1996 KJMC FINANCIAL SERVICES CHAIRMAN'S REPORT On behalf of the Board of Directors and on my own behalf, I extend to you all a warm welcome to this 8th Annual General Meeting of Your Company. The performance of Your Company during the year under review 1995-96, has been very close to the projections inspite of depression in Capital Market throughout the year. Heartened by the spectacular performance, the Board of Directors are pleased to recommend a dividend of 45% on Equity Shares which again is an all time high dividend as against the projected dividend of 30% indicated in the Prospectus of the Company. [A] ECONOMIC SCENARIO Coming to today's scenario, it may be mentioned that the economic scenario under the policy of liberalisation which was started 3 yeas ago continued unabated last year. The latest estimates indicate that the Growth of G.D.P. is maintained 6.2% keeping inflation under check. More particularly the growth of industry was as high as 10% despite serious liquidity crunch. The present Government at Centre has committed itself to follow the path of reform and liberalisation and privatisation of more sectors is on the card which will generate more competition leading to greater efficiencies and improvement in the quality of services. It is believed that entry of more private Banks, Insurance Companies, thrust on development of infrastructure, more liberalisation in respect of F.D.I. - E.C.B., Euro Issues and G.D.R. will stimulate the inflow of funds and revitalise the Capital Market operations. The economic growth seems to have acquired a momentum of its own undeterred by uncertain political climate. In my view, these are encouraging signs and splak of the inbuilt strength of our country and give a glimpse of what our country can achieve and what our countrymen can aspire for in a conducive climate. [B] YOUR COMPANY'S THRUST ON DIVERSIFICATION The company's thrust is on expanding Fund-based and Non-Fund-based services on a large scale by providing value added services based on research and specialisation to meet the challenges of the 21st Century. The Management feels that it is time to act now or never. With this view in mind, the Management has decided to foray into Infrastructural Development activities, Banking and Insurance activities, Housing Finance activities, Mutual Fund and Venture Fund activities. This has become absolutely necessary to face the stiffcompetition, locally and internationally. As a part of the steps taken towards diversification programme and to expand its activities in financial sector, your Company has sponsored during the year Eight new Companies under the banner of KJMC to take up the following activities such as :- 1) Forex Services 2) Housing Finance Services 3) Infrastructure Development Services 4) Asset Management Company by Sponsoring Mutual Funds. Your Company intends to enter into Banking business. Necessary application in this regard for acquiring the Banking licence has been filed with Reserve Bank of India. Your Company is also planning to enter into Insurance Services Sector as soon as necessary laws are enacted in this respect. In order to mobilise funds, increase the resources base, we have started accepting Fixed Deposits from Public and Shareholders. Rating "CARE A - (FIXED DEPOSIT)" which indicates adequate safety of payment of Principal and Interest has been issued by CARE and has also received a certificate from RBI to increase rate of interest as may be desired by Board of Directors. Your Company has also started Foreign Exchange Division after receiving RBI's approval for the same. In the ensuing year your Company has got sufficient non-fund based assignments in hand and barring unforeseen circumstances the Company expects to achieve the projected targets. [C] THE FUTURE PROSPECTS : i. EXPECTED BUOYANCY IN CAPITAL MARKET Recently, in the Budget proposals, Government has announced certain relaxations in direct investments, Euro Bond and GDR Issues, External Commercial borrowings and raised the minimum holdings by FIIs from 5% to 10% in one single Company. All these relaxations have contributed to resurgence of investors' confidence and will hopefully add to the buoyancy in Capital Market. ii. FOREIGN EXCHANGE FLOW Demand for investment is expected to remain buoyant during 1996-97, based on a series of steps taken by the monetary authorities - particularly, the serial reduction in CRR and SLR and recent relaxation in GDR and ECB guidelines - are expected to enhance liquidity, deposit growth and lendable capacity of financial intermediaries. FDI flows show clear signs of gathering momentum and appear likely to show a significant rise in the next fiscal year. Both GDR markets and FII inflows have displayed upward swings recently. These developments, alongwith reforms undertaken in both segments of the capital market, should lead to revitalisation of the domestic capital market. Thus, investment climate in the coming fiscal year looks promising on current reckoning. iii. IMPROVEMENT IN LIQUIDITY The liquidity tightness that continued during 1995-96 is displaying some signs of easing and short term money market rates are already evidencing signs of decline. This is largely as a result of significant monetary policy changes effected by the RBI in April and July 1996, specifically, the serial reduction in CRR from 14% to 12% between April and July 1996 and the freeing of interest rates on deposits of maturity period over one year. FII-led improvement in foreign inflows since December 1995 have also served to add buoyancy to overall liquidity. The long term rates. however, continue to rule firm and the trends in the regard need to be watched in the context of anticipated growth of industrial investment in