MCB INDIA SOVEREIGN BOND ETF the "FUND"
ANNUAL REPORT
FOR THE YEAR ENDED JUNE 30, 2020
MCB INDIA SOVEREIGN BOND ETF
ANNUAL REPORT - FOR THE YEAR ENDED JUNE 30, 2020
TABLE OF CONTENTS PAGES
MANAGEMENT & ADMINISTRATION 1
CORPORATE GOVERNANCE REPORT 2 - 13
MANAGER'S REPORT 14 - 16
SECRETARY'S CERTIFICATE 17
INDEPENDENT AUDITOR'S REPORT 18 - 18 (c)
FINANCIAL STATEMENTS 19 - 35
STATEMENT OF FINANCIAL HIGHLIGHTS 36 MCB INDIA SOVEREIGN BOND ETF
MANAGEMENT & ADMINISTRATION
PLACE OF BUSINESS OF THE FUND C/o MCB Investment Management Co. Ltd Sir William Newton Street Port Louis, MAURITIUS
REGISTERED OFFICE C/o Gfin Corporate Services Ltd Level 6, Gfin Tower 42 Hotel Street, Cybercity Ebene, MAURITIUS
BOARD MEMBERS Mr Gilbert Gnany Mr Sanjay Sachdev Mr Patrick Eric Ronald Lam Yan Foon Mr Jean Hok Hui How Hong
FUND MANAGER MCB Investment Management Co. Ltd Sir William Newton Street Port Louis, MAURITIUS
CORPORATE SECRETARY Gfin Corporate Services Ltd Level 6, Gfin Tower 42 Hotel Street, Cybercity Ebene, MAURITIUS
REGISTRAR MCB Registry & Securities Ltd Sir William Newton Street Port Louis, MAURITIUS
BANKER The Mauritius Commercial Bank Ltd 9-15, Sir William Newton Street Port Louis, MAURITIUS
CUSTODIAN FOR INVESTMENTS Citibank, N.A. FIFC, 11th Floor C-54/55, G Block, Bandra Kurla Complex, Bandra – East Mumbai 400 098, INDIA
AUDITORS BDO & Co. 10, Frere Felix de Valois Street Port Louis, MAURITIUS
LEGAL ADVISOR BRIDGES LTD 5 Unicorn House Royal Street, Port-Louis MAURITIUS
ISIN MU0516N00024
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CORPORATE GOVERNANCE REPORT FOR THE YEAR ENDED JUNE 30, 2020
1. GOVERNANCE STRUCTURE
1.1 Overview
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 is authorised by the Financial Services Commission (the “FSC”) to operate as a Collective Investment Scheme, categorised as a Global Scheme pursuant to a Category 1 Global Business Licence from the FSC. The Fund was admitted on the Stock Exchange of Mauritius on June 06, 2016 and is a public interest entity as defined by law. It is committed to the highest standard of business integrity, transparency and professionalism in all its activities to ensure that the activities of the Fund are managed ethically and responsibly to enhance value for all stakeholders.
The Fund is managed by MCB Investment Management Co. Ltd (the “Manager”), a company duly licensed by the FSC to promote, manage and administer collective investment schemes and closed-end funds.
The Fund has no employees and its day-to-day operations are handled by its functionaries which include the Manager, a registrar and a custodian.
1.2 Statement of Compliance
The board of directors has given and will continue to give due consideration to the principles of good corporate governance which are applicable to the Fund under the Code. It is worth noting that the ultimate holding company of the Manager, MCB Group Limited (“MCBG”), is required to comply with the principles of the Code.
Throughout the year ended June 30, 2020 and to the best of the Board’s knowledge the organisation has complied with the Code in all material aspects except for certain sections as mentioned and explained in the table below.
Principle Section relating to Reasons for non -compliance 2 Organisations should have at least an Audit Given that the Fund is a Collective Investment Committee and a Corporate Governance Scheme, this Principle is being complied with Committee at the level of the Manager’s holding and ultimate holding companies.
2 Board Structure with an appropriate Given that the Fund is a Collective Investment combination of executive, non-executive and Scheme with no employees, executive independent directors and having both directors cannot be appointed. Moreover, the genders. board of the Manager, is fully compliant with this Principle.
The board of directors will regularly reassess the requirements of the Code to ensure that the Fund remains compliant thereto.
1.3 Constitutive documents
1.3.1 Constitution and Prospectus
The constitution and prospectus of the Fund (the “Constitutive Documents”) have been duly approved by the Board and are reviewed by the latter on a regular basis. The Constitutive Documents provide for delegation of authority and clear lines of responsibility with a reporting mechanism whereby matters affecting the affairs and reputation of the Fund are duly escalated to the Board of the Fund.
The Constitutive Documents provide amongst others the following main objectives:
(i) Defining the Fund's purpose, strategy and value; (ii) Determining policies and best practices to ensure that the business is conducted with the highest standards of ethical conduct within the Fund; (iii) Reviewing and, where appropriate, approving risk policy of the Fund; and (iv) Reviewing and approving the financial statements of the Fund.
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1.3.2 Organisation Structure
The Fund has issued one management share to the Manager, a wholly owned subsidiary of MCB Capital Markets Ltd ("MCBCM"), which is itself wholly-owned by MCBG.
MCB Capital Markets Ltd
MCB Investment Management Co. Ltd
(the “Manager”)
Management Shares
(100%) / Participating Shares
Investment Management Agreement
MCB India Sovereign Bond ETF (the “Fund”)
1.3.3 Statement of Main Accountabilities
The Board is responsible and accountable for the long-term success of the Fund and has approved and set the main accountabilities of the Board collectively as follows:
Main Accountabilities Chairperson -Provides overall leadership to the Board -Ensures that the Board is effective in its tasks of setting and implementing the Fund’s direction and strategy -Ensures that the development needs of the directors are identified and appropriate training is provided to continuously update their skills and knowledge -Maintains sound relations with the shareholders Board -Ensures compliance by the Fund with applicable legislation, regulation and policies -Safeguards the assets of the Fund. -Ensures Board decisions are being implemented and the long- term interests of the shareholder are being served. Secretary -Providing guidance to the Board relating to thei r duties, responsibilities and powers -Informing the Board of all legislation pertaining to meetings of the shareholders and the Board -Ensuring that the minutes of all meetings of shareholders and Board are properly recorded, and that all statutory registers are properly maintained -Certifying in the annual financial statements, that the Fund has filed with the Registrar of Companies all such returns as are required under the Act as may be amended from time to time.
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1.3.4 Material Clauses of the Constitution
As per the Constitution of the Fund, no shareholder shall have any pre-emptive rights whatsoever to subscribe for any additional shares issued by the Fund. The Board is expressly permitted to issue further Participating Shares at any time ranking as to voting or distribution rights or both equally with Participating Shares, already issued by the Fund without such issue qualifying as a variation of class rights of the existing Participating Shares.
2. THE BOARD STRUCTURE
2.1 Board roles and responsibilities
The Board’s primary function is to direct and supervise the business and affairs of the Fund. The Board consists of four directors, at least two of whom shall at all times be resident in Mauritius. All board meetings of the Fund are chaired from and decisions are taken in Mauritius. The members of the Board are appointed by the holder of the Management Share.
There is no designated Chairperson for the Fund. The Chairperson for board meetings is decided when the directors meet.
The Board meets twice a year to review the investments, operations and administrative affairs of the Fund. There are no service contracts between the Fund and any of its directors in their personal capacity, nor are any such contracts proposed. A director may vote at, or be counted in the quorum of any meeting of the Board to consider any contract in which the director is interested, provided that such director declares the interest prior to the taking the vote at the meeting and causes such interest to be recorded in the register of interests.
All the members of the board possess the necessary knowledge, skills, objectivity, intellectual honesty, integrity, experience and commitment to make sound judgements on various key issues relevant to the business of the Fund, independent of the Manager and to protect the interests of shareholders, clients and other stakeholders.
All directors receive timely information so that they are equipped to play as full a part as possible in board meetings. All board members have access to the Company Secretary for any further information they require.
The Fund has entered into an investment management agreement of unlimited duration with the Manager which gives the Manager full power to administer, supervise and direct the acquisition and/or disposal (by whatever means) of the Fund’s investments subject to and in compliance with the investment objectives and in light of any reasonable instructions that may be given by the Board.
