Société d Investissementà Capital Variable, Luxembourg (SICAV) ( the Fund ) Report on the Activity of the Fund for the year ended in accordance with CSSF Circular 2002/81 2015 KPMG Luxembourg, Société coopérative, a Luxembourg entity and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved.
KPMG Luxembourg, Societe cooperative 39. Avenue John F. Kennedy L-1855 Luxembourg Tel. : +352 22 5 1 51 1 Fax: +352 22 51 71 Email: info@kpmg.lu Internet: www.kpmg.lu To the Board of Directors Kotak Funds 16, boulevard d' A vranches L-1 160 Luxembourg Grand Duchy of Luxembourg December 31,2014 The following report has been prepared by us in accordance with our appointment dated April 30, 2014 and in compliance with Circular 2002/81. Our engagement letter is dated January 16, 2015. Our audit fieldwork was completed on April 22, 2015 and no subsequent review procedures have been carried out to the date of this report. This report has been prepared exclusively for the use of the Fund's management, its Board of Directors, its Management Company and the Commission de Surveillance du Secteur Financier. Accordingly it is not to be reproduced in whole or in part or relied upon by any other person or for any other purpose without our prior written authorisation. We would like to express our thanks to all those persons involved in the Fund's organisation for their co-operation and assistance during our assignment. Luxembourg, April 30, 2015 KPMG Luxembourg Societe cooperative Cabinet de revision agree L. Aktan KPMG luxembourq. S«6te cooperat<ve. a Lu embourg eot<iv and a TVA LU 27351518 member hrm of tho KPMG network of "'dependent membet fums R.C S Luxembourg B 149133 aff1!1atod Mth KPMG ln1crnat1onal Coope1a11ve l.. KPMG lntc1na11onal"). a Swiss entity
Contents 1 Terms of engagement 3 1.1 Short-form annual report 3 1.2 Report on the Activity of the Fund 3 2 Report on the Activity of the Fund 4 2.1 Organisational structure 4 2.1.1 Central Administration 6 2.1.2 Depositary Bank 7 2.1.3 Relationships with Management Company 8 2.1.4 Relationships with other intermediaries 9 2.2 Assessment of transactions and procedures 9 2.2.1 Anti-money laundering procedures 9 2.2.2 Valuation methods 14 2.2.3 Risk management system 15 2.2.4 Specific tests 17 2.2.5 Statement of assets & liabilities and income & expense account 19 2.2.6 NAV publication 23 2.2.7 Results of reconciliations 23 2.3 Internet 23 2.4 Investor complaints 23 2.5 Late Trading and Market Timing 24 2.6 Follow-up of issues raised in previous Report on the Activity of the Fund 25 2.7 Overall conclusion 25 Appendix 1 Appendix 2 Appendix 3 Representation letter Nil Management Letter Supervision by the Management Company of the delegated functions Appendix 4 Independent Service Auditor's Assurance Report on the Description of Controls, their Design and Operating Effectiveness i
1 Terms of engagement 1.1 Short-form annual report We have been appointed by the Shareholders of the Fund on April 30, 2014 to perform the annual audit of the Fund, in accordance with Luxembourg laws and regulations. Our audit is conducted in accordance with International Standards on Auditing as adopted for Luxembourg by the Commission de Surveillance du Secteur Financier. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the judgment of the Réviseur d Entreprises agréé, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the Réviseur d Entreprises agréé considers internal control relevant to the entity s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the Board of Directors of the SICAV, as well as evaluating the overall presentation of the financial statements. We have obtained a representation letter from the Board of Directors of the Fund relating to the annual audit, dated April 17, 2015. We issued an unqualified audit report relating to the year ended. 1.2 Report on the Activity of the Fund The Report on the Activity of the Fund has been prepared in accordance with the requirements of the CSSF Circular 2002/81. This report has been prepared exclusively for the use of the Fund s management, its Board of Directors, its Management Company and the Commission de Surveillance du Secteur Financier. Accordingly it is not to be reproduced in whole or in part or relied upon by any other person or for any other purpose without our prior written authorisation. The Fund is responsible for providing all information necessary for the preparation of the descriptive part of the report mentioned above. The Board of Directors is responsible for obtaining access to the records of the Central Administration or Depositary Bank, providing certain required information and approving the report. We have obtained a representation letter from the Board of Directors of the Fund relating to the 2014 Report on the Activity of the Fund (Appendix 1). 3
2 Report on the Activity of the Fund 2.1 Organisational structure Fund: Société d Investissement à Capital Variable (SICAV), incorporated on September 12, 2007 under Part I of the Luxembourg Law of December 20, 2002. Since July 1, 2011, the SICAV is subject to Part I of the Luxembourg Law of December 17, 2010. The Fund has incorporated India Bluechip (Mauritius) Ltd (Previously known as India Bluechip Fund Ltd) on December 14, 2010, India Midcap (Mauritius) Ltd (Previously known as India Midcap Fund (Mauritius) Ltd) on April 19, 2010 and K Debt (Mauritius) Limited on September 27, 2013 as wholly-owned subsidiaries ( the Mauritian Subsidiaries ). The current prospectus as at is dated November, 2013. Management Company: RBS (Luxembourg) S.A. ( RBSL ) 33, Rue de Gasperich L-5826 Hesperange Grand Duchy of Luxembourg Investment Manager: Kotak Mahindra (UK) Limited 55 Baker Street, London W1U 7EU United Kingdom Global Distributor: Kotak Mahindra (UK) Limited 55 Baker Street, London W1U 7EU United Kingdom Facilities Agent (for UK): Kotak Mahindra (UK) Limited 8th Floor Portsoken House 155-157 Minories London EC3N 1LS United Kingdom Central Administration, Registrar, Transfer Agent and Domiciliary Agent: For the Fund HSBC Securities Services (Luxembourg) S.A. (until November 14, 2014) 4
