SIGNIFICANT ACCOUNTING POLICIES A BACKGROUND In February 2003, Kotak Mahindra Finance Limited was given a license to carry out banking business by the Reserve Bank of India (“RBI”). It was the first NBFC Company in India to be converted into a Bank. Kotak Mahindra Bank Limited (“Kotak Mahindra Bank” “Kotak” or “the Bank”) provides a full suite of banking services to its customers encompassing Retail Banking, Treasury and Corporate Banking in India and also has a rebrsentative office in Dubai. B BASIS OF brPARATION The financial statements have been brpared in accordance with statutory requirements brscribed under the Banking Regulation Act, 1949. The accounting and reporting policies of Kotak Mahindra Bank used in the brparation of these financial statements is the accrual method of accounting and historical cost convention and it conforms with Generally Accepted Accounting Principles in India (“Indian GAAP”), the Accounting Standards specified under Section 133 of the Companies Act, 2013 read with Rule 7 of the Companies (Accounts) Rules, 2014 and other relevant provisions of the Companies Act, 2013 (“the 2013 act”), in so far as they apply to banks and the guidelines issued by the Reserve Bank of India (“RBI”). The Ministry of Corporate Affairs (“MCA”) has notified the Companies (Accounting Standards) Amendment Rules, 2016 vide its notification dated 30th March, 2016. As per clarification of MCA dated 27th April, 2016, the said rules are applicable to accounting period commencing on or after the date of notification i.e. 1st April, 2016. Use of estimates The brparation of financial statements requires the Management to make estimates and assumptions considered in the reported amounts of assets and liabilities (including contingent liabilities) as of the date of the financial statements and the reported income and expenses during the reporting period. The Bank’s Management believes that the estimates used in brparation of the financial statements are prudent and reasonable. Actual results could differ from these estimates. Any revision to the accounting estimates is recognised prospectively in the current and future periods. C SIGNIFICANT ACCOUNTING POLICIES 1 Investments Classification: In accordance with the RBI guidelines on investment classification and valuation, investments are classified on the date of purchase into “Held for Trading” (‘HFT’), “Available for Sale” (‘AFS’) and “Held to Maturity” (‘HTM’) categories (hereinafter called “categories”). Subsequent shifting amongst the categories is done in accordance with the RBI guidelines at the lower of the acquisition cost or carrying value and market value on the date of the transfer, and debrciation, if any, on such transfer is fully provided. Under each of these categories, investments are further classified under six groups (hereinafter called “groups”) - Government Securities, Other Approved Securities, Shares, Debentures and Bonds, Investments in Subsidiaries / Joint Ventures and Other Investments for the purposes of disclosure in the Balance Sheet. The Bank follows ‘Settlement Date’ accounting for recording purchase and sale transactions in securities, except in the case of equity shares where ‘Trade Date’ accounting is followed. Basis of classification: Investments that are held principally for resale within 90 days from the date of purchase are classified under HFT category. As per the RBI guidelines, HFT securities, which remain unsold for a period of 90 days are reclassified as AFS securities as on that date. Investments which the Bank intends to hold till maturity are classified as HTM securities. The Bank has classified investments in subsidiaries, joint ventures and associates under HTM category. Investments which are not classified in either of the above two categories are classified under AFS category. Acquisition Cost: The cost of investments is determined on weighted average basis. Broken period interest on debt instruments and government securities are considered as a revenue item. The transaction costs including brokerage, commission etc. paid at the time of acquisition of investments is recognised in Profit and Loss Account. Disposal of investments: • Investments classified as HFT or AFS - Profit or loss on sale or redemption is recognised in the Profit and Loss Account. • Investments classified as HTM - Profit on sale or redemption of investments is recognised in the Profit and Loss Account and is appropriated to Capital Reserve after adjustments for tax and transfer to Statutory Reserve. Loss on sale or redemption is recognised in the Profit and Loss Account. Valuation: The valuation of investments is performed in accordance with the RBI guidelines as follows: a) Investments classified as HTM – These are carried at their acquisition cost. Any brmium on acquisition of debt instruments / government securities is amortised over the balance maturity of the security on a straight line basis. Any diminution, other than temporary, in the value of such securities is provided. b) Investments classified as HFT or AFS – Investments in these categories are marked to market and the net debrciation, if any, within each group is recognised in the Profit and Loss Account. Net apbrciation, if any, is ignored. Further, provision other than temporary diminution is made at individual security level. Except in cases where provision other than temporary diminution is made, the book value of the individual securities is not changed as a result of periodic valuations. c) The market or fair value of quoted investments included in the ‘AFS’ and ‘HFT’ categories is measured with respect to the market price of the scrip as available from the trades or quotes on the stock exchanges, SGL account transactions, price list of RBI or prices declared by Primary Dealers Association of India (‘PDAI’) jointly with Fixed Income Money Market and Derivatives Association of India (‘FIMMDA’) as at the year end. d) Treasury Bills, Exchange Funded Bills, Commercial Paper and Certificate of Deposits being discounted instruments, are valued at carrying cost. e) Units of mutual funds are valued at the latest Net Asset Value declared by the mutual fund. f) Investments in subsidiaries / joint ventures (as defined by the RBI) are categorised as HTM and assessed for impairment to determine other than temporary diminution, if any, in accordance with the RBI guidelines. g) Market value of investments where current quotations are not available, is determined as per the norms brscribed by the RBI as under: • In case of unquoted bonds, debentures and brference shares where interest / dividend is received regularly (i.e. not overdue beyond 90 days), the market price is derived based on the Yield to Maturity for Government Securities as published by FIMMDA / PDAI and suitably marked up for credit risk applicable to the credit rating of the instrument. The matrix for credit risk mark-up for each category and credit rating along with residual maturity issued by FIMMDA is adopted for this purpose; • In case of bonds and debentures (including Pass Through Certificates) where interest is not received regularly (i.e. overdue beyond 90 days), the valuation is in accordance with prudential norms for provisioning as brscribed by the RBI. Interest on such securities is not recognised in the Profit and Loss Account until received; •Equity shares, for which current quotations are not available or where the shares are not quoted on the stock exchanges, are valued at break-up value (without considering revaluation reserves, if any) which is ascertained from the Company’s latest Balance Sheet. In case the latest Balance Sheet is not available, the shares are valued at Rs. 1 per investee company; • Units of Venture Capital Funds (VCF) held under AFS category where current quotations are not available are marked to market based on the Net Asset Value (NAV) shown by VCF as per the latest audited financials of the fund. In case the audited financials are not available for a period beyond 18 months, the investments are valued at Rs. 1 per VCF. Investment in unquoted VCF after 23rd August, 2006 are categorised under HTM category for the initial period of three years and valued at cost as per RBI guidelines; • Security receipts are valued as per the Net Asset Value (NAV) obtained from the issuing Asset Reconstruction Company or Securitisation Company. h) Non-performing investments are identified and valued based on the RBI guidelines. i) Repurchase and reverse repurchase transactions - Securities sold under agreements to repurchase (Repos) and securities purchased under agreements to resell (Reverse Repos) are accounted as collateralised borrowing and lending transactions respectively. The difference between the consideration amount of the first leg and the second leg of the repo is recognised as interest income or interest expense over the period of the transaction. 2 Advances Classification: Advances are classified as performing and non-performing advances (‘NPAs’) based on the RBI guidelines and are stated net of bills rediscounted, specific provisions, interest in suspense for non-performing advances, claims received from Export Credit Guarantee Corporation, provisions for funded interest term loan and provisions in lieu of diminution in the fair value of restructured assets. Also, NPAs are classified into sub-standard, doubtful and loss assets. Interest on NPAs is transferred to an interest suspense account and not recognised in the Profit and Loss Account until received. Amounts paid for acquiring non-performing assets from other banks and NBFCs are considered as advances. Actual collections received on such non-performing assets are compared with the cash flows estimated while purchasing the asset to ascertain overdue. If the overdue is in excess of 90 days, then the assets are classified into sub-standard, doubtful or loss as required by the RBI guidelines on purchase of non-performing assets. The Bank transfers advances through inter-bank participation with and without risk. In accordance with the RBI guidelines, in the case of participation with risk, the aggregate amount of the participation issued by the Bank is reduced from advances and where the Bank is participating, the aggregate amount of the participation is classified under advances. In the case of participation without risk, the aggregate amount of participation issued by the Bank is classified under borrowings and where the Bank is participating, the aggregate amount of participation is shown as due from banks under advances. Provisioning: Provision for NPAs comprising sub-standard, doubtful and loss assets is made in accordance with the RBI guidelines. In addition, the Bank considers accelerated specific provisioning that is based on past experience, evaluation of security and other related factors. Specific loan loss provision in respect of non-performing advances are charged to the Profit and Loss Account. Any recoveries made by the Bank in case of NPAs written off are recognised in the Profit and Loss Account. The Bank considers a restructured account as one where the Bank, for economic or legal reasons relating to the borrower’s financial difficulty, grants to the borrower concessions that the Bank would not otherwise consider. Restructuring would normally involve modification of terms of the advance / securities, which would generally include, among others, alteration of repayment period / repayable amount / the amount of installments / rate of interest (due to reasons other than competitive reasons). Restructured accounts are classified as such by the Bank only upon approval and implementation of the restructuring package. Necessary provision for diminution in the fair value of a restructured account is made. In accordance with RBI guidelines the Bank has provided general provision on standard assets including credit exposures computed as per the current marked to market values of interest rate and foreign exchange derivative contracts and gold at levels stipulated by RBI from time to time - direct advances to sectors agricultural and SME at 0.25%, commercial real estate at 1.00%, restructured standard advances progressively to reach 5%, teaser rate housing loans at 2.00%, commercial real estate-residential housing at 0.75% and for other sectors at 0.40%. Further to provisions required as per the asset classification status, provisions are held for individual country exposure (except for home country) as per the RBI guidelines. Exposure is classified in the seven risk categories as mentioned in the Export Credit Guarantee Corporation of India Limited (‘ECGC’) guidelines and provisioning is done for that country if the net funded exposure is one percent or more of the Bank’s total assets based on the rates laid down by the RBI. Provision for Unhedged Foreign Currency Exposure of borrowers are made as per the RBI guidelines. 3 Loss on Sale of Advances to Asset Reconstruction Company Loss on sale of Advances sold to Asset Reconstruction Company are recognised immediately in the Profit and Loss Account. 