2.2 Composition of the Board
The Board examines the size, composition and the essential competencies of its members annually to ensure that there is an appropriate balance of skill, experience and knowledge to enable it to carry out its duties and responsibilities effectively. The Board currently comprises of four members as detailed below:
Name Title Category Gender Country of Residence Jean HOK HUI HOW HONG Director Independent Male Mauritius Sanjay SACHDEV Director Non -Executive Male USA Patrick Eric Ronald LAM YAN FOON Director Non -Executive Male Mauritius Gilbert GNANY Director Non -Executive Male Mauritius
Given that the Fund has no employees, it is not possible to have executive directors.
Messrs. Patrick Eric Ronald Lam Yan Foon and Gilbert Gnany are directors of the Fund, the Manager and MCBCM. Mr. Gnany is also a director at the level of MCBG.
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Given that the size of the Fund is relatively small and the board composition of the Manager is in line with the requirements of the Code, the Board is of opinion that having more than one independent director will not materially add value to the Fund’s governance framework.
2.3 Profile of Directors
A brief profile of each director along with their directorships is set out below:
(i) Jean Hok Hui How Hong, Independent Director
Mr. How Hong holds a Diploma in Sugar Technology (School of Agriculture, University of Mauritius). He has 40 years’ management experience in the agro-industry, wholesale and distribution sector at Innodis Ltd. He was the Chief Operating Officer for 3 years and then Chief Executive Officer for 8 years prior to retiring in December 2016. Mr. How Hong has assumed functions of Executive Director of Mauritius Farms Ltd, and General Manager (Commercial Division) Happy World Ltd.
Directorship in other listed companies: Innodis Ltd and African Domestic Bond Fund (Stock Exchange of Mauritius)
(ii) Sanjay Sachdev, Non-Executive Director
Sanjay Sachdev has spent 28+ years building game-changing asset management businesses in a number of emerging markets. He drove the creation of several multi-billion dollar asset management businesses, across public and private markets investing in different asset classes and has worked with the Principal Financial Group, Shinsei Bank of Japan and the Tata Group in the US, India. S.E. Asia and Japan. Mr. Sachdev does not act as director of any other listed entity.
Directorship in other listed companies: None
(iii) Patrick Eric Ronald Lam Yan Foon (Rony Lam), Non-Executive Director
Rony Lam started his career with KPMG in Beijing and London, where he qualified as a Chartered Accountant. Since 2000, he has pursued a career in investment banking at HSBC Investment Bank and Barclays in London and Asia. From 2007 to 2012, he was a Partner at Fenchurch Advisory Partners, a leading UK investment banking firm focused exclusively on advising financial institutions on mergers and acquisitions and capital markets transactions. Rony was a Cambridge Commonwealth Trust scholar and holds a BA (Honours) and MA (Cantab) in Economics from Cambridge University. He also has a Diploma in Mandarin Chinese from Renmin University of China.
Directorship in other listed companies: African Domestic Bond Fund (Stock Exchange of Mauritius)
(iv) Gilbert Gnany, Non-Executive Director
Mr Gilbert Gnany holds a ‘Licence ès Sciences Economiques (Economie Mathématique), a ‘Maîtrise en Econométrie’ and a ‘DESS en Méthodes Scientifiques de Gestion et Calcul Economique Approfondi’ (France). He previously worked as Senior Advisor on the World Bank Group’s Executive Board where he was responsible for issues relating mainly to the International Finance Corporation and to the private and financial sectors. Prior to joining the World Bank, he was the MCB Group Chief Economist and Group Head of Strategy, Research & Development after having been the Economic Advisor to the Minister of Finance in Mauritius. During his career, he has been involved in various high-profile boards/committees. Amongst others, he chaired the Stock Exchange of Mauritius Ltd, the Statistics Advisory Council and the Statistics Board as well as having been a member of the Board of Governors of the Mauritius Offshore Business Activities Authority, a director of the Board of Investment and of the Mauritius Sugar Authority. He was also a member of the IMF Advisory Group for sub-Saharan Africa, a member of the Senate of the University of Mauritius and a director of the Financial Services Institute. He is currently a Board member of several companies within the Group namely MCB Capital Markets Ltd, MCB
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Seychelles, MCB Maldives, MCB Madagascar, MCB Microfinance Ltd, MCB Consulting Services Ltd and MCB Institute of Finance amongst others. On the institutional side, he is an external IMF expert in statistics, in particular on data dissemination standards and strategy. Moreover, he is a member of the Financial Services Consultative Council and of the Managing Committee of the COVID-19 Solidarity Fund. He also acts as Chairperson on the Statistics Board of Mauritius, the COVID-19 Committee on Economic Recovery and the Economic Commission of Business Mauritius which serves, inter alia, as a platform for public-private sector dialogue.
Directorship in listed companies MCB Group Limited (Stock Exchange of Mauritius) Promotion and Development Ltd (Stock Exchange of Mauritius) Caudan Development Ltd (Stock Exchange of Mauritius) African Domestic Bond Fund (Stock Exchange of Mauritius) Medine Ltd (Stock Exchange of Mauritius)
2.4 Corporate Secretary
The Fund’s secretary is GFin Corporate Services Ltd, a private company incorporated in Mauritius with registered office address at Level 6, GFin Tower, 42 Hotel Street, Cybercity, Ebene 72201 (“Corporate Secretary”). All board members have access to the Corporate Secretary for information relating to the Board matters.
2.5 Board Attendance
Board meetings are usually held twice a year but may be convened at any time in case urgent matters need to be discussed.
No of Meetings held during the year 4 Directors Mr. Sanjay Sachdev* 3 Mr. Gilbert Gnany * 4 Mr. Patrick Eric Ronald Lam Yan Foon * 4 Mr. Jean Hok Yui How Hong * 4
* Physically or through their duly appointed alternate director pursuant to Article 23.9 of the Constitution.
2.6 Board Committees
Given that the Fund is a Collective Investment Scheme, all board committees have been set up at the level of the Manager’s Group.
3. DIRECTORS APPOINTMENT PROCEDURES
3.1 Directors Selection
The Remuneration, Corporate Governance and Ethics Committee (RCGEC) of MCBG identifies suitable candidates for the Board of the Fund after determining whether the potential candidates have the required criteria it has established. The RCGEC then proposes the selected candidates to the Manager and the Board of the Fund for review and approval.
3.2 Election and Re-election of Directors
All directors are re-elected each year at the annual meeting of shareholders.
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3.3 Induction of new Directors
There was no new director appointed during the year under review. All new directors are given an induction pack, which comprises the offering and constitutive documents and the minutes of the last meeting of the Board. An introductory meeting is organised to explain the business activities of the Fund and its governing policies.
The other directors as well as the Company Secretary are readily available to answer any queries that newly appointed directors may have with respect to the Fund.
The above mentioned induction programme meets the specific needs of both the Fund and the newly appointed directors and enable the latter to participate actively in Board discussions.
3.4 Professional Development
Directors are encouraged to keep themselves up to date with the professional practices and industry related developments. The Board regularly reviews and comes to an agreement with each director, if necessary, on his or her training and development needs. Upon request from directors, the Fund provides the necessary resources for developing and updating its directors’ knowledge and capabilities.
3.5 Succession Planning
The Fund does not have any direct employees. MCBG is one of the largest group of companies in Mauritius with a large pool of talent with different skills, academic and professional qualifications, and expertise in various fields of business. The MCB Group strategy includes the recognition and fostering of talents within executive and management levels across the Group thus ensuring that opportunities are created to develop current and future leaders.
3.6 Time Commitment
Each director is expected to devote sufficient time and attention to the affairs of the Fund. The Fund anticipates a time commitment of at least 48 hours per annum. This will include attendance at Board meetings, the Annual Meeting of Shareholders and meetings as part of the Board evaluation process and training and development programmes. There is always the possibility of additional time commitment in respect of ad-hoc matters that may arise from time to time, and particularly when the Fund is undergoing a period of increased activity.
4. DIRECTORS DUTIES, REMUNERATION AND PERFORMANCE
4.1 Legal duties of Directors
The directors are aware of their legal duties under the Act and other relevant legislations. They exercise the required standard degree of care, skill and diligence which a reasonably prudent and competent director in such position would exercise.
4.2 Remuneration Philosophy
The Fund does not have any staff and as such does not have a remuneration philosophy.
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4.3 Directors’ Remuneration
Directors Remuneration from the Fund 2020 2019 USD USD Mr Gilbert Gnany - - Mr Sanjay Sachdev - - Mr Patrick Eric Ronald Lam Yan Foon - - Mr Jean Hok Hui How Hong 381 283 381 283
Directors who are already in an executive position within the MCB Group do not receive additional remuneration as Board member, in line with MCBG policy. Mr Sanjay Sachdev is not entitled to any director fees and Mr Jean Hok Hui How Hong is entitled to a fixed annual director fees of MUR 15,000.
