SAM Global Securities Limited
Index to Condensed Financial Statements
Pages
Statements of Income
Balance Sheets
Statements of Cash Flows
Statements of Changes in Shareholders’ Equity
Notes to Financial Statements
SAM Global Securities Limited
Condensed Statements of Income
(Unaudited)
The accompanying notes are an integral part of these financial statements
SAM Global Securities Limited
Condensed Statements of Income
(Unaudited)
For the nine months ended December 31, (Rs. in thousands, except per share data) | 2007 | 2008 | 2008 Convenience translation into US$ |
Revenues: |
|
|
|
Commission income | 236,440 | 171,554 | 3,531 |
Proprietary trading, net | 377,088 | 12,996 | 268 |
Interest and dividends | 11,744 | 33,067 | 681 |
Other Income | 2,729 | - | - |
Total revenues | 628,001 | 217,617 | 4,480 |
Expenses: | |||
Exchange, clearing and brokerage fees | 138,880 | 108,535 | 2234 |
Employee compensation and benefits | 39,246 | 68,521 | 1410 |
Information and communication | 9,223 | 8,995 | 185 |
Advertisement expenses | 8,374 | 11,016 | 227 |
Depreciation and amortization | 6,806 | 20,788 | 428 |
Interest expense | 6,439 | 5,941 | 122 |
General and administrative expenses | 27,100 | 41,116 | 846 |
Total expenses | 236,068 | 264,912 | 5452 |
Gain on sale of shares in exchange | 26,265 | - | - |
Earnings before income taxes | 418,198 | (47,295) | (973) |
Income taxes | 123,671 | (13,594) | (280) |
Earnings after taxes | 294,527 | (33,701) | (693) |
Share in profit of equity investee | 845 | (7,207) | (148) |
Net income | 295,372 | (40,908) | (842) |
Earnings per share: | |||
Basic and diluted: Net income | 29.54 | (3.43) | (3.43) |
Weighted average number of shares used to compute basic and diluted earnings per share | 10,000,057 | 11,934,741 | 11,934,741 |
The accompanying notes are an integral part of these financial statements
SAM Global Securities Limited
Condensed Balance Sheets
(Unaudited)
As of (Rs. in thousands) | March 31, 2008 | December 31, 2008 | December 31, 2008 |
Assets |
|
|
|
Cash and cash equivalents | 42,226 | 8,137 | 167 |
Receivables from exchange and clearing organizations (net of allowance for doubtful debts of Rs. Nil as of March 31, 2008 and Rs Nil as of December 31, 2008) | 56,004 | 238 | 5 |
Receivables from customers (net of allowance for doubtful debts of Rs. 2,500 as of March 31, 2008 and Rs. 7,500 as of December 31, 2008) | 327,163 | 1,070,936 | 22,045 |
Due from related parties | 612,827 | 74,752 | 1,539 |
Securities owned: | |||
Marketable, at market value | 10,048 | 6,926 | 143 |
Not readily marketable, at estimated fair value | 25,000 | 25,000 | 515 |
Investments | 11,245 | 3,823 | 79 |
Deposits with clearing organizations and others | 188,780 | 159,625 | 3,286 |
Membership in exchanges owned, at cost (market value of Rs. 4,560 as of March 31, 2008 and Rs. 4,508 as of December 31, 2008) | 2,036 | 2,036 | 42 |
Property and equipment (net of accumulated depreciation of Rs. 18,992 as of March 31, 2008 and Rs. 36,791 as of December 31, 2008 ) | 45,150 | 96,197 | 1,980 |
Intangible assets (net of accumulated amortization of Rs. 6,309 as of March 31, 2008 and Rs. 9,319 as of December 31, 2008) | 6,180 | 7,233 | 149 |
Deferred taxes, net | 1,803 | 15,396 | 317 |
Other assets | 84,395 | 194,065 | 3,995 |
Total Assets | 1,412,857 | 1,664,364 | 34,262 |
|
| ||
Liabilities and Shareholder’s Equity |
| ||
Payable to broker-dealers | 9,753 | 10,559 | 218 |
Payable to customers | 453,440 | 701,330 | 14437 |
Due to related parties | 17,237 | 4,614 | 95 |
Derivatives held for trading | 9,370 | - | - |