4 Securitisation The Bank enters into arrangements for sale of loans through Special Purpose Vehicles (SPVs). In most cases, post securitisation, the Bank continues to service the loans transferred to the SPV. At times the Bank also provides credit enhancement in the form of cash collaterals and / or by subordination of cash flows to Senior Pass Through Certificate (PTC) holders. In respect of credit enhancements provided or recourse obligations (projected delinquencies, future servicing etc.) accepted by the Bank, appropriate provision / disclosure is made at the time of sale in accordance with Accounting Standard 29, “Provisions, Contingent Liabilities and Contingent Assets”. In accordance with the RBI guidelines, the profit or brmium on account of securitisation of assets at the time of sale is computed as the difference between the sale consideration and the book value of the securitised asset amortised over the tenure of the securities issued. Loss on account of securitisation on assets is recognised immediately to the Profit and Loss Account. The Bank invests in PTCs of other SPVs which are accounted for at the deal value and are classified under Investments. 5 Fixed Assets (Tangible and Intangible) and debrciation/ amortisation Tangible and Intangible Assets have been stated at cost less accumulated debrciation and amortisation and adjusted for impairment, if any. Cost includes cost of purchase inclusive of freight, duties, incidental expenses and all expenditure like site brparation, installation costs and professional fees incurred on the asset before it is ready to put to use. Subsequent expenditure incurred on assets put to use is capitalised only when it increases the future benefit / functioning capability from / of such assets. Gain or losses arising from the retirement or disposal of a Tangible / Intangible Asset are determined as the difference between the net disposal proceeds and the carrying amount of assets and recognised as income or expense in the Profit and Loss Account. Profit on sale of brmises, if any, is transferred to Capital Reserve as per the RBI guidelines. Debrciation / Amortisation - Debrciation is provided on a pro-rata basis on a Straight Line Method over the estimated useful life of the assets at rates which are higher than the rates derived from useful lives brscribed under Schedule II of the Companies Act, 2013 in order to reflect the actual usage of the assets. Estimated useful lives over which assets are debrciated / amortised are as follows: Asset Type Estimated Useful life in years Premises -58 Improvement to leasehold brmises -Over the period of lease subject to a maximum of 6 years. Office equipments (High capacity chillers, Transformers, UPS DG set, Fire Supbrssion, HVAC, PAC & Elevators) -10 Office equipments (other than above)- 5 Computers -3 Furniture and Fixtures -6 Vehicles -4 ATMs -5 Software (including development) expenditure -3 Used assets purchased are debrciated over the residual useful life from the date of original purchase. Items costing less than Rs. 5,000 are fully debrciated in the year of purchase. 6 Cash and cash equivalents Cash and cash equivalents include cash in hand, balances with Reserve Bank of India and Balances with Other Banks / institutions and money at Call and short Notice (including the effect of changes in exchange rates on cash and cash equivalents in foreign currency). 7 Bullion The Bank imports bullion including brcious metal bars on a consignment basis for selling to its wholesale and retail customers. The difference between the sale price to customers and actual price quoted by supplier is reflected under other income. The Bank also borrows and lends gold, which is treated as borrowings or lending as the case may be in accordance with the RBI guidelines and the interest paid or received is classified as interest expense or income and is accounted on an accrual basis. 8 Revenue recognition Interest income (other than in respect of retail advances) is recognised on accrual basis. Interest income in respect of retail advances is accounted for by using the internal rate of return method to provide a constant periodic rate of return on the net investment outstanding on the contract. Interest income on investments in PTCs and loans bought out through the direct assignment route is recognised at their effective interest rate. Interest income on discounted instruments is recognised over the tenure of the instruments so as to provide a constant periodic rate of return. Service charges, fees and commission income are recognised when due except for guarantee commission and letter of credit which is recognised over the period of the guarantee / letter of credit. Syndication / arranger fee is recognised as income as per the terms of engagement. Upon an asset becoming NPA the income accrued gets reversed, and is recognised only on realisation, as per RBI guidelines. Penal interest is recognised as income on realisation. Dividend income is accounted on an accrual basis when the Bank’s right to receive the dividend is established. Gain on account of securitisation of assets is amortised over the life of the securities issued in accordance with the guidelines issued by the RBI. In respect of non-performing assets acquired from other Banks / FIs and NBFCs, collections in excess of the consideration paid at each asset level or portfolio level is treated as income in accordance with RBI guidelines and clarifications. 9 Employee benefits Defined Contribution Plan Provident Fund Contribution as required by the statute made to the government provident fund or to a fund set up by the Bank and administered by a board of trustees is debited to the Profit and Loss Account when an employee renders the related service. The Bank has no further obligations. Superannuation Fund The Bank makes contributions in respect of eligible employees, subject to a maximum of Rs.0.01 crore per employee per annum to a Fund administered by trustees and managed by life insurance companies. The Bank recognises such contributions as an expense in the year when an employee renders the related service. New Pension Scheme The Bank contributes up to 10% of eligible employees’ salary per annum, to the New Pension Fund administered by a Pension Fund Regulatory and Development Authority (PFRDA) appointed pension fund manager. The Bank recognises such contributions as an expense in the year when an employee renders the related service. Defined Benefit Plan Gratuity The Bank provides for Gratuity, covering employees in accordance with the Payment of Gratuity Act, 1972, Service regulations and Service awards as the case may be. The Bank’s liability is actuarially determined (using Projected Unit Credit Method) at the Balance Sheet date. The Bank makes contribution to Gratuity Funds administered by trustees and managed by life insurance companies. Pension Scheme In respect of pension payable to certain erstwhile ING Vysya Bank Limited (“eIVBL”) employees under Indian Banks’ Association (“IBA”) structure, the Bank contributes 10% of basic salary to a pension fund and the balance amount is provided based on actuarial valuation conducted by an independent actuary as at the Balance Sheet date. The Pension Fund is administered by the