4.4 Directors’ interests in shares
The directors do not hold shares in the Fund directly or through any associate (as defined under the Listing Rules of the Stock Exchange of Mauritius) except for Mr. Gilbert Gnany who held 1,500 participating shares (representing 0.16% of total shares in issue) as at June 30, 2020.
4.5 Directors’ service contracts
There are no fixed term contracts or service contracts between the Fund and the directors.
4.6 Related Party Transactions
For related party transactions, please refer to note 14 of the Financial Statements.
4.7 Policies of the Fund and Code of Ethics
The following policies of the ultimate holding company, MCBG, have been adopted by the Manager:
• Information, Information Technology and Information Security Governance Policy • Conflicts of interest and Related Party Transaction Policy • Whistleblowing Policy • Code of Ethics
Compliance with the Code of Ethics is regularly monitored and evaluated by the Board of the Manager.
4.8 Whistleblowing
The Whistleblowing Policy of MCBG provides all employees within the Group, including those of the Manager, a reporting channel on suspected misconduct or malpractice within the Manager without the risk of subsequent victimization or discrimination. The policy outlines the complaint handling and reporting processes to improve transparency.
4.9 Information Governance
The Fund has outsourced substantially all its operations to reputable service providers, mainly within the MCB Group, to whom the policies (as per 4.7 above) of MCBG applies. The Board oversees information governance of its service providers.
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4.10 Register of Interest
An interest register is maintained by the Corporate Secretary and is available for consultation by the shareholder upon request.
4.11 Directors’ Performance
The Board acknowledges the need of regularly reviewing the performance and effectiveness of the Board and its Directors. The directors endeavour to maintain the same vigilance in leading the Fund.
5. RISK GOVERNANCE AND INTERNAL CONTROL
The Board has ultimate responsibility for risk management which is delegated to the Manager of the Fund.
The Manager’s policy on risk management encompasses all significant business risks including physical, operational, human resources, technology, business continuity, financial, compliance and reputational which could influence the achievement of the Fund's objectives.
The system of internal control, which is embedded in all key operations of the Manager, provides reasonable rather than absolute assurance that the Fund's business objectives will be achieved.
The Manager, is responsible for the design, implementation and monitoring of all risk, compliance and anti-money laundering policies and procedures of the Fund and has a direct reporting line to the Board of Directors.
The Board is satisfied regarding the implementation, operation and effectiveness of internal control and risk management.
The key risks for the Fund are legal, regulatory, operational, reputational, performance and financial risks. The Board is ultimately responsible for these matters but delegates the ongoing tasks to the Manager.
Legal risks are managed by the Manager, taking advice from the Fund's legal advisor where appropriate. The Board also takes out appropriate insurance cover.
Regulatory risks are managed by the Manager and involves the setting out of proper processes and procedures in order to meet the licensing requirements set by the Financial Services Commission and the Fund's responsibilities under The Financial Intelligence and Anti-Money Laundering Act 2002.
The operational risks profile of business activities and processes have been analysed and following evaluation, appropriate controls have been designed and implemented. In addition, risk arising from business processes is managed through the application of the necessary technical controls at every stage of those processes.
Reputational and performance risks are managed by the Board.
The identification and management of the financial risks are discussed in note 4 to the Financial Statements.
During the financial year under review all significant areas with respect to risk governance were covered by the internal control and no risk or deficiency has been noted in the organisation’s system of internal controls.
6. REPORTING WITH INTEGRITY
6.1 Health and Safety Issues
The Manager is committed to the highest standards of integrity and ethical conduct in dealing with all its stakeholders.
The Fund however does not have any employees.
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6.2 Corporate Social Responsibility
There were no Corporate Social Responsibility contributions made during the year under review.
6.3 Charitable Donation
No donation was made by the Fund during the year under review.
6.4 Political Donation
The Fund did not make any political donation during the year under review.
6.5 Documents on website
The prospectus, constitution, the interim accounts and the latest Audited Financial Statements as well as the Manager’s corporate governance undertakings are published on the website of MCB Capital Markets.
7. AUDIT
7.1 Internal Audit
Given that the Fund is a Collective Investment Scheme, internal audit assignments are done at the level of the Manager.
The internal audit function of the Manager is outsourced to the Group Internal Audit Department of The Mauritius Commercial Bank Ltd (GIA), which provides another balanced assessment of key risks and controls, independent from reports received from the Manager's management.
The Head of GIA is independent of the Executive Management of the Manager and reports to the Audit Committee of MCBCM semi-annually.
GIA ensures that the quality of internal audit services provided to the Manager is aligned with recognised best practices. GIA leverages on a systematic and disciplined approach, notably through the use of well-focused audit work programs and computer aided audit techniques to evaluate the effectiveness of the internal control systems of the Manager. The Institute of Internal Auditors requires each internal audit function to have an external quality assessment conducted at least once every five years. The last exercise was carried out in November/December 2018, by an internationally recognised auditing firm which confirmed the Internal Audit BU’s compliance with the International Standards for the Professional Practice of Internal Audit issued by the above-mentioned institute.
Areas, systems and processes covered by internal audit including non-financial matters are as follows:
• Governance: Review of minutes of Board meetings and review of monitoring process of the Risk and Compliance Unit • Accounting: Bank reconciliation and fixed assets • Investment: Investment agreement • CIS Management: Settlement and dealing, pricing and reporting • Client take-on: Unit trust –application and redemption • IT: Quantis logical access management, disaster recovery, shared folder administration, Service Level Agreement • Others: Human resources analysis
There are no restrictions placed on the internal auditors in conducting their audit exercises.
7.2 External Auditors
The Board receives reports from the Fund’s external auditor. The external auditors did not carry out non-audit services for the Fund during the financial year under review.
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The Board recommends the appointment of external auditors to the shareholder.
The Board also evaluates the performance of the External Auditor and reviews the integrity, independence and objectivity of the External Auditor by:
• Confirming that the External Auditor is independent from the Fund • Considering whether the relationships that may exist between the Fund and the External Auditor impair the External Auditor’s judgement
The board will recommend that the audit partner for the Fund be changed every five years.
7.3 Auditors’ Fees
The fees payable to the auditors, for audit for the year under review were as follows:
2020 2019 USD USD Audit fees - BDO & Co 3,280 3,163
No other services have been provided by the auditors for the year under review.
8. RELATIONS WITH THE SHAREHOLDER AND OTHER KEY STAKEHOLDERS
Shareholders are kept properly informed on matters affecting the Fund. The annual meeting of shareholder is held in accordance with the Companies Act and upon consultation with the shareholder. Notices for the annual meeting and other shareholder meetings are duly sent to the shareholder.
The Fund's website is used to provide relevant information to other stakeholders. Open lines of communication are maintained to ensure transparency and optimal disclosure.
8.1 Shareholders Agreement Affecting The Governance of the Fund by the Board
There is currently no such agreement.
8.2 Major Transaction
No major transaction as defined under section 130(2) of the Act was undertaken.
8.3 Third Party Management Agreement
(a) Investment Management Agreement
The Fund has entered into an investment management agreement with the Manager which gives the latter full power to administer, supervise and direct the acquisition and/or disposal (by whatever means) of the Fund’s investments subject to and in compliance with the investment objectives and in light of any reasonable instructions that may be given by the Board. The Manager fulfils additional duties and reporting obligations including:
(i) To provide instructions with respect to the execution of purchases and sales of investments on behalf of the Fund as it deems to be in the best interests of the Fund; (ii) To make all material disclosures to the Fund regarding itself and its members, managers, partners, officers, directors, shareholders, employees, affiliates or any person who controls any of the foregoing, their investment performance and general investment methods, the investment performance of their customer accounts;
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(iii) To maintain a continuous record of all investments and securities acquired by the Fund and with respect to all transactions effected by it or on behalf of the Fund in accordance with such regulatory and reporting requirements of the Financial Services Commission (the "FSC") and such other relevant authorities; (iv) To maintain such books and records as are appropriate, check all periodical reports, transaction advice and/or statements received from time to time from the Custodian and shall render to the Fund such periodic and special reports as the Fund may reasonably request from time to time; (v) To deal with applications for shares of the Fund and cause for the issue of shares duly subscribed for; (vi) To calculate the Net Asset Value of the Participating Shares; and (vii) To perform (by itself or through other service providers) all administrative services required by the Fund and engage in any other lawful activities.