Accounts payable, accrued expenses and other liabilities | 29,788 | 22,375 | 461 |
Overdraft facilities balances | 74,296 | 27,490 | 566 |
Deferred taxes, net | - | - | - |
Total Liabilities | 593,884 | 766,368 | 15,777 |
Commitments and contingencies (Note 17) |
The accompanying notes are an integral part of these financial statements
SAM Global Securities Limited
Condensed Balance Sheets
(Unaudited)
As of (Rs. in thousands) | March 31, 2008 | December 31, 2008 | December 31, 2008 |
Shareholders' Equity | |||
Common Stock |
|
| |
(13,010,000 equity shares authorized; 11,730,083 and 11,981,442 equity shares issued and outstanding as of March 31, 2008 and December 31, 2008; par value Rs. 10) | 117,301 | 119,814 | 2,466 |
Additional paid in capital | 236,535 | 353,953 | 7,286 |
Retained earnings | 465,137 | 424,229 | 8,733 |
Total Shareholders' Equity | 818,973 | 897,996 | 18485 |
Total Liabilities and Shareholders' Equity | 1,412,857 | 1,664,364 | 34,262 |
The accompanying notes are an integral part of these financial statements
SAM Global Securities Limited
Condensed Statements of Cash Flows
(Unaudited)
The accompanying notes are an integral part of these financial statements
SAM Global Securities Limited
Condensed Statements of Cash Flows
For the nine months ended December 31, (Rs. in thousands) | 2007 | 2008 | 2008 Convenience translation into US$ |
Cash flows from financing activities | |||
Net movement in overdraft facilities balances | 16,495 | (46,806) | (963) |
Proceed from issue of share capital | - | 119,931 | 2,469 |
Net cash provided by financing activities | 16,495 | 73,125 | 1,506 |
Net increase in cash and cash equivalents during the period | 19,897 | (34,089) | (699) |
Add : Balance as of beginning of the period | 18,074 | 42,226 | 869 |
Balance as of end of the period | 37,971 | 8,137 | 170 |
The accompanying notes are an integral part of these financial statements
SAM Global Securities Limited
Condensed Statements of Changes in Shareholders’ Equity
(Unaudited)
Nine months ended December 31, 2007
(Rs. in thousands) | Common Stock | Additional Paid in Capital | Retained earnings | Total | |
Shares | Par value | ||||
Balance as of March 31, 2007 | 10,000,057 | 100,001 | - | 208,121 | 308,122 |
Net income for the period | - | 295,372 | 295,372 | ||
Balance as of December 31, 2007 | 10,000,057 | 100,001 | - | 503,493 | 603,494 |
Nine months ended December 31, 2008
(Rs. in thousands) | Common Stock | Additional Paid in Capital | Retained earnings | Total | |
Shares | Par value | ||||
Balance as of March 31, 2008 | 11,730,083 | 117,301 | 236,535 | 465,137 | 818,973 |
Net income for the period | (40,908) | 79,022 | |||
Balance as of December 31, 2008 | 11,981,442 | 119,814 | 353,952 | 424,229 | 897,995 |
Balance as of December 31, 2008 Convenience translation into US$ | 2,466 | 7,286 | 8,733 | 18,485 | |
The accompanying notes are an integral part of these financial statements
SAM Global Securities Limited
Notes to Condensed Financial Statements (Unaudited)
(Rs. in thousands, except per share data)
1.
Description of Business
SAM Global Securities Limited (the “Company” or “SAM Global”) is a limited liability company incorporated and domiciled in India. The Company is a trading member of the Bombay Stock Exchange Limited (“BSE”) in the capital market and trading and clearing member in the futures and options market. The Company provides depository participant services through Central Depository Services (India) Limited. The Company’s shares are listed on the Guwahati Stock Exchange in India.
