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NOTES TO ACCOUNTS

Essar Shipping Ltd.

You can view the entire text of Notes to accounts of the company for the latest year
Market Cap. (₹) 173.86 Cr. P/BV -0.07 Book Value (₹) -116.21
52 Week High/Low (₹) 17/7 FV/ML 10/1 P/E(X) 0.00
Bookclosure 26/09/2018 EPS (₹) 0.00 Div Yield (%) 0.00
Year End :2018-03 

1. CORPORATE INFORMATION

Essar Shipping Limited ("the Company") was incorporated in September 2010 and is listed on the Bombay Stock Exchange and National Stock Exchange in India. The Company is mainly engaged in fleet operating and chartering activities and operates international and coastal voyages. The Company has also directly and/or through its subsidiaries and associates invested in diverse business verticals viz. Fleet operating and chartering (tankers and dry bulkers), Oilfields services (land rigs and semi-submersible rig) and logistics services (trucks, trailers and tippers). The place of business of the Company is in Mumbai, India.

(i) Leased assets

The lease term in respect of assets acquired under finance leases expires within 10 years. Refer Note 22 for terms of leasing arrangements and related disclosures.

(ii) Water treatment plant

Gross block of plant and equipment includes a water treatment plant of Rs. 38.84 crores (previous year: Rs.38.84 crore) given on lease. The net book value is Rs. Nil (previous year: Rs. Nil).

(iii) Assets given as security for borrowings

Fleet and Land owned by the Company have been given to lenders as security for various borrowing facilities.

(iv) Impairment testing for fleet

In view of pertinent slowdown in shipping industry, the Company has assessed ‘recoverable amount’ of each fleet by estimating their “value in use”, in terms of IND-AS 36 “Impairment of Assets”. ‘Value in use' is estimated by applying appropriate discount rate to projected net cash inflows having regard to existing long term contracts, expected tariff based on past trends and costs to operate the fleet which represents the management’s best estimate of the set of economic conditions that will exist over remaining useful life of each fleet. Based on the aforementioned assessment, it has been concluded that ‘recoverable amount’ of the fleet is higher than their respective carrying amount.

Foot notes:

* 100% equity shares of Essar Shipping DMCC have been pledged with Mashreq Bank for SBLC facility availed by Essar Shipping DMCC.

** 49% shares have been pledged in favour of IDBI Trusteeship Services Limited towards security for secured non convertible debentures of Rs.700 crore.

*** The terms of preference shares issued by Essar Oilfield Services India Limited have been changed from 14.5% optionally convertible cumulative (redeemable) participating preference shares to 0.01% compulsory convertible preference shares of Rs.10/- each on 31st March, 2018.

Terms and rights attached to equity shares

The Company has only one class of equity shares having par value of Rs.10/- per share. Each holder of the equity share is entitled to one vote per share. In the event of liquidation of the Company, the holders of equity shares will be entitled to receive remaining assets of the Company, after distribution of all preferential amounts. The distribution will be in proportion to the number of equity shares held by the shareholders.

Note:

Shares reserved for issue under options

(i) The Company had reserved issuance of 3,77,463 equity shares of Rs.10 each for offering to eligible employees of the Company and its subsidiaries under Employees Stock Options Scheme (ESOS) (Refer note 28 for details)

(ii) 2,800 Foreign Currency Convertible Bonds (FCCB) are convertible into 122,852,787 equity shares (previous year 122,852,787 equity shares) of Rs. 10/- each Refer foot note (f) to note 10(a) for details.

Debenture Redemption Reserve

In terms of rule 18(7) of the Companies (Share Capital and Debentures) Rules 2014, the Company is required to create a Debenture Redemption Reserve (DRR) of Rs.185 crores (previous year: Rs.185 crores) in respect of debentures issued and outstanding as on 31st March, 2018. However, in view of continuous losses, the Company has not created such DRR.

Share options outstanding reserve

This reserve contains the intrinsic value of unvested employee stock options

Tonnage tax (utilised) and Tonnage tax reserve

These reserves are mandatory under the Income Tax Act, 1961 for companies who opt for the Tonnage Tax scheme prescribed under the said Act.

