MANAGEMENT DISCUSSION AND ANALYSIS

(I) BUSINESS OVERVIEW

Subdued Global Economic Activity in CY2015

The global economic recovery remained muted in CY2015 with plunging oil and commodity prices, volatile equity and currency markets, and slowdown in China amid export weakness. Even as advanced economies showed modest growth, emerging markets and developing economies declined for the fifth consecutive year. The US economic activity stayed resilient with manufacturing activity lagging due to dollar gaining in strength

Emerging Markets are expected to show a marginal increase in growth in the coming years, as compared to 2015. While a China slow down and economic rebalancing is expected and some countries will show the impact of the global manufacturing weakness, India and parts of emerging Asia are projected to grow at a robust pace. Latin America and Caribbean are expected to contract in 2016 reflecting the recession in Brazil and other countries in economic distress. The Middle East is projected to grow at higher rates, but lower oil prices and geopolitical tensions continue to temper the outlook. Russia is expected to remain in recession in 2016

The International Monetary Fund has estimated global growth rate at 3.4% for CY2016 and 3.1% in 2017 with a slower pickup in emerging markets and developing economies and a modest and uneven recovery in advanced economies. This expectation would be subject to multiple factors/downsides - a generalised slowdown in emerging market economies, China's rebalancing, lower commodity prices, the gradual exit from extraordinarily accommodative monetary conditions in the United States and the potential exit of Britain from the European Union

India : An Outperformer Amongst Major Economies

The macroeconomic situation in India continued to show signs of improvement with the baseline GDP growth target of 7.6% for FY2016 being achieved. While Emerging Markets overall remain vulnerable to swings in market sentiments and capital outflows, financial markets in India exhibited differentiated responses to these developments with equity and forex markets showing increased volatility and money and bond markets remaining insulated. With inflation under control, the Reserve Bank of India (RBI) has announced four rate cuts since January 2015, aggregating 150 basis points

For FY2017, the Reserve Bank of India has projected a growth rate of 7.6%, on the back of continuing reform momentum, improvement in business environment, forecast of a better than normal monsoon, the likely boost to consumption demand from the implementation of the 7th Pay Commission recommendations, continued low commodity prices and continuing monetary policy accommodation. After two consecutive years of deficient monsoon, the expected normal monsoon would strengthen rural demand and augment the supply of farm products

The government's start up initiative, along with the thrust on infrastructure and measures announced in the Union Budget 2016-17 to transform the rural sector is expected to boost investment further. In the Union Budget for 2016-17, the Government has also adhered to the path of fiscal consolidation and this will support the disinflation process going forward. The implementation of these measures should improve supply conditions and allow efficiency and productivity gains to accrue. On the other hand, persisting corporate sector stress and risk aversion in the banking system, along with weaker global growth and trade outlook could impart a downside to growth outcomes going forward

Private Equity : Trends and Themes

The global Private Equity industry reflected the uncertain economic environment. Private Equity funds raised US$ 44 bn for Emerging Markets in 2015, a 17% decline from 2014. Private capital investment also decreased, as fund managers deployed US$ 29 bn in Emerging Markets, down from US$ 38 bn deployed in 2014. Overall, the emerging markets share of global fund raising declined from 14% in 2014 to 12% in 2015, while the share of global investment declined from 9% to 7% over the same period. The common themes for investors across emerging markets were currency volatility, capital outflows and declines in commodity prices

Notwithstanding the drop in fund raising across Emerging Markets, India was able to attract investor interest, driven by projections of a steady 7%+ growth rates in the country. The fund raising environment in India picked up, with an aggregate fund raising for FY2016 at US$ 5.8 bn, up 24% compared to FY2015. However, funds have flowed with an uneven sbrad across sectors. The Venture

Capital sector, focused on technology enabled services, has garnered a bulk of the funds flow. IT & ITES sector contributed to 45% of total investments, with US$ 7 bn invested in 2015, thereby driving the investment growth during the year. However, the number of Venture Capital deals in Q4 2015 fell by 14% on a quarterly basis, as concerns regarding a potential slowdown in Venture Capital activity appear to be building, largely linked to operating parameters lagging expectations. Nonetheless, this sector will continue to aid economic growth and the government's initiative to promote bank financing for start-up ventures to boost entrebrneurship is expected to attract more Private Equity/ Venture Capital investments in start-ups, although in a more measured format

In other sectors such as real estate and infrastructure, challenges remain. The investment appetite is yet to revive as developers struggle to cope with leveraged balance sheets

Although the Real Estate sector is the third largest sector by value, investments in this sector declined 20% year on year. Given the long gestation for most investments, the uncertain approval processes and less than expected returns, structured debt products have been most popular. Many direct investors have also started to create portfolios of ready commercial assets