HSBC Bank plc, Luxembourg Branch (from November 15, 2014) 16, boulevard d Avranches L-1160 Luxembourg Grand Duchy of Luxembourg For the Mauritius Subsidiaries Cim Fund Services Limited 33, Edith Cavell Street Port-Louis Mauritius Depositary Bank: For the Fund HSBC Securities Services (Luxembourg) S.A. (until November 14, 2014) HSBC Bank plc, Luxembourg Branch (from November 15, 2014) 16, boulevard d Avranches L-1160 Luxembourg Grand Duchy of Luxembourg Custodian Bank for the subsidiaries in Mauritius HSBC Bank (Mauritius) Limited 6F HSBC Centre 18 Cybercity Ebène Mauritius HSBC Limited Mumbai Central Service Center S.K. Ahire Marg, Worli Mumbai 400 030 India Legal Adviser: Elvinger, Hoss & Prussen 2, Place Winston Churchill L-1340 Luxembourg Grand Duchy of Luxembourg Khaitan & Co One Indiabulls Centre 13 th Floor Tower 1 841 Sepanati Bapat Marg Mumbai 400013 India 5
2.1.1 Central Administration 2.1.1.1 Use by Fund s auditor of a report issued by an auditor of the Central Administration The Central Administration functions carried out on behalf of the Fund are described in the HSBC Bank plc, Luxembourg Branch Fund and Custody Services Report on controls placed in operation and tests of operating effectiveness under International Standard on Assurance Engagement N. 3402, applicable for the functions relating to central administration, transfer agency and depositary bank. The Service Organisation Report of HSBC Bank plc, Luxembourg Branch was issued by KPMG Luxembourg, Société coopérative on February 25, 2015 and covers the period from January 1, 2014 to. The procedures and controls described in the above mentioned report include the following sections: Procedures and controls required by the section 1.1.2.1 of the CSSF Circular 02/81 (Administrative Agent and Transfer Agent) Procedures manual in accordance with Chapter D of the IML Circular 91/75, as amended by Circular 05/177; Securities portfolio valuation; Compliance monitoring and reporting; Accounting and financial control (review and control of reconciliation reports); NAV per share calculation; Transaction processing; Validation and recording of securities purchases and disposals; Procedures and controls required by the section 1.1.2.2 of the CSSF Circular 02/81 (Administrative Agent and Transfer Agent) Description of IT organisation and software; Significant system changes and migrations; Procedures and controls for manual accounting entries Information security; Contingency plan. The above mentioned report is available upon request to HSBC Bank plc, Luxembourg Branch. Significant exception in the HSBC Bank Plc, Luxembourg Branch Fund and Custody Services Report on controls placed in operation and tests of operating effectiveness under ISAE 3402 6
We read the HSBC Bank Plc, Luxembourg Branch Fund and Custody Services Report on controls placed in operation and tests of operating effectiveness under ISAE 3402 for the period from January 1, 2014 to and noted that the Report of the Independent Service Auditors include a qualification on the following control objectives: 1. Controls provide reasonable assurance that authorized Transfer Agency transactions are processed and recorded accurately and on a timely basis. 2. Controls provide reasonable assurance that fund distributions are processed accurately, completely, and on a timely basis. We performed additional procedures such as management enquiries and substantive testing to ensure that this exception had no impact on the Fund operations. Based on our additional procedures as described above nothing came to our attention indicating that such control weakness had a material impact on the Fund s Operations. A copy of the Independent Service Auditor's Assurance Report on the Description of Controls, their Design and Operating Effectiveness is provided in Appendix 4. 2.1.2 Depositary Bank 2.1.2.1 Use by Fund s auditor of a report issued by an auditor of the Depositary Bank The custodian functions carried out on behalf of the Fund are described in the HSBC Bank plc, Luxembourg Branch Fund and Custody Services Report on controls placed in operation and tests of operating effectiveness under International Standard on Assurance Engagement N. 3402, applicable for the functions of central administration, transfer agency and depositary bank. The Service Organisation Report of HSBC Bank plc, Luxembourg Branch was issued by KPMG Luxembourg, Société cooperative on February 25, 2015 and covers the period from January 1, 2014 to. The procedures and controls described in the above mentioned report include the following sections: Procedures and controls for section 1.2.2.1 and 1.2.2.2 of the CSSF Circular 2002/81 Reference to procedures manual covering the Depositary Bank activities; Selection and monitoring of Sub-custody network; Description of IT organisation and software; Adequacy of IT system and human resources to fulfil contractual obligations towards the Fund; Significant system changes and migrations; Listing of sub-custodians network; Description of the system changes that occurred during the year. The above mentioned report is available upon request to HSBC Bank plc, Luxembourg Branch. 7
2.1.3 Relationships with Management Company 1. Description received by the external auditor The Fund has appointed RBS (Luxembourg) S.A. (the Management Company ), a company registered under Chapter 15 of the law of December 17, 2010 on undertakings for collective investment, as amended. Under the Fund Management agreement dated September 12, 2007, the Management Company is responsible for the investment management, administration and distribution and marketing of the Fund. The purpose of the Management Company is the creation, the promotion, the administration and the management of undertakings for collective investment in transferable securities (UCITS) authorised by Directive 2009/65/CE as amended as well as of other undertakings for collective investment which are not covered by Directive 2009/65/CE as amended and for which the Company is subject to prudential supervision but the units of which cannot be marketed in other EU member states under the said Directive. The