(b) Registrar
The Fund has appointed MCB Registry and Securities Ltd as its registrar (the "Registrar"). The Registrar is incorporated under the laws of Mauritius and is licensed by the FSC as a Registrar and Transfer Agent. The duties of the Registrar include:
(i) Maintaining, in relation to each class of shares, the register of shareholders of the Fund and generally performing all actions related to the issuance and transfer of Participating Shares and the safe- keeping of certificates, if any; (ii) Recording in the register all redemption and/or issue of Participating Shares;
(iii) Dealing with and replying to all correspondence and other communications addressed to the Fund in relation to the replacement or transfer of Participating Shares; and (iv) Performing all other incidental services necessary to its duties, which duties are set out in the registrar and transfer agent agreement.
(c) Corporate Secretary
GFin Corporate Services Ltd has been appointed corporate secretary (the “Corporate Secretary”). The Corporate Secretary is incorporated under the laws of Mauritius and is licensed by the FSC as a Management Company to, inter alia, provide company management services to global business companies. The duties of the Corporate Secretary include:
(i) Providing guidance to the Board relating to their duties, responsibilities and powers; (ii) Informing the Board of all legislation pertaining to meetings of the shareholders and the Board;
(iii) Ensuring that the minutes of all meetings of shareholders and Board are properly recorded, and that all statutory registers are properly maintained; and (iv) Certifying in the annual financial statements, that the Fund has filed with the Registrar of Companies all such returns as are and may be required under Mauritian laws.
8.4 Shareholders Holding more than 5% of the Fund
Holders of Management Shares as at June 30, 2020 MCB Investment Management Co. Ltd 100.0%
Messrs. Patrick Eric Ronald Lam Yan Foon and Gilbert Gnany are directors of the Fund, the Manager and MCBCM. Mr. Gnany is also a director at the level of MCBG.
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8.5 Share Option Plan
No such scheme currently exists within the Fund.
8.6 Timetable of important events
The Board aims to hold board meetings twice a year. Annual Meeting of Shareholders is usually held in November/ December.
8.7 Dividend Policy
The holders of Management Shares do not have any rights to dividends whereas holders of Participating Shares are entitled to dividends twice a year (subject to solvency requirements).
STATEMENT OF DIRECTORS’ RESPONSIBILITIES
The directors collectively as a Board acknowledge their responsibilities for the following and state that:
(i) the financial statements fairly present the state of affairs of the Fund as at the end of the financial year and the result of operations and cash flows for the year: (ii) adequate accounting records and effective internal control systems and risk management have been maintained; (iii) appropriate accounting policies supported by reasonable and prudent judgements and estimates have been used consistently; (iv) the financial statements have been prepared in accordance with the International Financial Reporting Standards (IFRS), International Accounting Standard (IAS), the Companies Act 2001 and the Financial Reporting Act 2004; (v) the financial statements have been prepared on a going concern basis; (vi) they are responsible for safeguarding the assets of the Fund; (vii) they are responsible for leading and controlling the organization and meeting all legal and regulatory requirements; (viii) they have taken reasonable steps for the prevention and detection of fraud and other irregularities.
The external auditors are responsible for reporting on whether the financial statements are fairly presented.
Having taken all the matters considered by the Board and brought to the attention of the Board during the year into account, we are satisfied that the annual report and financial statements taken as a whole are fair, balanced and understandable.
For and on behalf of the board of directors:
……………………………………………… ……………………………………………… Director Director
Date: 23 September 2020
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MANAGER'S REPORT
MCB India Sovereign Bond ETF Returns (USD)
Inception Security 3 Months 6 Months 1 Year (Annualised Return)
MCB India Sovereign Bond ETF (NAV to NAV) 2.50% 0.90% 0.50% 15.90%
MCB India Sovereign Bond ETF (Market price) 2.50% 0.60% 0.40% 15.00%
Benchmark 2.40% 1.00% 1.80% 22.20%
Inception date : 6 June 2016 Benchmark : ZyFin India Sovereign Bond Liquid Index
The financial year 2019-2020 has been marked by challenging times on the economic front. Starting off with a growth rate expectation of 7% plus, the expectation has been rolled back closer to 5%. Many major economies slipped into the slowdown mode and the fears of global economic recession confronted the markets. With slower pace of economic growth, stagnant investment and declining private consumption, the RBI adopted an accommodative stance and lowered repo rate by cumulative 135bps in CY2019.
During the first quarter January to March, the economic impact of the 2019–20 coronavirus pandemic in India has been hugely disruptive. Stock markets in India posted their worst loses in history on 23 March 2020. However, on 25 March, one day after a complete 21 day lockdown was announced by the Prime Minister, SENSEX and NIFTY posted their biggest gains in 11 years, adding a value of ₹4.7 lakh crore (US$66 billion) crore to investor wealth.
Disruption caused by ongoing coronavirus crisis and consequent expected slowdown in economic situation has resulted in huge FPI selling and redemptions in mutual funds leading to a spike in bond yields. Across the globe, central bankers are reacting to this pandemic with massive rate cuts and liquidity injection to stabilize financial conditions.
India's Economic Outlook
The final budget for 2019-20 reiterated the government's commitment to fiscal prudence with a fiscal deficit target of 3.3% GDP, lower than what was presented in the interim budget; mainly on the back of a higher nominal GDP assumption of 11% as opposed to a 10.5% growth witnessed in FY19. The budget also assumed that the central government debt as a percentage of GDP will come down to 48.0% of GDP in FY20 from 48.4% in FY19 on the back of a benign inflation regime which will help reduce the cost of borrowing. The government increased the divestment target to 1.05 lakh crore for FY20.
RBI Monetary Policy
The Monetary Policy Committee cut the repo rate in five successive meetings, starting from the new governor’s first meeting in Feb’19 till Oct’19, bringing the repo rate down by 135 basis points, from 6.50% to 5.15% In August’19 RBI went in for a larger-than-expected interest rate cut of 35 bps for the first time since Sep-15. With slower pace of economic growth, declining private consumption and stagnant investment, RBI governor also stated that the MPC will continue with the accommodative stance for as long as it is necessary. In the last policy of the year MPC highlighted the need of careful monitoring of inflation data and the transmission of interest rate cuts so far initiated.
14 MCB INDIA SOVEREIGN BOND ETF
MANAGER'S REPORT
RBI Monetary Policy (cont'd)
In the March 2020 Monetary Policy, RBI reduced the policy repo rate by 75 bps. RBI also decided to widen the LAF corridor from 50 bps to 65 bps in view of persistent excess liquidity. Therefore, key policy rates stand as follows: Repo Rate at 4.40%, Reverse Repo Rate at 4.0% and Marginal Standing Facility Rate at 4.65%. RBI announced Targeted Long- Term Repo Operations (TLTROs) up to three years of maturity for a total amount up to Rs 1 Lakh Cr at floating rate linked to policy repo rate. Cash Reserve Ratio was reduced to 3% of NDTL down from 4% of NDTL. The reduced rate would be applicable for one year.
In the May 2020 Monetary Policy, RBI reduced rates by another 40bps, extended the moratorium of term loans by three more months, extended liquidity support to some of the financial institutions and provided some relief to states. The RBI had so far announced liquidity measures to the extent of Rs9.6trn, 4.6% of GDP and continued to specify that they would do whatever it takes.
Bond Market
The bond market in the financial year 2019-2020 was driven by easing monetary stance by RBI, liquidity conditions in the banking space, movement in crude oil prices, fiscal worries on the back of major policy announcements, weak macro numbers, fears of cyclical slowdown in the economy and major global events. The year also witnessed yield inversion in U.S for a brief period which sent shock waves on concerns over impending recession globally. Terms spreads and credit spreads both head north due continued stress by few corporate defaults, however these spreads moderated near the end of the year.
The G-Sec yields declined from a high of around 7.50% in Jan’19 to 6.30% in Jul’19 aided by liquidity surplus in the banking system, repo rate cut by the RBI, subdued crude oil prices and increase in the foreign investment. Further since Sep’19, G-Sec yields moved upwards with concerns over fiscal slippages, volatility in the global crude oil prices, post the announcement of the corporate tax rate cut, and expectations of further rate cut by the RBI to support the slowing economy. New benchmark G-Sec 6.45% was also auctioned on 7th October 2019 which had lower coupon as compared with earlier benchmark with coupon 7.26%.
RBI took several measures including rate cut by 75 bps, CRR cut by 100 bps, rise in MSF, TLTRO, LTRO, Dollar sell/buy swaps and OMO purchase of government bonds which helped retaining some stability and optimism in debt markets and easing any resultant financial dislocations as well as keep the funding channels working. RBI liquidity measures injected liquidity of INR 3.74 lakh crore to the system. The liquidity measures are positive for the bond markets.
