MANAGEMENT DISCUSSION & ANALYSIS REPORT

1. Industry Structure and Developments:

• Highlights of Union Budget 2016 - 17:

Finance Minister brsented Union Budget for 2016 - 17 in the Parliament on 29th February, 2016 incorporating the following changes in respect of Gem and Jewellery Industry:

i. Basic Excise Duty of 1% (without Input Credit) or 12.5% (With Input Credit) is being levied on articles of jewellery. The levy is however exempted for jewelers falling below the turnover threshold (having a turnover of less than Rs. 6 crore (Rs. 60 Million) in a year).

ii. PAN is compulsory on purchase of any jewellery above Rs. 200,000.

Tax Collected at Source (TCS) at 1% on sale of jewellery, if the payment is made in cash exceeding Rs. 200,000.

2. Opportunities:

India

The Indian middle class is expected to rise from 16 per cent of population to 46 per cent of population by 2023. As in the case of China, this emerging and burgeoning middle class in India will be dominated by the young and upwardly mobile population, with a substantial amount of disposable income to spend. Ensured of financial security, a major portion of their disposable income is likely to be spent on purchase of conspicuous products, including jewellery. Luxury retailing including diamond jewellery is gaining importance in India. Indian consumer is ready to splurge on luxury items and is increasingly doing so. A globally connected youth market in metropolitan cities is revolutionizing jewellery consumption in India with demand for fashion jewellery on the rise. Indian diamond industry players are taking diamonds to the mainstream, allowing people of most economic levels to purchase diamond jewellery.

Furthermore, the introduction of certified diamonds has increased trust and made diamond valuations more transparent. Jewellery manufacturers are innovating and producing fashionable and still affordable diamond jewellery targeted at the middle class where demand for such products is strong and growing by leaps and bounds. Transition from traditional retail to organised retail is taking place with sale of branded jewellery on upswing. The convenience of shopping with multiplicity of choice under one roof, innovative and trendy designs, affordabale price points are some of the factors apbrciated by the new generation. This change in pattern, marked by a shift away from gold, is likely to continue, driving the diamond jewellery.

Online Sales

In line with the overall growth in e-commerce, online sales of jewellery are also on the upswing. Coupled with international designs, aggressive pricing, easy payment options like EMI and features like 30 days no questions asked return policy, these e-retailers are providing an excellent option for customers. Online sales and e-commerce in jewellery is expected to grow strongly in the future. Sovereign plans to tie up with 1 of the big online retail portal to increase its sales.

3. Company Overview:

Sovereign Diamonds Ltd has been Enduring Excellence to create a distinct and differentiated edge over its competitors, which has enabled the Company to emerge as a brferred supplier for diamond jewellery to some of the leading retail brands and retail chains across the country and globe.

Manufacturing Facility for Jewellery

The Company has a unit for jewellery manufacturing located at Mumbai sbrad over 13,500sq.ft employing approximately 100 skilled employees. This unit is equipped with advanced machinery and technology, encompassing rapid prototyping technology and the CAD/CAM software and 3D printers. Production processes are synchronised to deliver maximum flexibility and minimum production cycle times, thus maximising client value. Mass produced or customised, hand-made or machine-made, the highly skilled artisans deliver a trademark brcision to detail in every jewellery piece. We are in the process of expansion in the current year and will increase our workforce to around 150 employees.

We also cater to HNI customers. From simply elegant to stunning signature pieces, the collections portray an exquisite blend of the modern and classic. Besides offering a wide range of brt diamond jewellery, the Company also undertakes customised orders with jewellery design consultation.

4. Risks, Threats and Concerns:

The Company has combrhensive risk management system where the senior management team sets the overall tone and risk culture of the organisation through defined and communicated corporate values and a risk management model which promotes out-of-the box thinking for converting potential risk to potential business opportunities. The Company regularly scans the macro economy and industry for risks which it believes would affect its performance and prospects. The Company ensures that all such foreseeable risks are analysed in detail and appropriate measures are taken to mitigate these or limit their effect to minimal.