Management Company may take participations in companies having the same or similar corporate object in the Grand Duchy of Luxembourg and abroad. More generally the Management Company may carry out all activities linked directly or indirectly to, and deemed useful and necessary for the accomplishment of its objective remaining always within the limitations set forth by Part IV, Chapter 15 of the law of December, 17 2010 as amended (the "2010 Law"). The Management Company has delegated the investment management of all Sub-funds to the Investment Manager, Kotak Mahindra (UK) Limited. The Investment Manager may with the prior approval of the Management Company and the Fund at its own expense and under its control and supervision, appoint one or more investment advisers to provide investment information, recommendations and research concerning prospective and existing investments. The Management Company has delegated to the Global Distributor Kotak Mahindra (UK) Limited, London the distribution and marketing of the shares of the Fund in those jurisdictions in which the Fund obtains a marketing permission. With the prior consent of the Management Company, the Global Distributor is empowered to appoint at its own expense and under the control and supervision of the Management Company and the Fund, sub-distributors and/or sales agents for the shares of the Fund. The Management Company has delegated the central administration functions to HSBC Bank plc, Luxembourg Branch. Please refer to Appendix 3 for a summary of the supervision by the Management Company of the delegated functions. 2. Significant exceptions noted Based on the description received from the Management Company, we have not noted any significant exceptions. 3. Assessment by the external auditor Based on description received from the Management Company in (1) above, nothing came to our attention to indicate that the Management Company does not fulfil its obligations vis-à-vis the Fund in accordance with Luxembourg law and contractual arrangements. 8
2.1.4 Relationships with other intermediaries 1. Procedures performed by the external auditor We have obtained from the Board of Directors a list of the significant arrangements with intermediaries for the Fund. The information received is included in the schedule below: Name of entity Description of function Description of contract HSBC Bank plc, Luxembourg Branch (Transfer of activities from HSBC Securities Services (Luxembourg) S.A. to HSBC Bank plc, Luxembourg Branch on November 15, 2014) Custodian, Domiciliary, Paying agent, Registrar and Transfer agent and Central administration. Service Agreement dated September 12, 2007. Kotak Mahindra (UK)Limited Global Distributor. Distribution Agreement dated September 12, 2007. RBS (Luxembourg) S.A. Management Company. Fund Management Agreement dated September 12, 2007. Kotak Mahindra (UK)Limited Investment Manager. Investment Management Agreement dated September12, 2007, amended as of October 30, 2013. We have obtained representation from the Board of Directors, as to whether the Fund s operations have at any time been disrupted by major problems in relation with any intermediaries. 2. Assessment by the external auditor Based on the procedure described above, nothing came to our attention indicating that the Fund s operations were disrupted by significant problems related to other intermediaries. 2.2 Assessment of transactions and procedures 2.2.1 Anti-money laundering procedures 2.2.1.1 Procedures in relation to CSSF Circular 2002/81 External audit guidelines Undertakings for Collective Investment 2.2.1.1.1 Use by Fund s auditor of a report issued by an auditor of the Transfer Agent The anti-money laundering procedures in place for the Fund, are described in an agreed-upon procedures report on anti-money laundering and counter terrorist financing policies and procedures was issued by PricewaterhouseCoopers, Société coopérative on March 30, 2015 for the period from December 1, 2013 to November 30, 2014. 9
The procedures described in the above mentioned report include the following policies and procedures: Risk-based approach; Investor due diligence measures; On-going Due Diligence; Record keeping obligation of documents and information; Training and awareness-raising of the personnel. The above mentioned report is available upon request to HSBC Bank plc, Luxembourg Branch. 2.2.1.1.2 Audit assessment and procedures conducted by Fund s auditor The following audit tests and assessment of procedures, which were not already documented in the reports referred to in the preceding section, were conducted to fulfil the requirements of Circular 2002/81. Assessment of procedures and controls 1. Procedures performed by the external auditor a) Distribution channels We have obtained the following description of the distribution channels for the Fund, as follows: 10
Sub-Funds India Growth Fund India Midcap Fund and India Fixed Income Fund India Growth Fund India Midcap Fund and India Fixed Income Fund India Growth Fund and India Midcap Fund Country of distribution UK Luxembourg Switzerland FATF/non-FATF status of the country FATF FATF FATF India Midcap Fund Sweden FATF India Growth Fund India Midcap Fund and India Fixed Income Fund India Growth Fund and India Midcap Fund Singapore* Finland FATF FATF Name of the intermediary** Kotak Mahindra (UK) Ltd. Kotak Mahindra (UK) Ltd. Kotak Mahindra (UK) Ltd. Kotak Mahindra (UK) Ltd. Kotak Mahindra (UK) Ltd. Kotak Mahindra (UK) Ltd (*) Kotak Funds can sell under the private placement regulations under the applicable law in these jurisdictions. (**) In certain jurisdictions, Kotak Mahindra (UK) Limited may not be involved in distribution directly. Instead, in its capacity as Global Distributor, Kotak Mahindra (UK) Limited has further appointed several distributors and intermediaries in the above jurisdictions for distribution of the Fund. b) Monitoring of unusual transactions We have ensured that the Fund was included in the sample of the agreed-upon procedures report on anti-money laundering and counter terrorist financing policies and procedures issued by PricewaterhouseCoopers, Société coopérative on March 30, 2015. 11