The Company engages in proprietary transactions and offers a wide range of services to meet client’s needs including brokerage services, clearing member services and depository services.
2.
Summary of Significant Accounting Policies
Interim financial information
The accompanying condensed financial statements of SAM Global Securities Limited as of Dec 31, 2008 and for the three months ended Dec 31, 2008 and 2007 are unaudited. In the opinion of management, the condensed financial statements include all adjustments that management considers necessary for a fair statement of its financial position, operating results and cash flows for the interim periods presented. Operating results and cash flows for interim periods are not necessarily indicative of results for the entire year. The condensed balance sheet as of March 31, 2008, was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted ("GAAP") in the United States of America. These financial statements should be read in conjunction with the audited financial statements and notes thereto for the year ended March 31, 2008.
For the convenience of the reader, the financial statements as of and for the Six month ended Dec 31, 2008 have been translated into U.S. dollars (US$) at US$1.00 = Rs. 48.58 based on the noon buying rate on Dec 31, 2008 by the Federal Reserve Bank of New York. Such translation should not be construed as representation that the rupee amounts have been or could be converted into U.S. dollars at that or any other rate, or at all.
Earnings Per Share
In accordance with the provisions of SFAS 128, "Earnings Per Share", basic earnings per share is computed on the basis of the weighted average number of shares outstanding during the period. The Company does not have any dilutive securities and hence the basic and diluted earnings per share are same.
Recent Accounting Pronouncements
In July 2006, the FASB issued Interpretation 48, Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement 109 (“FIN 48”). The interpretation clarifies the accounting for uncertainty in income taxes recognized in a company's financial statements and prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 became effective beginning April 1, 2007 for us. The adoption of FIN 48 did not result in a cumulative effect adjustment to retained earnings as of April 1, 2007.
In September 2006, the FASB issued SFAS 157, Fair Value Measurements, which establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. This Statement applies under other accounting pronouncements that require or permit fair value measurements. SFAS 157 is effective for fiscal years beginning after November 15, 2007, which is fiscal year commencing April 1, 2008 for us. The Company is in the process of evaluating the impact SFAS 157 will have on the financial statements.
In February 2007, the FASB issued FASB Statement 159, The Fair Value Option for Financial Assets and Financial Liabilities ("SFAS 159"). SFAS 159 allows the company to choose to measure certain financial assets and financial liabilities at fair value. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings. SFAS 159 is effective for fiscal years beginning after November 15, 2007, which is fiscal year commencing April 1, 2008 for us. The Company in the process of evaluating the impact SFAS 159 will have on the Company’s financial statements.
In April 2007, the FASB issued FSP No. FIN 39-1, Amendment of FASB Interpretation No. 39 (“FSP FIN 39-1”). FSP FIN 39-1 modifies FIN No. 39, Offsetting of Amounts Related to Certain Contracts, and permits companies to offset cash collateral receivables or payables with net derivative positions. FSP FIN 39-1 is effective for fiscal years beginning after November 15, 2007 which is fiscal year commencing April 1, 2008 for us with early adoption permitted. The Company in the process of evaluating the impact FSP FIN 39-1 will have on the Company’s financial statements.
In June 2007, the Accounting Standards Executive Committee of the AICPA issued Statement of Position 07-1, Clarification of the Scope of the Audit and Accounting Guide Investment Companies and Accounting by Parent Companies and Equity Method Investors for Investments in Investment Companies (“SOP 07-1”). The intent of SOP 07-1 is to clarify which entities are within the scope of the AICPA Audit and Accounting Guide, Investment Companies (the “Guide”). Financial Accounting Standards Board (“FASB”) has agreed to propose an indefinite delay of the effective dates of SOP 07-1. The Company in the process of evaluating the impact SOP 07-1 will have on the Company’s financial statements.