General reserve

These were transferred to the Company at the time of its demerger from Essar Shipping Ports & Logistics Limited Foreign Currency Monetary Items Translation Differences Account or FCMITDA Foreign currency losses relating to monetary items denominated in foreign currencies are accumulated in the FCMITDA and amortised over the term of the related monetary liabilities.

Other items of comprehensive income

These are actuarial gains / (losses) on employee benefit obligations

Foot notes:-

i) Repayment terms:

a) Secured debentures: 2,000 debentures issued on 25th March 2010 and 5,000 debentures issued on 22nd June 2009 are redeemable at the expiry of 10 years with put and call option exercisable after five years from their respective dates of issue. The Company has received notice from the debenture holder invoking the put option. The Company is in discussion with the debenture holder to waive the option and based on the said discussion, the management is reasonably confident that the debenture holder will waive the option and the debentures would be redeemed at the expiry of ten years from the date of their issue. However, the debentures have been classified as current liabilities till such waiver is received.

b) Secured debentures: 205 debentures issued on 1st February 2013 are redeemable at the expiry of 10 years from the date of issue and the holder of the debentures have an option to call after 5 years from the date of issue. These debentures are overdue for payment on balance sheet date.

c) Secured Rupee term loans from banks and others: Repayable in quarterly instalments starting from October, 2015 to December, 2020.

d) Secured foreign currency term loans from banks : Repayable in quarterly instalments starting from March, 2006 to July, 2019

e) Finance lease obligation: Repayable in monthly instalments starting from November 2016 to April 2027.

f) Foreign currency convertible bonds: i) FCCBs of US$ 111,428,571 (Series B) due on 24th August, 2017 and US$ 128,571,429 (Series A) due on 24th August, 2015 got extended to 24th August, 2019, carry interest @ 5% per annum payable semi annually. The FCCBs are convertible into 122,852,787 fully-paid equity shares of Rs.10 each of the Company, any time upto the date of maturity, at the option of the FCCB holders at conversion price of Rs.91.70 per share at a predetermined exchange rate of Rs.46.94 per US$. The FCCBs, if not converted till the maturity date, will be redeemed at par.

g) The classification of loans between current liabilities and non - current liabilities continues based on repayment schedule under respective agreements as no loans have been recalled due to non compliance of conditions under any of the loan agreements except in case of certain non current borrowings from debenture holders amounting to Rs.739.50 crore and from banks amounting to Rs.58.21 crore where some of these lenders have not confirmed the loan balances as on the balance sheet date

h) Interest rates: Loans availed from banks, financial institutions, NBFC’s and Alternate Investment Funds carry a weighted average interest rate of 9.44% per annum (previous year: 8.06% per annum)

I. Details of retirement benefits:

The employees of the Company are members of a state - managed retirement benefit plans namely provident fund, pension fund, gratuity fund and superannuation fund operated by the Government of India. The Company is required to contribute a specified percentage of payroll costs to the retirement benefit scheme to fund the benefits. The only obligation of the company with respect to the retirement benefit plan is to make the specified contributions.

The Company has recognised the following amounts in the Statement of Profit and Loss during the year under ‘Contribution to staff provident and other funds. (refer note 16)

II. Defined benefit plans

The company operates funded gratuity, non funded gratuity and funded provident fund plan for qualifying employees. Under the plans the employees are entitled to retirement benefits depending upon the number of years of service rendered by them subject to minimum specified number of years of service. No other post retirement benefits are provided to these employees. Contribution to provident fund (office staff and offshore officers)

The actuarial valuation of plan assets and the present value of defined benefit obligation were carried out at March 31, 2018 by the certified actuarial valuer. The present value of the defined benefit obligation, related current service cost and past service cost were measured using the projected unit credit method.