board of trustees and managed by life insurance company. The brsent value of the Bank’s defined obligation is determined using the Projected Unit Credit Method as at the Balance Sheet date. Employees covered by the pension plan are not eligible for employer’s contribution under the provident fund plan. The contribution made to the trust is recognised as planned assets. The defined benefit obligation recognised in the Balance Sheet rebrsents the brsent value of the defined benefit obligation as reduced by the fair value of the plan assets. Actuarial gains or losses in respect of all defined benefit plans are recognised immediately in the Profit and Loss Account in the year they are incurred. Compensated Absences – Other Long-Term Employee Benefits The Bank accrues the liability for compensated absences based on the actuarial valuation as at the Balance Sheet date conducted by an independent actuary which includes assumptions about demographics, early retirement, salary increases, interest rates and leave utilisation. The net brsent value of the Banks’ obligation is determined using the Projected Unit Credit Method as at the Balance Sheet date. Actuarial gains / losses are recognised in the Profit and Loss Account in the year in which they arise. Other Employee Benefits As per the Bank’s policy, employees are eligible for an award after completion of a specified number of years of service with the Bank. The obligation is measured at the Balance Sheet date on the basis of an actuarial valuation using the Projected Unit Credit Method. The undiscounted amount of short-term employee benefits expected to be paid in exchange for the services rendered by employees is recognised during the period when the employee renders the service. These benefits include performance incentives. Employee share based payments Equity-settled scheme: The Employee Stock Option Schemes (ESOSs) of the Bank are in accordance with Securities and Exchange Board of India (Share Based Employee Benefits) Regulations, 2014. The Schemes provide for grant of options on equity shares to employees of the Bank and its Subsidiaries to acquire the equity shares of the Bank that vest in a cliff vesting or in a graded manner and that are to be exercised within a specified period. In accordance with the Securities and Exchange Board of India (Share Based Employee Benefits) Regulations, 2014 and the Guidance Note on Accounting for Employee Share-based Payments, issued by The Institute of Chartered Accountants of India, the cost of equity-settled transactions is measured using the intrinsic value method. The intrinsic value being the excess, if any, of the fair market price of the share under ESOSs over the exercise price of the option is recognised as deferred employee compensation with a credit to Employee’s Stock Option (Grant) Outstanding account. The deferred employee compensation cost is amortised on a straight-line basis over the vesting period of the option. The cumulative expense recognized for equity-settled transactions at each reporting date until the vesting date reflects the extent to which the vesting period has expired and the number of equity instruments that are outstanding. The options that do not vest because of failure to satisfy vesting condition are reversed by a credit to employee compensation expense, equal to the amortised portion of value of lapsed portion. In respect of the options which expire unexercised the balance standing to the credit of Employee’s Stock Option (Grant) Outstanding accounts is transferred to General Reserve. The fair market price is the latest available closing price, brceding the date of grant of the option, on the stock exchange on which the shares of the Bank are listed. Where the terms of an equity–settled award are modified, the minimum expense recognised in ‘Payments to and provision for employees’ is the expense as if the terms had not been modified. An additional expense is recognised for any modification which increases the total intrinsic value of the share–based payment arrangement, or is otherwise beneficial to the employee as remeasured as at the date of modification. In respect of options granted to employees of subsidiaries, the Bank recovers the related compensation cost from the respective subsidiaries. Cash-settled scheme: The cost of cash-settled transactions (Stock Apbrciation Rights – [“SARs”]) is measured initially using intrinsic value method at the grant date taking into account the terms and conditions upon which the instruments were granted. This intrinsic value is amortised on a straight-line basis over the vesting period with recognition of corresponding liability. This liability is remeasured at each Balance Sheet date up to and including the settlement date with changes in intrinsic value recognised in Profit and Loss Account in ‘Payments to and provision for employees’. The SARs that do not vest because of failure to satisfy vesting condition are reversed by a credit to employee compensation expense, equal to the amortised cost in respect of the lapsed portion. 10 Foreign currency transactions Foreign currency monetary assets and monetary liabilities are translated as at the Balance Sheet date at rates notified by the Foreign Exchange Dealers’ Association of India (FEDAI) and the resultant gain or loss is accounted in the Profit and Loss Account. Income and Expenditure items are translated at the rates of exchange brvailing on the date of the transactions except in respect of rebrsentative office (which are integral in nature) expenses, which are translated at monthly average exchange rates. Outstanding forward exchange contracts (other than deposit and placement swaps) and spot contracts outstanding at the Balance Sheet date are revalued at rates notified by FEDAI for specified maturities and at the interpolated rates of interim maturities. In case of forward contracts of greater maturities where exchange rates are not notified by FEDAI, are revalued at the forward exchange rates implied by the swap curves in respective currencies. The resulting profits or losses are recognised in the Profit and Loss Account as per the regulations stipulated by the RBI / FEDAI. Foreign exchange swaps “linked” to foreign currency deposits and placements are translated at the brvailing spot rate at the time of swap. The brmium or discount on the swap arising out of the difference in the exchange rate of the swap date and the maturity date of the underlying forward contract is amortised over the period of the swap and the same is recognised in the Profit and Loss Account. Contingent liabilities on account of foreign exchange contracts, letters of credit, bank guarantees and acceptances and endorsements outstanding as at the Balance Sheet date denominated in foreign currencies are translated at year-end rates notified by FEDAI. 