2.2.1.2 Procedures in relation to CSSF Regulation N 12-02 on the fight against money laundering and terrorist financing 1. Information obtained from the Management Company of the Fund: We have obtained the following information/ description of procedures and controls from the Management Company of the Fund. a) Policy implemented by the Management Company of the Fund for the prevention of money laundering and terrorist financing, including its processes implemented to ensure conformity with Luxembourg laws and regulations applicable to investment funds with regard to AML/CTF (Anti- Money Laundering/Counter Terrorist Financing): RBSL s procedures dictate the ongoing monitoring on a monthly basis through various checks. AML/KYC is mainly checked via review and investigation of stopped/blocked accounts and if any high risk accounts have been identified. RBSL rolled out the Fund s AML risk policies to all clients that explain the role of the various parties and is agreed by all parties. In addition RBSL Delegated Function Oversight team oversight visits the Central Administrators at least once a year to perform a sample check of investor files that they would deem of higher risk. In addition, a due diligence review is carried out on the global distributor as per agreed timelines. b) Oversight controls exercised by the Management Company of the Fund in order to ensure that the above described policy is properly implemented: The Management Company is issuing on a regular basis (generally quarterly) a Conducting officer and Management Company report as well as Management Information System ( MIS ) reports to the attention of the Board. Those reports inform the Board on the activity of the Fund and the event that has to be brought to their attention, in order for the Board to take the adequate decisions. c) Analysis by the Fund s management of the risks of money laundering and terrorist financing to which the Fund is exposed, such as types of investors and distribution network: RBSL rolled out AML Risk Policies for all funds. These Risk policies cover countries, investors and distribution. RBSL also have a country risk rating defined at RBS group level. In case of discrepancy between the country risk rating of the transfer agent and RBSL, discussion and analysis will be made and decision will be taken at the board level. RBSL through its oversight model performs ongoing oversight controls over the third party delegates (Fund accounting, Transfer Agency, Investment Manager ) throughout the period. Details of this ongoing monitoring and related control and risk assessments as well as any potential issues are: a. included in the monthly MIS reports produced by RBSL for the attention of the Board of RBSL. b. included in the Conducting Officers and Management Company reports provided to the Board of the SICAV for review and any necessary action at each Board meeting. RBSL conducts regular External Compliance Reviews ( ECR ) of the delegates (transfer agent, fund accounting, global distributor and the investment manager), in which a review of controls implemented and operated by the third parties appointed by the Board of the Fund for the carrying out of all or part of the day to day functions is undertaken in order to ensure that such controls are adequate, effective and comply with the regulatory and legal requirements. An ECR report is 12
produced after each review and is addressed to the attention of the Board of the SICAV as well as to the attention of the Board of RBSL. The annual and semi-annual financial statements, the controls reports as well the Long Form Report are reviewed, based on the information received from the delegates for accuracy, completeness, correctness and coherence (taking into account the ongoing monitoring conducted during the year of the Funds activities), with RBSL providing comments to the relevant delegates and as applicable. All investigations of suspicious activity are managed and recorded by the management team. d) Statistical information about suspicious transactions detected at the level of the Fund, including information on the number of suspicious transactions reported to the CRF ( cellule de renseignement financier du parquet ), as well as the total amounts of the funds involved: If during our oversight review, RBSL discover a transaction or activity that is deemed to be suspicious, this will be communicated internally to the MLRO at RBSL. If the MLRO concurs with the finding then there is a duty to report the activity to the relevant authorities. RBSL MLRO has not detected any suspicious transactions for Fund. e) Statistical information about the percentage of transactions for which data on the payer were missing or incomplete, and the measures taken by the professional in this context: RBSL has not been made aware of any missing or incomplete transactions for which data on the payer were missing. f) Information about training and awareness program in relation to AML/CTF carried out by management of the Fund (i.e. the Board of Directors of the Fund or employees of the Management Company): The Fund has no employees. The members of the Board, through regular regulatory updates by professional advisers (including but not limited to RBSL, legal advisors and auditors) and their other professional activities, are kept abreast of developments in relation to AML/CFT. It is foreseen that a dedicated training session for Board members will be undertaken in 2015. There is an annual training session in place for all staff within RBSL. The training for 2014 took place on February 27, 2014. RBSL also have a GPL Training (Group Policy Learning) which is an e-learning that each employee has to do. At the end of the learning each employee has to pass a test in order to validate the understanding of the lesson. The above descriptions are based on our inquiries conducted with the Fund s management. As part of this process we have also obtained evidence of the key monitoring reports (including among others: liquidity monitoring report, risk management systems applicable to the Fund). 2. Significant exceptions noted We have not noted any significant exceptions or points for improvement. 3. Assessment by the external auditor Based on our tests performed in 2.2.1.1. and 2.2.1.2. above, nothing came to our attention to indicate that AML/CTF procedures were not properly applied. 13
