MANAGEMENT DISCUSSION & ANALYSIS

GLOBAL ECONOMY OVERVIEW

During the year, major economies across geographies remained The European Central Bank lowered its projections for inflation largely subdued. Global growth declined from 3.4% in 2014 to 3.1% and economic growth, brdicting 1.4% growth for the Euro Area in in 2015 driven mainly by fall in commodity prices, considerable 2016. The deceleration in large emerging market economies such tightening in world trade, and choppy financial markets. In the US, as China, Russia, and Brazil in 2016 had a rub-on impact on the rest growth remained flat at 2.4% with a modest uptake expected in 2017. of the world.

INDIAN ECONOMY OVERVIEW

India remains a bright spot amid the global uncertainty, with its growth rate outpacing the emerging as well as developed markets. At 7.6% GDP growth in the financial year ended March 31, 2016 (FY2015-16), India is one of the fastest growing major economies in the world. During the year, the economy crossed the US$2 trillion mark and is expected to continue the trajectory in FY2016-17. Furthermore, inflation, fiscal deficit, and current account balance have exhibited distinct signs of improvement. India's trade deficit reduced to a five-year low of US$5.1 billion in March 2016, which came on the back of a sharp 21.6% fall in imports. Trade deficit stood at US$118.5 billion in FY2015-16, 14% lower than in the brvious year. Consumer price inflation fell to a six-month low of 4.8% in March 2016. In the coming year, a normal monsoon will further boost growth prospects.

FINANCIAL SERVICES INDUSTRY

India's diversified financial sector comprises commercial banks, non-banking financial companies, co-operatives, pension funds, insurance companies, mutual funds and others. During FY2015-16, the Government took several measures to strengthen the financial services sector, which include Jan Dhan campaign for financial inclusion, licensing of payment banks and small finance banks, the new bankruptcy law, liberalisation of foreign direct investment and portfolio investment, universal social security schemes in insurance and pension, and gold monetisation scheme.

GROWTH DRIVERS FOR FINANCIAL SERVICES INDUSTRY Strong economic growth and demographic advantage

India's economic growth is expected to rise above 8% over FY2016-20 from around 7% in FY2012-15, helping expand the financial services sector. The economic progress will be supported by a large workforce. According to CRISIL, India is set to become the largest contributor to the global workforce. Its working age population (15-59 years) is likely to swell from 749 million in 2010 to 962 million in FY2029-30. A large productively employed young population will spur consumption demand and increase in the number of customers in the financial services space.

Increase in disposable income

The rise in disposable income is resulting in higher standard of living, boosting demand for personal credit. Credit under the personal finance segment (excluding housing) rose at 9.3% CAGR during FY2009-15 to US$93.4 billion by end-2015. (Source: RBI

Under-penetrated housing finance

India's mortgage finance market is largely under-penetrated compared with the rest of the world, providing sufficient opportunity for housing financiers to step up their housing credit. With the median age of little over 25 years in India, there is potential for huge demand from young working-age population.

Rising Rural Income

Disposable household income in rural India is projected to grow at 3.6% CAGR over the next 15 years. Rising income is expected to increase the need for financial services in rural areas. The Prime Minister's Jan Dhan Yojana (JDY) has enabled the opening of nearly 220 million bank accounts in rural India. This will financially empower the rural population by encouraging savings, easing loan delivery, and promoting direct cash transfers. Source: McKinsey estimates, Ministry of agriculture, Techsci Research

KEY INITIATIVES

The Government has announced many initiatives to make financial services accessible and affordable to the public. Some of them include:

o New banking license - Reserve Bank of India (RBI) has been active in pushing the agenda of financial inclusion across the country. As a part of this vision, RBI has granted in-principle banking licenses to two players, which have become operational in FY2015-16. This is in line with RBI's directive to set up universal and niche banks in the country, catering to diverse sectors of the economy, with special focus on financial inclusion and micro-credit.

O Small and payments banks - The primary objective of setting up small and payments banks is to extend financial inclusion across the country. The small finance banks are expected to offer credit to the society's under-banked sections through high technology and low cost operations. Payments banks are allowed to leverage other players'network, besides their own to help in providing a large number of access points, particularly in remote areas.

O Jan Dhan Yojana - The Honourable Prime Minister unveiled the Jan Dhan Yojana, one of the biggest financial inclusion programmes in the world. The government's long-term mission is to have a full-fledged brick and mortar network for all villages with population above 2,000. Moreover, each bank must have at least one fixed-point banking outlet for every 1,000 to 1,500 households.

O Benefits to large NBFCs - NBFCs with asset size of over Rs. 5,000 million would be eligible as a financial institution under SARFAESI Act, which would significantly enable their ability to enforce collateral towards recovery dues from defaulting borrowers. Also, from FY2016-17, NBFCs are eligible for deduction to the extent of 5% of their income in respect of provision of bad and doubtful debts (NPAs) under the Income Tax Act.

O FDI norms - FDI will be allowed beyond 18 specified NBFC activities in the automatic route in other activities, which are overseen by financial sector regulators.

O Affordable housing - The government has taken several initiatives to encourage development of the housing sector. The Union Budget FY2016-17 has been able to brsent 360-degree initiatives for customers, builders, and lenders to provide major impetus to the affordable housing segment. o Digital locker - Under the Digital India initiative, the Government aims to provide a digital locker to Indian residents. It will store their personal documents to enable easy sharing across agencies. This will consequently minimise usage of physical documents, eliminating the incidence of fake documents. A dedicated 10MB free personal storage space, linked to each resident's Aadhaar, is being provided. Currently, accessible via web portal, this will also be made available through mobile application.