11 Derivative transactions Notional amounts of derivative transactions comprising of forwards, swaps, futures and options are disclosed as off Balance Sheet exposures. The Bank recognises all derivative contracts (other than those designated as hedges) at fair value, on the date on which the derivative contracts are entered into and are re-measured at fair value as at the Balance Sheet or reporting date. Derivatives are classified as assets when the fair value is positive (positive marked to market) or as liabilities when the fair value is negative (negative marked to market). Changes in the fair value of derivatives other than those designated as hedges are recognised in the Profit and Loss Account. Outstanding derivative transactions designated as “Hedges” are accounted in accordance with hedging instrument on an accrual basis over the life of the underlying instrument. Option brmium paid or received is recognised in the Profit and Loss Account on expiry of the option. Option contracts are marked to market on every reporting date. 12 Lease accounting Leases where the lessor effectively retains substantially all the risks and rewards of ownership of the leased term, are classified as operating leases. Operating lease payments are recognised as an expense in the Profit and Loss Account on a straight-line basis over the lease term. 13 Accounting for provisions, contingent liabilities and contingent assets The Bank has assessed its obligations arising in the normal course of business, including pending litigations, proceedings pending with tax authorities and other contracts including derivative and long term contracts. In accordance with Accounting Standard - 29 on ‘Provisions, Contingent Liabilities and Contingent Assets’, the Bank recognises a provision for material foreseeable losses when it has a brsent obligation as a result of a past event and it is probable that an outflow of resources will be required to settle the obligation, in respect of which a reliable estimate can be made. Provisions are not discounted to its brsent value and are measured based on best estimate of the expenditure required to settle the obligation at the Balance Sheet date. These are reviewed at each Balance Sheet date and adjusted to reflect the current best estimates. In cases where the available information indicates that the loss on the contingency is reasonably possible but the amount of loss cannot be reasonably estimated, a disclosure to this effect is made as contingent liabilities in the financial statements. The Bank does not expect the outcome of these contingencies to have a materially adverse effect on its financial results. Contingent assets are neither recognised nor disclosed in the financial statements. 14 Impairment The carrying amounts of assets are reviewed at each Balance Sheet date if there is any indication of impairment based on internal / external factors. Impairment loss, if any, is provided in the Profit and Loss Account to the extent carrying amount of assets exceeds their estimated recoverable amount. 15 Taxes on income The Income Tax expense comprises current tax and deferred tax. Current tax is measured at the amount expected to be paid in respect of taxable income for the year in accordance with the Income Tax Act, 1961. Deferred tax assets and liabilities are recognised for the future tax consequences of timing differences being the difference between the taxable income and the accounting income that originate in one period and are capable of reversal in one or more subsequent period. Deferred tax assets on account of timing differences are recognised only to the extent there is reasonable certainty that sufficient future taxable income will be available against which such deferred tax assets can be realised. In case of carry forward losses and unabsorbed debrciation, under tax laws, the deferred tax assets are recognised only to the extent there is virtual certainty supported by convincing evidence that sufficient future taxable income will be available against which such deferred tax assets can be realised. Deferred tax assets are reassessed at each reporting date, based upon the Management’s judgement as to whether realisation is considered as reasonably certain. Deferred tax assets and liabilities are measured using tax rates and tax laws that have been enacted or substantively enacted at the Balance Sheet date. Changes in deferred tax assets / liabilities on account of changes in enacted tax rates are given effect to in the Profit and Loss Account in the period of the change. 16 Earnings per share Basic earnings per share are calculated by dividing the net profit or loss for the year attributable to equity shareholders (after deducting attributable taxes) by the weighted average number of equity shares outstanding during the year. The weighted average number of equity shares outstanding during the year is adjusted for events of bonus issue, bonus element in a rights issue to existing shareholders and share split. For the purpose of calculating diluted earnings per share, the net profit or loss for the year attributable to equity shareholders and the weighted average number of shares outstanding during the year are adjusted for the effects of all dilutive potential equity shares. Diluted earnings per share reflect the potential dilution that could occur if securities or other contracts to issue equity shares were exercised or converted during the year. 17 Share issue expenses Share issue expenses are adjusted from Securities Premium Account as permitted by Section 52 of the Companies Act, 2013. 18 Credit cards reward points The Bank estimates the liability for credit card reward points and cost per point using actuarial valuation conducted by an independent actuary, which includes assumptions such as mortality, redemption and spends. 