The union budget paved way for inclusion of its sovereign bonds in Global Emerging Markets bond indices. This would be a huge positive for long bonds
The falling commodity prices, surplus system liquidity and bond rally globally helped Indian rates lower. However due to equity sell off INR will remain under pressure against USD which is manageable as RBI has enough reserves to fight the same.
15 MCB INDIA SOVEREIGN BOND ETF
MANAGER'S REPORT
In the month of April amidst all the measures of easing liquidity and rate cuts by RBI, 10Y benchmark dropped marginally by 3bps to close the month at 6.11% levels compared to its close on April 01, 2020 at 6.31%. In spite of RBI's continuous effort to provide enough liquidity, the corporate bond segment faced redemption pressure from various AMC's following which the yields for the corporate bonds witnessed an uptick of 10-20bps across the segments and tenures. Due to lower issuances and stable demand the MM segment witnessed yields falling by 20-30 bps.
During the month of May 2020, with all the developments including rate cut by RBI close the month at 6.01%. The corporate bond markets witnessed activity only in quality credits, the demand for good credits remained high due to which the yields dropped by 30-50bps across the tenures.
Following the government's Economic Package 2.0, the RBI reduced rates, extended the moratorium of term loans by three more months, extended liquidity support to some of the financial institutions and provided some relief to states. RBI has reduced the repo rate by 115bps and reverse repo rate by 155bps (widening the gap to discourage banks from parking under LAF - Liquidity Adjustment Facility) till the month of June. Following these developments, the India 10Y dropped below 6.0% levels to close the month at 5.88%. Corporate bonds witnessed yields dropping by 35-40bps due to lack of issuances and demand from the institutions. Money Markets continued its rally and moved lower by 40-50bps mainly due to ample liquidity with Mutual Funds and the deployment options remain low due to lower issuances.
Market Outlook
A quarter into to pandemic now, still there is no certainty about the when the economies will be fully functional. While central banks continue to focus on maintaining financial stability, governments struggle with putting a plan in place to restart with the new normal. Against this backdrop, yields are expected to trade in narrow range with a positive bias.
FUND MANAGER For and on behalf of MCB INVESTMENT MANAGEMENT CO. LTD
16 MCB INDIA SOVEREIGN BOND ETF
SECRETARY'S CERTIFICATE FOR THE YEAR ENDED JUNE 30, 2020
I certify that, to the best of my knowledge and belief, the Fund has filed with the Registrar of Companies all such returns as are required of the Fund under the Companies Act 2001.
SECRETARY For and on behalf of GFin Corporate Services Ltd
Date:
17
MCB INDIA SOVEREIGN FUND INDEPENDENT AUDITOR'S REPORT
To the Members of MCB India Sovereign Bond ETF
Opinion
We have audited the financial statements of MCB India Sovereign Bond ETF (the “Fund”), on pages 19 to 35 which comprise the statement of financial position as at June 30, 2020 and the statement of profit or loss and other comprehensive income, statement of changes in net assets and statement of cash flows for the year then ended, and notes to the financial statements, including a summary of significant accounting policies.
In our opinion, the financial statements on pages 19 to 35 give a true and fair view of the financial position of the Fund as at June 30, 2020, and of its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards and comply with the Companies Act 2001.
Basis for Opinion
We conducted our audit in accordance with International Standards on Auditing (ISAs). Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial Statements section of our report. We are independent of the Company in accordance with the International Ethics Standards Board for Accountants’ Code of Ethics for Professional Accountants (IESBA Code) together with the ethical requirements that are relevant to our audit of the financial statements in Mauritius, and we have fulfilled our other ethical responsibilities in accordance with these requirements and the IESBA Code. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
Key audit matters
Key audit matters are those matters that in our professional judgement were of significance in our audit of financial statements. These matters were addressed in the context of our audit of the financial statements as a whole and in forming our opinion thereon, and we do not provide a separate opinion on these matters. The key audit matter below relates to the financial statements: -
18
MCB INDIA SOVEREIGN FUND INDEPENDENT AUDITOR'S REPORT (CONT’D)
To the Members of MCB India Sovereign Bond ETF
Key audit matters (cont’d)
Key audit matter How our audit addressed the key audit matter
Valuation of Financial asset Financial asset at fair value through profit - We assessed the design and operating effectiveness of the or loss comprise of local currency bond Fund’s key controls supporting the existence and valuation of issued by the Central Government of India. the currency bond. The carrying value of the financial asset is - We performed completeness test through verifying the a significant item on the statement of acquisition and disposal of currency bond during the period. financial position and is considered as a - We ensured existence of the currency bond through key audit matter. independent confirmation. - We traced the share price to Bloomberg screen. - We recomputed the carrying value of the financial asset and agreed to valuation report.
Other information
Directors are responsible for the other information. The other information comprises the information included in the Manager’s report but does not include the financial statements and our auditor’s report thereon.
Our opinion on the financial statements does not cover the other information and we do not express any form of assurance conclusion thereon.
In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit or otherwise appears to be materially misstated. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard.
Corporate Governance Report Our responsibility under the Financial Reporting Act is to report on the compliance with the Code of Corporate Governance disclosed in the annual report and assess the explanations given for non-compliance with any requirement of the Code. From our assessment of the disclosures made on corporate governance in the annual report, the public interest entity has, pursuant to section 75 of the Financial Reporting Act, complied with the requirements of the Code.
18(a)
MCB INDIA SOVEREIGN FUND INDEPENDENT AUDITOR'S REPORT (CONT’D)
To the Members of MCB India Sovereign Bond ETF
Responsibilities of Directors and Those Charged with Governance for the Financial Statements
The directors are responsible for the preparation and fair presentation of the financial statements in accordance with International Financial Reporting Standards and in compliance with the requirements of the Companies Act 2001, and for such internal control as the directors determine is necessary to enable the preparation of the financial statements that are free from material misstatement, whether due to fraud or error.
In preparing the financial statements, the directors are responsible for assessing the Fund's ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the Fund or to cease operations, or have no realistic alternative but to do so.
Those charged with governance are responsible for overseeing the Fund’s financial reporting process.
Auditor’s Responsibilities for the Audit of the Financial Statements
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements.
As part of an audit in accordance with ISAs, we exercise professional judgement and maintain professional scepticism throughout the audit. We also: • Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. • Obtain an understanding of internal control relevant to the audit 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 Fund’s internal control. • Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by directors. • Conclude on the appropriateness of directors’ use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Fund's ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Fund to cease to continue as a going concern.
18(b)
MCB INDIA SOVEREIGN FUND INDEPENDENT AUDITOR'S REPORT (CONT’D)
To the Members of MCB India Sovereign Bond ETF
Auditor’s Responsibilities for the Audit of the Financial Statements (cont’d)
• Evaluate the overall presentation, structure and content of the financial statements, including the disclosures, and whether the financial statements represent the underlying transactions and events in a manner that achieves fair presentation.
We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.
Report on Other Legal and Regulatory Requirements
Companies Act 2001
We have no relationship with, or interests in, the Fund, other than in our capacity as auditors, and dealings in the ordinary course of business.
We have obtained all information and explanations we have required.
In our opinion, proper accounting records have been kept by the Fund as far as it appears from our examination of those records.
Other Matter
This report is made solely to the members of MCB India Sovereign Bond ETF (the “Fund”), as a body, in accordance with Section 205 of the Companies Act 2001. Our audit work has been undertaken so that we might state to the Fund's members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Fund and the Fund's members as a body, for our audit work, for this report, or for the opinions we have formed.
BDO & Co Chartered Accountants
Port Louis, Ameenah Ramdin, FCCA, ACA Republic of Mauritius Licensed by FRC
18(c)
MCB INDIA SOVEREIGN BOND ETF
STATEMENT OF FINANCIAL POSITION AS AT JUNE 30, 2020
Notes 2020 2019 USD USD ASSETS
Non-current asset Financial assets at fair value through profit or loss 6 8,577,195 9,187,115
Current Assets Other receivables 7 36,705 19,949 Cash and cash equivalents 12(c) 27,974 10,096 Total current assets 64,679 30,045
Total Assets 8,641,874 9,217,160
REPRESENTED BY:
Net assets attributable to holders of redeemable participating shares 8,631,066 9,193,199 Management Share 10 10 10 8,631,076 9,193,209
Current liabilities Other payables 11 10,041 10,037 Current tax liability 13(a) 757 13,914 Total liabilities 10,798 23,951
Total net assets attributable to holders of redeemable participating shares and liabilities USD 8,641,874 9,217,160
Net asset value per share USD 9.43 9.84
These financial statements have been approved for issue by the Board of Directors on September 23, 2020.