2.2.2 Valuation methods Valuation policies 1. Work performed by the external auditor We have obtained and reviewed from the Board of Directors current written procedures and valuation rules in relation to the following investments: Securities listed on Regulated Markets, which operate regularly and are recognised and open to the public, will be valued at the last available price; in the event that there should be several such markets, on the basis of the last available price of the main market for the relevant security. Should the last available price for a given security not truly reflect its fair market value, then that security shall be valued on the basis of the probable sales price which the Directors deem it is prudent to assume; In case of securities traded on the Indian stock exchanges, the closing price on the National Stock Exchange failing which the closing price on the Bombay Stock Exchange (BSE) failing which the closing price on any other exchange whereat the security is traded shall be considered; Swaps are valued at their fair value based on the underlying securities (at close of business or intraday) as well as on the characteristics of the underlying commitments; Shares or units in underlying open-ended investment funds shall be valued at their last available price; Liquid assets and money market instruments may be valued at nominal value plus any accrued interest or on an amortised cost basis. All other assets, where practice allows, may be valued in the same manner. Short term investments that have a remaining maturity of one year or less may be valued (i) at market value, or (ii) where market value is not available or not representative, at amortised cost. We priced the Fund s investments as per portfolios in the financial statements as at independently to ensure that the valuation rules applied by the Central Administration as at complied with the valuation methods as per Fund s prospectus. As at, the Fund s portfolios comprises listed equities, bonds, listed futures and listed options. In addition India Fixed Income Fund invests in 3 bonds representing 5.32 % of the Net Asset Value, for which no market quotation is available as at. 2. Significant exceptions noted We have not noted any significant exceptions. 3. Assessment by the external auditor Based on our tests performed in (1) above, nothing came to our attention to indicate that current written procedures and valuation rules were not properly applied on a consistent basis and in conformity with the prospectus of the Fund. Unlisted and/or illiquid securities 1. Work performed by the external auditor 14
We have obtained and reviewed from the Board of Directors current written procedures and valuation rules in relation with unlisted and/or illiquid securities, as follows: Securities not listed on Regulated Markets, which operate regularly and are recognized and open to the public, will be valued on the basis of their last available price; in the event that there should be several such markets, on the basis of the last available price of the main market for the relevant security. Should the last available price for a given security not truly reflect its fair market value, then that security will be valued by the Directors on the basis of the probable sales price which the Directors deem it is prudent to assume. We have reviewed the valuation of the portfolio as at year-end and have verified that illiquid and unlisted securities were identified and valued in accordance with the procedure described above. 2. Significant exceptions noted We have not noted any significant exceptions. 3. Assessment by the external auditor Based on our tests performed in (1) above, nothing came to our attention to indicate that current written procedures and valuation rules for the unlisted and / or illiquid securities at year end were not properly applied. Arm s length transactions 1. Work performed by the external auditor We obtained representation from the Board of Directors that they were not aware of any transactions entered into by the Fund with the Fund manager, or any of its connected persons, which were not carried out on an arm s length basis. In addition, as part of our audit procedures, we selected a sample of 15 transactions during the period and verified that these transactions were performed on an arm s length basis. 2. Significant exceptions noted We have not noted any significant exceptions. 3. Assessment by the external auditor Based on our tests performed in (1) above, nothing came to our attention to indicate that any of the Fund s transactions have not been carried out on an arm s length basis. 2.2.3 Risk management system 2.2.3.1 Systems and controls for monitoring and managing the investment policy and restrictions and other related risks 1. Procedures performed by the external auditor We have obtained and reviewed Management s description of the systems and controls for monitoring and managing the investment policy and restrictions and other related risks to which the Fund is exposed including: 15