19 Segment reporting In accordance with guidelines issued by RBI vide DBOD.No.BP.BC.81/21.01.018/2006-07 dated 18th April, 2007 and Accounting Standard 17 (AS-17) on “Segment Reporting”, the Banks’ business has been segregated into the following segments whose principal activities were as under: Segment Principal activity Treasury, BMU and Corporate Centre -Money market, forex market, derivatives, investments and primary dealership of government securities and Balance Sheet Management Unit (BMU) responsible for Asset Liability Management and Corporate Centre which primarily comprises of support functions. Corporate / Wholesale Banking- Wholesale borrowings and lendings and other related services to the corporate sector which are not included under retail banking. Retail Banking Includes: I Lending Commercial vehicle finance, personal loans, home loans, agriculture finance, other loans / services and exposures which fulfill the four criteria for retail exposures laid down in Basel Committee on Banking Supervision document “International Convergence of Capital Measurement and Capital Standards : A Revised Framework.” II Branch Banking Retail borrowings covering savings, current, term deposit accounts and Branch Banking network / services including distribution of financial products. III Credit Cards Receivables / loans relating to credit card business. Other Banking business- Any other business not classified above. A transfer pricing mechanism has been established by Asset Liability Committee (ALCO) for allocation of interest cost to the above segments based on borrowing costs, maturity profile of assets / liabilities etc. and which is disclosed as part of segment revenue. Segment revenues consist of earnings from external customers and inter-segment revenues based on a transfer pricing mechanism. Segment expenses consist of interest expenses including allocated operating expenses and provisions. Segment results are net of segment revenues and segment expenses. Segment assets include assets related to segments and exclude tax related assets. Segment liabilities include liabilities related to the segment excluding net worth, employees’ stock option (grants outstanding) and proposed dividend and dividend tax thereon. Since the business operations of the Bank are primarily concentrated in India, the Bank is considered to operate only in the domestic segment. NOTES TO ACCOUNTS A. Merger of ING Vysya Bank Limited The Board of Directors of Kotak and the Board of Directors of ING Vysya Bank Ltd. (“eIVBL”) at their respective meetings held on 20th November, 2014 approved an amalgamation of eIVBL with Kotak. Subsequently, the shareholders of Kotak and eIVBL have approved the scheme of amalgamation at their respective Extra Ordinary General Meetings held on 7th January, 2015. The amalgamation was approved by the Reserve Bank of India (the “RBI”) under subsection (4) of Section 44A of the Banking Regulation Act, 1949 and the Competition Commission of India. The amalgamation is effective from the day beginning 1st April, 2015. While both the entities are banking companies which are licensed by the RBI under the Banking Regulation Act, 1949, Kotak is a company incorporated under the Companies Act, 1956, and eIVBL is a company incorporated under Mysore Companies Regulation, 1917. As per the Scheme, upon its coming into effect from the appointed date i.e. 1st April, 2015, the entire undertaking of eIVBL including all its assets, liabilities and reserves and surplus stood transferred/ deemed to be transferred to and vest in Kotak. Further, in consideration of the transfer of and vesting of the undertaking of eIVBL, 725 equity shares of Kotak of the face value of Rs. 5/- each fully paid-up was issued to shareholders of eIVBL for every 1,000 equity shares of the face value of Rs.10/- each of eIVBL held by them on the record date i.e. 17th April, 2015. Accordingly 13,92,05,159 equity shares of Rs.5/- each of Kotak were allotted at par to the shareholders of ING Vysya vide board resolution dated 21st April, 2015. The excess of the paid up value of equity shares of eIVBL over the paid up value of equity shares issued as consideration amounting to Rs.122.40 crore has been transferred to Amalgamation Reserve as per the Scheme of Amalgamation. The amalgamation has been accounted using the pooling of interest method under Accounting Standard 14 (AS14), “Accounting for amalgamation” and the principles laid down in Part VII – paragraph 19 of the approved Scheme of Amalgamation. The assets, liabilities and reserves and surplus of eIVBL were recorded by Bank at their carrying amounts as on 1st April, 2015 except for adjustments which were made to bring uniformity of accounting policies as required under AS14. The impact of these adjustments was Rs.189.95 crore which has been adjusted in the balance of Profit and Loss Account. Timing differences, if any, arising on these adjustments have been accounted with corresponding adjustment to Deferred Tax Asset. Further, with respect to revaluation of fixed assets, the revaluation reserve amounting to Rs.101.37 crore held by eIVBL was reversed and the Gross Block of Fixed Assets were credited back with Rs.101.37 crores. The accumulated debrciation on such reserve amounting to Rs.11.15 crore was also reversed in Gross Block of Fixed Assets. Certain other reclassifications of items were carried out to ensure consistency in brsentation. The results for the year ended 31st March, 2016 are not comparable with that of the corresponding period of the brvious year. B. DISCLOSURES AS LAID DOWN BY RBI CIRCULARS: 1. Credit default swaps: The Bank has not entered into any Credit Default Swap transactions 2. The Provision Coverage Ratio (PCR) of the Bank after considering technical write-off is 63.68% as at 31st March, 2016 (brvious year: 56.80%). 3. There are no unsecured advances for which intangible security such as charge over the rights, licenses, authority, etc. are accepted as collateral by the Bank. 4. During the year ended 31st March, 2016 and year ended 31st March, 2015 the Bank has not exceeded the prudential exposure limits as laid down by RBI guidelines for the Single Borrower Limit (SBL)/ Group Borrower Limit (GBL). 5. During the year Nil penalty (brvious year Rs. 0.10 crore) had been imposed by the Reserve Bank of India in terms of the Section 47A(1) read with Section 46(4)(i) of the Banking Regulation Act, 1949 for non-compliance of certain RBI instructions. 6. There are no Off-Balance Sheet SPVs sponsored (which are required to be consolidated as per accounting norms) (brvious year Nil). 7. Draw Down from Reserves: In accordance with the RBI requirement on creation and utilisation of Investment reserve in respect of HFT and AFS investments, reserve of Rs. 41.52 crore has been utilised during the year (brvious year Rs. 86.65 crore had been created). 8. There are no outstanding letter of awareness (brvious year Nil). 