Some of the foreseeable risks as envisaged and their management as envisaged by the Company are:

Synthetic Diamonds

There has been an influx of Synthetic Diamonds in all the major markets. In the recent past few cases of undisclosed mixing of synthetic diamonds with natural diamonds have been reported. With improvement in technologies year over year, it is getting increasingly difficult to differentiate between the natural and artificial diamonds. The situation is evolving into a major challenge as Consumer confidence has taken a serious blow. Various initiatives are being undertaken by major diamond producers, trade bodies and retailers to increase the awareness about synthetic diamonds and its proper disclosure to boost the consumer confidence. The Gems and Jewellery Export Promotion Council has set up a Natural Diamond Monitoring Committee (NDMC) consisting of rebrsentatives from various trade bodies to address this issue. Proper disclosure of synthetic diamonds has been encouraged at all the levels in the value chain. Use of technically advanced equipment for the detection of undisclosed synthetic diamonds has also been increased.

Exchange Rate Risks

The industry is exposed to inherent risk of exchange rate fluctuations. The year 15-16 witnessed continuous weakening of rupee amidst some wild fluctuations. Rupee has debrciated over 11 per cent during last year. After breaching level of 68 per US$, rupee stabilized around level of 65 toward the year end. The import centric nature of the trade, acts as a natural hedge for the company. The Company has a sound foreign exchange policy and experienced personnel constantly monitor the exchange rate movements. This ensures that the exchange rate fluctuations have no adverse impact on the margins of the Company.

5. Internal control systems and their adequacy:

The Company has an Internal Control System, commensurate with the size, scale and complexity of its operations. The scope and authority of the Internal Audit (IA) function is defined in the Internal Audit Charter. To maintain its objectivity and independence, the Internal Audit function reports to the Chairman of the Audit Committee of the Board. The Company monitors and evaluates the efficacy and adequacy of internal control system in the Company, its compliance with operating systems, accounting procedures and policies at all locations of the Company. Based on the report of internal audit function, process owners undertake corrective action in their respective areas and thereby strengthen the controls.

6. Financial Overview:

During the year 2015-16, the Company delivered outstanding results with marked improvement in diamond jewellery businesses. The Company has always focussed on improving its operational efficiency by Enduring Excellence in manufacturing to create compelling value for its customers. It has always taken a pragmatic view of markets, and ensured its brsence in the key diamond markets of the world to engage closely with its customers. Based on these strengths, the Company has consistently performed well, even during difficult times when both the industry and the economy were under brssure.

For the year 15-16, some key financial highlights of the consolidated performance were:

• Crossed a milestone of Rs. 53.21 crore in turnover during the year.

• Turnover decreased by 11.52% to Rs. 53.21 crores against that of Rs. 60.14 crores in the brvious year.

• PBT for the year decreased by 34.05% to Rs. 1.84 crores compared to Rs. 2.79 crores in the brvious year.

• PAT for the year decreased by 34.59% to Rs. 1.21 crores compared to Rs. 1.85 crores in the brvious year.

7. Material development in Human Resources / Industrial Relations front, including number of people employed:

The Company prides in its people-centric principle in guiding its relationship with its employees. Employees are a key facet to the Company and the Company acknowledges that their contribution has played a key role in its growth and success. The Company ensures that safe working conditions are provided both in the manufacturing plants as well as offices of the Company. The Company regularly conducts medical checkups of all the workers at the factory regularly and updates their skills with training and development programmes, which take place at all levels. The Company pursues a culture of rewarding of excellence and commitment and encouraging bonding and team work. The Company believes in creating positive, proactive and professional work environments where talents are nurtured and careers are advanced.

By order of the Board

For Sovereign Diamonds Limited

Sd/- (Ajay R. Gehani)

Managing Director

Place: Mumbai

Date: 27th May, 2016