indications whether all or part of the responsibility for monitoring and/or operation of the risk management system has been delegated to a third party; the list of the entities responsible for each of the major risks to which the Fund is exposed; Specifications on the frequency of the controls. Where the Board has delegated risk management, we obtained the description of the Board s procedures and controls for the monitoring of such risks. Information covering the types of risk (including amongst others credit/ counterparty risk, market risk, settlement risk, exchange risk, interest rate risk, liquidity risk and risk in respect of derivative instruments), their frequency of control, the responsible party for performing the control as well as Board monitoring procedures with respect to the types of risk are described in the Risk Management Process (RMP) dated and communicated to the CSSF on January 30, 2015. 2.2.3.2 Fund s compliance with the risk management process and rules to be adopted by UCITS 1. Description of the permanent risk management function We have obtained the following description from the Board of Directors: The Management Company has adopted a risk management policy which has been implemented by a permanent risk management function - The permanent risk management function is reporting to the Board of Directors and is independent, from a hierarchical and functional point of view, of operational units of the Fund - The permanent risk management function reports on a minimum of three times a years to the Board of Directors and to the senior management during the Board of Director Meeting. - As communicated to the CSSF on January 30, 2015, the risk management activity is carried out by RBS (Luxembourg) S.A. 2. Assessment and procedures performed by the Fund s auditor The following procedures were conducted to assess the Fund s compliance with the requirements of CSSF Circular 2011/512 relating to the risk management process and rules to be adopted by UCITS. The procedures performed by the Fund s auditor are mainly based on inquiry, inspection or observation. a) Risk Management Process We obtained a copy of the Risk Management Process communicated to the CSSF on January 30, 2015 and inspected that: - the Fund and all its sub-funds were appropriately covered in this documentation. In case of launch of new sub-funds or significant change in the investment policy and risk profile, we ensured that a revised documentation of the Risk Management Process has been amended accordingly and communicated to the CSSF and at least once a year at the closing date of the Management Company s financial year (at the latest one month after its closing) ;and 16
- the description of the Risk Management Process follows the format laid out in the appendix of the CSSF Circular 2011/512. We have inquired the Management Company and obtained evidence of the key monitoring reports (including among others: liquidity monitoring, liquidity risk, counterparty risk, operational risk, concentration risk, derivatives risk and supervision of the delegated functions) specifically applicable to the Fund, and inquired as to whether the exceptions highlighted in those key reports were appropriately addressed through an effective escalation process. We reviewed the correspondence from CSSF to be informed about any comment from CSSF on the Risk Management Process. The Fund auditor is not responsible to evaluate the adequacy of the parameters adopted by the Board of Directors/the Management Company, in particular regarding the choice between the commitment approach or a Value-at-Risk approach used for calculating the global exposure. b) Frequency of the control for the global exposure We inspected that the frequency calculation of the global exposure, using the commitment approach was performed on a daily basis in accordance with the Risk Management Process. c) Liquidity risk We inquired whether the Management Company of the Fund has implemented a liquidity risk management process which takes into account the liquidity profile of the investments and the redemption policy of the Fund. We inspected whether the liquidity risk management process is supported by stress tests in order to ensure that the Fund is able to comply at any time with its repurchase obligation laid down by the Law. 2.2.3.3 Significant exceptions noted Based on the description received from the Management Company and on our tests performed above, we have not noted any significant exceptions. 2.2.3.4 Assessment by the external auditor Based on the description received from the Management Company in 2.2.3.1 and 2.2.3.2 above and on our tests performed above, nothing came to our attention to indicate that the risk management process pursuant to the rules and principles formulated in the CSSF Circular 2011/512 and detailed in the communication to the CSSF made on January 30, 2015 has not been implemented in all material aspects. 2.2.4 Specific tests We obtained from the Board of Directors a list of all instances of material NAV computation errors and active non-compliance with investment policy and restrictions as described below: 17
Type of 2002/77 Reportable matter Nature of error/breach Reported to CSSF Y/N Status of 2002/77 Payment done Y/N Active noncompliance with investment rules compensation did not exceed EUR 25,000 and for which amount payable to any investor did not exceed EUR 2,500 India Fixed Income Fund: Between December 30, 2013 and January 24, 2014, the sub-fund invested in an Indian undertaking for collective investments named Kotak Liquid Plan A Growth (the Target Fund ) which was a non-eligible investment. The investment was sold on January 25, 2014 with a realized gain of INR 52,153.80 (USD 832). Y (letter dated March 27, 2014) We reviewed the correction of the breach. No compensation is required. N/A As part of our audit, we reviewed the compliance of the Fund with its investment policy and restrictions as at year end and we applied analytical procedures on the evolution on the net asset value per share during the period from January 1, 2014 to. Based on the work performed, we have not noted any instances of non-reported material NAV computation error nor active non-compliance with investment policy and restrictions. 18
2.2.5 Statement of assets & liabilities and income & expense account Review of the combined statement of net assets and combined statement of operations Combined Statement of net assets Assets December 31, 2013 USD USD Investments in securities at cost 214,638,198 90,334,273 Unrealised appreciation 41,008,254 4,626,237 Investments in securities, at market value 255,646,452 94,960,510 Cash at bank 19,190,885 3,012,796 Receivable resulting from sales of securities 5,503,898 149,499 Unrealised appreciation on futures contracts 7,023 26,136 Due from shareholders 3,070,597 10,426 Interest receivable 440,807 - Sundry debtors and prepayments 60,306 382,756 Options purchased - - 28,273,516 3,581,613 Total assets 283,919,968 98,542,123 Liabilities Unrealised depreciation on futures contracts 2,207 20,336 Payable resulting from purchases of securities 8,783,559 448,382 Sundry creditors and accruals 1,157,173 766,817 Due to shareholders 1,933,272 - Subscriptions received in advance from shareholders - 112,495 Options sold 1,547 - Total liabilities 11,877,758 1,348,030 Net Asset Value 272,042,210 97,194,093 19