Risk exposure- asset volatility

The plan liabilities are calculated using a discount rate set with reference to bond yields; if plan assets underperform this yield, this will create a deficit. Most of the plan asset investments is in fixed income securities with high grades and in government securities. These are subject to interest rate risk and the fund manages interest rate risk derivatives to minimize risk to an acceptable level. A portion of the funds are invested in equity securities and in alternative investments % which have low correlation with equity securities. The equity securities are expected to earn a return in excess of the discount rate and contribute to the plan deficit.

ii) Mortality rates considered are as per the published rates in the India Assured Lives Mortality (2006-08) (modified) ULT. (Previous year Life Insurance Corporation of India (2006-08) ) mortality table

iii) Leave policy: Leave balance as at the valuation date and each subsequent year following the valuation date to the extent not availed by the employee accrued till 31st December, 2014, is available for encashment on separation from the Company up to a maximum of 120 days.

iv) The contribution to be made by the Company for funding its liabilities for gratuity (funded and non funded) and towards provident fund during the financial year 2018-19 amounts to Rs.2.72 crore

v) The expected rate of return on plan assets is based on market expectation, at the beginning of the year, for returns over entire life of the related obligation.

vi) The assumption of future salary increases, considered in actuarial valuation, takes account of inflation, seniority, promotion, supply and demand and other relevant factors.

vii) Liability on account of long term absences has been actuarially valued as per Projected Unit Credit Method.

viii) Short term compensated absences have been provided on actual basis.

(I) The weighted average duration of the defined benefit obligation is 6 years.

During the year, the Company has recognized income from an Arbitration Award alongwith interest accrued thereon amounting to Rs.369.8 crore. This award relates to a claim for breach of contract against a charterer. The dispute in this regard has been adjudged in favour of the Company by the Arbitrator. Although the Charterer has appealed the Award in the Delhi High Court, management is confident of a positive result from the same.

Energy Transportation International Limited, Bermuda, (ETIL), a wholly owned subsidiary of the Company has been incurring losses such that its net worth has eroded fully. It was operating a VLCC which was on Time Charter from a German company. However, on 10th January 2018, the Time Charter for the said VLCC was terminated by the German company leaving ETIL with no vessels to operate. In this scenario, the Company has created a provision for diminution other than temporary in respect of its investment in ETIL on 31st March 2018 amounting to Rs.67.66 crores.

Subsequent to balance sheet date, the Company sold a capesize vessel for scrapping as it neared the end of its useful life. The book value of the vessel was Rs.143 crore and the sale proceeds in respect of the same were Rs.65 crores, thereby resulting in a loss on sale of Rs.78 crores. As at 31st March 2018, the said vessel has been classified as an asset held for sale and has been disclosed in the balance sheet at its market value (net of costs to sell) and the resultant diminution in value has been included as an Exceptional expense in the standalone statement of profit and loss.

2. FINANCIAL INSTRUMENTS

(i) Capital management

The Company manages its capital to ensure that it will be able to continue as a going concern while maximising the return to stakeholders through the optimisation of the debt and equity balance. The company's overall strategy remains unchanged from previous years. The capital structure of the company consists of debt, which includes the borrowings including temporary overdrawn balance, cash and cash equivalents including short term bank deposits, equity comprising issued capital and reserves. The gearing ratio for the year is as under:

Fair value measurements recognised in the statement of financial position:

The following table provides an analysis of financial instruments that are measured subsequent to initial recognition at fair value, grouped into Levels 1 to 3 based on the degree to which the fair value is observable.

- Level 1 fair value measurements are those derived from quoted prices (unadjusted) in active markets for identical assets or liabilities.

- Level 2 fair value measurements are those derived from inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices).

- Level 3 fair value measurements are those derived from valuation techniques that include inputs for the asset or liability that are not based on observable market data (unobservable inputs).

The fair value of the financial assets and liabilities are included at the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. The following methods and assumptions were used to estimate the fair values:

a) Cash and short-term deposits, trade and other receivables, trade and other payables, and other current liabilities approximate their carrying amounts largely due to the short-term maturities or nature of these instruments.

b) The fair value of loans from banks and other financial indebtedness as well as other non current financial liabilities is estimated by discounting future cash flows using rates currently available for debt or similar terms and remaining maturities.

c) Derivative instruments have been fair valued on the reporting date on the basis of quotes provided by third party qualified valuers / market participants.

