MCB INDIA SOVEREIGN BOND ETF the "FUND" INTERIM REPORT FOR THE QUARTER ENDED SEPTEMBER 30, 2018

Transcription

1 the "FUND" INTERIM REPORT FOR THE QUARTER ENDED SEPTEMBER 30, 2018

2

3 INTERIM FINANCIAL STATEMENTS - FOR THE QUARTER ENDED SEPTEMBER 30, 2018 TABLE OF CONTENTS PAGES MANAGEMENT & ADMINISTRATION 1 MANAGER'S REPORT 2-5 INTERIM FINANCIAL STATEMENTS 6-16 STATEMENT OF FINANCIAL HIGHLIGHTS 17

4 MANAGEMENT & ADMINISTRATION PLACE OF BUSINESS OF THE FUND REGISTERED OFFICE BOARD MEMBERS FUND MANAGER CORPORATE SECRETARY REGISTRAR BANKER CUSTODIAN FOR INVESTMENTS AUDITORS LEGAL ADVISOR ISIN C/o MCB Investment Management Co. Ltd 9th Floor, MCB Centre, Sir William Newton Street Port Louis, MAURITIUS C/o Gfin Corporate Services Ltd Level 6, Gfin Tower 42 Hotel Street, Cybercity Ebene, MAURITIUS Mr Gilbert Gnany Mr Sanjay Sachdev Mr Patrick Eric Ronald Lam Yan Foon Mr Jean Hok Hui How Hong MCB Investment Management Co. Ltd 9th Floor, MCB Centre, Sir William Newton Street Port Louis, MAURITIUS Gfin Corporate Services Ltd Level 6, Gfin Tower 42 Hotel Street, Cybercity Ebene, MAURITIUS MCB Registry & Securities Ltd 9th Floor, MCB Centre, Sir William Newton Street Port Louis, MAURITIUS The Mauritius Commercial Bank Ltd 9-15 Sir William Newton Street Port Louis, MAURITIUS Citibank, N.A. FIFC, 11th Floor C-54/55, G Block, Bandra Kurla Complex, Bandra East Mumbai , INDIA BDO & Co. 10, Frere Felix de Valois Street Port Louis, MAURITIUS BRIDGES LTD 5 Unicorn House Royal Street, Port-Louis MAURITIUS MU0516N

5 MANAGER'S REPORT Security 3 Months 6 Months 1 Year Inception 1 (Annualized Return) MCB India Sovereign Bond ETF -4.70% % % -1.10% Benchmark % % % -0.60% 1 Inception date: 6 th June Benchmark: ZyFin India Sovereign Bond Liquid Index Source: Bloomberg The economy had a mixed second quarter (Q2) of the fiscal year While the business activity in the private sector increased in Q2 at a faster rate than in Q1, given that India purchases about 80% of the oil it consumes from abroad, recent increases in oil prices caused the merchandise trade deficit to widen through to August. To help reduce the growing external sector imbalance, the government raised import tariffs on 12 billion worth of imports on 26th September. The Indian economy grew 8.2% year-on-year in the second quarter (Q2) of 2018, above 7.7% in the previous three months and beating market expectations of 7.6%. It is the strongest growth rate since the first quarter of 2016, boosted by household spending, financial, real estate and manufacturing activities. However, India's industrial production increased by 4.3% from a year earlier in August 2018, slowing from a downwardly revised 6.5% gain in the previous month and above market expectations of a 4% rise. Output growth eased for manufacturing (4.6% from 7% in July) and mining production fell (-0.4% from 3.4%). Meanwhile, electricity output rose at a faster pace (7.6% from 6.7%). Indian Indicators 10 Year Benchmark / INR FPI DEBT (INR Cr.) Current Account Deficit CPI Inflation IIP Forex Reserves ( Million) Gross Domestic Product (GDP)(Annual YoY %) Source: Bloomberg; NSDL, Trading Economics. 28-Sep % , %(30 th June 2018) 3.69% (August 2018) 4.30% 401, % 29-Jun % , % (31 st March 2018) 5.00% 3.20% (May 2018) 406, % 2