general and infrastructural demand for credit in particular complemented by the market borrowing programme of the government. iv. FOCUS ON INFRASTRUCTURE DEVELOPMENT To understand the future of Capital Market we have also to dwell upon the major macroeconomic issue, i.e. financing of infrastructure, which has a bearing on th operations of FIs, including NBFCs. Infrastructure development is a key commitment on the country's macro agenda and reflecting national priorities, your company has adopted infrastructure financial services as a key focus area. v. DEMAND FOR MONEY UNPRECEDENTED The fund requirements for financing projects in this sector are, however, of gigantic proportions. Estimates of fund requirements are variously put at Rs. 94,500 crore to Rs. 1,40,000 crore per year during the next five years. In power and telecom alone, an annual investment requirement of somewhere between Rs. 50,000 - Rs. 85,000 crore is envisaged over the next quinquennium. With the opening up of the sector to foreign investment, the focus seems to have shifted to attracting sizeable external funds for financing such projects. While it is no doubt important to attract as much foreign investment as possible, for which there is a good scope, there is a need to pay attention to resources required to be raised domestically, as bulk of the required funds flow into infrastructure has to be sourced domestically and for this Government is obliged to give necessary filip to the Capital Markets. It is heartening to note that the infrastructure sector has received due attention in the recent Budget and a series of measures have been announced by the Honourable Finance Minister for its development. The definitional ambit of infrastructure for the purpose of five year tax holiday under Sec 80IA has been widened to include irrigation, water supply, sanitation and sewerage systems. With a view to improving the retail-level attractiveness of investing in infrastructure projects, all income from such investments has been exempted from tax. Infrastructure projects have themselves benefited by way of exclusion from payment of Minimum Alternative Tax. An adequately capitalised specialised financial institution for providing financial and other assistance to long-gestative projects in select infrastructure sector constituents is proposed to be set up. It is hoped that the new organisation will bring additional resources to the sector and will not duplicate the efforts of existing DFIs in this regard. Finally, the option given to FIIs to invest in unlisted companies will go a long way towards providing the much-needed start-up funds for greenfield infrastructure projects which take time to get listed. Overall, the pronounced policy thrust in favour of infrastructure in the Budget augurs well for this crucial sector. vi. DEVELOPMENT OF LONG TERM DEBT MARKET In this context, I strongly urge that there is considerable urgency to activate long term debt market in the country to enable the corporate sector as well as FIs to raise long term funds. Creating an active market for debt instruments is a must for sustaining the interest of investors in such instruments in the long run. Some efforts in this direction have recently been made, like introduction of primary dealers in Government securities and setting up of Securities Trading Corporation by RBI. However, for a vibrant debt market the participation base has to be considerably widend and adequate funding arrangements for dealers need to be ensured. In all mature markets, bulk of long term funds is provided by Insurance Funds, Provident Funds, Superannuation Funds and Gratuity Funds. In our country, because of statutory restrictions, participation of these funds in the long term bond markets is not very significant. There is a need to relax these restrictions which could give the bond market the necessary boost. [D] CONCLUDING OBSERVATIONS To conclude, I have no hesitation in saying that the prospects for future growth of your Company's operations are quite bright. We are fully alive to the fundamental changes that are taking place in our operating environment. We have kept ourselves fine-tuned to environmental changes alongwith emergence of increasingly sophisticated client needs, even as our services are getting diversled. Simultaneously, the Company would actively address its secular agenda of expanding its client base and developing new and improved services. With the buoyancy in the economy which is poised for a rapid growth in the years to come, according to me, the prospects for Non-Banking Financial Companies in the light of measures taken by R.B.I for liberalisation and deregulation are extremely bright and the prospects of your Company are brighter still. Our faith in the shape of things to come is reflected in the diversification programme undertaken by the Company as stated earlier. In these exciting times, staying focused on our business and building on our credentials and capabilities is, I believe, the surest route towards enhancing the shareholders value. [E] ACKNOWLEDGMENTS I gratefully acknowledge the advice and guidance given by the honourable members of the Board. Your Company primarily derives its competitive edge from the professional approach of its staff and their unfailing dedication to the objectives of our Company. Their hard work and commitment merit sincere appreciation. Finally, I must place on record our deep sense of gratitude for the faith and trust reposed by our shareholders in the management of your Company. With your sustained support and encouragement, we are confident that your Company would continue to achieve new milestones of progress in the years ahead. I. C. Jain Chairman Place : Mumbai, Dated : 26th September, 1996.