Likewise, in the infrastructure space limited number of primary deals have been concluded. However, this sector has witnessed a number of asset buyouts by financial long term investors, especially in the roads and the renewable energy space. Infrastructure developers are looking to monetise assets in order to reduce debt burden as also to recycle capital to fund their next round of asset development. This trend is expected to accelerate going forward, providing infrastructure Private Equity players with opportunities on both sides - in buying assets for a yield play and for funding infrastructure developers, which will have increased appetite for bid for new projects, once the brvious round assets have been monetised

Another emerging trend from global investors is the increasing requirement of adherence to Environmental, Social and Governance (ESG) standards, driven by cost-saving potential, mitigation of regulatory risks and the positive impact to the society. Coupled with a need to mitigate the volatility in the economy, this trend is leading to an increase in capital allocation from investors for defensive and socially relevant investment themes focussing on sectors such as financial inclusion, healthcare, education, food and agriculture, clean energy and technology

Keeping these trends in perspective, Indian Private Equity landscape is transforming dramatically. While investment opportunities across the spectrum are beginning to emerge, the Indian entrebrneur is yet to wholeheartedly embark on an investment cycle, especially given the high impact of heavily leveraged balance sheets. So, while on one hand capital is definitely being sought for, investors themselves are demanding structures and formats that mitigate risks and provide greater participation and control. However, given India's current growth and economic advantage vis-a-vis other markets, Private equity will continue to provide necessary capital required for the next round of growth

(II) ANALYSIS OF PERFORMANCE FOR THE YEAR ENDED MARCH 2016

Business Review

General currency volatility, capital outflows and decline in commodity prices remained top of mind for many investors across emerging markets. India also remained vulnerable to swings in market sentiments and capital outflows

Against this backdrop, the Tara India Fund IV had a first close of US$ 40 mn in January 2015. During the fiscal, additional approvals were also received from financial and multilateral institutions. Current investors are also looking to commit larger amounts, with a final close expected shortly. Recognising that social infrastructure needs in India still need to be addressed and are a major focus of the new government, IIML, with its strong track record in this space, has made the Fund's focus as healthcare and life sciences, education and skill development, clean energy, financial inclusion, food and agriculture, water, urban infrastructure and connectivity services

Through continuous investor connect over years, IIML has gained clear understanding of the market drivers and the types of fund products which would meet the investor's requirements. The IL&FS India Infrastructure Fund has been structured targeting investors keen on receiving a regular yield together with emerging market returns and will be making investments in growth and operational assets. In the first phase of fund marketing, fund raising efforts are focused on investors in the geographies of Japan, Korea and Australia and the attempt is to better engage with the investors to facilitate smooth diligence process at our end and to allay their doubts over the regulatory environment and other project related risks. Similarly, given the structured nature of the investor demand in Real Estate, a listed product is currently being marketed

During the year some of the large funds under IIML management entered their extension periods. IL&FS India Realty Fund II, which was raised in 2007 with a corpus of US$ 895 mn, approached the end of its life in December 2015. Post completion of its investment period in 2011, the Fund lost crucial value creation time to the subdued business environment between 2011 and 2014. Endeavours to generate optimal exits often involve protracted negotiations and the investors have reposed faith in extending the fund to allow for optimal exits

A critical ingredient for success in new fund raises will be our divestment track record and the ESG policies adopted by the Company, as they also address directly the regulatory and project issues that the investors may expect to face in India. In this aspect, we have a significant opportunity to showcase our expertise, given that all the current Funds being managed by the Company have implemented ESG and are brsently in the monitoring and harvesting stage

During the year, the Company undertook divestments aggregating Rs. 14.7 bn. Key Funds such as IL&FS India Realty Fund, Standard Chartered IL&FS Asia Infrastructure Growth Fund and Tara India Fund III, are in active divestment phase, and your Company is working with the respective investee companies to lay the path towards liquidity over the next 2-3 years

Financial Performance

While regular divestments are essential to showcase the Company's investment prowess, a consistent divestment record over the last 3 years has steadily decreased the fee earning AUM for the Company. This has led to lower fee income and the company has successfully contained its cost over the last several years to offset the same

Though current fund raising efforts for IL&FS India Infrastructure Fund, Tara India Fund IV and Yatra platform have entailed marketing spends, the Company deems such costs as being important to build sustainable business value for the future. On a consolidated basis, the Total Income of the Company for the Financial Year 2015-2016 was Rs. 1,907.60 million. The resultant Profit after Tax after minority interest on a consolidated basis for the Financial Year 2015-2016 was Rs. 560.85 million