6 MANAGER'S REPORT RBI August Monetary Policy Review: India s Central Bank - The Reserve Bank of India (RBI) during the 3rd bi-monthly meeting of its Monetary Policy Committee (MPC) in August, decided to raise repo rates by 25 bps citing inflationary pressures arising out of volatile crude oil prices, rising house hold inflation expectations, hardening input price pressures, uncertainty over fiscal slippages and being vigilant on second round impact on inflation. The MPC voted 5-1 in favour of hiking the repo rate by 25 bps to 6.50%. RBI has projected inflation at 4.6% in Q2, 4.8% in H2 of and 5.0% in Q , with risks evenly balanced. GDP growth projection for is retained, at 7.4%, ranging % in H1 and % in H2, with risks evenly balanced; GDP growth for Q1: is projected at 7.5%. Government Bond: The yield on the 10-year benchmark government security (7.17% GoI 2028) ended at 8.02% on 28th September 2018 i.e. 12 bps higher than its close at 7.90% on 29th June Sovereign bond market remained volatile with a negative bias during the quarter due to depreciating rupee, higher crude oil prices, expectations of rate hike, rise in U.S. treasury yields and fiscal slippage. The higher than anticipated depreciation of the Indian rupee led to increased outflows of overseas funds from the Indian sovereign debt market. Supply pressures amid weekly bond auctions also contributed to fall in Government Bond prices. Source: Bloomberg The RBI released multiple press statements to assuage the market on meeting liquidity needs of the system and also announced Open Market Operations (OMO) and Term Liquidity Repos. The RBI conducted an OMO of 2.76 billion in September and announced to purchase total of 4.97 billion of government securities under OMO in October. The government has announced a substantial reduction of 9.66 billion in its planned market borrowing programme for H2FY19. The government borrowing in the second half of the financial year is expected to be approximately billion as against billion during Apr-Sep Bond markets took positive cues from these announcements and the 10-year government bond yield dipped below 8.0% mark. However, sharp rise in crude oil with US sanctions on Iran imminent, and rising US treasury yields took the 10- year benchmark G-Sec to 8.18% levels. But with RBI's commentary, in its monetary policy review, not as hawkish as expected, the consensus among market players was that the next rate hike is some time away. Further, the apex bank retained its monetary policy stance at neutral. 3

7 MANAGER'S REPORT Forex: INR depreciated by 5.87% against during July to September quarter due to rising crude prices, widening CAD and heavy dollar demand during the period. FII net debt outflow during the quarter was 0.93 billion compared to outflow of 5.61 billion during April to June quarter. Source: Bloomberg Liquidity: Systemic liquidity remained in surplus during first half of September on the back of government spending. However, liquidity was under stress since September 14, due to advance tax outflow. To ease liquidity conditions, RBI conducted OMO purchase of 1.40 billion on September 27, Further RBI increased the facility to avail funds for liquidity coverage ratio to 13% from 11%, effective October 1. The increase will take carve out from the statutory-liquidity ratio that is available to banks to 15% of their deposits. In addition, RBI announced additional OMO purchase of 4.97 billion in the month of October based on its assessment of the durable liquidity needs going forward and the seasonal growth in currency in circulation observed in build-up to the festive season. Inflation: On the macroeconomic data released during the period, inflation predictably softened to 3.69% in August vs 4.17% in July, helped both by favorable base effects and muted sequential headline momentum. The muted headline momentum was mainly because of soft food prices which continue to surprise to the down side. Core inflation also moderated to 5.6% in August compared to 5.9% in July. During July 2018, Government announced the revised minimum support prices (MSPs) for Kharif crop for FY The price of key Kharif crop Paddy (which has CPI weightage of 4.5%) was revised up by 13% YoY while other crops prices were raised in the range of 3.5% to 52.5%. The hike in Minimum Support Price is likely to add to both inflation and fiscal burden, however, the exact impact would depend on the government's procurement plans and implementation of the same. 4