(iii) Financial risk management objectives:

The Company’s principal financial liabilities comprise of loan from banks and financial institutions, finance lease obligations, overdrafts and trade payables. The main purpose of these financial liabilities is to raise finance for the Company’s operations. The Company has various financial assets such as trade receivables, cash and short term deposits, which arise directly from its operations.

The main risks arising from Company’s financial instruments are foreign currency risk, interest rate risk, credit risk and liquidity risk. The Board of Directors review and agree policies for managing each of these risks.

(iv) Foreign currency risk:

Foreign currency risk mainly arises from transactions undertaken by the Company denominated in currencies other than its functional currency. Exposure to foreign currency risk is partly mitigated by natural hedges of matching revenues and costs.

The carrying amounts of the Company’s financial assets and financial liabilities denominated in foreign currencies at the reporting date are as follows:

The following table details the Company's sensitivity to a 5% increase and decrease in the functional currency against the relevant foreign currency. 5% is the sensitivity rate used when reporting foreign currency risk internally to key management personnel and represents management's assessment of the reasonably possible change in foreign exchange rates. The sensitivity analysis includes only outstanding foreign currency denominated monetary items and adjusts their translation at the period end for a 5% change in foreign currency rates. A positive number below indicates an increase in profit and other equity where the functional currency strengthens by 5% against the relevant foreign currency. For a 5% weakening of the functional currency against the relevant currency, there would be an equal and opposite impact on the profit and other equity, and the balances below would be negative.

(v) Interest rate risk:

The Company is exposed to interest rate risk as it borrows funds at floating interest rates. The interest rate risk is managed by monitoring the Company's level of borrowings periodically and structuring its borrowings on varying maturities and interest rate terms. The Company’s exposures to interest rates on financial assets and financial liabilities are detailed in the liquidity risk management section of this note.

Interest rate sensitivity analysis:

The sensitivity analysis below has been determined based on the exposure to interest rates at the balance sheet date. For floating rate liabilities, the analysis is prepared assuming the amount of liability outstanding at the balance sheet date was outstanding for the whole year. A 50 basis point increase or decrease is used when reporting interest rate risk internally to key management personnel and represents management's assessment of the reasonably possible change in interest rates.

If interest rates had been 50 basis points higher/lower and all other variables were held constant, the Company’s profit for the year ended March 31, 2018 would decline by Rs.0.94 crore (previous year Rs.3.87 crore). This is mainly attributable to the Company’s exposure to interest rates on its variable rate borrowings

(vi) Other price risk

The Company is not exposed to any significant equity price risks arising from equity investments, as on 31st March 2018. Equity investments are held for strategic purposes rather than trading purposes. The Company does not actively trade these investments.

Equity price sensitivity analysis:

There is no exposure to equity price risks as at the reporting date or as at the previous reporting date.

(vii) Credit risk:

The credit risk is primarily attributable to the Company's trade and other receivables and guarantees given by the Company on behalf of others. The amounts presented in this standalone statement of financial position are net of allowances for doubtful receivables, estimated by management based on prior experience and their assessment of the current economic environment. The maximum related party credit exposure at March 31, 2018 on account of carrying amount of advances /deposit, trade and other receivables and guarantees is disclosed in the note on related party transactions. Based on the creditworthiness of the related parties, financial strength of related parties and its parents and past history of recoveries from them, the credit risk is mitigated.

Cash and cash equivalents are held with reputable and credit-worthy banks.

(viii) Fair value of financial instruments:

All financial assets are initially recognised at fair value of consideration paid. Subsequently, financial assets are carried at fair value or amortized cost less impairment. Where non - derivative financial assets are carried at fair value, gains and losses on re- measurement are recognised directly in equity unless the financial assets have been designated as being held at fair value through profit or loss, in which case the gains and losses are recognised directly in the standalone statement of profit and loss. Financial assets are designated as being held at fair value through profit or loss when it is necessary to reduce measurement inconsistency for related assets and liabilities. All financial liabilities other than derivatives are initially recognised at fair value of consideration received net of transaction costs as appropriate (initial cost) and subsequently carried at amortised cost.