) DIRECTORS )
The notes on pages 23 to 35 form an integral part of these financial statements. Independent auditor's report on pages 18 to 18 (c).
19 MCB INDIA SOVEREIGN BOND ETF
STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME FOR THE YEAR ENDED JUNE 30, 2020
Notes 2020 2019 USD USD
Income Income on fixed income securities 582,002 695,427 Interest income - 19 Refund from Manager (to cap total expense ratio) 26,118 29,521 608,120 724,967
Expenses Manager's fees 65,179 65,510 Registrar's fees 6,675 6,482 Custodian's fees 9,359 9,594 Professional fees 8,208 3,641 Licence fees 17,382 28,230 Other direct fees 9,218 9,779 116,021 123,236
Fair value (losses)/ gains on financial assets 6 (104,717) 175,695 Foreign exchange losses (15,535) (27,214) (Losses)/ Gains on disposal of financial assets (306,286) 316,690 (426,538) 465,171
Profit before taxation 65,561 1,066,902
Taxation 13(b) (36,770) (42,703)
Profit for the year 28,791 1,024,199
Equalisation Income received on units created 8,983 - Income paid on units liquidated (6,772) (386,663)
2,211 (386,663)
Increase in Net Assets Attributable 31,002 637,536
The notes on pages 23 to 35 form an integral part of these financial statements. Independent auditor's report on pages 18 to 18 (c).
20 MCB INDIA SOVEREIGN BOND ETF
STATEMENT OF CHANGES IN NET ASSETS FOR THE YEAR ENDED JUNE 30, 2020
Net Assets Attributable to holders of redeemable participating Notes shares USD
Balance at July 01, 2019 9,193,199
Issue of redeemable participating shares 9(ii) 371,017
Redemption of redeemable participating shares 9(ii) (543,006)
Increase in Net Assets Attributable for the year 31,002
Distribution to shareholders 8 (421,146)
Balance at June 30, 2020 8,631,066
Balance at July 01, 2018 24,324,913
Redemption of redeemable participating shares 9(ii) (15,245,846)
Increase in Net Assets Attributable for the year 637,536
Distribution to shareholders 8 (523,404)
Balance at June 30, 2019 9,193,199
The notes on pages 23 to 35 form an integral part of these financial statements. Independent auditor's report on pages 18 to 18 (c).
21 MCB INDIA SOVEREIGN BOND ETF
STATEMENT OF CASH FLOWS FOR THE YEAR ENDED JUNE 30, 2020
Notes 2020 2019 USD USD
Cash used in operations Cash used in operations 12(a) (106,655) (167,485) Refund for the year 13(a) - 4,341 Tax paid 13(a) (49,927) (58,492)
Net cash used in operations (156,582) (221,636)
Cash flows generated from investing activities Interest received 745,549 1,251,895 Purchase of financial assets 6 (9,272,264) (9,734,131) Proceeds from disposal of financial assets 9,307,634 24,888,899
Net cash generated from investing activities 780,919 16,406,663
Cash flows used in financing activities Issue of participating shares 9(ii) 371,017 - Redemption of participating shares 9(ii) (543,006) (15,245,846) Income received on participating shares created 8,983 - Income paid on participating shares liquidated (6,772) (386,663) Dividend paid (421,146) (523,404)
Net cash used in financing activities (590,924) (16,155,913)
Increase in cash and cash equivalents 33,412 29,114
Movement in Cash and Cash Equivalents At July 01, 10,096 8,196 Increase in cash and cash equivalents 33,412 29,114 Foreign exchange losses (15,535) (27,214)
At June 30, 12(c) 27,974 10,096
The notes on pages 23 to 35 form an integral part of these financial statements. Independent auditor's report on pages 18 to 18 (c).
22 MCB INDIA SOVEREIGN BOND ETF
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED JUNE 30, 2020
1 OBJECTIVE
The Fund’s objective is to track the performance of Zyfin India Sovereign Bond Liquid Index in USD which is constituted of the most liquid, fixed rate, local currency bond issued by the Central Government of India.
2 BASIS OF PREPARATION
The principal accounting policies adopted in the preparation of these financial statements are set out below. These policies have been consistently applied to all the years presented unless otherwise stated and where necessary, comparative figures have been amended to conform with changes in presentation in the current year.
The financial statements of MCB India Sovereign Bond ETF comply with the Companies Act 2001 and have been prepared in accordance with International Financial Reporting Standards (IFRS). These financial statements are that of an individual entity. The financial statements are presented in US Dollars (USD) and all values are rounded to the nearest dollar, except when otherwise indicated. The financial statements are prepared under the historical cost convention, except for financial instruments at fair value through profit or loss which are stated at fair value.
Standards, Amendments to published Standards and Interpretations effective in the reporting period IFRS 16 Leases results in the recognition of almost all leases on balance sheet. The standard removes the current distinction between operating and financing leases and requires recognition of an asset (the right to use the leased item) and a financial liability to pay rentals for virtually all lease contracts. The interpretation has no impact on the Fund’s financial statements IFRIC 23 Uncertainty over Income Tax Treatments explains how to recognise and measure deferred and current income tax assets and liabilities where there is uncertainty over a tax treatment. There are no new disclosure requirements but requirement to provide information about judgements and estimates made in preparing the financial statements. The interpretation has no impact on the Fund’s financial statements. Prepayment Features with negative compensation (Amendments to IFRS 9) enable entities to measure certain prepayable financial assets with negative compensation at amortised cost. These assets, which include some loan and debt securities, would otherwise have to be measured at fair value through profit or loss. To qualify for amortised cost measurement, the negative compensation must be ‘reasonable compensation for early termination of the contract’ and the asset must be held within a ‘held to collect’ business model. The amendments have no impact on the Fund’s financial statements. Annual Improvements to IFRSs 2015–2017 Cycle: • IFRS 3 – clarified that obtaining control of a business that is a joint operation is a business combination achieved in stages. • IFRS 11 – clarified that party obtaining joint control of a business that is a joint operation should not remeasure its previously held interest in the joint operation. • IAS 12 – clarified that income tax consequences of dividends on financial instruments classified as equity should be recognised according to where the past transactions or events that generated distributable profits were recognised. • IAS 23 – clarified that, if a specific borrowing remains outstanding after the related qualifying asset is ready for its intended use or sale, it becomes part of general borrowings.
The amendments have no impact on the Fund’s financial statements
23 MCB INDIA SOVEREIGN BOND ETF
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED JUNE 30, 2020
2 BASIS OF PREPARATION (CONT'D)
Standards, Amendments to published Standards and Interpretations issued but not yet effective
Certain standards, amendments to published standards and interpretations have been issued that are mandatory for accounting periods beginning on or after 1 January 2020 or later periods, but which the Fund has not early adopted.
At the reporting date of these financial statements, the following were in issue but not yet effective:
Sale or Contribution of Assets between an Investor and its Associate or Joint Venture (Amendments to IFRS 10 and IAS 28) IFRS 17 Insurance Contracts Definition of a Business (Amendments to IFRS 3 Definition of Material (Amendments to IAS 1 and IAS 8) Interest Rate Benchmark Reform (Amendments to IFRS 9, IAS 39 and IFRS 7) Classification of Liabilities as Current or Non-current (Amendments to IAS 1) Annual Improvements 2018–2020 Property, Plant and Equipment: Proceeds before Intended Use (Amendments to IAS 16) Onerous Contracts - Cost of Fulfilling a Contract (Amendments to IAS 37) Reference to the Conceptual Framework (Amendments to IFRS 3) Covid-19-Related Rent Concessions (Amendment to IFRS 16) Amendments to IFRS 17 Extension of the Temporary Exemption from Applying IFRS 9 (Amendments to IFRS 4)
Where relevant, the Fund is still evaluating the effect of these Standards, Amendments to published Standards and Interpretations issued but not yet effective, on the presentation of its financial statements.
3. SIGNIFICANT ACCOUNTING POLICIES
The accounting policies set out below have been consistently applied to all periods presented in these financial statements.
(a) Foreign currencies
(i) Functional and presentation currency The financial statements are presented in US Dollars (USD), which is the Fund’s functional and presentation currency. The Fund's business or other activity is carried out in a currency other than the Mauritian rupee, which is a requirement of the Financial Services Act 2007. Subscriptions and redemptions of the redeemable shares in the Fund are denominated in US Dollar. The performance of the Fund is measured and reported to the investors in USD. The Board of Directors considers the USD as the currency that most faithfully represents the economic effects of the underlying transactions, events and conditions.
