The Company’s principal sources of liquidity are cash and cash equivalents and the cash flow that is generated from operations. The investment of surplus cash is governed by the Company’s investment policy approved by the Board of Directors. The Company believes that the working capital is sufficient to meet its current requirements.

As at December 31, 2018, the Company had a working capital of Rs. 1,344.62 million including cash and cash equivalents and current fixed deposits of Rs. 475.24 million and current investments of Rs. 199.50 million. As at December 31, 2017, the Company had a working capital of Rs. 1,109.88 million including cash and cash equivalents and current fixed deposits of Rs. 740.32 million and current investments of Rs. 136.88 million. Accordingly, no liquidity risk is perceived.

4. Capital Management

The Company’s policy is to maintain a strong capital base so as to maintain investor, creditor and market confidence and to sustain future development of the business. The Company monitors the return on capital as well as the level of dividends on its equity shares. The Company’s objective, when managing capital, is to maintain an optimal structure so as to maximize shareholder value. The capital structure is as follows:

The Company is predominantly equity financed which is evident from the capital structure table above. Further, the Company has always been a net cash company with surplus cash and bank balances invested in fixed deposit with banks and liquid mutual funds.

5. Segment information

Information reported to the Chief Operating Decision Maker (CODM) for the purpose of resource allocation and assessment of segment performance focuses on the types of services provided. The CODM has identified the following as its reportable segments.

a) Information technology

b) Business process outsourcing

Revenues and expenses directly attributable to segments are reported under each reportable segment. Expenses which are not directly identifiable to each reportable segment have been allocated on the basis of associated revenues of the segment and manpower efforts. All other expenses which are not attributable or allocable to segments have been disclosed as unallocable expenses.

Assets and liabilities of the Company are used interchangeably between segments and the CODM does not review assets and liabilities at reportable segment level. Accordingly, segment disclosure relating to assets and liabilities has not been provided as per Ind AS 108.

Geographic segments are based on the areas in which the major customers of the Company operate and / or the area in which the assets are located. Although the Company’s major operating divisions are managed on a worldwide basis, they operate in five principal geographical areas of the world which are: India, United States of America, South East Asian countries, Europe and Other areas.

6. Leases

a) Finance lease - Company as lessee

The Company has finance leases for furniture and fixture. Each renewal is at the option of the lessee. Future minimum lease payments (MLP) under finance leases together with the present value of the net MLP are as follows:

b) Operating Lease - Company as lessee

The Company has operating lease for office premises. Lease payments recognised as expense during the year ended December 31, 2018 and December 31, 2017 is Rs. 33.06 million and Rs. 31.94 million, respectively.

Non-cancellable operating lease arrangements extend for a maximum period of 5 years from their respective dates of inception. The leases have varying terms, escalation clauses, renewal rights and no restrictions are imposed.

c) Operating Lease - Company as lessor

The Company has entered into an operating lease arrangement for its surplus land and building which has been classified under investment property. Lease rentals recognised as income during the year ended December 31, 2018 and December 31, 2017 is Rs. 6.78 million and Rs. 6.85 million, respectively.

The operating lease arrangement extends for a maximum period of 3 years and has price escalation clause of 5% for every subsequent 3 years of the extended term. The lease is cancellable and there are no restrictions imposed on lease agreements.

Notes:

1. Figures for the year ended December 31, 2018 and December 31, 2017 are as per provisions of the Companies Act, 2013. Figures for the year ended December 31, 2017 are based on the Previous GAAP.

2. The remuneration paid during the year ended December 31, 2018 and December 31, 2017, in excess of the limits specified above has been approved by the Central Government.

7. During the year ended December 31, 2006, Government of India has promulgated an Act namely The Micro, Small and Medium Enterprises Development Act, 2006 which comes into force with effect from October 2, 2006. As per the Act, the Company is required to identify the Micro, Small and Medium suppliers and pay interest to micro and small enterprises on overdue beyond the specified period irrespective of the terms agreed with the suppliers. Based upon the information and the supplier profile available with the Company, the management believes that there are no dues to such suppliers.