Combined statement of operations Income Year ended Year ended December 31, 2013 Combined USD Combined USD Dividend income 1,456,103 1,354,970 Bonds interest 731,261 - Other income 187,059 161,208 Total income 2,374,423 1,516,178 Expenses Management fees 2,375,343 1,929,012 Facilitation fees 145,676 167,344 Administration and custodian fees 225,353 218,332 Audit and professional fees 157,500 137,672 Management company fees 107,103 113,040 Subscription tax 58,692 47,607 Amortisation of formation expenses - 7,229 Transaction costs 80,216 95,241 Directors' fees and expenses 31,801 35,680 Bank interest and charges 35,401 33,350 Other expenses 261,423 374,128 Total expenses 3,478,508 3,158,635 Net (loss)/gain from investments (1,104,085) (1,642,457) Net realised gains/(losses) on: Net (loss)/profit realised on: Investments portfolio 12,205,358 (7,654,436) Futures contracts 288,276 (285,629) Foreign exchange transactions (1,409,215) (900,655) Net realised gains/(losses) 11,084,419 (8,840,720) Net change in unrealised appreciation on: Investments portfolio 36,382,017 (361,227) Futures contracts (984) (7,782) Options (52) 37,151 36,380,981 (331,858) Results from Operations 46,361,315 (10,815,035) Opening net assets at beginning of year 97,194,093 123,147,887 Subscriptions during the year 198,328,076 58,699,054 Redemptions during the year (69,611,434) (73,784,737) Dividends paid (229,837) (53,076) Closing net assets at end of year 272,042,210 97,194,093 20
As at, there are 3 active sub-funds. The sub-funds invest in India through subsidiaries in Mauritius as detailed below: India Midcap (Mauritius) Ltd is a 100% subsidiary of Kotak Funds India Midcap Fund. India Bluechip (Mauritius) Ltd is a 100% subsidiary of Kotak Funds India Growth Fund. K Debt (Mauritius) Limited is a 100% subsidiary of Kotak Funds India Fixed Income Fund. The total net asset value increased by USD 175 million between December 31, 2013 and. The increase in total net assets is mainly explained by the combined effect of net subscriptions of USD 129 million and positive results from operations of USD 46 million. Other expenses mainly include paying agent fees, tax and administration fees. Other income include mainly dilution levy charges and expense waivers. Sundry creditors and accruals mainly include management fees, administration and custodian fees and other fees. Window Dressing For each sub-fund we performed the procedures detailed hereafter so as to determine whether there is indication of transactions being conducted for the sole purpose of window dressing the annual report. We compared the portfolio at year end with the portfolio 15 days before and 15 days after year end in order to identify whether there were any transactions carried out for the sole purpose of window dressing. Based on the work performed, we have no evidence that significant transactions were made for the sole purpose of window dressing the annual report. Portfolio turnover ( churning ) We obtained from the Board of Directors the statistical data on the annual portfolio turnover. In the preparation of the statistical data, the portfolio turnover was calculated using the following formula: Turnover = [Total 1 Total 2 ] * 100 M Total 1 = Total purchases + Total sales of securities Total 2 = Total subscriptions + Total redemptions M = Average Net Assets (over the period) We have also obtained from the Board of Directors the following explanation of the level of the turnover. 21
The results of calculation are presented hereafter, together with the explanation for the level of the turnover. FUND TURNOVER 2014 (%) COMMENTS India Growth Fund 22% The turnover ratios for the growth and India Mid Cap Fund (16%) midcap fund reflect strong inflows and our investment philosophy of buying for a long term perspective. India Fixed Income Fund 314% Due to dynamic market situation fund needed to actively manage duration of the portfolio. Performance fees The Fund s prospectus does not foresee the payment of performance fees to investment managers. Retrocessions The Board of Directors confirmed that no retrocessions were paid during the year under review. Expenses We obtained from the Board of Directors a schedule of the gross expenses, including transactions costs. During the year ended, the Fund incurred transaction costs (which include mainly specify type of transaction costs e.g. brokerage costs) for a total amount of USD 778,954 as disclosed in the note 10 to the audited financial statements as. Transaction costs included in the cost of investments were as follows: Broker costs include commissions and stock exchange taxes and arise on purchases and sales of investments during the year under review. Those costs are included with the cost of investments purchased and deducted from the proceeds received on sales of investments. Management fees were recomputed to verify that they were accrued and calculated in accordance with the underlying contractual arrangements and the prospectus. Based on the work performed, we have no evidence that significant expenses are not calculated in accordance with the prospectus and other contractual arrangements. Brokerage Commission rebates and soft commission arrangements We obtained representation from the Board of Directors that neither the Fund s investment managers nor any of its related parties have received rebates from brokers. We have also obtained representations from the Board of Directors that no soft commission arrangements are in place. 22