OPPORTUNITY

Changing consumer behaviour - The young generation is rapidly adopting technology to interact and transact with the world. The number of internet users in India has tripled to 485 million in the past three years (Source: Euromonitor). New technologies such as cloud and analytics are gaining importance. This would provide a huge opportunity to nimble and innovative players in the financial sector to use technology to strengthen their business. Technology can be used to reach customers in a cost effective manner and enhance customer experience through faster turnaround time, wider product offerings and better risk control and pricing.

THREATS

O Uncertainty in global markets, owing to a recessionary environment in advanced economies and increased strain in China and other emerging markets can result in volatile capital inflows and currency fluctuations. In India, the slow pace in implementation of economic reforms and important legislations can further delay growth.

O Any adverse change in the regulatory and policy environment in which IIFL operates could affect our business and financial condition.

o I n the financial services industry, security and sanctity of client data is of utmost importance. A regular and continuous threat for firms is data theft via malicious malware and email. Technology has not only increased players, vendors and customers, but has added multiple threats to the businesses. Cyber-attacks are getting larger in scale and size, even to the extent of coordinated attacks from different geographies.

SEGMENT OVERVIEW

NBFCs growing in prominence

Indian NBFCs have been effective in serving the unbanked customers by spearheading into retail asset-backed lending, lending against securities and microfinance. Primarily, they offer small business loans, small-ticket personal loans, financing of two wheelers and cars, farm equipment financing and loans for purchasing used commercial vehicles/ machinery.

According to ICRA, NBFCs will account for 17.1% of the country's total credit by FY2018-19, compared with 13.1% in FY2014-15 and 9.4% in FY2005-06. Majority of the growth is expected to be at the cost of government-owned banks, whose share is estimated to fall to an all-time low of 58.6% by FY2018-19 (against 64.5% in FY2014-15). According to joint report by the Boston Consulting Group (BCG) and Confederation of Indian Industry (CII), NBFCs' share of credit went up from 10% to 13% between FY2004-05 and FY2014-15. This growth is likely to surge over the next 5-10 years.

Factors supporting growth of NBFCs include better product lines, wider and effective reach, quick turnaround time, strong risk management capabilities and better understanding of customer segments. In an atmosphere where delivery of financial services has become increasingly commoditised, customer experience will play the distinguishing factor for an ideal service provider. The ability to provide tailor-made financial solutions across multiple platforms will result in an upsurge of product innovations. Going ahead, there is need for NBFCs to be integrated in the financial system with full policy support. This will help meet the financing needs of growing India.

Wealth Management - potential for growth

Wealth management is gaining huge popularity in India as an increasing number of Indians are joining the millionaire club. According to the Asia Pacific 2016 Wealth Report, India is ranked 4th among the top five Asia-Pacific countries with about 24-million number of high net worth individuals (HNWIs). Mumbai and Delhi have been named among the top Asia Pacific cities for HNIs. Mumbai is home to 41,200 millionaires and Delhi houses 20,600 HNIs.

There is a need to seize this opportunity of growing HNIs population, primarily driven by strong GDP growth and savings rates. In future, wealth managers will have to reinforce their asset gathering and client acquisition competences through differentiated offerings, tailoring them to specific regions and client segments. The emphasis will be on more innovative and customised investment strategies as well as product offerings to make the most of the performance of existing assets.

Capital Markets on an improving trend

There has been a substantial increase in capital market activity with the government's pro-reform initiatives. An encouraging response has been noticed to initial public offerings with strong participation from domestic as well as institutional investors. The mutual funds industry registered robust inflows during the year from the retail investor base. The industry added over 5 million retail folios in FY2015-16, taking the count to 45.4 million with over 75% folios in equity-oriented funds (Source: CRISIL).

Going forward, the capital markets will face headwinds in the form of global growth slowdown, slow pickup in investment activities,and corporate earnings growth, which may continue to weigh down on market sentiment. Nevertheless, equity as an asset class is significantly under-owned. Therefore, it will remain a brferred asset class with expectations of improvement in corporate balance sheet and renewal of investment and consumption cycles.

COMPANY OVERVIEW

IIFL Holdings Ltd (Bloomberg Code: IIFL IN, NSE: IIFL, BSE: 532636) is a leading player in the Indian financial services space. IIFL Group offers financing, asset and wealth management, equity, commodity and currency broking, financial product distribution, investment banking, institutional equities, project financing and advisory services through its various subsidiaries.

Promoted by first generation entrebrneurs, Mr. Nirmal Jain and Mr. R. Venkataraman, IIFL Group is backed by number of marquee institutional investors including, Fairfax Group and General Atlantic. The Group's subsidiaries are led by highly qualified and experienced management team who promote a culture of growth, entrebrneurship and innovation among the huge talent pool of about 12,000 people. IIFL Group has a strong geographic footprint in India with nearly 2,500 business locations, besides an extensive global brsence with offices in London, New York, Geneva, Singapore, Hong Kong, Dubai and Mauritius.

Founded in 1995 as a research firm, IIFL has consistently innovated, reinvented and adapted itself to the dynamic business environment without losing focus on its domain of financial services. Today, IIFL has diversified into a full range of financial services, serving over 3 million customers across various business segments. The Group has de-risked itself from the volatility of capital markets with multiple revenue streams and a good mix of fee and funding-based income. IIFL's strong brsence across various customer segments (retail, affluent, institutional) and wide network encompassing branches, franchisees, sub-brokers, online and mobile platforms help in catering to the financial needs of aspiring and growing India.

BUSINESS OVERVIEW Financing  NBFC

During the year, IIFL Holdings Limited has consolidated its holding in the NBFC through the acquisition of 1.13% equity share capital of India Infoline Finance Ltd., the Company's non-banking financial subsidiary, from Bennett Coleman & Company Ltd. Pursuant to the said acquisition, India Infoline Finance Ltd. and India Infoline Housing Finance Ltd. (subsidiary of India Infoline Finance Ltd.) have become the Company's 100% subsidiaries.