(ix) Liquidity risk:

Ultimate responsibility for liquidity risk management rests with the Board of Directors, which has built an appropriate liquidity risk management framework for the management of the Company's short, medium and long-term funding and liquidity management requirements. The Company manages liquidity risk by maintaining adequate reserves, banking facilities and reserve borrowing facilities, by continuously monitoring forecast and actual cash flows and matching the maturity profiles of financial assets and liabilities.

The Company monitors its risk of shortage of funds using a recurring liquidity planning tool. This tool considers the maturity of both its financial investments and financial assets (e.g. accounts receivables, other financial assets) and projected cash flows from operations, public offerings and refinancing of current borrowings.

Liquidity table:

The following tables details the Company’s remaining contractual maturity for its financial liabilities. The tables have been drawn up based on the cash flows of financial liabilities based on the earliest date on which the Company can be required to pay:

Operating leases : Company as a lessee

The Company has not entered into any non-cancellable operating leases.

3. BUSINESS SEGMENT AND GEOGRAPHICAL SEGMENT

a) Business segment

The Company has only one reportable primary business segment of fleet operating and chartering.

b) Geographical segment

The Company’s fleet operations are managed on a worldwide basis from India. The revenue from operations are identified as geographical segment based on location of customers:

Note:

Equity shares to be issued upon conversion of FCCB and exercise of Employee Stock Option Scheme have not been considered for the purpose of calculating of weighted average number of diluted equity shares, as they are anti dilutive.

4. EMPLOYEE STOCK OPTION SCHEME

a) In the Annual General Meeting held on September 9, 2011, the shareholders approved the issue of Employee Stock options under the Scheme titled “Essar Shipping Employee Stock options Scheme -2011” (hereafter named ESOS A).

The ESOS A allows the issue of options to employees and executive Directors of the Company and its subsidiaries (whether in India or abroad). Each option comprises one underlying equity share.

As per the Scheme, the Compensation Committee grants the options to the employees deemed eligible. The exercise price of each option shall be determined by the Compensation committee as per the said scheme. The options granted vest in a graded manner over a period of 5/4/3 years from the date of the grant in proportions specified in the Scheme. Options may be exercised within 7 years from the date of vesting. The Company has issued the said ESOS in two tranches on November 2, 2011 and February 8, 2012 at an exercise price of ' 22.30 each, the market price of the shares on the grant date of the ESOS was '22.30 per share and ' 31.30 per share respectively.

The difference between the market price of the share underlying the options granted on the date of grant of option and the exercise price of the option (being the intrinsic value of the option) representing Stock compensation expense is expensed over the vesting period.

5. MANAGERIAL REMUNERATION

The appointment of and remuneration to the two Whole-time Directors have been approved by the shareholders at the last AGM of the Company and applications to the Central Government has been made for approval of their remuneration.

6. GOING CONCERN

As at 31st March, 2018, the Company's Current Liabilities exceed its Current Assets by Rs.1,506.51 crore as at 31st March, 2018. The following steps are being taken to rectify this mismatch.

1) Loan from a public financial institution along with interest accrued thereon amounting to Rs.1,087 crore classified as Current is expected to be rescheduled.

2) Advance from a subsidiary for purchase of vessel amounting to Rs.330 crores is not payable within one year.

3) Loan from an Alternate Investment Fund along with interest accrued thereon amounting to Rs.196 crore is not payable within one year.

4) Loan from an NBFC along with interest accrued thereon amounting to Rs.43 crore will not be repaid out of the Company's current assets.

5) Certain loans classified as current owing to covenant defaults are expected to be rescheduled such that they will not be repayable within one year.

7. SUBSEQUENT EVENT

Subsequent to the 31st March, 2018, the Company has entered into a Memorandum of agreement for sale of a capsize dry bulk carrier of 175,048 DWT

8. The previous year figures have been regrouped / reclassified wherever necessary to correspond with the current year’s classification / disclosure.

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