8 MANAGER'S REPORT Outlook: With the OMO support and lower borrowing, the 10-year government Bond yield is likely to be in the range of 7.80% %. Even though there remain upside risks to yields on account of concerns over fiscal slippage, tightening liquidity, risk emanating from rising oil prices, higher inflation, higher supply of State development loan (SDL) bonds and rising international yields, we believe these factors to have a limited impact. In such a scenario, investors should remain invested in debt funds which prioritize safety and high liquidity rather than wait and try to do bottom fishing. FUND MANAGER For and on behalf of MCB INVESTMENT MANAGEMENT CO. LTD 5

9 CONDENSED STATEMENT OF FINANCIAL POSITION AS AT SEPTEMBER 30, 2018 Notes Sep 30,2018 June 30, 2018 ASSETS Non-current asset Investment in financial assets 3 8,216,325 24,405,966 Current Assets Other receivables 4 8,352 8,187 Cash and cash equivalents 123,782 8,196 Total current assets 132,134 16,383 Total Assets 8,348,459 24,422,349 REPRESENTED BY: Net assets attributable to holders of redeemable participating shares 8,294,339 24,324,913 Management Share ,294,349 24,324,923 Current liabilities Other payables 6 51,292 72,064 Current tax liability 9(a) 2,818 25,362 Total Liabilities 54,110 97,426 Total net assets attributable to holders of redeemable participating shares 8,348,459 24,422,349 Net asset value per share These financial statements have been approved for issue by the Board of Directors on 09 November ) ) DIRECTORS The notes on pages 10 to 16 form an integral part of these interim financial statements. 6

10 CONDENSED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME FOR THE QUARTER ENDED SEPTEMBER 30, 2018 Note Quarter ended September 30, 2018 Quarter ended September 30, 2017 Income Income on fixed income securities 221, ,316 Interest income 19 2 Refund from Manager (to cap total expense ratio) 4,596 3, , ,333 Expenses Manager's fees 20,440 28,296 Registrar's fees 2,227 3,116 Custodian's fees 2,582 2,317 Professional fees 2, Other direct fees 4,989 5,912 32,350 40,455 Fair value loss on financial assets (559,206) (314,770) Foreign exchange (loss)/ gain (6,633) 134,456 Loss on disposal of financial assets (23,302) (389,152) (589,141) (569,466) Loss before taxation (395,463) (413,588) Taxation 9(b) (2,601) (40,401) Loss after taxation (398,064) (453,989) Equalisation Income received on shares created - 660,893 Income paid on shares liquidated (386,663) - (386,663) 660,893 Total comprehensive income for the quarter (784,727) 206,904 The notes on pages 10 to 16 form an integral part of these interim financial statements. 7

11 CONDENSED STATEMENT OF NET ASSETS FOR THE QUARTER ENDED SEPTEMBER 30, 2018 Note Net Assets Attributable to holders of redeemable participating shares Balance at July 01, ,324,913 Redemption during the period 5 (ii) (15,245,847) Total comprehensive income (784,727) Balance at September 30, ,294,339 Balance at July 01, ,761,160 Issue during the period 5 (ii) 16,139,106 Total comprehensive income 206,904 Dividend declared and paid during the period (989,586) Balance at September 30, ,117,584 The notes on pages 10 to 16 form an integral part of these interim financial statements. 8

12 CONDENSED STATEMENT OF CASH FLOWS FOR THE QUARTER ENDED SEPTEMBER 30, 2018 Notes Quarter ended September 30, 2018 Quarter ended September 30, 2017 Cash flows from operations Cash (used in)/ generated from operations 8(a) (48,672) 8,748,381 Tax paid (25,145) (1,115) Net cash (used in)/ generated from operations (73,817) 8,747,266 Cash flows from investing activities Interest received 928, ,316 Purchase of financial assets 3 (705,535) (52,100,409) Disposal of financial assets 15,605,645 36,596,009 Net cash generated from/ (used in) investing activities 15,828,546 (15,311,084) Cash flows from financing activities Issue of participating shares 5 (ii) - 16,139,106 Redemption of participating shares 5 (ii) (15,245,847) - Income received on participating shares created - 660,893 Income paid on participating shares liquidated (386,663) - Dividend paid - (989,586) Net cash (used in)/ generated from financing activities (15,632,510) 15,810,413 Net increase in cash and cash equivalents 122,219 9,246,595 Movement in Cash and Cash Equivalents At start of period 8,196 25,508 Increase in cash 122,219 9,246,595 Foreign exchange (loss)/ gain (6,633) 134,456 At end of period 123,782 9,406,559 The notes on pages 10 to 16 form an integral part of these interim financial statements. 9