The Group's NBFC business has further strengthened its position, with a diverse product suite comprising home loan, loan against property, commercial vehicle finance, healthcare finance, gold loan, capital market finance and SME business. During the year, its operations focused on digitization and strategic headcount addition in growth verticals.

In line with its strategy, the Company has made investments in setting up analytics capabilities, software and infrastructure to drive business growth through streamlined processes and greater operational efficiency. There has been continuous progress on the digitization front to provide seamless experience to customers over multiple platforms. During the year, the Company launched its first-ever mobile app and self-service portal for customers. Customers now also have more flexibility in choosing from different modes of disbursal and payment such as IMPS, brpaid cards and online money transfer along with traditional methods of payment. The Company's focus on digitization and analytics should further help in improving operating efficiencies and enhancing customer experience.

During the year, the Company forayed into digital SME space through tie-ups with e-commerce companies such as Flipkart and Snapdeal, to provide analytics-led, br-approved working capital finance to their suppliers. Moreover, the Company intends to increase its penetration in this product segment gradually via tie-ups with other prominent players.

Home Finance

IIFL believes in the government's 'Housing for All' mission and expects this initiative to be instrumental in reaching out to masses. India Infoline Housing Finance Ltd, a wholly owned subsidiary of India Infoline Finance Ltd, has increased its focus on retail home loan segment. Its added emphasis is on affordable housing, offering loans under Pradhan Mantri Awas Yojana - Credit Linked Subsidy Scheme (PMAY-CLSS) to the society's targeted sections.

During the year, the home loan business exhibited significant growth in loan disbursal, pursued quality business and enhanced customer service. The retail mortgage book has grown 89% y-o-y and it constitutes about 41% of the overall NBFC book as on March 31, 2016.

The Company has set up captive teams for managing the entire lifecycle for home loans. It has initiated the digital journey through a new-age website and mobile app with a customer login to view loan statement and pay EMI online. The Company plans to leverage technology as well as existing group distribution network to expand its reach and service customers in smaller cities and towns in India.

Wealth Management

During the year, IIFL Wealth Management Ltd (IIFLW) has made considerable progress in all its business segments - domestic and offshore services, asset management, distribution of financial products and trustee services. Its assets under management (AUM) is growing at a steady pace of 12% y-o-y to about Rs. 800 billion. The Company manages over Rs. 38 billion of AIF assets through its asset management, making it one of the largest AIF platforms in the country. It is the only AIF manager to return over Rs. 10 billion of clients' money invested in its products up to March 31, 2016.

During the year, IIFLW has obtained SEBI registration for membership with NSE and BSE to offer broking services to its clients.

Strategic investment by General Atlantic: General Atlantic Singapore Fund Pte. Ltd (GA), a leading global growth equity firm, made a strategic investment in IIFLW. GA invested an aggregate of Rs. 9,038 million in IIFLW through fresh issue of equity shares and additionally Rs. 1,591 million for acquisition of shares from IIFLW employees. Pursuant to this, GA holds a stake of 21.61% in the equity of IIFLW, on fully diluted basis (assuming full conversion of outstanding ESOPs of the Company). GA's investment will help support IIFLW's continued growth and platform expansion as the brmier wealth manager in India.

NBFC acquisition: During the year, IIFLW acquired 100% equity and management of Chephis Capital Markets Limited, a non-deposit taking non-systematically important NBFC [ND-Non SI].The acquisition tookplace in February 2016 after obtaining necessary RBI approval. The subsidiary's name was subsequently changed to IIFL Wealth Finance Limited (IIFLW Finance). IIFLW Finance will provide loan against securities to IIFL Wealth clients. IIFLW has invested Rs. 9,000 million out of investments received from GA towards equity of IIFLW Finance. IIFLW Finance has commenced its lending business and the total loan assets as on March 31, 2016 stood at Rs. 1,000 million.

AMC: Under IIFL Mutual Fund Platform, the assets under management have increased from Rs. 3,524 million to Rs. 4,923 million. During the year, the IIFL Dividend Opportunities Index Fund and IIFL Nifty ETF were merged with IIFL India Growth Fund.

The following schemes were launched during the year under IIFL's Alternative Investment Fund(s) platform (IIFL AIF):

• IIFL Best of Class Fund I (Category III) - focused on investment in equity and equity-related securities of listed Indian companies.

• IIFL Cash Opportunities Fund (Category III) - emphasised on primarily investing in debt and quasi debt securities.

O I IFL Investment Opportunities Fund Series 1 (Category III)

- focused on investing in multiple asset classes including equity and equity-linked instruments, private equity, fixed income instruments, debt and debt-related instruments of companies.

• IIFL Asset Revival Fund Series 2 (Category III) - focused on investments in securities with debrssed valuations; having a high probability of benefiting from improving macro-economic scenario in the medium to long term.

• I IFL Seed Ventures Fund 1 (Category II) - emphasised on primarily investing in private equity, alternative investment funds and venture capital funds registered with SEBI and securities of unlisted entities.

o IIFL Real Estate Fund Domestic Series III (Category II)

- focused on investing in equity, debt and equity-linked instruments involved in projects or ventures that have significant growth potential in India's real estate sector.

The total assets managed by IIFL AMC under Mutual Fund, AIF and Portfolio Management Services have increased to Rs. 56,200 million as on March 31, 2016 from Rs. 28,950 million as on March 31, 2015.

Distribution business: With regulatory changes signalling a move from a commission-based model to a more transparent and regulated advisory fee model, the coming year promises to be one of transition. Imposition of service tax, capping of commissions and focus on no load schemes will continue to put brssure on commissions. However, it will also open the possibility to build a robust annuity-based business model with focus on a fee plus performance structure, which offers greater transparency to clients. IIFLW, with its financial product distribution and asset management services, added by the acquisition of NBFC and broking licenses of BSE and NSE, is positioned as one of the most extensive product platforms in the country. The Company would continue to invest heavily in technology to increase employee efficiency, delivery of products and best-in-class services to high net worth clients.