In December 2007, FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements – An Amendment of ARB No. 51 (SFAS 160). SFAS 160 establishes new accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. This Statement requires the recognition of a non-controlling interest as equity in the consolidated financial statements and separate from the parent’s equity. Purchases or sales of equity interests that do not result in a change in control will be accounted for as equity transactions. The company will be required to adopt this new Statement prospectively to all non-controlling interest, including any that arose before the effective date, for fiscal years, beginning after December 15, 2008 which is fiscal year commencing April 1, 2009 for us. Early adoption is prohibited. The Company in the process of evaluating the impac t SFAS 160 will have on the Company’s financial statements.
In December 2007, FASB issued SFAS No. 141 (Revised 2007), Business Combinations (SFAS 141R). This Statement replaces SFAS No. 141, Business Combinations. SFAS 141R requires an acquirer to recognize the assets acquired, the liabilities assumed including contingencies and non-controlling interest in the acquiree, at the acquisition date, measured at their fair value, with limited exceptions specified in the statement. In a business combination achieved in stages, this Statement requires the acquirer to recognize the identifiable assets and liabilities as well as the non-controlling interest in the acquiree at full amounts of their fair values. This Statement requires the acquirer to recognize contingent consideration at the acquisition date, measured at its fair value at that date. The company will be required to apply this new Statement prospectively to business combinations consummated in fiscal years beginning after Decembe r 15, 2008 which is fiscal year commencing April 1, 2009 for us. Early adoption is prohibited.
In March 2008, FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities – An Amendment of FASB Statement No. 133 (SFAS 161). SFAS 161 requires enhanced disclosures on derivative and hedging activities by requiring objectives to be disclosed for using derivative instruments in terms of underlying risk and accounting designation. This Statement requires disclosures on the need of using derivative instruments, accounting of derivative instruments and related hedged items, if any, under SFAS 133 and effect of such instruments and related hedge items, if any, on the financial position, financial performance and cash flows. The company will be required to adopt this new Statement prospectively, for fiscal years beginning after November 15, 2008 which is fiscal year commencing April 1, 2009 for us. The Company in the process of evaluating the impact SFAS 161 will have on the Company’s finan cial statements.
3.
Securities Owned
Securities consist of trading securities at market values, as follows:
As of | March 31, 2008 | December 31, 2008 | December 31, 2008 |
US $ | |||
Equity shares | 10,048 | 6,926 | 143 |
Total | 10,048 | 6,926 | 143 |
Securities consist of trading securities at fair value, as follows:
As of | March 31, 2008 | December 31, 2008 | December 31, 2008 |
US $ | |||
Equity shares | 25,000 | 25,000 | 515 |
Total | 25,000 | 25,000 | 515 |
4.
Other Assets
Other assets consist of:
As of | March 31, 2008 | December 31, 2008 | December 31, 2008 |
US $ | |||
Security deposits paid | 6,317 | 6,959 | 143 |
Advance tax, net | 62,083 | 65,013 | 1,338 |
Prepaid expenses | 3,251 | 1,928 | 40 |
Interest accrued but not due | 1,633 | 1,605 | 33 |
Employee receivables | 249 | 6 | 1 |
Advances other | 10,862 | 118,554 | 2,440 |
Total | 84,395 | 194,065 | 3,995 |
Advance tax primarily includes taxes paid to Indian taxation authorities for income tax, net off amount of provision for income tax.
Prepaid expenses primarily include the un-expired portion of annual rentals paid for use of leased telecommunication lines, satellite link charges, insurance premiums and bank guarantee charges.
Security deposits primarily include deposits for electricity connections and assets taken on operating lease.
Advances to suppliers primarily includes amount paid as advance against advertisement expenses to Bennett Coleman & Co Ltd amounting to Rs.116,560.
5.