9. DISCLOSURES ON REMUNERATION A. Qualitative Disclosures: a) Information relating to the composition and mandate of the Remuneration Committee: The Nomination & Remuneration committee comprises of independent directors of the Bank. Key mandate of the Nomination & Remuneration committee is to oversee the overall design and operation of the compensation policy of the Bank and work in coordination with the Risk Management Committee to achieve alignment between risks and remuneration. b) Information relating to the design and structure of remuneration processes and the key features and objectives of remuneration policy: Objective of Bank’s Compensation Policy is: • To maintain fair, consistent and equitable compensation practices in alignment with Bank’s core values and strategic business goals; • To ensure effective governance of compensation and alignment of compensation practices with prudent risk taking; • To have mechanisms in place for effective supervisory oversight and Board engagement in compensation. The remuneration process is aligned to the Bank’s Compensation Policy objectives. c) Description of the ways in which current and future risks are taken into account in the remuneration processes. It should include the nature and type of the key measures used to take account of these risks: In order to manage current and future risk and allow a fair amount of time to measure and review both quality and quantity of the delivered outcomes, a significant portion of senior and middle management compensation is variable. Further reasonable portion variable compensation is non-cash and deferred, over a period of 3 years or longer. In addition, remuneration process provides for ‘malus’ and ‘clawback’ option to take care of any disciplinary issue or future drop in performance of individual/ business/ company. d) Description of the ways in which the bank seeks to link performance during a performance measurement period with levels of remuneration: Individual performances are assessed in line with business/ individual delivery of the Key Result Areas (KRAs), top priorities of business, budgets etc. KRAs of Line roles are linked to financials, people, service and process (Quality) parameters and KRAs of non-Line Roles have linkage to functional deliveries needed to achieve the top business priorities. Further remuneration process is also linked to market salaries / job levels, business budgets and achievement of individual KRAs. e) A discussion of the bank’s policy on deferral and vesting of variable remuneration and a discussion of the bank’s policy and criteria for adjusting deferred remuneration before vesting and after vesting: A discussion on Policy on Deferral of Remuneration Employees are classified into following three categories for the purpose of remuneration: Category I: Whole Time Directors (WTD)/Chief Executive Officer (CEO) Category II: Risk Control and Compliance Staff Category III: Other Categories of Staff Following principles are applied for deferral / vesting of variable remuneration in accordance with RBI guidelines and Bank’s compensation policy: Category I a. Variable Pay will not exceed 70% of Fixed Pay. b. The Cash component of the Variable Pay will not exceed 50% of the Fixed Pay. c. If Variable Pay is higher than 50% of Fixed Pay, at least 40% of Variable Pay will be deferred over a period of 3 years, or longer, on a pro-rata basis. The compensation will be approved by the Nomination and Remuneration committee and RBI. Category II a. Variable Pay will not exceed 70% of Fixed Pay. b. The Cash component of the Variable Pay will not exceed 50% of the Fixed Pay. c. If Variable Pay is higher than 50% of Fixed Pay, at least 40% of Variable Pay will be deferred over a period of 3 years, or longer, on a pro-rata basis. Category III Variable Pay is payable as per approved schemes for incentive or Bonus: i) The Cash component of the Variable Pay will not exceed 60% of the Fixed Pay. ii) If Variable Pay is higher than 60% of Fixed Pay, at least 40% of Variable Pay will be deferred over a period of 3 years, or longer, on a pro-rata basis. iii) However, if Variable Pay is less than or equal to Rs. 10 lakhs, management will have the discretion to pay the entire amount as cash. For adjusting deferred remuneration before & after vesting: Malus: Payment of all or part of amount of deferred variable pay can be brvented. This clause will be applicable in case of: • Disciplinary Action (at the discretion of the Disciplinary Action Committee) and/ or • Significant drop in performance of Individual/ Business/ Company (at the discretion of the Nomination & Remuneration Committee) and/ or • Resignation of the staff prior to the payment date. Clawback: Previously paid or already vested deferred variable pay can also be recovered under this clause. This clause will be applicable in case of Disciplinary Action (at the discretion of the Disciplinary Action Committee and approval of the Nomination & Remuneration Committee). f) Description of the different forms of variable remuneration (i.e. cash, shares, ESOPs and other forms) that the bank utilizes and the rationale for using these different forms: The main forms of such variable remuneration include: • Cash – this may be at intervals ranging from Monthly, Quarterly, Annual. • Deferred Cash / Deferred Incentive Plan. • Stock Apbrciation Rights (SARs): These are structured, variable incentives, linked to Kotak Mahindra Bank Stock price, payable over a period of time. • ESOP as per SEBI guidelines. The form of variable remuneration depends on the job level of individual, risk involved, the time horizon for review of quality and longevity of the assignments performed. B. Quantitative Disclosures: a) Number of meetings held by the Remuneration Committee during the financial year and remuneration paid to its members. During year ended 31st March, 2016 five meetings of Nomination and Remuneration Committee was held. Each Member of the Nomination and Remuneration Committee is paid a sitting fee of Rs. 30,000 per meeting. b) Number of employees having received a variable remuneration award during the financial year. Quantitative disclosure restricted to CEO, two Whole Time Directors and six Operating Management committee members as risk takers. c) Number and total amount of sign-on awards made during the financial year. Nil (brvious year Nil) d) Details of guaranteed bonus, if any, paid as joining / sign on bonus. Nil (brvious year Nil) e) Details of severance pay, in addition to accrued benefits, if any. Nil (brvious year Nil) f) Total amount of outstanding deferred remuneration, split into cash, shares and share-linked instruments and other forms. Cash – Nil Outstanding SARs as at 31st March, 2016 – 128,696 rights (brvious year 100,614 rights) Outstanding ESOPs as at 31st March, 2016 – 891,694 equity shares (brvious year 644,816 equity shares) g) Total amount of deferred remuneration paid out in the financial year. Payment towards SARs during year ended 31st March, 2016 Rs. 6.29 crore (brvious year Rs. 7.86 crore) h) Breakdown of amount of remuneration awards for the financial year to show fixed and variable, deferred and nondeferred. Total fixed salary for the year ended 31st March, 2016 - Rs. 18.75 crore (brvious year Rs. 17.12 crore) Deferred Variable Pay* SARs – 35,370 rights (brvious year 44,290 rights) ESOPs – 145,660 equity shares (brvious year 207,850 equity shares) Non Deferred variable pay* Rs. 4.02 crore (brvious year Rs. 3.43 crore) * Details relating