Agency

During the year, the capital market activities declined due to adverse market conditions, as overall exchange volumes declined. The Company's digital business has however gained traction. IIFL Markets, mobile trading platform, is the best rated and highest downloaded app in its category. Since February 2015, the app has seen over 500,000 downloads and over 13,500 users on Google Play Store have accorded it a rating of 4.4 out of 5, best among the peer group.

IIFL is one of the largest distributors of financial products such as Life Insurance, Mutual Funds, NCDs, Tax-free bonds, IPOs etc. through wide distribution network and business associates. ICICI Prudential, Reliance, Bharti AXA, Future Generali, Aegon Religare, HDFC Standard Life Insurance are some of the key partners in insurance. The increasing use of internet and mobile communication has given consumers access to extensive information and ability to buy/sell in a fast and convenient manner. During the year, the Company forayed into online solutions and mobile applications in the area of mutual fund and insurance. With our mobile apps, retail investors can compare products, gain access to in-depth information across manufacturers at a click of a button thereby, aiding informed decision-making.

IIFL's investment banking division registered strong momentum and expanded the product range outside conventional equity and capital market segments. FY2015-16 was a defining year at IIFL with 10 completed transactions, the largest number of investment banking transactions executed by IIFL in its history in a single fiscal year. This included IPOs, QIPs, NCD placements and br-IPO placements, among others, which have enabled mobilisation/placement of Rs. 32,756 million

FINANCIAL REVIEW

As a significant part of the Company's business is conducted through its subsidiaries, the consolidated accounts provide a more accurate rebrsentation of the Company's performance compared with the standalone. Therefore, the 'Management Discussion and Analysis' pertains to consolidated results.

NBFC Operations

For the year, the income from NBFC operations stood at Rs. 11,563 million, up 13% year-on-year (y-o-y), while Profit after Tax was at Rs. 3,387 million, up 12% y-o-y. NBFC's ROE for FY2015-16 stood at 16.9% and ROA was 1.8%.

Consistent financial performance is being achieved through a well-diversified product suite comprising traditional businesses such as home loan, loan against property, commercial vehicle finance, gold loan and medical equipment finance as well as new age businesses such as digital finance.

Loan book, brdominantly retail, showed a steady increase of 21% y-o-y to Rs. 177,695 million with total Assets under Management (AUM) at Rs. 195,144 million, up 21% y-o-y for the year ended March 31, 2016. This growth was driven by retail home loans, commercial vehicle (CV), medical equipment finance and SME business loans. In recent years, the share of retail mortgages in the overall loan book has been rising steadily. Retail mortgage loans, at Rs. 72,414 million, constitute 41% of the loan book and grew 89% y-o-y. Commercial vehicle loan book increased 93% y-o-y to Rs. 16,936 million. The Company's large mortgage loans or construction finance strategy dovetails its retail home loan strategy where it funds reputed developers against their residential projects, which are suitable for the Company's home loan customer segments

However, there was a decline in loan book of large mortgages; gold and capital market related loans grew in single digits. This is part of a conscious strategy to de-risk the Company's loan book and make it more retail focused.

NIMs have declined to 6.2% in FY2015-16 due to higher share of lower-yielding loans. Going forward, NIMs are expected to stabilise at these levels due to higher yields on gold, CV, and SME loans. Borrowing costs are expected to drop as banks gradually pass on the benefits of rate cuts by RBI.

The Company will continue to expand its retail customer base supported by strong brsence in over 1,000 branches across length and breadth of the country. Furthermore, it is driving digitization initiatives for improved operational and sales efficacy.

Operating cost ratios are expected to decline, as the Company achieves better economies of scale in most of its products. The Company has put in place the requisite infrastructure including branches, sales, credit and risk teams and support functions. The Company should be able to grow its loan book significantly from current level, on the back of this infrastructure. The Company's focus on digitization and analytics should further help improve its operating efficiencies.

India Infoline Finance Ltd's capital adequacy ratio stood at 17.71% as at March 31, 2016, while the Tier I capital ratio was 11.66%. Similarly, the capital adequacy ratio of India Infoline Housing Finance stood at 16.75% as on March 31, 2016 against the mandated 12%, giving adequate room to expand the loan book. In FY2015-16, Gross Non-Performing Assets (GNPA) marginally increased to 1.44% from 1.27% in FY2014-15. Net NPAs remained flat at 0.54%. Total provision coverage (including standard asset provision) stands at 89.7% of gross NPAs.

The Company's NPAs remain at a low level and provision coverage is comfortable. It has created additional provisions, well in excess of RBI norms as well as its own internal norms.

NPAs are expected to remain stable in the coming year due to a de-risked portfolio strategy, well developed credit appraisal and monitoring processes, and enhanced collection efforts. The Company would be moving from 150+DPD to 120+DPD NPA recognition norm in the current year. This would create a temporary rise in NPA ratio in the first quarter, which the Company expects to bring down in subsequent quarters through tightening of collection periods.

Wealth management operations

The wealth subsidiary, IIFL Wealth Management Ltd registered another year of strong financial performance. During FY16, the Company's income was at Rs. 5,909 million, up 29% y-o-y while PAT was at Rs. 1,694 million, up 52% y-o-y.

The Company offers advisory, wealth structuring solutions, asset management and distribution services to high net-worth households (HNWH). Under the wealth management business, total assets under management, distribution, and advice stood at Rs. 794 billion as at March 31, 2016, up 12% y-o-y.

During the year, the Company commenced lending operations to HNWH clientele, through the dedicated NBFC subsidiary, IIFL Wealth Finance Ltd; and had assets of Rs. 9 billion as at March 31, 2016. In the coming year, the Company expects to build a strong loan against securities book from its HNWH clientele.