Property and Equipment
Property and equipment consist of:
As of | March 31, 2008 | December 31, 2008 | December 31, 2008 US $ |
Building | 1,620 | 1,620 | 33 |
Equipment | 7,551 | 20,090 | 414 |
Furniture and fixtures | 18,786 | 52,143 | 1,073 |
Computer hardware | 33,202 | 56,152 | 1,156 |
Vehicle | 2,983 | 2,983 | 61 |
Total property and equipment | 64,142 | 132,988 | 2,738 |
Less: Accumulated depreciation | 18,992 | 36,791 | 757 |
Total property and equipment, net | 45,150 | 96,197 | 1,980 |
Depreciation expense amounted to Rs. 7,328 and Rs. 17,778 for the three and nine months ended December 31, 2008 respectively. Depreciation expense amounted to Rs. 1,846 and Rs. 4,676 for the three and nine months ended December 31, 2007 respectively.Rs.21 from accumulated depreciation has been recognized as Profit on sale of property & equipment as these assets has been sold on purchase value.
6.
Intangible Assets
Intangible assets consist of:
As of | March 31, 2008 | December 31, 2008 | December 31, 2008 US $ |
Intangible assets subject to amortization | |||
Software | 12,489 | 16,552 | 341 |
Total intangible assets | 12,489 | 16,552 | 341 |
Less: Accumulated amortization | 6,309 | 9,319 | 192 |
Total intangible assets, net | 6,180 | 7,233 | 149 |
Amortization expense amounted to Rs. 1,182 and Rs. 3,010 for the three and nine months ended December 31, 2008 respectively. Amortization expense amounted to Rs. 755 and Rs. 2,131 for the three and nine months ended December 31, 2007 respectively.
7.
Overdraft Facilities
The Company’s debt financing is generally obtained through the use of overdraft facilities from banks. The interest rates on such borrowings reflect market rates of interest at the time of the transactions. The balance of these facilities was Rs. 74,296 and Rs. 27,490 at average effective interest rates of 12.5% and 10.00%, as of March 31, 2008 and December 31, 2008, respectively. Deposits have been placed by the Company with bankers to secure these debts. These deposits are classified in the balance sheet under “Deposits with clearing organizations and others”. Refer note 15 for assets pledged as collateral.
8.
Exchange, Clearing and Brokerage fees
As per regulations in India, specified securities transactions are liable for securities transaction tax (“STT”). The securities transactions tax in respect of proprietary trading amounted to Rs. 948 and Rs. 13,547 for the three and nine months ended December 31, 2008 respectively. The securities transactions tax in respect of proprietary trading amounted to Rs. 76,837 and Rs. 188,619 for the three and nine months ended December 31, 2007 respectively. Previously ‘STT’ had been considered in calculating current tax as a part of advance tax.
9.
Revenue
Market development fees of Rs. Nil and Rs. 28,000 for the three and nine months ended December 31, 2008 is included in the proprietary trading. Market development fees of Rs. 138,600 and Rs. 322,300 for the three and nine months ended December 31, 2007 is included in the proprietary trading. This amount is earned for the efforts of the Company for development of securities market pursuant to an agreement.
10.
Investments
Investments consist of:
As of | March 31, 2008 | December 31, 2008 | December 31, 2008 US $ |
Investments accounted for by equity method | 7,422 | - | - |
Investments carried at cost | 3,823 | 3,823 | 79 |
Total | 11,245 | 3,823 | 79 |
As part of its corporate strategy and in the normal course of its business, the Company makes investments in the equity of companies which are engaged in businesses similar to Company’s core business.
Earlier SAM Global held 9,400 shares, representing 26.8% interest in Pullin Investment Private Limited ("Pullin"). The Company had accounted for its share of equity in earnings/ (losses) of Pullin under equity method of accounting. Now these shares have been sold out on 16 Aug, 2008 hence no further need for equity accounting.
Earlier SAM Global held 12,000 shares, representing 26.8% interest in Abhichaya Investment Private Limited ("Abhichaya"). The Company had accounted for its share of equity in earnings/ (losses) of Abhichaya under equity method of accounting. Now these shares have been sold out on 16 Aug ,2008hence no further need for equity accounting.