8. The Board of Directors of Company at its meeting held on September 22, 2017 had approved a scheme of amalgamation under Section 230-232 and other applicable provisions of the Companies Act, 2013 between GM Solutions Private Limited (“GM Solutions”) and R Systems International Limited and their respective shareholders and creditors (the “Scheme”), with effect from the appointed date i.e. January 1, 2018. The purpose of the amalgamation was to simplify the shareholding structure by reducing the shareholding tiers and also to demonstrate the promoters’ direct commitment to and engagement with the Company.

The Scheme was approved by the National Company Law Tribunal, New Delhi vide order dated December 07, 2018. In accordance with the Scheme, 29,746,353 (Two Crore Ninety Seven Lakhs Forty Six Thousand Three Hundred and Fifty Three Only) fully paid up equity shares of the face value of Re. 1/- (Rupee One) of R Systems International Limited has been issued and allotted to the equity shareholders of GM Solutions in the proportion of their respective equity shareholding in GM Solutions. Upon the issuance and allotment of aforesaid shares, the existing 29,746,353 equity shares of the Company held by the GM Solutions have been extinguished. Authorised share capital of the Company stands increased by the amount of authorized share capital of GM Solutions in accordance with the Scheme. Further, the Scheme envisages transfer of all rights and obligations, assets and liabilities, interests and claims of the Transferor Company to the Company with effect from the appointed date.

The aforesaid Scheme has been accounted under ‘Common Control’ method in accordance Ind AS 103 “Business Combinations” and correspondingly all assets, liabilities and reserves of the Transferor Company have been accounted for at their respective book values in the books of the Company effective January 01, 2017.

Details of assets, liabilities and reserves of GM Solutions as on January 01, 2017 and December 31, 2017 are as follows:

* Tax deducted at source is Rs. 900.

The total comprehensive income for the year ended December 31, 2017 has been adjusted to give effect of amalgamation. Consequent to this restatement, the total comprehensive income for the year ended December 31, 2017 is reduced by INR 3.88 million.

9. First time adoption of Ind AS

These are the Company’s first financials prepared under Ind AS.

The accounting policies set out in Note 2 have been applied in preparing the financial statements for the year ended December 31, 2018, the comparative information presented in these financial statements for the year ended December 31, 2017 and in the preparation of opening Ind AS balance sheet at January 01, 2017. In preparing its opening Ind AS balance sheet, the Company has adjusted the amounts reported previously in financial statements prepared in accordance with the accounting standards notified under Section 133, of the Act and other relevant provisions contained in the Act (previous GAAP or Indian GAAP). In its transition from previous GAAP to Ind AS, the Company has also availed certain optional exemptions and mandatory exceptions in accordance with Ind AS 101.

An explanation of how this transition has affected the Company’s financial performance and cash flows is set out in the following tables and notes.

A. Exemption from full retrospective application:

a. Share based payment transactions

The Company has elected to apply the exemption available under Ind AS 101 regarding application of Ind AS 102 “Share Based Payments’; to equity instruments that had vested before the date of transition to Ind AS.

b. Investments in subsidiaries

Ind AS 101 permits a first-time adopter to elect to continue with the carrying value for all of its investments in subsidiaries as recognised in the financial statements as at the date of transition to Ind AS, measured as per the previous GAAP, and use that as its deemed cost as at the date of transition.

B. Mandatory exceptions

a. Estimates

An entity’s estimate on the date of transition to Ind AS shall be consistent with estimates made for the same date on accordance with previous GAAP (after adjustments to reflect any difference in accounting policies), unless there is objective evidence that those estimates were in error.

Ind AS estimates as at January 01, 2017 are consistent with the estimates as at the same date made in conformity with previous GAAP. The Company made estimates for the following items in accordance with Ind AS at the date of transition as these were not required under previous GAAP:

- Investment in mutual funds carried at FVTPL;

- Impairment of financial assets based on expected credit loss model;

- Fair valuation of financial assets and liabilities excluding derivatives.

b. De-recognition of financial assets and liabilities

Ind AS 101 requires a first time adopter to apply the de-recognition provisions of Ind AS 109 prospectively for transactions occurring on or after the date of transition to Ind-AS. However, Ind AS 101 allows a first time adopter to apply the derecognition requirements under Ind AS 109, retrospectively from a date of the entity’s choosing, provided that the information needed to apply Ind AS 109 to financial assets and liabilities de-recognised as a result of past transactions was obtained at the time of initially accounting for those transactions.