With the acquisition of NBFC and broking licenses of BSE and NSE, the Company positioned itself to participate in the larger share of wallet besides family office, estate planning, and offshore advisory solutions enabling a stronger penetration into this segment.

Capital Market Activities

On the capital market business, the Company's revenues and profits declined on y-o-y basis as market volumes declined and commission rates were under brssure. Income from capital market activities includes brokerage and related income from cash and derivatives segment at BSE and NSE as well as currency segment, commodities trading and investment banking services. During the year, capital market activities income was at Rs. 4,397 million, down 2% y-o-y.

The average daily equity market turnover was at Rs. 68,308 million in FY2015-16, down by 4% y-o-y as against 10% y-o-y fall in the exchange turnover. The exchange traded volumes in commodity segment increased 8% y-o-y, while the business' volumes were up 5% y-o-y. Within currency segment, the average daily currency turnover for the business was down 24%, while exchange (NSE) volumes were up 47% y-o-y.

During the year, the Company's investment banking team focused on diversifying its business mix beyond traditional Equity Capital Markets (ECM) based products. This trend is expected to continue in coming years. The team has successfully completed 10 transactions during FY2015-16 and endeavours to grab a larger market share in FY2016-17. Besides the experience and track record of its team members, the investment banking division leverages upon the Group's strong research capabilities, strength in institutional placements, wide reach and brsence in every investor segment.

COSTS

The following section provides details of the expenditure incurred by the Company under various heads during the year.

Employee Expense

Employee costs went from Rs. 6,049 million in FY2014-15 to Rs. 7,045 million in FY2015-16, up 16% y-o-y because of salary increments and bonus. The largest salary increases were in housing finance and wealth operations, primarily due to increase in headcount to support higher business volumes last year and in anticipation of future ramp up. Salary costs were contained in the capital markets business. Overall headcount for all companies in IIFL Group fell 8% from 12,903 in FY2014-15 to 11,890 in FY2015-16.

Finance Cost

Finance cost increased to Rs. 16,800 million in FY2015-16 from Rs. 14,338 million in FY2014-15, an increase of 17%. This increase was primarily driven by incremental borrowings to fund the loan book growth, which was up 21%, y-o-y. The average cost of funds for the NBFC business has reduced further by 86 bps in FY2015-16 to settle at 10.2%.

Debrciation Expense

Debrciation expense in FY2015-16 was Rs. 661 million, compared to Rs. 592 million in FY2014-15. The Company debrciates assets on straight-line basis, writing off computer and technology assets completely in three years, and other assets like furniture, electrical and office equipment, among other in five years.

Provisions and Write-offs

The Company makes provisions and write-offs as per management estimates, subject to minimum provision requirement in accordance with the directions and asset classification norms issued by the RBI and National Housing Bank. The provisions and write-off at Rs. 1,151 million increased marginally by 10% in this fiscal year.

Gross NPA and Net NPA ratios were at 1.44% and 0.54%, respectively, for the financial year ended March 31, 2016. Against gross NPA of Rs. 2,554 million, specific provisions stand at Rs. 1,591 million. Besides, provision of Rs. 701 million has been made for standard assets in keeping with statutory requirements. Total provision coverage (including standard asset provision) stands at 89.7% of Gross NPAs.

SOURCES OF FUNDS Share Capital

The Company's share capital has increased from Rs. 620 million to Rs. 633 million. This was because of allotment of 6,302,905 equity shares of Rs. 2 each to employees upon exercise of ESOPs under the Company's employee stock options schemes

Reserves and Surplus

The Company's net worth (excluding minority interest) was up from Rs. 25,577 million in FY2014-15 to Rs. 29,200 million in FY2015-16, primarily owing to retained earnings. Book value per share as on March 31, 2016 increased from Rs. 82.44 per share in brvious fiscal year to Rs. 92.25 per share (excluding minority interest).

Resource Mobilisation

Secured loans outstanding as on March 31, 2016 were Rs. 117,430 million, compared to Rs. 104,683 million as at the end of the brvious year. These loans are primarily secured against the Company's receivables. The Company has diversified its sources of funds and augmented long-term sources of funds, further strengthening its asset liability duration matching profile.

The dependence on short-term borrowing resources reduced further during the year. Out of the total, 19% of the funding was through commercial paper, 46% through cash credit and term loan, and 35% was through NCDs. The Company's unsecured loans as on March 31, 2016 stood at Rs. 42,046 million, vis-a-vis Rs. 41,710 million as at the end of the brvious year.

Asset Liability Management

The NBFC and HFC subsidiaries have in place Board level a supervisory Asset Liability Management Committee comprising Directors. There is an ALCO operating committee comprising the Company's senior officials i.e., CEO, CFO, heads of departments and the Executive Directors. The ALCO operating committee meets once a month and the Board level ALCO meets once a quarter to review the position.

APPLICATION OF FUNDS Fixed Assets

The Company has invested in state-of-the-art technology to support, inter alia, its branch operations, back-office, customer service, and call centre operations. The Company has its own offices at major business locations such as Mumbai (Lower Parel and Andheri), Thane, Delhi, and Chennai.

Investments

Treasury investments are generally made for liquidity management purposes. The Company primarily invests in G-secs, bank deposits, and liquid schemes of mutual funds to meet these requirements. The Company's investment portfolio stood at Rs. 18,670 million in FY2015-16, compared with Rs. 12,834 million in FY2014-15. Of the total, Rs. 12,894 million was deployed in various funds, Rs. 5,040 million in debentures and bonds, certificate of deposits of Rs. 449 million, Rs. 165 million in equity of various companies and other investments of Rs. 105 million. The portfolio also contains 130,000 shares valued at Rs. 17 million in The Bombay Stock Exchange Ltd.