2.2.6 NAV publication 1. Procedures performed by the external auditor We have obtained from the Board of Directors the description of the procedures and controls in place to ensure that the publication requirements, per the current prospectus and Luxembourg law, are being met. The Fund provides NAV information to Bloomberg and Finesti on each valuation date. We enquired with the Board of Directors whether any instances of non-compliance with article with article 157 of the Law of December 17, 2010, as amended, were noted during the year. 2. Assessment by the external auditor Nothing has come to our attention that would indicate instances where the NAVs were not published in accordance with article 157 of the Law of December 17, 2010 as amended and in accordance with the prospectus. 2.2.7 Results of reconciliations 1. Procedures performed by the external auditor We have reviewed the reconciliations of the Fund s cash, securities and derivatives with the Custodian positions as at. 2. Points for improvement noted During our review of cash reconciliation we noted that for India Midcap Fund and India Fixed Income Fund certain transactions with settlement dates several days before, were not recorded as settled as per the sub-funds accounting records. These reconciling items were adjusted for purpose of financial statements and had no impact on the sub-funds net asset values per share. 2.3 Internet The website for the Fund is http://investindia.kotak.com/kotakfunds. The Website is used for information purpose. 2.4 Investor complaints We obtained representation from the Board of Directors that there were no outstanding significant litigation at the year-end date. 23
2.5 Late Trading and Market Timing 2.5.1 Use by Fund s auditor of a report issued by an auditor of the Transfer Agent The procedures put in place by the Fund to protect itself from late trading, are described in HSBC Bank plc, Luxembourg Branch Fund and Custody Services Report on controls placed in operation and tests of operating effectiveness under International Standard on Assurance Engagement N. 3402 for the period from January 1, 2014 to, report applicable for the functions relating to transfer agency. The Service Organisation Report of HSBC Bank plc, Luxembourg Branch was issued by KPMG Luxembourg, Société coopérative on February 25, 2015 and covers the period from January 1, 2014 to. The above mentioned report is available on request at HSBC Bank plc, Luxembourg Branch. 2.5.2 Audit assessment and procedures conducted by Fund s auditor in relation to late trading The following audit tests and assessment of procedures were conducted to fulfil the requirements of Circular 2002/81, which were not already documented in the reports referred to in the preceding section. We have tested a sample of 15 transactions (subscriptions and redemptions) to confirm that they were processed in accordance with the procedures of the transfer agent. 2.5.3 Audit assessment and procedures conducted by Fund s auditor in relation to market timing 1. Procedures performed by the external auditor We have obtained and reviewed the Board of Directors assessment whether the Fund could be exposed to market timing practices. According to the Board of Directors assessment, the Fund is not likely to be subject to any market timing practices, given the type of investment policy. The prospectus dated November, 2013 emphasizes that: The Management Company may combine shares which are under common ownership or control for the purposes of ascertaining whether an individual or a group of individuals can be deemed to be involved in market timing practices. Accordingly, the Directors reserve the right to cause the Management Company to reject any application for conversion and/or subscription of Shares from investors whom the former considers market timers or frequent traders; If a Sub-Fund is primarily invested in markets which are closed for business at the time the Sub-Fund is valued, the Directors may, during periods of market volatility, and by derogation from the provisions below, under Net Asset Value, cause the Management Company to allow for the Net Asset Value per Share to be adjusted to reflect more accurately the fair value of the Sub-Fund s investments at the point of valuation; 24
Applications for subscription, redemption and conversion shall be dealt with at an unknown net asset value ("forward pricing"). We have obtained and reviewed the procedures put in place by the Fund to protect itself by the best possible means against market timing practices. 2. Significant exceptions noted We have not noted any significant exceptions or points for improvement. 2.5.4 Assessment by the external auditor Based on our tests performed in 2.5.3 and 2.5.5 above, nothing came to our attention to indicate that procedures to protect the Fund from late trading and market timing are not appropriate and were not properly applied during the year under review. 2.6 Follow-up of issues raised in previous Report on the Activity of the Fund The schedule below summarises the key recommendations and observations made to the Board of Directors in the previous year management letter and the points for improvement described in the Report on the Activity of the Fund of the previous year, together with a description of their current status. Date applicable report/letter of Description of significant exception or point for improvement Description of current status Long Form Report for the year ended December 31, 2011, 2012 and 2013 Transaction costs are not booked separately in accounting and have been estimated by the Central Administration for the disclosure in the financial statements. The Central Administration has undertaken to identify and record separately the transaction and purchase costs in the future. Closed The Investment Manager is now providing HSBC with an updated trade file to show the transaction costs separately. As such, the transaction costs disclosed in the financial statements are the actual amounts and are not based on estimates. 2.7 Overall conclusion Significant exceptions / weaknesses described in the Management Letter as at A no management letter was issued for the year ended. Please refer to Appendix 2. 25