24 MCB INDIA SOVEREIGN BOND ETF
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED JUNE 30, 2020
3. SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
(a) Foreign currencies (cont'd)
(ii) Transactions and balances Foreign currency transactions are translated into the functional currency using the mid-exchange rates prevailing on the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translations at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the statement of profit or loss and other comprehensive income.
Foreign exchange gains and losses that relate to cash and cash equivalents and all other foreign exchange gains and losses are presented in profit or loss within 'foreign exchange gain'.
Non-monetary items that are measured at historical cost in a foreign currency are translated using the exchange rate at the date of the transaction.
Non-monetary items that are measured at fair value in a foreign currency are translated using the exchange rate prevailing at the date that their fair value was determined.
(b) Net gain from financial instruments at fair value through profit or loss
Net gain from financial instruments at fair value through profit or loss includes all realised and unrealised fair value changes.
(c) Fees & Other Expenses Fees and other expenses are recognised in profit or loss on an accrual basis.
(d) Revenue recognition Revenue is recognised to the extent that it is probable that the economic benefits will flow to the Fund and the revenue can be reliably measured.
For all financial instruments measured at amortised cost, interest income and interest expenses are recognised in a time-proportion basis using the effective interest method. This method uses the effective interest rate (EIR) that exactly discounts the estimated future cash receipts or payments over the expected life of the financial instrument or a shorter period, where appropriate, to the net carrying amount of the financial asset or financial liability. The carrying amount of the financial asset or financial liability is adjusted if the Fund revise their estimates of payments or receipts. The adjusted carrying amount is calculated based on the original effective interest rate and the change in carrying amount is recorded as interest income or expense.
(e) Current and Deferred income tax Current Tax The current income tax is based on taxable income for the year calculated on the basis of tax laws enacted or sustainability enacted by the end of the reporting period.
Deferred income tax Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements.
25 MCB INDIA SOVEREIGN BOND ETF
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED JUNE 30, 2020
3. SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
(e) Current and Deferred income tax (cont'd) Deferred income tax (cont'd)
Deferred income tax is determined using the tax rates that have been enacted or substantively enacted at the reporting date and are expected to apply in the period when the related deferred income tax asset is realized or the deferred income tax liability is settled.
Deferred tax assets are recognised to the extent that it is probable that future taxable profit will be available against which deductible temporary differences can be utilized.
(f) Financial Assets
The Fund classifies its financial assets into one of the categories discussed below, depending on the purpose for which the asset was acquired. The Manager determines the classification of investments at initial recognition. The Fund accounting policy for each category is as follows: (i) Fair value through profit or loss
The Fund classifies the following financial assets at fair value through profit or loss (FVPL): - debt investments that do not qualify for measurement at either amortised cost or FVOCI
(ii) Amortised cost
These assets arise principally where the objective is to hold these assets in order to collect contractual cash flows and the contractual cash flows are solely payments of principal and interest. They are initially recognised at fair value plus transaction costs that are directly attributable to their acquisition or issue, and are subsequently carried at amortised cost using the effective interest rate method, less provision for impairment.
The Fund financial assets measured at amortised cost comprise financial assets at amortised cost, other receivables and cash and cash equivalents in the statement of financial position. Cash and cash equivalents includes bank balances.
(g) Financial liabilities
The Fund classifies its financial liabilities as follows: Trade payables and other short-term monetary liabilities, which are initially recognised at fair value and subsequently carried at amortised cost using the effective interest method.
26 MCB INDIA SOVEREIGN BOND ETF
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED JUNE 30, 2020
3. SIGNIFICANT ACCOUNTING POLICIES (CONT'D)
(h) Participating Shares
The Fund classifies financial instruments issued as financial liabilities or equity instruments in accordance with the substance of the contractual terms of the instruments.
The Participating Shares are the most subordinate classes of financial instruments in the Fund and rank pari passu in all material respects and have the same terms and conditions. The Participating Shares provide investors with the right to require redemption for cash at a value proportionate to the investor’s share in the Fund’s net assets at each weekly redemption date and also in the event of the Fund’s liquidation.
The Participating Shares are classified as financial liabilities and are measured at the present value of the redemption amounts.
(i) Capital Management
The Fund has no equity. The Participating Shares issued by the Fund provide an investor with the right to require redemption for cash at a value proportionate to the investor’s share in the Fund’s net assets at each redemption date being every Monday and are classified as liabilities. See note 9 for a description of the terms of the Participating Shares issued by the Fund.
The Fund’s objectives in managing the Participating Shares are to ensure a stable base to maximise returns to all investors, and to manage liquidity risk arising from redemptions. The Fund’s management of the liquidity risk arising from Participating Shares is discussed in note 4.
The Fund is not subject to any externally imposed capital requirements.
4. FINANCIAL RISK MANAGEMENT
(a) Financial Risk Factors
The Fund's activities expose it to a variety of financial risks, including: - Foreign currency risk; - Liquidity risk and - Market risk.
A description of the significant risk factors is given below together with the risk management policies applicable. Foreign Currency Risk
The Fund operates internationally and is exposed to foreign exchange risk arising from Indian Rupees.
Liquidity Risk
Liquidity risk is the risk that the Fund will encounter difficulty in meeting the obligations associated with its financial liabilities that are settled by delivery of cash or another financial asset.
Prudent liquidity risk management implies maintaining sufficient cash and marketable securities and the ability to close out market positions. The Fund keeps a minimum cash ratio and invests primarily in easily marketable securities to meet any redemptions.
27 MCB INDIA SOVEREIGN BOND ETF
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED JUNE 30, 2020
4. FINANCIAL RISK MANAGEMENT (CONT'D)
(a) Financial Risk Factors (cont'd)
Liquidity Risk (cont'd)
Market Risk
The Fund is exposed to market risk, i.e., the risk that the value of the financial instruments will fluctuate as a result of changes in market prices, whether these changes are caused by factors specific to the individual security or its issuer or factors affecting all securities traded on the market. Appropriate diversification is ensured through the investment policy and guidelines approved by the Fund's Board of Directors.
(b) Fair value estimation
The nominal value less estimated credit adjustments of trade receivables and payables are assumed to approximate their fair values. The carrying amounts of financial assets approximate their fair value.
5. CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS
Estimates and judgements are continuously evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances.
The Fund makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal the related actual results. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below.
(a) Limitation of sensitivity analysis
Sensitivity analysis in respect of market risk demonstrates the effect of a change in a key assumption while other assumptions remain unchanged. In reality, there is a correlation between the assumptions and the other factors. It should also be noted that these sensitivities are non-linear and larger or smaller impacts should not be interpolated or extrapolated from these results.
28 MCB INDIA SOVEREIGN BOND ETF
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED JUNE 30, 2020
6 FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS
The movement in financial assets at fair value through profit or loss may be summarised as follows:
2020 2019 USD USD At July 01, 8,900,282 23,562,665 Additions during the year 9,272,264 9,734,131 Disposal during the year (9,438,225) (26,285,528) Fair value (losses)/ gains on financial assets (104,717) 175,695 Fair value release on disposal (175,695) 1,713,319
8,453,909 8,900,282
Interest receivable 123,286 286,833
At June 30, 8,577,195 9,187,115
7 OTHER RECEIVABLES 2020 2019 USD USD Prepayments 10,230 8,155 Receivable from Fund Manager 26,118 11,784 Registrar's fees paid in advance 347 - Share capital receivable 10 10 36,705 19,949
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.
8 DISTRIBUTION TO SHAREHOLDERS 2020 2019 USD USD
Paid during the year 421,146 523,404 Outstanding at June 30, - - 421,146 523,404
Interim per unit 0.26 0.32 Final per unit 0.18 0.24 0.44 0.56
29 MCB INDIA SOVEREIGN BOND ETF
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED JUNE 30, 2020
9 MOVEMENT IN PARTICIPATING SHARES
2020 2019 Issued and fully paid No. of Shares No. of Shares
(i) At July 01, 934,650 2,616,980
Issue of shares during the year 38,949 -
Redemption of shares during the year (58,675) (1,682,330)
At June 30, 914,924 934,650
USD USD (ii) At July 01, 12,608,903 27,854,749 Issue of shares during the year 371,017 -
Redemption of shares during the year (543,006) (15,245,846)
At June 30, 12,436,914 12,608,903
(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.