Deferred Tax Assets and Liabilities

Deferred tax assets and liabilities have been computed as per the provisions of the Income Tax Act, 1961. Deferred tax assets (Net) were Rs. 1,307 million as at FY2015-16, compared with Rs. 1,228 million as at FY2014-15.

HUMAN RESOURCES

IIFL's human resource department has been constantly striving to support the businesses, implement digital solutions, and build a strong culture of transparency and service orientation within the organisation. The Group continued to live up to the expectations of building people-friendly policies and practices in FY2015-16 and closely align them to its business requirements.

Strong Management Team

This year, IIFL was increasingly looked at as a brferred employer by senior professionals from the banking and financial services industry. The Group attracted several top-notch professionals in the Wealth, NBFC and HFC businesses, who were driven by the agenda of growth and transformation. The entrebrneurial culture that IIFL prides in is a 'magnet for talent' that is looking for opportunities to make an impact in an environment that encourages innovation and risk taking. The management team has been strengthened by the Group's niche hiring in its sales, technology, risk, operations and HR functions.

Technology Enablement

The Group has made substantial attempts in designing a technologically sound human resource system, known as Adrenalin. It can be easily accessed by all employees, at all times as an app. This web-based system for Employee Life Cycle Management has substantially reduced the time spent on administrative activities.

Training and Development

The Group provides learning opportunities in diverse subjects, such as financial planning, mutual funds, as well as fundamental and technical analysis, through classroom coaching and e-learning. The Group also provides product-specific trainings for all its businesses.

During the year, IIFL initiated free-of-cost, short-duration Customer Education Programmes for its customers across the country. The programmes primarily focused on capital market, derivatives, financial planning, and commodities. IIFL also launched Paid Education Programme to deliver these trainings to willing participants.

Encouraging Performance

IIFL, as an organisation, holds performance and potential to determine employee growth and promotions. Individual Performance Measures (IPMs) for employees is IIFL's very own way of setting expectations across clearly demarcated parameters. A formal bi-annual process supplements the Group's efforts to evaluate the performance of employees in an objective and transparent manner and provide feedback in a constructive manner.

Encouraging gender diversity

IIFL is an equal opportunity employer. To cultivate a healthy and balanced workforce, focus is given particularly on having at least one female employee in branches. Quarterly women-oriented workshops/ programmes are conducted for mentoring and development of the female staff. During the year, IIFL launched the WIW (Women Influence Women) Series to showcase the 'Star Women' performers who were nominated on various criteria.

Focus on enhancing employee engagement

IIFL promotes creativity and innovation among its employees, and this can only happen when employees are engaged at work. Various initiatives were introduced during the year to actively engage and connect with employees, sbrad across locations and businesses. Initiatives are also underway to measure employee engagement at a team level through a regular 'Pulse Survey', and facilitating the teams to work on specific interventions to enhance team scores

RISK MANAGEMENT

Risk management is a key element of IIFL's business strategy and is integrated seamlessly across all of its business operations. The objective of IIFL's risk management process is to optimise the risk-return equation and ensure meticulous compliance to all extant laws, rules, and regulations applicable for all of its business activities.

IIFL seeks to foster a strong and disciplined risk management culture across all of its business entities and at all levels of employees. IIFL takes a holistic view of risk management and undertakes an enterprise-wide risk management approach under the Enterprise Risk Management (ERM) Framework. IIFL believes that ERM provides a sound foundation to ensure that the risk-taking activities across the Group are in line with the business strategy, the risk appetite approved by the Board and regulatory requirements.

IIFL adopts the 'three lines-of-defence' (3 LOD) model wherein management control at the business entity level is the first line of defence in risk management. Various risk control and compliance oversight functions, established by the management are the second line of defence. Finally, the third line comprises the internal audit/ assurance function. All three lines play a distinct role within IIFL's wider governance framework.

IIFL's experienced compliance and audit and risk management teams play a vital role in ensuring that rules and regulations are strictly followed in all processes, not just in letter but also in spirit. The risk management discipline is centrally initiated but implemented at the business entity level. This ensures that each of the operating subsidiaries is fully responsible for the initiation, management, measurement, and mitigation of all risk-taking activities within the business unit, and for meticulous compliance to all regulatory guidelines pertaining to the specific business.

Risk management also forms a critical part of the Group's training modules across all levels, so that employees across the hierarchy are

trained on risk management and implications thereof. The Company's well-defined organisational structure, documented policies and standard operating procedures (SOPs), authority matrix and internal controls ensure efficiency of operations, besides compliance with internal policies and regulatory requirements.

IIFL has adopted digital initiatives in all its key businesses, starting with broking and distribution followed by loans and credit as well as customer service, internal operations and HR. Digitization ensures less human intervention and superior customer service. Moreover, technology vastly eliminates the scope for any fraud, omission, and commission of errors.

Credit, Liquidity and Finance Risk

In the financing business, IIFL has a multi-level Credit and Investment Committee consisting of Directors of the Board / Head of the Departments to consider medium to large credit proposals. However, smaller proposals are decided at appropriate level as per the approval matrix. The Group has in place Risk Management Committee and Asset Liability Management Committee (ALCO), consisting of Directors and senior officials. They regularly meet and review the policies, systems, controls, and positions of the financing business. The Risk Management Committee reviews the risk management processes, covering credit and underwriting controls, operations, technology and compliance risks.

Enterprise risk management framework, put in place at the Group level, provides oversight on the risk-taking activities and guidance. The ALCO committee reviews the strategic management of interest rate and liquidity risk, review of product pricing for various loans and advances, desired maturity profile and mix of the incremental assets and liabilities. It also reviews the Company's funding policies in the light of interest rate movements and desired fund mixes, particularly fixed / floating rate funds, wholesale / retail funds and money market funding, among others.