13 NOTES TO THE INTERIM FINANCIAL STATEMENTS FOR THE QUARTER ENDED SEPTEMBER 30, REPORTING ENTITY MCB India Sovereign Bond ETF (the "Fund") was incorporated in Mauritius under the Companies Act 2001 on March 04, 2016 as a public company with liability limited by shares and holds a Category 1 Global Business Licence issued by the Financial Services Commission (the "FSC") to operate as a Collective Investment Scheme, categorised as a Global Scheme. The Fund's registered office is C/o Gfin Corporate Services Ltd, Level 6, Gfin Tower, 42 Hotel Street, CyberCity, Ebene, Mauritius. The Fund s objective is to track the performance of Zyfin India Sovereign Bond Liquid Index in which constitute the most liquid fixed rate, local currency sovereign bond issued by the Central Government of India. The Fund is promoted by MCB Investment Management Co. Ltd (the Fund Manager ), which is a company duly licensed by the FSC to promote funds and offer management, administration, distribution and other services to collective investment schemes and closed-end funds. 2 BASIS OF PREPARATION The interim financial statements are unaudited and have been prepared using the same accounting policies as those adopted in the financial statements for the year ended June 30, 2018 and comply with IAS INVESTMENT IN FINANCIAL ASSETS The movement in investments in financial assets may be summarised as follows: Designated at fair value through profit or loss Sep 30, 2018 Jun 30, 2018 Opening Balance 23,562,665 9,757,641 Additions 705,535 88,742,363 Disposals (16,767,628) (73,393,997) Fair value release 1,138, ,977 Fair value loss on financial assets (559,206) (1,713,319) 8,080,047 23,562,665 Interest receivable 136, ,301 Closing Balance 8,216,325 24,405,966 4 OTHER RECEIVABLES Sep 30, 2018 Jun 30, 2018 Prepayments 8,342 8,177 Share capital receivable ,352 8,187 The carrying amounts of other receivables approximate their fair value and do not contain impaired balances. The Fund does not hold any collateral as security. 10

14 NOTES TO THE INTERIM FINANCIAL STATEMENTS FOR THE QUARTER ENDED SEPTEMBER 30, MOVEMENT IN PARTICIPATING SHARES (i) Number of shares No. of Shares No. of Shares At July 01, 2018/ ,616, ,505 Issue of shares during the period - 1,480,652 Redemption of shares (1,682,330) - At Sep 30, 2018/ ,650 2,356,157 (ii) Issued and Fully Paid At July 01, 2018/ ,854,749 8,810,897 Issue of shares during the period - 16,139,106 Redemption of shares (15,245,847) - At Sep 30, 2018/ ,608,902 24,950,003 (iii) Class Rights Rights of Participating Shares 1 Voting rights The holders of Participating Shares shall not have the right to receive notice of meeting of shareholders of the Fund and shall have no right to vote at any such meetings and/or to approve any resolution of the Fund except in the circumstances permitted by the Constitution or required under Mauritian Law. 2 Dividends The holders of Participating Shares shall have rights to dividends. 3 Distribution of surplus assets Upon winding up of the Fund, the holders of Participating Shares shall have the right to a pro-rata share of any surplus assets of the Fund but in priority to the holder of Management Share in accordance with the Constitution. 11