to variable pay pertains to remuneration awards for the financial year 2014-15 awarded during current financial year. Remuneration award for the year ended 31st March, 2016 are yet to be reviewed and approved by the remuneration committee. i) Total amount of outstanding deferred remuneration and retained remuneration exposed to ex-post explicit and / or implicit adjustments. – Nil j) Total amount of reductions during the financial year due to ex- post explicit adjustments. – Nil k) Total amount of reductions during the financial year due to ex- post implicit adjustments. – Nil38. b) Qualitative disclosure around LCR The Reserve Bank of India has brscribed monitoring of sufficiency of Bank’s liquid assets using Basel III – Liquidity Coverage Ratio (LCR). The LCR is aimed at measuring and promoting short-term resilience of Banks to potential liquidity disruptions by ensuring maintenance of sufficient high quality liquid assets (HQLAs) to survive an acute stress scenario lasting for 30 days. The LCR requirement has been introduced in a phased manner with banks required to maintain minimum LCR of 60% till Dec 2015 and 70% from Jan 2016 onwards. The requirement will be increasing by 10% annually to 100% by Jan 2019. The ratio comprises of high quality liquid assets (HQLAs) as numerator and net cash outflows in 30 days as denominator. HQLA has been divided into two parts i.e. Level 1 HQLA which comprises primarily of cash, excess CRR, SLR securities in excess of minimum SLR requirement and a portion of mandatory SLR as permitted by RBI (under MSF and FALLCR) and Level 2 HQLA which comprises of investments in highly rated non-financial corporate bonds and listed equity investments considered at brscribed haircuts. Cash outflows are calculated by multiplying the outstanding balances of various categories or types of liabilities by the outflow run-off rates and cash inflows are calculated by multiplying the outstanding balances of various categories of contractual receivables by the rates at which they are expected to flow in. The Bank has implemented the LCR framework and has consistently maintained LCR well above the regulatory threshold. The average LCR for the quarter ended 31st March, 2016 was 77.75% which is above the regulatory limit of 70%. For the quarter ended 31st March, 2016 Level 1 HQLA stood at 88.38% (24,625 crs) of the total HQLA. LCR is expected to bring in more funding stability due to severe run-off factors on wholesale funding but at the same time it has increased the liquidity cost due to maintenance of high quality liquid assets. Apart from LCR, Bank uses various stock liquidity indicators to measure and monitor the liquidity risk in terms of funding stability, concentration risk, dependence on market borrowings, liquidity transformation, etc. The Bank maintains a diversified source of funding in terms of depositor concentration, lender concentration as well as instrument concentration. This is evident through low depositor and lender concentration with top 20 depositors contributing 11.9% of Bank’s total deposits and top 10 lenders contributing 7.2% of Bank’s total liabilities. Asset Liability Committee (ALCO) of the Bank is the primary governing body for Liquidity Risk Management supported by Balance Sheet Management Unit (BMU), Risk Management Department (RMD), Finance and ALCO Support Group. BMU is the central repository of funds within the Bank and is vested with the responsibility of managing liquidity risk within the risk appetite of the Bank. Bank has incorporated Basel III Liquidity Standards - LCR and NSFR as part of its risk appetite statement for liquidity risk. 10. Frauds The Bank has reported 114 cases of fraud during the financial year ended 31st March 2016 amounting to Rs.44.94 crore. The Bank has recovered / expensed off / provided the entire amount where necessary. C. OTHER DISCLOSURES: 1. Lease Discloures: a. The Bank has taken various brmises and equipment under operating lease. The lease payments recognised in the Profit and Loss Account are Rs. 403.26 crore (brvious year Rs. 266.41 crore). The sub-lease income recognised in the Profit and Loss Account is Rs. 7.13 crore (brvious year Rs. 6.65 crore). b. The future minimum lease payments under non-cancellable operating lease – not later than one year is Rs. 360.14 crore (brvious year Rs. 242.99 crore), later than one year but not later than five years is Rs. 1,056.90 crore (brvious year Rs. 722.54 crore) and later than five years Rs. 899.84 crore (brvious year Rs. 674.31 crore). The lease terms include renewal option after expiry of primary lease period. There are no restrictions imposed by lease arrangements. There are escalation clauses in the lease agreements. 2. Tier II Bonds a) Lower Tier II Bonds outstanding as at 31st March, 2016 Rs. 969.70 crore (brvious year Rs. 482.00 crore). During the current year and brvious year the Bank had not issued lower Tier II bonds. In accordance with the RBI requirements lower Tier II bonds of Rs. 524.71 crore (brvious year Rs. 220.44 crore) are not considered as Tier II capital for the purposes of capital adequacy computation under Basel III guidelines. b) Upper Tier II Bonds outstanding as at 31st March, 2016 are Rs. 806.31 crore (brvious year Rs. 417.25 crore) of which bonds issued outside India are Rs. 670.31 crore (brvious year Rs. 281.25 crore). During the current and brvious year, the Bank did not issue upper Tier II bonds. c) Interest Expended-Others (Schedule 15(III)) includes interest on subordinated debt (Lower and Upper Tier II) Rs. 125.97 crore (brvious year Rs. 62.88 crore). 16. The Bank has received few intimations from “suppliers” regarding their status under the Micro, Small and Medium Enterprises Development Act, 2006 and there is no outstanding against those suppliers as on 31st March, 2016, hence disclosures, if any, relating to amounts unpaid as at the year end together with interest paid / payable as required under the said Act have not been given. The above is based on information available with the Bank and relied upon by the Auditors. 3. Figures for the brvious year have been regrouped / reclassified wherever necessary to conform to current years’ brsentation. The brvious year comparative numbers were audited by a firm of Chartered Accountants other than S. R. Batliboi & Co. LLP. As per our report of even date attached. For S. R. Batliboi & Co. LLP Firm Registration No. 301003E/E300005 Chartered Accountants per Viren H. Mehta Partner Membership No. 048749 For and on behalf of the Board of Directors Dr. Shankar Acharya Chairman Uday Kotak Executive Vice Chairman and Managing Director Dipak Gupta Joint Managing Director Jaimin Bhatt President and Group Chief Financial Officer Bina Chandarana Company Secretary Mumbai, 11th May, 2016 |