To ensure frequent reviews and actions, an internal ALCO Operating Committee has also been put in place. The Committee consists of business, finance, and treasury heads, which meets on a monthly basis, analyses and initiates appropriate actions keeping in view the emerging conditions. The supervisory ALCO of the Board ensures that the business and risk management strategy operates within the limits/parameters set by the Board and reviews the functioning of the internal ALCO. It also reviews the Company's funding strategy and implementation of ALCO's decisions.

Market Risk

The financial sector is affected by a variety of factors linked to domestic economic progress and global developments. Any significant economic event happening across the globe can have a direct or indirect impact on the Company. To mitigate this, the Company has diversified its revenue streams across multiple product lines and businesses, involving fund and non-fund based advisory and distribution businesses. Under the fund-based business, the Company has a diversified portfolio of mortgage/home loan, gold loan, loan against securities, medical equipment finance, commercial vehicle finance, and SME business loan. Similarly, in non-fund based business, it has a diversified offering of equity, currency, commodity broking, wealth management and depository services, asset management, alternate investment funds, domestic and offshore services, distribution of financial products, investment banking, and institutional equities.

Technology Risk

IIFL understands the importance of technology in the business segments it operates and lays utmost emphasis on the system development and use of best technology available in the industry. Numerous initiatives have been launched for continued focus on effectiveness and digitization of the businesses and organisational processes. New apps on mobiles and tablets have been deployed to offer seamless process, improve customer convenience and employee productivity.

The management periodically reviews information security threats and has taken substantial steps to ensure the organisation is safeguarded against hacking attacks, data leakage and security breaches. The IT and certain business processes have successfully completed upgradation of ISO 27001 to latest 2013 framework demonstrating implementation of effective information security process and reinforcing our commitment to provide robust and secure technology for all our clients. During the year, the Company has implemented technology to block illegitimate network traffic and automated blocking of malicious attack from the internet.

The Group has invested resources in implementing controls and it continuously monitors any violations, brventing misuse and data leakage.

Compliance Risk

The Group operates primarily in the financial services space. Each of its businesses is carried on under separate units/entity and is regulated by the respective regulator. The compliance function forms a critical part of the Group's operations.

IIFL is registered and regulated by SEBI for merchant banking, stock broking, depository participant, commodity broking, portfolio management, advisory, asset management, mutual fund, and alternate investment fund businesses. India Infoline Finance Ltd. is an NBFC registered with RBI, and the housing finance subsidiary namely India Infoline Housing Finance Ltd. is registered with National Housing Bank. The insurance broking subsidiary is registered with IRDA. Besides, the foreign subsidiaries are registered with respective overseas regulatory authorities. The Company has a full-fledged compliance department manned by knowledgeable and well-experienced professionals in compliance, corporate, legal and audit functions. The department guides the businesses/support functions on all regulatory compliances and monitors implementation of extant  regulations/circulars, ensuring all the regulatory compliances, governance and reporting of the Group.

The compliance and audit discipline extends across the entire transaction cycle: KYC process, term sheets/agreements, vetting transaction execution, transaction settlement involving securities, loan documentations br-and post-disbursement, fund transfer, customer reporting and confirmation and regulatory information/ returns/reports to various regulatory authorities, among others. Operating in financial services space, the Company has put in place adequate systems and controls to ensure compliance with anti-money laundering standards. Besides, the Group entities are also registered with US-IRS under Foreign Account Tax Compliant Act (FATCA), wherever applicable, in compliance with regulatory requirements. The Company has instituted special purpose audits for credit audit, verification audit, broking/DP systems audit, portfolio management audit and asset management function, among others. Moreover, compliance with corporate acts, including Companies Act, SEBI Act, FEMA, Securities Contracts (Regulation) Act and Rules, RBI-NBFC regulations, NHB-HFC regulations, Insurance Act, and so on was verified by independent secretarial auditors on the holding company and major subsidiaries, during the year. Their reports and recommendations were considered by the Board and necessary implementations have been initiated.

The compliance requirements across various service points have been communicated combrhensively to all, through compliance manuals and circulars. To ensure complete involvement in the compliance process, heads of all businesses/zones/area offices and departments across businesses/entities submit quarterly compliance reports. The compilations of these reports are reviewed by the Audit Committee/Board and are also submitted to regulatory authorities, periodically. Besides, the internal auditors verify the compliances as part of their audit process.

Human Resource Risk

The Group has taken several actions to ensure that the talent pipeline for the Company is strong especially when it comes to key management positions. We have been able to attract top notch talent from MNC and Indian corporates wherever required to supplement our existing management capability. We have also been able to retain our top performing home grown talent by offering them larger opportunities when a vacancy has arisen internally.

The Group also has a strong focus on ensuring that employees are adequately trained in their job functions and on all compliance related trainings. The HR function also ensures all statutory compliances with labour laws and other relevant statutes and ensures that strong background screening standards are in place to minimise any risk of fraud from incoming employees.

A strong emphasis on internal controls on various HR processes and technology enablement also ensures that operational risk in the HR function is managed well.

Reputation Risk

Over the years, the Company has fostered a culture that enables operating managers to say 'No' to poor quality business and eschewing from adopting short cuts and stopgap alternatives. In addition, it has in place stringent employee code of conduct and trading guidelines, which are to be followed by every employee. The Company's policy and processes ensure close monitoring and strict disciplinary actions against those deviating from the same.