SAM Global holds 460,000 shares, representing 5.2% interest in SMC Global Securities Limited (‘SMC Global”). The Company accounts for its investment in SMC Global under cost method of accounting. The market value of SMC Global’s equity shares is not readily determinable. The carrying amount of investment is Rs. 3,823 as of March 31, 2008 and December 31, 2008.
11.
Accounts Payable, Accrued Expenses and Other Liabilities
As of | March 31, 2008 | December 31, 2008 | December 31, 2008 US $ |
Advance AMC charges | 8,627 | 6,918 | 142 |
Accrued payroll | - | 5,222 | 107 |
Accrued expenses | 19,262 | 7,413 | 154 |
Provision for stamp duty | 97 | 110 | 2 |
Provision for gratuity | 1,802 | 2,712 | 56 |
Total | 29,788 | 22,375 | 461 |
12.
Employee Benefits
The Gratuity Plan
Net gratuity cost for the three months ended December 31, 2007 and 2008 comprises the following components:
Quarter ended December 31, | 2007 | 2008 | 2008 US $ |
Service cost | 140 | 97 | 2 |
Interest cost | 57 | 23 | 1 |
Amortization | - | - | - |
Expected return on assets | 904 | 285 | 6 |
Net gratuity costs | 1,101 | 405 | 9 |
Net gratuity cost for the nine months ended December 31, 2007 and 2008 comprises the following components:
Nine months ended December 31, | 2007 | 2008 | 2008 US $ |
Service cost | 308 | 382 | 8 |
Interest cost | 71 | 89 | 2 |
Amortization | - | - | - |
Expected return on assets | 904 | 1,122 | 23 |
Net gratuity costs | 1,283 | 1,593 | 33 |
The company has contributed Rs. Nil and Rs. Nil in the three and nine months ended December 31, 2008 respectively and expects to contribute approximately Rs. 1,467 to the gratuity trust during the remainder of fiscal 2008.
Provident Fund
The Company’s contribution towards the provident fund amounted to Rs. 680 and Rs. 1,904 for the three and nine months ended December 31, 2008 respectively.
The Company’s contribution towards the provident fund amounted to Rs. 450 and Rs. 1,210 for the three and nine months ended December 31, 2007 respectively.
13.
Income Taxes
The effective tax rate was 33.99% and 33.99% for the three and nine months ended December 31, 2008 respectively. The effective tax rate was 46.8% and 28.6% for the three and nine months ended December 31, 2007 respectively.
The company’s major tax jurisdiction is India. In India, the assessment is not yet completed for the financial year 2006-07 and onwards. The Company continues to recognize interest and penalties related to income tax matters as part of the income tax provision.
14.
Collateral and Significant Covenants
Amounts that the Company has pledged as collateral, which are not reclassified and reported separately, consist of the following:
As of | March 31, 2008 | December 31, 2008 | December 31, 2008 US $ |
Fixed deposits | 186,125 | 158,550 | 3,264 |
Total | 186,125 | 158,550 | 3,264 |
These fixed deposits are classified in the balance sheet under “Deposits with clearing organizations and others”.
15.
Concentration
The following table gives details in respect of percentage of commission income generated from top two, five and ten customers:
Quarter ended December 31, (in %) | 2007 | 2008 |
Revenue from top two customers | 2.5 | 3.0 |
Revenue from top five customers | 3.9 | 5.0 |
Revenue from top ten customers | 5.8 | 7.0 |
Nine months ended December 31, (in %) | 2007 | 2008 |
Revenue from top two customers | 3.0 | 2.6 |
Revenue from top five customers | 4.8 | 3.9 |
Revenue from top ten customers | 6.6 | 5.7 |
16.