15 NOTES TO THE INTERIM FINANCIAL STATEMENTS FOR THE QUARTER ENDED SEPTEMBER 30, MOVEMENT IN PARTICIPATING SHARESS (CONT'D) (iv) Reconciliation of Net Assets and Net Assets Value per Share Sep 30, 2018 Jun 30, 2018 Net Assets calculated as per Prospectus 8,280,680 24,315,894 Adjustments: Income tax adjustment 15,416 9,775 Under accrual of professional fees (132) (92) Other fees (1,625) (681) Other income - 17 Net Assets as per Financial Reporting 8,294,339 24,324,913 Per Share Per Share Net Assets per share calculated as per Prospectus Adjustments: Income tax adjustment Under accrual of professional fees (0.00) (0.00) Other fees - (0.00) Other income Net Assets per share as per Financial Reporting OTHER PAYABLES Sep 30, 2018 Jun 30, 2018 Advance from Manager 1,688 6,284 Manager's fees payable 34,003 50,169 Registrar's fees payable 3,564 1,337 Custodian's fees payable 2,293 5,899 Professional fees payable 8,813 6,700 Directors' fees payable Index Provider fees 644 1,388 51,292 72,064 The carrying amounts of other payables approximate their fair values. 12

16 NOTES TO THE INTERIM FINANCIAL STATEMENTS FOR THE QUARTER ENDED SEPTEMBER 30, MANAGEMENT SHARE One Management Share of 10 was issued by the Fund to MCB Investment Management Co. Ltd on incorporation. 8 NOTES TO THE STATEMENT OF CASH FLOWS Quarter ended Sep 30, 2018 Quarter ended Sep 30, 2017 (a) Cash generated from operations Loss before taxation (395,463) (413,588) Adjustments for: Interest income on fixed income securities (221,413) (193,316) Fair value loss on financial assets 559, ,770 Foreign exchange loss/ (gain) 6,633 (134,456) Loss on disposal of financial assets 23, ,152 (27,735) (37,438) Changes in working capital: Other receivables (165) (607,931) Other payables (20,772) 9,393,750 Cash flows from operations (48,672) 8,748,381 (b) Reconciliation of liabilities arising from financing activities At July 1, 2018 Cash Flows At Sep 30, 2018 Participating shares 27,854,749 (15,245,847) 12,608,902 (c) Cash and cash equivalents Cash at bank 123,782 9,406,559 9 INCOME TAX The Fund is liable to pay tax on its net income at the rate of 15% and is entitled to a tax credit equivalent to the higher of actual foreign tax suffered or 80% of Mauritius tax payable in respect of its foreign-sourced income. 13

17 NOTES TO THE INTERIM FINANCIAL STATEMENTS FOR THE QUARTER ENDED SEPTEMBER 30, INCOME TAX (CONT'D) (a) In the Statement of Financial Position Sep 30, 2018 Jun 30, 2018 At start of period 25,362 20,385 Charge for the period/ year 2, ,345 Paid for the period/ year (25,145) (120,368) At end of period 2,818 25,362 Split as follows: Current tax asset (4,341) (4,341) Withholding tax payable 7,159 29,703 2,818 25,362 (b) In the Statement of Profit or Loss and other Comprehensive Income The tax on the Fund's profit before tax differs from the theoretical amount that would arise using the basic tax rate of the Fund as follows: June 30, 2018 Sep 30, 2017 Loss before taxation (395,463) (413,588) Tax calculated at a rate of 3% (11,864) (12,408) Tax effect on: Expenses not deductible for tax purposes 17,475 21,118 Income not subject to tax (1,437) - Withholding tax relief (4,174) - Withholding tax suffered 2,601 31,691 Under-provision of tax liabilities - - Tax charge 2,601 40, RELATED PARTY TRANSACTIONS The transactions of the Fund with related parties during the period are as follows: (a) Manager's Fees The Fund appointed MCB Investment Management Co. Ltd to implement the investment strategy as specified in the Prospectus. MCB Group Limited is the ultimate holding company of the Fund Manager. The investment management fees payable for the period under review are detailed below: Sep 30, 2018 Sep 30, 2017 MCB Investment Management Co. Ltd 20,440 28,296 14