The company has elected to apply the de-recognition provision of Ind AS 109 prospectively from the date of transition to Ind AS.

c. Classification and measurement of financial assets

As required under Ind AS 101, the Company has classified and measured the financial assets on the basis of the facts and circumstances existing at the date of transition to Ind AS.

C. Reconciliation between previous GAAP and Ind AS

The following reconciliations provide a quantification of the effect of significant differences arising from the transition from previous GAAP to Ind AS in accordance with Ind AS 101:

- Equity as at January 01, 2017;

- Equity as at December 31, 2017;

- Total comprehensive income for the year ended December 31, 2017; and

- Explanation of material adjustments to cash flow statements. In the reconciliations mentioned above, certain reclassifications have been made to previous GAAP financial information to align with the Ind AS presentation.

e. Notes to first time adoption

Note 1 - Security deposits measured at amortised costs

Under IGAAP, security deposits (both assets and liabilities) were accounted for at their undiscounted nominal values. Under Ind AS, these have been accounted for at amortised cost method by discounting the cash flows using effective interest rates. Consequently, the impact of aforesaid amortisation has been accounted for in the statement of profit and loss. The resulting changes as at the transition date has been adjusted in opening retained earnings.

Note 2 - Deferred tax

Ind AS 12 requires entities to account for deferred taxes using the balance sheet approach, which focuses on temporary differences between the carrying amount of an asset or liability in the balance sheet and its tax base. The various transitional adjustments have led to temporary tax differences, which the Company has accounted for as deferred tax adjustments. Deferred tax adjustments are recognised in correlation to the underlying transaction as either in profit and loss or other comprehensive income. The resulting changes as at the transition date has been adjusted in opening retained earnings.

Note 3 - Fair valuation of investment in Mutual Funds

Under IGAAP, investments in mutual funds were classified as current investments and were carried at lower of cost and fair value. Under the Ind AS, these investments are classified as at fair value through profit or loss (FVTPL) and measured at fair value. The resulting fair value changes have been recognised in the statement of profit and loss.

Note 4 - Allowance for credit loss

Under IGAAP, the entity determined provisions for impairment of trade receivables (provision for bad and doubtful debts) using incurred loss model i.e. if they remained outstanding over the prescribed period. Under Ind AS, impairment allowance has been determined based on expected credit loss model (ECL) for trade receivables and other financial assets, which has resulted in additional provisions being accounted for in statement of profit and loss. The impact of additional provisions due to ECL as at the transition date has been adjusted in opening retained earnings.

Note 5 - Effect of inclusion of ESOP trust

Under Ind AS, the financial statement of R Systems Employee Welfare Trust (ESOP Trust) have been included in the standalone financial statements of the Company as the trust was created for the benefit of the employees and administered by the Company and in substance the ESOP Trust functions as an extension of the Company.

Note 6 - Share-based payments measurements

The Company has granted equity-settled share-based payments to certain employees. The Company accounted for these share-based payment arrangements by reference to their intrinsic value under previous GAAP. Under Ind AS, the related liability has been adjusted to reflect the fair value of the outstanding equity-settled share-based payments. Accordingly, the amount transferred from Employee Stock Option Outstanding account to Securities Premium account, due to issue of shares to employees against options, is also measured at fair value.

Note 7 - Re-measurements of post-employment defined benefit obligation

Under the previous GAAP, the actuarial gains/losses on defined benefit obligations and plan assets were recognised as employee benefits expense in the statement of profit and loss. Under Ind AS, such actuarial gains/losses are recognised under other comprehensive income. The related tax expense/income is also reclassified to other comprehensive income.

Note 8 - Impact of merger of GM Solutions Private Limited

Merger of GM Solutions Private Limited with the Company has been accounted for with effect from January 01, 2017. (Refer to Note 35 for details)

Note 9 - Retained earnings

Retained earnings as at January 01, 2017 has been adjusted consequent to the above Ind AS adjustments.

10. The financial statements have been approved by the Board of Directors at its meeting held on February 08, 2019.