(III) OUTLOOK FOR FINANCIAL YEAR 2016-17

India's economy is on track to being one of the fastest-growing economies in the World this year. Resilient domestic demand and a limited reliance on the external sector are expected to fuel a pickup in growth. The Budget reaffirms the government's fiscal consolidation path and introduces a number of measures to spur the rural economy and improve the business environment. With an above normal monsoon forecast and reforms expected in line with the path set in the Union Budget, in the absence of any major exogenous shocks, the Indian economy is projected to grow at 7.6% in FY2017

However, any weakening of global economic activity could generate spill overs in the Indian market as well. Similarly volatility in the foreign exchange market on account of external developments and uncertainty on oil prices in view of the political forces impacting oil market dynamics could also dampen the growth in India. Also tightening in US monetary policy in the context of a resilient US recovery could also influence the growth outlook in India

Progress on infrastructure improvements and government efforts to boost investment are expected to offset the impact of any tightening of borrowing conditions resulting from tighter U.S. monetary policy. The Union Budget 2016 also lays significant focus on infrastructure development and thus there is expected to be a wide scope for investment in this sector in the coming years. It is expected that these developments will boost investor interest in the IL&FS India Infrastructure Fund and generate good traction for the same

Infrastructure in the country is in a challenging phase and in order to help cash-strapped developers get easier access to funds while also creating a new investment avenue for institutions and high net worth individuals, the market regulator allowed Indian firms to launch Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs). The Government has also recently moved to remove Dividend Distribution Tax on InvITs / REITs, which was seen as a significant hindrance to their acceptance. With the removal of this roadblock, such investments will become attractive to investors and will help in bringing foreign funds to India's financial markets

InvITs are proposed to provide a suitable structure for financing/refinancing of infrastructure projects in the country by providing wider and long-term re-finance for existing infrastructure projects. They are expected to help in attracting international finance into Indian infrastructure sector and will enable the investors to hold a diversified portfolio of infrastructure assets. They are a good avenue for the developers and funds already invested in infrastructure assets to monetise their investments. InvITs are also proposed to bring higher standards of governance into infrastructure development and management and distribution of income from assets so as to attract investor interest

These developments are thus creating a favourable environment for financing and development of infrastructure in the country and IL&FS India Infrastructure Fund is rightly positioned to channelize the investor interest into this sector. It is also an upcoming opportunity for IIML to play on its strength and expertise and act as managers for external InvITs and REITs

There is need to offer similar differentiated products to investors, and reduce the time to market. In this context, it is imperative to evolve your Company's business model beyond classic fund management. This evolution would be in form of extension of existing lines of business by deepening the product offering - for instance, by offering not just equity, but also structured products across infrastructure and real estate; not just in India but across geographies like Middle East and Africa

Another facet of this extension is the provision of advisory services to offshore investors which do not have the capacity to extract value from their direct investments in India. Your Company has taken such success fee based mandates in the real estate space and would seek to build on this practise. In addition, leveraging on the investor relationships, your Company plans to put together a consortium of like-minded investors, which can then invest in opportunities sourced through our robust network of corporate relationships. IIML managed funds would also co-invest alongside the consortium, providing an additional degree of comfort to the consortium members. Consequently, such an initiative will go towards showcasing a large number of proprietary deals to IIML which would, in turn, provide a competitive edge vis-a-vis its peers

In addition, there is need to develop new business lines around concepts like InvITs, which are, as of now, at a nascent stage. Management of such ventures would help broaden our revenue profile and ensure growth. Such initiatives would entail higher marketing and establishment costs, and therefore in order to contain the impact of profitability, your Company would also need to continue to stay focussed on managing and optimizing its costs

(IV) BUSINESS SEGMENT AND HUMAN RESOURCES

The Company brsently operates in one business segment - fund management and other related services

The brsent team is well equipped to manage all aspects of its brsent business. With established efficiency in investment sourcing, monitoring and exit processes, the company has proven consistency in performance. Operations across multiple locations and jurisdictions have maintained uniformity in delivering effective outputs

In pursuit of continued excellence in our operations, the Company is not only focusing on delivering the best in what it is doing but also envisions venturing beyond the existing opportunity set. This is being achieved by implementing best practices as well as incentivizing the team so that the team stays motivated to deliver and is brpared to face a challenging environment

The Company brsently has 44 employees

(V) INTERNAL CONTROL SYSTEMS

The Company has an adequate system of internal controls to ensure accuracy of accounting records, compliance with all laws and regulations and compliance with all rules, processes and guidelines brscribed by the management

An extensive internal audit is carried out by an independent firm of Chartered Accountants. Post audit reviews are also carried out to ensure follow up on the observations made. The scope of the internal audit is determined by the Audit Committee and the internal audit reports are reviewed by the Audit Committee on a regular basis

The Internal Auditors also review all Related Party transactions and the Corporate Social Responsibility activities of the Company