Commitments and Contingent Liabilities
a) Operating Leases
SAM Global has certain operating leases for office premises. Rental expenses for operating leases are accounted for on a straight line method. Rental expense amounted to Rs. 5,060 and Rs.15,473 for the three and nine months ended December 31, 2008 respectively. Rental expense amounted to Rs. 2905 and Rs. 3,735 for the three and nine months ended December 31, 2007 respectively. There are no non-cancelable lease arrangements.
b) Guarantees
As of March 31, 2008 and December 31, 2008, guarantees of Rs 410,000 and Rs. 500,000 are provided by various banks to exchange clearing houses on behalf of the Company, in the ordinary course of business, as a security for due performance and fulfillment by the Company of its commitments and obligations.
As of March 31, 2008 and December 31, 2008, the Company has provided corporate guarantees of Rs. 200,000 and Rs. 200,000 respectively to banks for guarantees issued by banks for SMC Comtrade Limited to exchange clearing houses, in the ordinary course of business.
As of March 31, 2008 and December 31, 2008, the Company has provided corporate guarantees of Rs. 1,050,000 and Rs. 1,050,000 respectively to banks for guarantees issued by banks for SMC Global Securities Limited to exchange clearing houses, in the ordinary course of business.
The initial term of these guarantees is generally for a period of 12 to 15 months. The bankers charges commission as consideration to issue the guarantees, The commission charged generally is in the range of 1.0% to 1.3% of the guarantee amount, The Company recognizes commission expense over the period of the guarantee and classify in the income statement under ‘interest expense’. The unamortized commission expense is included in prepaid expenses and classified in the balance sheet under “other assets”. The potential requirement for the Company to make payments under these agreements is remote. Thus, no liability has been recognized for these transactions. The fair value of the guarantees is considered to be insignificant given the risk of loss on such guarantees at the date of its inception and, therefore, no amount was recognized towards fair value of guarantees given in the financial statements on the inception date.
c) Litigation
The Company is involved, from time to time, in investigations and proceedings by governmental and regulatory agencies, certain of which may result in adverse judgments, fines or penalties. Factors considered by management in estimating the Company’s reserves for these matters are the merits of the claims, the total cost of defending the litigation, the likelihood of a successful defense against the claims, and the potential for fines and penalties from regulatory agencies. The Company establishes reserves for potential losses to the extent that such matters are probable and can be estimated, in accordance with SFAS 5, “Accounting for Contingencies.” As litigation and the resolution of regulatory matters are inherently unpredictable, the Company cannot predict with certainty the ultimate loss or range of loss related to matters where there is only a reasonable possibility that a loss may be incurred. The Company believes, based on current k nowledge and after consultation with legal counsel, that the resolution of loss contingencies will not have a material adverse effect on the financial statements of the Company.
Order by SEBI dated October 5, 2005 in the matter of Digital Stock
SEBI has alleged irregularities in sub-broker operations and directed to review the Company to review systems and procedures and confirm to SEBI that all the operations are within the framework of SEBI regulations, rules and guidelines.
The Company has responded to SEBI that it has carried out comprehensive review of all systems and procedures and has ensured that the same are in compliance with all the SEBI Act, Rules and Regulations as well as directives and guidelines of SEBI.
Further, SEBI vide their SCN dated 25/06/2008 under Rule 4, appointed an adjudication officer, to adjudicate the matter. The Company has filed an application for consent before the SEBI in September 2007.
Subsequent Events
The Board of Directors of the Company passed a resolution on April 18, 2008 for the amalgamation of SAM Global Securities Limited (“SAM”) with SMC Global Securities Limited (“SMC”). The Board of Directors of SMC also approved the resolution of amalgamation.
Under the scheme of amalgamation prepared under sections 391 and 394 and other applicable provisions of the Companies Act in India, the shareholders of SAM will receive one equity share of the face value of Rs. 10 each of SMC for every six fully paid up shares of SAM. The company has also taken the NOC’s from Ghuwati Stock Exchange where the securities of the company are listed and also from SEBI. The company has taken the approval of unsecured creditors wide there meeting held on 20th December, 2008 and for share holders, company has taken their approval, so the court has dispensed with the meeting of share holders. Under the Companies Act in India, the scheme will require the consent of High Court of Delhi in order to be effective. Now the date of final petition has been fixed on 26th of February, 2009.