With customer-centricity at the heart of all its activities, the Company has institutionalised a number of measures to secure customer interests. Placement and execution of orders by clients instantaneously, trader terminals, tablets, and mobile applications providing real-time data, ledger balances of the stocks and funds position keep the customers informed about their positions online. The Company transfers client funds/securities to the customers in designated banks/demat accounts. All receipts and payments from/to customers are done through account payee cheques/DDs with client IDs, and no cash acceptance is permitted. The financing business system provides for day-to-day updates on customer security vaults, loan balances, and interest dues. During the year, the Company has launched a mobile application for lending customers, whereby customers can check their loan status and latest dues instantly. The Company has established a strong system of custody/ safekeeping of securities documents at a centralised vault system and gold jewellery at the respective branches in safe vaults and controls through a 24X7 e-surveillance, access control and alarms, among others. The Company makes constant and concerted efforts to educate customers on the dos and don'ts with respect to their dealings.

RISK GOVERNANCE FRAMEWORK

IIFL has put in place a robust risk governance structure at the Group level and in each of the key operating entities with the active involvement of the Board, management team, and risk management committee. It provides guidance and direction to the management.

Key roles and responsibilities are enumerated below:

The Board of Directors

O The Board of Directors set the overall risk strategy and appetite for the Group

O The Risk Management Committee (RMC) of the Board regularly reviews the risk assessment of the Group to ensure that risk-taking is within the limits defined by the Board

Management Team

O Enterprise Risk Management Committee (ERMC) is the Group's apex-level management committee that supervises all risk-taking activities to ensure adherence to the overall risk strategy and appetite set by the Board

O The Group CRO provides the leadership and oversight of effective risk management practices undertaken at the operating entity level, driving standardisation across the Group

o ERMC meets periodically and reviews the risk challenges and mitigation actions

INTERNAL CONTROLS

The Company's internal audit is conducted as per the Annual Audit Plan approved by the Audit Committee. The scope of internal audit covers all aspects of business including regular front-end and back-end operations and internal compliances. It lays emphasis to check on process controls, measures undertaken by the Company to monitor risk and to check on leakages or frauds. The Company has invested in ensuring that its internal audit and control systems are adequate and commensurate with the nature of business, regulatory brscriptions and the size of its operations. Moreover, the Company successfully completed ISO 27001:2013 transition certificate, during the year.

The internal control system is supplemented by concurrent and internal audits, as well as special audits and regular reviews by the management. For Group-wide internal audits, the Company has distributed the audit of major businesses to separate top audit firms to have wider and heterogeneous verification approach and inputs, and derive larger value from the audit process. In this regard, the Company has in place Mahajan & Aibara for the capital markets  businesses, KPMG for NBFC and HFC businesses, M.P. Chitale &  Company for asset management business.

The Company also retains specialised audit firms to carry out specific / concurrent audit of some critical functions, such as half-yearly internal audit of broking business mandated by SEBI/ Exchanges, DP processes, Know Your Customer (KYC) verifications, demat transfers, pay-outs verifications, systems audit, branches and sub brokers audits, PMS, mutual fund and alternative investment funds operations audit, credit audit, loan documentation audits, br / post disbursement audit, end use verification audits and verification of related party transactions, among others. The Company also has an internal team of audit professionals at its head office in Mumbai, supported by regional teams at zonal offices. The Group has in place separate internal audit teams dedicated for major business verticals i.e., NBFC, HFC, distribution and asset management business. The internal team undertakes special situation audits and follows up on implementation of internal auditors' recommendations and action taken reports. In addition, the Company complies with several specific audits mandated by regulatory authorities such as SEBI / Exchanges / Depositories, and the reports are periodically submitted to the regulators.

The Board/Audit Committee reviews the overall risk management framework and the adequacy of internal controls instituted by the management team. The Audit Committee reviews major instances of fraud on a quarterly basis and actions are taken on the same. It also focuses on the implementation of the necessary systems and controls to strengthen the system and brvent such recurrence. The internal processes have been designed to ensure adequate checks and balances, regulatory compliances at every stage. Internal audit team carries out a risk-based audit of these processes to provide assurance on the adequacy and effectiveness of internal controls for brvention, detection, reporting and remediation of frauds.

Internal Financial Controls

The Company has in place adequate internal controls with reference to financial statements and operations, and the same are operating effectively. The internal auditors tested the design and effectiveness of the key controls and no material weaknesses were observed in their examination. Besides, statutory auditors verified the systems and processes and confirmed that the Internal Financial Controls System over financial reporting is adequate; and such controls are operating effectively.

OUTLOOK

A sound financial system is essential for a country's overall economic growth. India, the world's fourth largest economy, is projected to grow at 7.5% in FY2016-17 (Source: World Bank). Yet, the per capita income in real terms during FY2015-16 stood at Rs. 72,889 or Rs. 6,074 per month (Source: mospi.nic.in). Policy reforms promoting inclusive growth and an easily accessible financial system will form the basis for a sustainable growth path. During the year, the government introduced and implemented several policies in this regard. The Jan Dhan Yojana - Aadhaar number - Mobile connectivity (JAM) Trinity will bring in more people under the umbrella of the formal financial sector. A normal monsoon this year would rejuvenate the rural economy and create more jobs, increasing disposable income. Furthermore, an improved rural economy will spur demand for financial services.

Companies with a diversified business model and a consistent strategy are most likely to gain from improving prospects of the Indian economy and financial services sector. There is a need for players to adopt a holistic approach towards digitalization and in aligning it with their business strategy.

A broad customer base, wide pan-India reach, diversified product range, experienced team of professionals, and well-developed systems and processes position IIFL suitably well to capture the emerging opportunities in the financial services space. IIFL is focused on fortifying its relationship with clients through seamless service and differentiated offerings. For this, the Group will leverage on digitization and a cost-effective model to enhance its operational processes. The Group will proactively attract and retain talented, motivated, and proven professionals and work on strategic alliances. Furthermore, it will augment services complementing the organisation's core competences and grow in the financial services space.

For IIFL Holdings Limited

Nirmal Jain

Chairman

DIN: 00010535

Place: Mumbai

Date: May 05, 2016