30 MCB INDIA SOVEREIGN BOND ETF
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED JUNE 30, 2020
9 MOVEMENT IN PARTICIPATING SHARES (CONT'D)
(iv) Reconciliation of Net Assets and Net Assets Value per Share 2020 2019 USD USD
Net Assets calculated as per Prospectus 8,630,794 9,188,562 Adjustments: Income tax adjustment (7) 1,137 Under accrual of professional fees - (634) Other payables 802 4,117 Other receivables (522) 17 Share capital receivable 10 10
Net Assets as per Financial Reporting 8,631,076 9,193,209
Per Share Per Share USD USD
Net Assets per share calculated as per Prospectus 9.43 9.83 Adjustments: Income tax adjustment (0.00) 0.00 Under accrual of professional fees - (0.00) Other payables 0.00 0.01 Other receivables (0.00) 0.00 Share capital receivable 0.00 0.00
Net Assets per share as per Financial Reporting 9.43 9.84
10 MANAGEMENT SHARE
One Management Share of USD 10 was issued by the Fund to MCB Investment Management Co. Ltd on incorporation.
11 OTHER PAYABLES 2020 2019 USD USD
Manager's fees payable 3,076 2,875 Registrar's fees payable - 460 Custodian's fees payable 789 1,455 Professional fees payable 3,835 3,692 Advisory fee Payable 2,128 1,355 Index Provider fees 213 200
10,041 10,037
The carrying amounts of other payables approximate their fair values.
31 MCB INDIA SOVEREIGN BOND ETF
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED JUNE 30, 2020
12 NOTES TO THE STATEMENT OF CASH FLOWS 2020 2019 USD USD
(a) Cash used in operations Profit before taxation 65,561 1,066,902 Adjustments for: Interest income on fixed income securities (582,002) (695,427) Fair value (gains)/losses on financial assets 104,717 (175,695) Foreign exchange losses 15,535 27,214 (Gains)/losses on disposal of financial assets 306,286 (316,690) (89,903) (93,696) Changes in working capital: Other receivables (16,756) (11,762) Other payables 4 (62,027)
Cash used in operations (106,655) (167,485)
(b) Reconciliation of liabilities arising from financing activities 2020 2019 USD USD
At July 01 12,608,903 27,854,749 Net Cash flows (171,989) (15,245,846)
Movement in participating shares 12,436,914 12,608,903
At July 01, 2019 - - Dividend declared during the year 421,146 523,404 Dividend paid during the year (421,146) (523,404)
Net movement - -
(c) Cash and cash equivalents
Cash at bank 27,974 10,096
While cash and cash equivalents are also subject to the impairment requirements of IFRS 9, no impairment loss was identified.
13 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, thus reducing its effective tax rate to 3%.
32 MCB INDIA SOVEREIGN BOND ETF
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED JUNE 30, 2020
13 INCOME TAX (CONT'D)
(a) In the Statement of Financial Position 2020 2019 USD USD
At July 1 13,914 25,362 Charge for the year 36,770 42,703 Refund for the year - 4,341 Paid for the year (49,927) (58,492) At June 30 757 13,914
(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: 2020 2019 USD USD Profit/(loss) before taxation 65,561 1,066,902 Tax effect on: Expenses not deductible for tax purposes 411,003 (486,045) Income not subject to tax - (52,500)
Chargeable income 476,564 528,357
Tax calculated at 15% 71,485 79,254 Foreign Tax Credit relief (57,188) (63,403) Withholding Tax suffered 22,473 26,852
Tax charge 36,770 42,703
14 RELATED PARTY TRANSACTIONS
The transactions of the Fund with related parties during the year 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 are detailed below: 2020 2019 USD USD
MCB Investment Management Co. Ltd 65,179 65,510
(b) Registrar Fees
MCB Registry & Securities Ltd acts as the Registrar and Transfer Agent of the Fund. The Registrar fees are detailed below:
2020 2019 USD USD MCB Registry & Securities Ltd 6,675 6,482
33 MCB INDIA SOVEREIGN BOND ETF
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED JUNE 30, 2020
14 RELATED PARTY TRANSACTIONS (CONT'D)
(c) Outstanding balances, June 30, 2020 June 30, 2019 USD USD Payables / (Paid in advance) to related parties MCB Investment Management Co. Ltd 3,076 2,875 MCB Registry & Securities Ltd - 460 3,076 3,335
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 year end are unsecured.
15 EVENTS AFTER THE REPORTING PERIOD
The Coronavirus disease 2019 (“COVID-19”) outbreak has caused extensive disruptions to businesses operation around the globe. On March 11, 2020, COVID-19 was labelled as pandemic by the World Health Organisation. The directors are in the opinion that it is difficult to predict the overall outcome and impact of COVID-19 on the financial statements of the Fund at this stage.
If the financial markets and/or the overall economy are impacted for an extended period, the carrying value of the investments and the Fund’s investment results may be materially adversely affected.
Except for the above, there have been no material events since the end of the reporting period which would require disclosure or adjustment to the financial statements for the year ended June 30, 2020.
34 MCB INDIA SOVEREIGN BOND ETF
NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED JUNE 30, 2020
Schedule of Investments as at June 30, 2019 June 30, 2020 Market Value Market Value % of Net (USD) Security Description (USD) Assets
Quoted Foreign Fixed Income Securities 8,900,282 7.26% GOI 2029 - - - 6.45% GOI 2029 8,453,909 97.95% 8,900,282 TOTAL QUOTED FOREIGN FIXED INCOME SECURITIES 8,453,909 97.95%
TOTAL NON-CURRENT ASSETS – INVESTMENT IN 8,900,282 FINANCIAL ASSETS 8,453,909 97.95%
286,833 TOTAL CURRENT ASSETS – INTEREST RECEIVABLES 123,286 1.43%
9,187,115 TOTAL MARKET VALUE OF INVESTMENTS 8,577,195 99.38%
6,094 OTHER ASSETS AND LIABILITIES 53,881 0.62%
9,193,209 NET ASSETS 8,631,076 100.0%
Currency Profile 9,179,576 INR 8,579,123 99.40% 13,633 USD 51,953 0.60% 9,193,209 NET ASSETS 8,631,076 100.0%
At June 30, 2020, if USD had weakened/ strengthened by 5% against the above other currencies with all other variables held constant, profit before taxation would have been USD 429k (June 30, 2019: USD 459k) higher/ lower, mainly as a result of retranslation of foreign currency denominated bank balances and financial assets.
Fair Value Hierarchy 9,187,115 Level 1 8,577,195 99.38% 9,187,115 TOTAL MARKET VALUE OF INVESTMENTS 8,577,195 99.38%
Had fair value increased/ decreased by 10%, the impact on profit before taxation would have been USD 845,000 (June 30, 2019: USD 890,000) higher/ lower with all other variables held constant.
35 MCB INDIA SOVEREIGN BOND ETF
APPENDIX: STATEMENT OF FINANCIAL FOR THE YEAR ENDED JUNE 30, 2020
Closing exchange rate: USD
INR 0.0132
Calculation notes:
Total Expense Ratio = Management & Administrative Expenses Daily Average Net Assets
Portfolio Turnover Rate = (Purchases - Subscriptions) + (Disposals - Redemptions) Daily Average Net Assets March 04, Year ended Year ended Year ended 2016 June 30, June 30, June 30, to 2020 2019 2018 June 30, 2017 USD USD USD USD
Opening net asset value 9,193,209 24,324,923 9,761,170 - Total revenue 608,120 724,967 1,564,186 658,609 Total expenses (152,791) (165,939) (364,782) (188,025) Realised (losses)/ gains for the year / period (306,286) 316,690 (3,004,967) 842,178 Unrealised (losses)/ gains for the year / period (120,252) 148,481 (1,521,545) (110,310) Total increase/(decrease) from operations 28,791 1,024,199 (3,327,108) 1,202,452 Dividend declared from net income (421,146) (523,404) (1,877,248) (280,162) Issue of participating shares 371,017 - 23,306,579 8,810,907 Redemption of participating shares (543,006) (15,245,846) (4,262,727) - Income paid on participating shares liquidated (6,772) (386,663) (36,599) - Income received on participating shares created 8,983 - 760,856 27,973 Closing net asset value 8,631,076 9,193,209 24,324,923 9,761,170
Portfolio turnover rate 194.54% 204.70% 537.99% 865.98%
Redeemable Participating Shares Number of shares outstanding 914,924 934,650 2,616,980 875,505 Management expense ratio (Total Expense Ratio) 0.99% 0.99% 0.99% 0.99% Closing market price per share 9.43 9.84 9.30 11.15
36