18 NOTES TO THE INTERIM FINANCIAL STATEMENTS FOR THE QUARTER ENDED SEPTEMBER 30, RELATED PARTY TRANSACTIONS (CONT'D) (b) Registrar Fees MCB Registry & Securities Ltd acts as the Registrar and Transfer Agent of the Fund. MCB Registry & Securities Ltd is a fellow subsidiary of the Fund Manager. The Registrar fees payable for the period under review are detailed below: Sep 30, 2018 Sep 30, 2017 MCB Registry & Securities Ltd 2,227 3,116 (c) Outstanding balances as at June 30, Sep 30, 2018 Jun 30, 2018 Payables to related parties MCB Investment Management Co. Ltd 34,003 50,169 MCB Registry & Securities Ltd 3,564 1,337 37,567 51,506 -The above transactions reflect the commercial objective of the Fund and occurred in the normal course of business. -There has been no guarantees provided or received for any related party receivables or payables -The outstanding balances as at the end of the period are unsecured. 15

19 NOTES TO THE INTERIM FINANCIAL STATEMENTS FOR THE QUARTER ENDED SEPTEMBER 30, 2018 June 30, 2018 Schedule of Investments as at Sep 30, 2018 Market Value Market Value % of Net () Security Description () Assets Quoted Foreign Fixed Income Securities 23,562, % GOI ,080, % 23,562,665 TOTAL QUOTED FOREIGN FIXED INCOME SECURITIES 8,080, % 843,301 TOTAL CURRENT ASSETS INTEREST RECEIVABLE 136, % 24,405,966 TOTAL MARKET VALUE OF INVESTMENTS 8,216, % (81,043) OTHER ASSETS AND LIABILITIES 78, % 24,324,923 NET ASSETS 8,294, % Currency Profile 24,380,616 INR 8,209, % (55,693) 85, % 24,324,923 NET ASSETS 8,294, % At September 30, 2018, if had weakened/ strengthened by 5% against the above other currencies with all other variables held constant, loss before taxation would have been 411k (June 30, 2018: 1,219k) lower/ higher, mainly as a result of retranslation of foreign currency denominated bank balances and financial assets. Fair Value Hierarchy 23,562,665 Level 1 8,080, % 23,562,665 TOTAL MARKET VALUE OF INVESTMENTS 8,080, % Had fair value increased/ decreased by 10%, the impact on loss before taxation would have been 808k (June 30, 2018: 2,356k) lower/ higher with all other variables held constant. 16

20 APPENDIX: STATEMENT OF FINANCIAL HIGHLIGHTS FOR THE QUARTER ENDED SEPTEMBER 30, 2018 Closing exchange rate: INR Calculation notes: Management Expense Ratio = (Total Expense Ratio) Management & Administration Expenses Daily Average Net Assets Portfolio Turnover Rate = (Purchases - Subscriptions) + (Disposals - Redemptions) Daily Average Net Assets Reconciliation of net assets attributable to holders of redeemable participating shares Quarter ended Period from September 30, Year ended June March 04, , 2018 to June 30, 2017 Opening net asset value 24,324,913 9,761,160 - Total revenue 226,028 1,564, ,609 Total expenses (34,951) (364,782) (188,025) Realised (loss)/ gain for the period/ year (23,302) (3,004,967) 842,178 Unrealised loss for the period/ year (565,839) (1,521,545) (110,310) Total (decrease)/ increase from operations (398,064) (3,327,108) 1,202,452 Dividend declared from net income - (1,877,248) (280,162) Net Subscriptions - 23,306,579 8,810,897 Redemption of participating shares (15,245,847) (4,262,727) - Income paid on participating shares liquidated (386,663) (36,599) - Income on issue of shares - 760,856 27,973 Closing net asset value 8,294,339 24,324,913 9,761,160 Portfolio turnover rate 9.50% % % Redeemable Participating Shares Number of shares outstanding ('000) 934,650 2,616, ,505 Management expense ratio (Total Expense Ratio) 0.99% 0.99% 0.99% Closing market price per share